Executive Compensation

Comprehensive Shareholder Engagement Program to Seek Feedback and Responsive Action

At the 2019 Annual Meeting of Shareholders, the advisory vote to approve the Company’s executive compensation received approximately 55% support. Although this was a majority, this was a decline from previous years and also below what the Board and management consider satisfactory.

In order to better understand our investors’ views regarding our executive compensation program, we undertook an extensive shareholder outreach and engagement initiative. We contacted 38 institutional investors representing 81% of our outstanding shares, and ultimately held meetings with 16 institutional investors representing approximately 59% of our outstanding common stock. In addition, we had discussions with two proxy advisory firms, Institutional Shareholder Services and Glass Lewis.

 

 

The Chairman of our Compensation Committee and Chairman of the Board led the majority of these meetings, with participation in most meetings by our Chief Financial Officer and our General Counsel, to discuss our executive pay, its alignment with performance, and the Company’s strategy and change in leadership, and they solicited feedback on our compensation program and practices. Key compensation-related themes discussed with investors included: CEO pay magnitude and structure, the design of our long-term incentive plan (“LTIP”), one-time awards, rigor of performance targets, and proxy disclosure. We also discussed business, Board, governance, and sustainability-related matters. Following the 2019 Annual Meeting, the Compensation Committee also engaged a new independent compensation consultant, FPL Associates (“FPL”), a nationally recognized compensation consulting firm specializing in the real estate industry, to assist it in reviewing our executive compensation program.

Our Board’s Proactive Response to Shareholder Feedback

Reduction in Magnitude of Chief Executive Officer Pay and Changes to Compensation Structure

Our shareholders provided candid, constructive feedback, which was shared with the entire Board. The consensus feedback received was support for the strong performance of our Chief Executive Officer and management team in light of our relative and absolute TSR performance, but concern about the magnitude of total Chief Executive Officer compensation.

The Committee carefully considered this feedback and implemented changes to our 2020 executive compensation program that are responsive to the views that we heard. As part of those changes, the Compensation Committee and full Board, with the consent and full cooperation of our Chief Executive Officer, has reduced or held flat most major categories of Chief Executive Officer compensation for 2020. As described in more detail below, this includes a reduction in base salary, reduction in target annual cash bonus opportunity, and reduction in target annual equity awards under our LTIP.

 

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CEO COMPENSATION: CHANGES COMMENCING IN 2020

 

 

In addition, the total compensation for our Chief Executive Officer in 2019, as reflected in our summary compensation table herein, is approximately 20% lower than our Chief Executive Officer’s total compensation in 2018. This reduction is, in part, due to the burn-off of one-time awards granted to Mr. Hsieh in connection with his hiring and promotion to CEO.

 

 

 

Other Changes to the Executive Compensation Program

The table below details not only the changes discussed above but other common themes of shareholder feedback and the actions the Committee took to address investors’ perspectives on our executive compensation program. The Committee is confident that these changes reflect our Board’s ongoing commitment to shareholder engagement and responsiveness.

 

 

 

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Topic		Shareholder Feedback		Spirit’s Response
CEO Pay Magnitude		•  Magnitude of CEO pay does not align with peers, particularly when factoring in the Company’s size and historical performance		•  Reduced base salary for our CEO from $900,000 in 2019 to $875,000 in 2020   •  Reduced the target cash bonus opportunity for our CEO from 175% to 150% of base salary and also the target LTIP opportunity down from 550% to 500% of base salary
LTIP Design		•  A higher allocation of the CEO’s LTIP equity grant should be tied to performance-based vesting, and conversely, a lower percentage of the CEO’s LTIP equity grant should be tied to time-based vesting		•  Increased the portion of our CEO and other executives’ annual LTIP equity grant tied to performance from 50% to 60%   •  Reduced the portion tied to time-based vesting for our CEO from 50% to 40%
Proxy Disclosure		•  More clarity and disclosure is desired with respect to the rationale of compensation decisions, including one-time awards and enhanced disclosure around the subjective portion of the annual bonus plan		•  Revamped proxy disclosure throughout, providing additional and clear rationale with respect to our pay decisions, and the linkage to performance   •  Enhanced disclosure around individual accomplishments and how such accomplishments correlate to bonus payouts
Rigor of Targets		•  The rigor of the compensation system should be increased, in particular eliminating the occupancy metric in the cash bonus plan and strengthening the target goal of the LTIP		•  Eliminated occupancy as a goal in the cash bonus plan   •  Increased the target total shareholder return in our LTIP whereby we must now have a total TSR equal to the 55th percentile (as opposed to the 50th percentile) compared to our Peer Group in order to receive a target payout
One-Time Grant		•  Shareholders generally oppose one-time awards and believe they should be used only in limited circumstances		•  With the completion of our leadership transition and company transformation, we do not anticipate granting any further one-time awards to our CEO
Employment Agreements		•  Double-trigger equity vesting should apply upon a change-in-control		•  Applied double-trigger vesting upon change-in-control to 2020 and later performance-based awards for all executives (time-based LTIP equity grants historically have had double-trigger vesting)   •  All 2020 and later equity awards are now subject to double-trigger vesting upon a change in control
Peer Group		•  In light of the recent spin-off of SMTA, and Spirit’s consequently smaller size, the peer group should be re-examined to ensure that multiple outsized peers are not being used		•  Undertook a fresh evaluation of our peer group to better align our size with that of the peers and made changes accordingly   •  For example, despite being direct peers in the net-lease REIT business, we excluded Realty Income Corporation from our new compensation peer group in light of the meaningful size differential

 

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Compensation Philosophy

The Compensation Committee believes that the executive compensation program should emphasize pay-for-performance and reflect the value created for our shareholders, while supporting our business strategies, operational goals and long-range plans. In addition, the Compensation Committee believes that such compensation should assist the Company in attracting and retaining key executives critical to our long-term success. Our compensation practices reflect this philosophy:

 

DO provide executive officers with the opportunity to earn market-competitive compensation through a mix of cash and equity compensation with a strong emphasis on performance-based incentive awards.   DO align pay and performance by linking a substantial portion of compensation to the achievement of pre-established performance metrics that drive stockholder value.   DO evaluate TSR when determining performance under LTIP performance share awards to enhance stockholder alignment.   DO cap payouts for awards under our annual and LTIP plans.   DO require executive officers to own and retain shares of our common stock to further align interests with our shareholders.   DO enhance executive officer retention with time-based vesting schedules for a portion of annual LTIP equity awards.   DO enable the Board to “claw back” incentive compensation in the event of a financial statement restatement pursuant to a recoupment policy.   DO maintain a Compensation Committee comprised solely of independent directors.   DO engage an independent compensation consultant to advise the Compensation Committee on executive compensation matters.		DO NOT base LTIP awards on a single performance metric, thereby discouraging unnecessary or excessive risk-taking.   DO NOT provide uncapped award opportunities.   DO NOT have employment agreements with executive officers that provide single-trigger change of control benefits.   DO NOT permit executive officers or directors to engage in derivative or other hedging transactions in our securities.   DO NOT provide executive officers with excessive perquisites or other personal benefits.   DO NOT permit executive officers or directors to hold our securities in margin accounts or pledge our securities to secure loans without pre-approval by the Audit and Compensation Committees (no executive officer or director pledged or held our securities in margin accounts at any time during 2019).   DO NOT provide for tax gross-up payments for compensation or benefits paid in connection with a change in control.

Consistent with our compensation philosophy that linking a substantial portion of compensation to variable at-risk pay elements creates appropriate alignment with our shareholders, the following graphs⁽¹⁾ show the emphasis we placed on variable at-risk pay elements, such as performance-based cash bonuses and equity awards, for all of our Named Executive Officers (defined herein) in 2019.

 

 

 

 

(1)	Restricted Stock and Performance Share awards were calculated for purposes of the above graphics using the grant date fair value of restricted stock awards and performance share awards calculated in accordance with ASC Topic 718.

 

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CORPORATE GOVERNANCE HIGHLIGHTS

Our Board is committed to sound governance practices designed to promote the long-term interests of shareholders and strengthen Board and management accountability. Our Board regularly evaluates our governance profile against best practices to identify areas for improvement. The Board also leverages our active shareholder engagement program to gather insights on key areas of shareholder interest and emerging trends to evaluate. Key elements of our governance program include:

 

Board of Directors		Governance Highlights
✓  Independent Chair   ✓  Independent, third party to facilitate Board self-evaluations (new in 2019)   ✓  All directors with the exception of our CEO are independent   ✓  Annual election of directors   ✓  Board regularly meets in executive sessions, including without the presence of our CEO   ✓  Board seeks direct engagement with employees at all levels of the organization		✓  Majority vote standard for director elections   ✓  Majority standard for stockholder right to call special meeting   ✓  Majority vote standard to amend/repeal Bylaw provisions, without subject matter restrictions   ✓  Ratified minimum stock ownership policy applicable to Board (new in 2019)   ✓  Active shareholder engagement program   ✓  Regular Board review of CEO and senior management succession plans   ✓  Stockholders entitled to submit proposals for inclusion in the Company’s proxy in accordance with Rule 14a-8

 

Committees & Attendance		Shareholder Engagement
✓  Ongoing Board committee leadership rotation   ✓  Annual Board evaluations   ✓  Fully independent Board committees   ✓ Dedicated Company Disclosure Committee to ensure timeliness and accuracy of all required disclosures   ✓  All Board members attended at least 90% of all meetings in 2019		✓ In 2019, we reached out to holders of over 81% of outstanding shares   ✓  Engaged with holders of 59% of outstanding shares   ✓ Topics included executive compensation, our business transformation, Board and governance practices, and sustainability   ✓  Shareholder feedback informs Board decision-making

 

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BOARD HIGHLIGHTS

The Nominating and Corporate Governance Committee is committed to ensuring that the Board is composed of directors who possess a wide variety of relevant skills, professional experiences and backgrounds, bring diverse viewpoints and perspectives, and effectively represent the long-term interests of shareholders. Our current Board composition reflects strong Board practices that support regular refreshment based on the Board’s needs and succession plans.

 

 

 

Board Practices Support Thoughtful Board Composition

✓  Active Board refreshment   ✓  Review of directors’ skills aligned with long-term strategy   ✓  Commitment to diversity in recruitment   ✓  Regular committee chair rotation   ✓  Director succession planning

Board Evaluation

The Nominating and Corporate Governance Committee regularly meets and performs an assessment of the skills and experience needed to properly oversee the interests of the Company. Upon review of the Company’s short- and long-term strategies and goals, the Nominating and Corporate Governance Committee determines the mix of skills and experience to be represented on the recommended slate of director nominees for the upcoming year. We are focused on ensuring that directors’ skills and experiences reflect the evolving needs of the business, and as such, our robust evaluation process is an important part of our Board refreshment and succession planning efforts.

 

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Commitment to a Diverse Board with Regular Refreshment

Our Board is composed of directors who collectively have the right mix of skills, experience and expertise to effectively oversee management. Specifically, our directors have backgrounds in finance, M&A, real estate, risk oversight, and corporate transformation, among other skills relevant to Spirit’s strategic transition.

The Nominating and Corporate Governance Committee considers diversity to be a key priority in director recruitment. In 2018 and 2019, our active refreshment process led to the appointment of Diana Laing and Elizabeth Frank, each of whom offered differentiated perspectives to the Board. Ms. Frank has extensive business experience, strategic skills and experience in the retail and consumer sectors. Ms. Laing has extensive experience in commercial real estate, corporate finance, and capital markets.

We believe that the current diverse mix of skillsets on our Board ensures a strong, engaged set of directors who are empowered to oversee management. This diversity in skillset pairs with other sources of viewpoint diversity. One third of our Board is female. We have also cultivated significant diversity in the length of service amongst our Board members, with tenures ranging from eleven years to just over a year. Our Board believes that tenure diversity enables us to capture the value of both new perspectives and the deep institutional knowledge of longer-tenured directors to help the Board effectively oversee our business.

Key Board Statistics

 

 

HUMAN CAPITAL MANAGEMENT, COMMUNITY, AND ENVIRONMENTAL HIGHLIGHTS

At Spirit, we believe that doing the right thing for our employees, community and environment leads to better results for all of our stakeholders and our company as a whole. By implementing sound human capital management, community and environmental practices throughout the operation of our business, we demonstrate our solid commitment to be responsible and conscientious in everything that we do as we strive to both increase long-term stakeholder value and make the communities in which we operate a better place to live and work.

Our company-wide focus on human capital management, community engagement and environmental sustainability is driven not only by management, but also in part by two employee driven groups, each of which has the full support of our executive management team and our Board:

 

•

Spirit One Committee. Employee group dedicated to both workplace culture initiatives and company involvement with non-profit organizations and charitable donations.

 

•

“Think Green” Committee. Employee group focused on making environmentally smart choices to reduce our environmental footprint.

Our engaged Board oversees Spirit’s human capital management, community, and environmental initiatives. In 2019, our Board or Board committees received updates or discussed environmental or social matters affecting the Company on at least five occasions.

 

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Key Initiatives at Spirit:

 

Human Capital Management At Spirit, we are “All One Team”				Environment Committed to reducing our environmental footprint and managing risk
•  Workplace Culture. Regularly conduct employee surveys and implement responsive corporate culture initiatives. Board invites employees to meet with directors to encourage open dialogue   •  Diversity and Inclusion. Diversity is a priority in our hiring process, and we seek to cultivate an inclusive culture. We protect the rights of women and minorities   •  Development and Training. Offer resources and training to our employees to position them for success   •  Employee Wellness. Support employees’ health and wellness by implementing numerous wellness initiatives   •  Health & Safety. Encourage dialogue with our employees about their occupational health, safety, and environmental concern				•  Energy Consumption. Use of automatic lighting control system and ENERGY STAR certified products at our headquarters   •  Pre-Acquisition Diligence. When evaluating new investments, we consider environmental factors & risks, and obtain a site assessment   •  Risk Mitigation. We include comprehensive environmental provisions in our leases and carry master environmental insurance coverage for every property we own   •  Recycling. We recycle materials such as aluminum, paper and plastic   •  Paper. Encourage paperless environment   •  Water. Encourage employees to use reusable water bottles   •  Investor Meetings. Use iPads instead of printing and mailing decks

 

Community Commitment to being a good corporate citizen				Ethics Our directors, officers and employees are subject to a Code of Business Ethics
•  Community Involvement. Support non-profit organizations and encourages employees to participate in volunteer activities   •  Employee Gift Matching. Spirit will match charitable contributions made by our employees to eligible organizations				•  Human Rights. Committed to protecting human rights   •  Labor. Committed to compensating employees at competitive rates   •  Anti-Corruption. Prohibit corruption in all of its forms   •  Fair Living Wages. Commitment to providing a fair living wage for all of our employees

VOTING ITEMS AND ROADMAP

Proposals to be Voted on and Board Voting Recommendations

 

Proposal   No.		Description		Board’s     Recommendation		Page
1		Election of director nominees named in this proxy statement		FOR each of the 9 nominees		69
2		Ratification of the appointment of the selection of Ernst & Young LLP as our independent registered public accounting firm for fiscal year 2020		FOR		81
3		Advisory vote to approve Named Executive Officer compensation		FOR		82
4		Advisory proposal on the frequency (every year, every 2 years, or every 3 years) of future advisory votes to approve named executive compensation		EVERY YEAR		83

 

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OUR EXECUTIVE OFFICERS

Set forth below is certain biographical information concerning our Named Executive Officers. Ages shown are as of the Record Date.

 

Name, Age, Position		Business Experience
Jackson Hsieh, Age 59 President and Chief Executive Officer (effective May 8, 2017)		Jackson Hsieh serves as President and Chief Executive Officer in addition to serving on the Board of Directors. In addition, Mr. Hsieh serves on the Company’s Investment Committee and Management Operating Committee that monitors business activities and defines company strategy. Prior to joining Spirit in September 2016, Mr. Hsieh served as Managing Director and a Vice Chairman of Investment Banking at Morgan Stanley, Vice Chairman and Sole/Co-Global Head of UBS’s Real Estate Investment Banking Group, and various other leadership roles which include a prior period at Morgan Stanley and tenures at Bankers Trust Company and Salomon Brothers, Inc. Mr. Hsieh is a graduate of the University of California at Berkeley and earned a master’s degree from Harvard University.
Michael Hughes, Age 45 Executive Vice President, Chief Financial Officer (effective April 1, 2018)		Michael Hughes serves as Executive Vice President and Chief Financial Officer. In addition, Mr. Hughes serves on the Company’s Investment Committee and Management Operating Committee that monitors business activities and defines company strategy. Prior to joining Spirit in April 2018, Mr. Hughes served as Executive Vice President and Chief Financial Officer at FelCor Lodging Trust from 2013 through the close of the company’s merger with RLJ Lodging Trust in 2017. Prior to that, he held various roles in corporate finance at FelCor from 2006 to 2013, and held multiple roles at Wyndham International, Inc. from 2002 to 2006, most recently serving as Vice President, Corporate Finance. Mr. Hughes was awarded a bachelor’s degree in business from Rhodes College and is a holder of the Chartered Financial Analyst® designation.
Ken Heimlich, Age 54 Executive Vice President, Head of Asset Management (effective April 3, 2018)		Ken Heimlich joined Spirit in March 2017 and serves as Executive Vice President and Head of Asset Management. In this role, he has oversight responsibility for portfolio management, servicing, dispositions, lease administration, property management, underwriting, and construction. In addition, Mr. Heimlich serves on the Company’s Investment Committee and Management Operating Committee that monitors business activities and defines company strategy. Mr. Heimlich has extensive experience in the REIT industry having served as Managing Principal at Capital Formation, LLC, a net lease real estate advisory firm, as well as in several senior leadership roles at GE Capital, Franchise Finance. During his tenure at GE Capital, he successfully led the IPS and Surplus platforms for a 2,000+ property portfolio, built and directed a nationwide retail development platform, and managed a 500-property triple net lease portfolio. Mr. Heimlich earned a bachelor’s degree in finance from Eastern Illinois University.
Jay Young, Age 50 Executive Vice President, General Counsel (effective April 25, 2016)		Jay Young serves as Executive Vice President and General Counsel. In addition, Mr. Young serves on the Company’s Investment Committee and Management Operating Committee that monitors business activities and defines company strategy. Prior to joining Spirit in April 2016, Mr. Young served as Senior Vice President and General Counsel for Wingstop, Inc., and In-House Counsel for CEC Entertainment, Wachovia Corporation and UBS. Mr. Young holds a bachelor’s degree in economics from Southern Methodist University, a Juris Doctor from the University of Oklahoma College of Law and a Master of Business Administration from the University of Oklahoma Price College of Business.

 

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COMPENSATION DISCUSSION AND ANALYSIS

COMPENSATION COMMITTEE REPORT

The Compensation Committee has reviewed and discussed with management the following Compensation Discussion and Analysis and, based on such review and discussions, recommended to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement.

COMPENSATION COMMITTEE

Kevin M. Charlton, Chairperson

Richard I. Gilchrist

Sheli Z. Rosenberg

Nicholas P. Shepherd

This Compensation Discussion and Analysis describes our 2019 compensation program for our principal executive officer (Jackson Hsieh), our principal financial officer (Michael Hughes), and our two other most highly compensated executive officers during 2019, Ken Heimlich and Jay Young (collectively, our “Named Executive Officers” or “NEOs”).

In particular, this discussion and analysis provides an overview of our executive compensation philosophy, the overall objectives of our executive compensation program, how each element of our executive compensation program is designed to satisfy those objectives, and the policies underlying our 2019 executive compensation program and the compensation awarded to our Named Executive Officers for 2019. The following discussion and analysis of compensation arrangements of our Named Executive Officers should be read together with the compensation tables and related disclosures.

INVESTOR OUTREACH AND COMPENSATION PROGRAM CHANGES

Say on Pay—Investor Outreach

At the 2019 Annual Meeting of Shareholders, approximately 55% of the votes cast were in favor of the advisory vote to approve the Company’s executive compensation. While the vote reflected continued majority support of the Company’s executive compensation program, this level of support was both a decline from previous years and also below what the Board and management consider satisfactory.

In order to better understand our investors’ views regarding our executive compensation program, we undertook an extensive shareholder outreach and engagement initiative. We contacted 38 institutional investors representing 81% of our outstanding shares, and ultimately held meetings with 16 institutional investors representing approximately 59% of our outstanding common stock. In addition, we had discussions with two proxy advisory firms, Institutional Shareholder Services and Glass Lewis.

 

 

The Chairman of our Compensation Committee and Chairman of the Board led the majority of these meetings to discuss our executive pay and its alignment with performance and the Company’s strategy and change in leadership, and to solicit feedback on our compensation program and practices. Following the 2019 Annual Meeting, the Compensation Committee also engaged a new compensation consultant, FPL, a nationally recognized compensation consulting firm specializing in the real estate industry, to assist it in reviewing our executive compensation program.

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

Changes to the Executive Compensation Program

Our shareholders provided candid, constructive feedback, which was shared with the entire Board. The Committee carefully considered this feedback and implemented changes to our executive compensation program that are responsive to the views that we heard. The table below details several common areas of shareholders’ feedback we received during our engagements with them and the actions the Committee took for our 2020 compensation program to address investors’ perspectives on our executive compensation program. The Committee is confident that these changes reflect our Board’s ongoing commitment to shareholder engagement and responsiveness.

 

 

 

Topic		Shareholder Feedback		Spirit’s Response
CEO Pay Magnitude		•  Magnitude of CEO pay does not align with peers, particularly when factoring in the Company’s size and historical performance		•  Reduced base salary for our CEO from $900,000 in 2019 to $875,000 in 2020   •  Reduced the target cash bonus opportunity for our CEO down from 175% to 150% of base salary and also the target LTIP opportunity down from 550% to 500% of base salary
LTIP Design		•  A higher allocation of the CEO’s LTIP equity grant should be tied to performance-based vesting, and conversely, a lower percentage of the CEO’s LTIP equity grant should be tied to time-based vesting		•  Increased the portion of our CEO and other executives’ annual LTIP equity grant tied to Company performance from 50% to 60%   •  Reduced the amount tied to time-based vesting for our CEO from 50% to 40%
Proxy Disclosure		•  More clarity and disclosure is desired with respect to the rationale of compensation decisions, including one-time awards and enhanced disclosure around the subjective portion of the annual bonus plan		•  Revamped proxy disclosure throughout, providing additional and clear rationale with respect to our pay decisions, and the linkage to performance   •  Enhanced disclosure around individual accomplishments and how such accomplishments correlate to bonus payouts
Rigor of Targets		•  The rigor of the compensation system should be increased, in particular eliminating the occupancy metric in the cash bonus plan and strengthening the target goal of the LTIP		•  Eliminated occupancy as a goal in the cash bonus plan   •  Increased the target total shareholder return in our LTIP whereby we must now have a total TSR equal to the 55th percentile (as opposed to the 50th percentile) compared to our Peer Group in order to receive a target payout
One-Time Grant		•  Shareholders generally oppose one-time awards and believe they should be used only in limited circumstances		•  With the completion of our leadership transition and company transformation, we do not anticipate granting any further one-time awards to our CEO

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

Topic		Shareholder Feedback		Spirit’s Response
Employment Agreements		•  Double-trigger equity vesting should apply upon a change-in-control		•  Applied double-trigger vesting upon change-in-control to 2020 and later performance-based awards for all executives (time-based LTIP equity grants historically have had double-trigger vesting)   •  All 2020 and later equity awards are now subject to double-trigger vesting upon a change in control
Peer Group		•  In light of the recent spin-off of SMTA, and Spirit’s consequently smaller size, the peer group should be re-examined to ensure that multiple outsized peers are not being used		•  Undertook a fresh evaluation of our peer group to better align our size with that of the peers and made changes accordingly   •  For example, despite being direct peers in the net-lease REIT business, we excluded Realty Income Corporation from our new compensation peer group in light of the meaningful size differential

EXECUTIVE SUMMARY

Compensation Philosophy and Objectives

The Compensation Committee believes that the executive compensation program should emphasize pay-for-performance and reflect the value created for our shareholders, while supporting our business strategies, operational goals and long-range plans. In addition, the Compensation Committee believes that such compensation should assist the Company in attracting and retaining key executives critical to our long-term success.

Pay for Performance

We emphasize pay for performance by designing the executive compensation program to align Company-wide financial and operational achievements through the use of annual cash bonuses and performance-based long-term equity awards granted to our Named Executive Officers.

Attract and Retain Talent

Our executive compensation philosophy also recognizes that, given that the market for experienced management is highly competitive in our industry, the core of our success is our ability to attract and retain the most highly-qualified executives to manage each of our business functions.

Fundamentally, we believe executive officer compensation should be structured to provide competitive base salaries and benefits, which attract and retain superior executives. Additionally, we use annual performance-based cash compensation to motivate executive officers to attain (and reward them for attaining) financial, operational, individual and other goals that are consistent with increasing stockholder value. Our LTIP employs a combination of restricted stock grants and performance share awards, both of which vest over time, to motivate and/or reward long-term, multi-year performance and facilitate retention of our executives. Our executives’ performance share awards vest at the end of a multi-year period based on the TSR we deliver relative to our peers, strongly aligning our executives’ interests with those of our shareholders.

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

Balanced Mix of Compensation, Weighted Towards Variable Pay Elements.

The Compensation Committee believes that a balanced mix of compensation elements, significantly weighted towards variable at-risk pay elements, provide the intended alignment of executive compensation with the Company’s performance and stockholder interests. The structure also provides the necessary fixed and knowable minimum and short and long-term incentive opportunities necessary to attract, motivate and retain talented and experienced executive officers.

The following graphs⁽¹⁾ show the emphasis we placed on variable at-risk pay elements, such as performance-based cash bonuses and LTIP equity awards, for all of our Named Executive Officers in 2019.

 

 

 

 

(1)	Restricted Stock and Performance Share awards were calculated for purposes of the above graphics using the grant date fair value of restricted stock awards and performance share awards calculated in accordance with ASC Topic 718.

Commitment to Compensation Best Practices

We view the components of our executive compensation program as related but distinct, and we regularly reassess the total compensation of our Named Executive Officers to ensure that our overall compensation objectives are met. Our Compensation Committee meets frequently to address compensation matters in a timely manner and regularly reviews our executive compensation program to ensure that it provides competitive pay opportunities to help attract and retain highly-qualified and dedicated executive talent that is critical to our business.

As part of its commitment to strong corporate governance and best practices, our Compensation Committee engaged and received advice on the compensation program from FPL, an independent, third-party compensation consultant, which provided no other services to us in 2019 other than those provided directly to or on behalf of the Compensation Committee.

In addition, we have an insider trading policy and a compensation recoupment policy, as well as stock ownership guidelines for our senior executives and our Board members.

Each of the primary elements of our executive compensation program is discussed in more detail below. While we have identified particular compensation objectives that each element of executive compensation serves, our compensation program is designed to be flexible and complementary, and to collectively serve all of the executive compensation objectives described above. Accordingly, whether or not specifically mentioned below, we believe that as a part of our overall executive compensation policy, each individual element, to a greater or lesser extent, serves each of our compensation objectives and that collectively, they are effective in achieving our overall objectives.

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

Compensation Practices at a Glance

 

DO provide executive officers with the opportunity to earn market-competitive compensation through a mix of cash and equity compensation with a strong emphasis on performance-based LTIP awards.   DO align pay and performance by linking a substantial portion of compensation to the achievement of pre-established performance metrics that drive stockholder value.   DO evaluate TSR when determining performance under LTIP performance share awards to enhance stockholder alignment.   DO cap payouts for awards under our annual bonus plan and LTIP plan.   DO require executive officers to own and retain shares of our common stock to further align interests with our shareholders.   DO enhance executive officer retention with time-based vesting schedules for a portion of LTIP awards.   DO enable the Board to “claw back” incentive compensation in the event of a financial statement restatement pursuant to a recoupment policy.   DO maintain a Compensation Committee comprised solely of independent directors.   DO engage an independent compensation consultant to advise the Compensation Committee on executive compensation matters.		DO NOT base LTIP awards on a single performance metric, thereby discouraging unnecessary or excessive risk-taking.   DO NOT provide uncapped award opportunities.   DO NOT have employment agreements with executive officers that provide single-trigger change of control benefits.   DO NOT permit executive officers or directors to engage in derivative or other hedging transactions in our securities.   DO NOT provide executive officers with excessive perquisites or other personal benefits.   DO NOT permit executive officers or directors to hold our securities in margin accounts or pledge our securities to secure loans without pre-approval by the Audit and Compensation Committees (no executive officer or director pledged or held our securities in margin accounts at any time during 2019).   DO NOT provide for tax gross-up payments for compensation or benefits paid in connection with a change in control.

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

Transformation of Spirit under our Chief Executive Officer’s Leadership and 2019 Performance and Financial Results

In 2019, Spirit completed the transformation we began over two years ago. In August 2017, we communicated to our shareholders that, while we were faced with several challenges, we had a plan. We had a vision. We told investors over the last two years that we were going to become a simplified triple net lease REIT with the following attributes: 1) competitive cost of the capital; 2) fortress balance sheet; 3) high quality real estate portfolio; 4) strong operating systems; 5) defined and disciplined investment strategy; and 6) outstanding people.

In 2019, we delivered on those promises.

2019 Milestones include:

 

Executed on business strategy of becoming a simplified triple-net REIT through the resolution of SMTA, receiving $265 million in aggregate proceeds

Delivered strong operating performance with minimal lost rent, over 99% occupancy and reduced property cost leakage compared to prior years

Improved tenant diversity reducing the top 10 concentration from 24.4% in 2018 to 22.2% in 2019

Returned to the capital markets issuing approximately $677 million in equity and $1.2 billion in unsecured bonds, the largest capital markets year in the Company’s history

Received credit upgrade from both S&P and Fitch from BBB- to BBB

Reduced Spirit’s weighted average cost of capital (WACC) to 5%, the lowest in the Company’s history

Spirit shareholders who retained their shares of SMTA received a 23% total shareholder return

Delivered total shareholder returns of 48% compared to the RMZ index of 26% and net lease comparable set of 27%

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

 

 

COMPENSATION DETERMINATION

Roles of our Compensation Committee and Chief Executive Officer in Compensation Decisions: The Compensation Committee oversees our compensation program for all Named Executive Officers, subject, in the case of our Chief Executive Officer, to the Board’s approval.

Our Chief Executive Officer evaluates the individual performance and contributions of each other Named Executive Officer and reports to the Compensation Committee his recommendations regarding their compensation. Our Chief Executive Officer does not participate in any formal discussion with the Compensation Committee or the Board regarding decisions on his own compensation and recuses himself from meetings when his compensation is discussed. The Board or the Compensation Committee, as applicable, approves compensation for each of the Named Executive Officers.

We do not solely rely on formulaic guidelines to determine the mix or levels of cash and equity-based compensation, but rather maintain a flexible compensation program that allows us to adapt components and levels of compensation to motivate, reward and retain individual Named Executive Officers within the context of our desire to attain financial and operational objectives consistent with our strategic goals and stockholder interests. Subjective factors considered in compensation determinations include the Named Executive Officer’s responsibilities, leadership abilities, skills, contributions as a member of the executive management team and to our overall performance, and whether the total compensation potential and structure is sufficient to ensure the retention of a Named Executive Officer when considering the compensation potential that may be available elsewhere.

Engagement of Compensation Consultants: For 2019, the Compensation Committee retained the services of a new independent compensation consultant, FPL, to provide assistance to the Compensation Committee in reviewing market data on compensation, understanding industry executive compensation trends, determining and managing risks associated with elements of our executive compensation program and assisting with the Company’s incorporation of responses we received from our shareholders in connection with our shareholder engagement efforts.

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

Peer Group

As an initial step in its annual review of executive and director compensation, the Compensation Committee, in consultation with FPL, considered investor feedback and the completion of the Company’s spin-off of assets that resulted in SMTA in 2018, and decided to revise the compensation peer group. The peer group utilized in assessing 2019 compensation consisted of the following companies:

 

		Duke Realty Corporation EPR Properties Federal Realty Investment Trust Gramercy Property Trust, Inc. Healthcare Trust of America, Inc. Lexington Realty Trust National Retail Properties, Inc. Omega Healthcare Investors, Inc. Realty Income Corporation SITE Centers Corp. STORE Capital Corporation VEREIT, Inc. W. P. Carey Inc.

Using the below methodology and best practices, the Compensation Committee, with input from FPL, developed a new peer group for consideration in determining 2020 compensation.

 

 

•

Consider size to identify peers that fall within the generally accepted size parameters of 0.5x to 2.0x our total capitalization

 

•

Consider operational activity and asset class to select other retail, net lease and/or asset management intensive REITs

 

•

Consider other characteristics such as geographic location and company performance

 

•

Consider other key questions such as:

 

–

Who are our direct competitors?

 

–

Who do we compete with for recruiting talent or where might our employees find employment elsewhere?

 

–

Who cites Spirit as a peer?

The peers in the revised compensation peer group were selected primarily on the basis of appropriate size (as defined by total capitalization), although operational activity (net lease and/or asset management intensive REITs) and the additional characteristics listed above were also considered. Additionally, the Compensation Committee also considered asset class and geography when selecting the new peers. As such, some of the larger net lease companies in the peer group for 2019 compensation were largely replaced with REITs that fall within the generally accepted size parameters of a peer group company (0.5x to 2.0x the size of Spirit by total capitalization). Changes to the peer group for 2020 compensation based on the above criteria are shown below.

 

 

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

The peer group developed in 2019 that will be used in setting 2020 compensation consists of the following 18 public REITs:

 

		Peer		Industry		2019 UPREIT Market Capitalization				2019 Total Capitalization
MPW		Medical Properties Trust, Inc.		Health Care		$	10,928.4			$	17,952.2
VER		VEREIT, Inc.		Other Retail		$	9,957.3			$	16,659.0
FRT		Federal Realty Investment Trust		Shopping Center		$	9,802.8			$	13,604.9
STOR		STORE Capital Corporation		Diversified		$	8,931.0			$	12,551.4
NNN		National Retail Properties, Inc.		Other Retail		$	9,206.2			$	12,549.4
HTA		Healthcare Trust of America, Inc.		Health Care		$	6,670.3			$	9,622.2
MAC		Macerich Company		Regional Mall		$	4,088.9			$	9,611.8
EPR		EPR Properties		Diversified		$	5,542.6			$	9,252.1
PGRE		Paramount Group, Inc.		Office		$	3,510.5			$	7,764.4
SRC		Spirit Realty Capital, Inc.		Other Retail		$	5,039.8			$	7,372.7
SBRA		Sabra Health Care REIT, Inc.		Health Care		$	4,379.1			$	6,791.0
PEB		Pebblebrook Hotel Trust		Hotel		$	3,507.0			$	6,567.7
AKR		Acadia Realty Trust		Shopping Center		$	2,387.3			$	4,874.5
RPAI		Retail Properties of America, Inc.		Shopping Center		$	2,862.2			$	4,581.9
LXP		Lexington Realty Trust		Diversified		$	2,739.5			$	4,207.3
WPG		Washington Prime Group Inc.		Regional Mall		$	806.5			$	4,080.3
UE		Urban Edge Properties		Shopping Center		$	2,439.8			$	4,069.3
SRG		Seritage Growth Properties		Other Retail		$	2,286.4			$	3,962.5
RPT		RPT Realty		Shopping Center		$	1,229.7			$	2,272.0
		Source: S&P Global as of December 31, 2019

 

The total market capitalization as of year-end 2019 of the new compensation peer group set for 2020 is as follows:

 

 

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

Also beginning in 2020, the Board, in consultation with FPL, selected a new performance peer group for purposes of assessing relative TSR performance under the performance share awards in the LTIP. This allows performance-based equity compensation to be measured against a more focused net-lease peer group that is more closely aligned to the Company’s business. For 2020, this performance peer group consists of:

 

Realty Income Corporation		W.P. Carey, Inc.
National Retail Properties, Inc.		EPR Properties
STORE Capital Corporation		Lexington Realty Trust
VEREIT, Inc.		Agree Realty Corporation
Essential Properties Realty Trust, Inc.

Compensation Program Components

Each of the following elements of our compensation program taken separately, and as a whole, are necessary to support the Company’s overall compensation objectives. The following table sets forth the key elements of our Named Executive Officers’ compensation, along with the primary objective associated with each element of compensation:

 

Pay Element		2019 Program		Changes for 2020 Program		Objectives
Base Salary		•  Reviewed annually and adjusted based on individual skill set, time in role, and pay relative to peers		•  Reduction in 2020 Base Salary for our CEO •  No Base Salary increases for our other Named Executive Officers		•  Compensate ongoing performance of job responsibilities and provide a fixed and knowable minimum income level as a necessary tool in attracting and retaining executives
Annual Cash Bonus		•  80% tied to corporate objectives •  20% tied to individual performance goals		•  84% will be tied to corporate objectives •  16% will be tied to individual performance goals		•  Incentivize and reward the attainment of short-term corporate objectives and individual contributions to the achievement of those objectives •  Performance metrics selected drive stockholder value creation
Time-Based Restricted Stock Awards		•  50% of our LTIP equity awards are time-based and vest ratably over three years		•  40% of our executives’ LTIP equity awards will be time-based and vest ratably over three years		•  To retain our executives as these awards vest over time, and build stock ownership positions, aligning interests of our executives with stockholder interests and encouraging the maximization of stockholder value
Performance-Based Awards		•  50% of LTIP equity awards vest on three-year TSR performance (relative TSR versus performance peer group)		•  60% of our executives’ LTIP equity awards will vest based on relative TSR performance		•  To emphasize long-term performance objectives, provides a pay-for-performance structure and rewards executives for TSR objectives, aligning executive interests with shareholders

Base Salary — Providing Knowable Income Commensurate with Responsibilities and Experience:

We provide our Named Executive Officers with a base salary to compensate them for services rendered to our Company during the fiscal year. The base salary payable to each Named Executive Officer is intended to provide a fixed component of compensation reflecting the executive’s skill set, experience, role and responsibilities. Generally, factors considered for initial base salary amounts include, but are not limited to, the scope of the Named Executive Officer’s responsibilities, years of service, and general knowledge of our Compensation Committee or Chief Executive Officer of the competitive market based on, among other things, experience with other companies and our industry. The base salaries of our Named Executive Officers are reviewed periodically by our Compensation Committee or Chief Executive Officer and merit salary increases have been made as deemed appropriate based on such factors including the scope of an executive officer’s responsibilities, individual contribution, prior experience and sustained performance.

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

Cash Bonus Program — Linking Short-Term Financial Performance and Strategic Initiatives to Compensation:

Annual cash bonuses are focused primarily on short-term Company financial performance, as well as individual performance metrics linked to important strategic initiatives. They are earned based upon achievement of Company-wide performance goals and the Compensation Committee’s assessment of individual performance for the applicable year.

Under the 2019 cash bonus program (“2019 Cash Bonus Program”), 80% of each executive officer’s cash bonus, increased from 75% in 2018 and 70% in 2017, was based on the Company’s achievement in 2019 of performance goals relating to (i) Adjusted Debt to Annualized Adjusted EBITDAre (a supplemental non-GAAP financial measure meaning earnings of the Company before interest, taxes, depreciation and amortization and other adjustments) (defined herein as “Debt to EBITDA Leverage”); (ii) occupancy; (iii) capital deployment (includes acquisitions made in accordance with the Company’s Investment Guidelines and Stock Repurchase Program) and (iv) AFFO per share (collectively, the “2019 Key Performance Measures”). 20% of each executive officer’s cash bonus, decreased from 25% in 2018 and 30% in 2017, was based on individual performance and is evaluated based on the Compensation Committee’s assessment of individual performance against pre-determined performance goals, with input from our Chief Executive Officer with respect to the other Named Executive Officers and from the Board with respect to our Chief Executive Officer.

Long Term Incentive Plan—Aligning Executive Compensation with Value Creation:

Our LTIP employs a combination of restricted stock grants and performance shares which vest over time to motivate and/or reward long-term, multi-year performance and facilitate retention of our executives.

Restricted stock awards, which generally vest over a three-year period, create a balanced focus on the achievement of short-term and long-term financial and operational goals and stock price performance.

Performance share awards are earned based on performance over a three-year performance cycle. In 2019, pursuant to the performance share awards, each participant was eligible to vest in and receive shares of the Company’s common stock based on an initial target number of shares granted multiplied by a percentage ranging between 0% and 250%, depending on the Company’s TSR during the performance period. The percentage range is based on the Company’s TSR compared to that of specified peer groups of companies during the performance period, which for the awards made in 2019 is from January 1, 2019 through December 31, 2021. For each performance share that ultimately vests, its holder is entitled to a cash payment equal to the aggregate dividends that would have been paid on the total number of performance shares as if such shares had been outstanding on each dividend record date over the period from the grant date through the issuance of the share. In the event of a non-qualifying termination of a participant prior to the performance period end date, all of the rights to performance shares will be automatically forfeited along with the participant’s rights to the cash payment of any dividend equivalent.

In setting LTIP award levels, our Compensation Committee considers resulting total compensation to our executives, including all elements of compensation described above, our Company’s performance and the market for compensation of executives of competitors and other comparable market participants.

2019 EXECUTIVE COMPENSATION

The following describes the primary components of our 2019 executive compensation program for each of our Named Executive Officers, the rationale for each component and how compensation amounts were determined. As discussed earlier in this Proxy, many features of the compensation program have been modified for 2020. The section below, however, describes the features and outcome of the program in place for 2019.

As mentioned above, our Named Executive Officers for 2019 are our principal executive officer (Mr. Jackson Hsieh), our principal financial officer (Mr. Michael Hughes) and our other most highly compensated executive officers during 2019, our Executive Vice President, Asset Management (Mr. Ken Heimlich) and our Executive Vice President, General Counsel and Secretary (Mr. Jay Young).

Base Salary

In its review of base salaries for 2019, the Compensation Committee considered the Company’s operating results and the positioning of the Company’s salaries for the Named Executive Officers as compared to similarly situated executives in the Company’s 2019 compensation Peer Group. Based on that review, the Compensation Committee approved no salary increase for Mr. Hsieh in 2019.

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

The 2018, 2019, and 2020 base salaries for each Named Executive Officer are set forth in the table below, which includes no base salary increases in 2020 for any Named Executive Officer and a base salary reduction for our Chief Executive Officer.

 

Named Executive Officer		2018 Base Salary($)				2019 Base Salary($)				2020 Base Salary($)
Jackson Hsieh			900,000				900,000				875,000	(1)
Michael Hughes			450,000				463,500				463,500
Ken Heimlich			377,400				388,722				388,722
Jay Young			355,000				365,650				365,650

 

(1)	Pursuant to Mr. Hsieh’s Second Amended and Restated Employment Agreement dated February 27, 2020.

Annual Performance Based Cash Incentive Compensation

We use cash bonuses to motivate our Named Executive Officers to achieve our short-term financial and strategic objectives while making progress towards our longer-term growth and other goals. In February 2019, our Compensation Committee approved the 2019 Cash Bonus Program, which ties our executives’ annual cash incentive awards closely to our financial performance, thereby aligning their interests of management with the interests of our shareholders. All of our Named Executive Officers were eligible to participate in the 2019 Cash Bonus Program.

The total annual cash bonus under the 2019 Cash Bonus Program (the “2019 Cash Bonus”) is allocated between (a) amounts paid pursuant to achievement of the objective pre-approved 2019 Key Performance Measures – Debt to EBITDA Leverage, Occupancy, Capital Deployment, and AFFO per share (such portion, the “2019 Company Performance Bonus”), and (b) amounts paid pursuant to the Compensation Committee’s or Board’s subjective assessment of the executive’s individual performance against pre-established goals (described below) (such portion, the “2019 Individual Bonus”). The 2019 Company Performance Bonus accounts for 80%, increased from 75% in 2018, of the target 2019 Cash Bonus opportunity.

Under the 2020 cash bonus program, the amount allocated to achievement of key company performance measures will be further increased to 84%.

Our Compensation Committee approved threshold, target and maximum bonus opportunities for each executive under the 2019 Cash Bonus Program, taking into consideration the degree of difficulty to achieve the targets, which are set forth below expressed as a percentage of each executive’s annual base salary:

 

Named Executive Officer		Threshold Bonus				Target Bonus				Maximum Bonus
Jackson Hsieh			87.5	%			175	%			350	%
Michael Hughes			62.5	%			125	%			200	%
Ken Heimlich			62.5	%			125	%			200	%
Jay Young			62.5	%			125	%			200	%

The Company’s performance goals and actual results under the 2019 Cash Bonus Program were as follows:

 

2019 Key Performance Measures		Threshold		Target		Maximum		Actual
Debt to EBITDA Leverage		5.4		5.1		5.0		4.9
Occupancy		97.50%		98.25%		99.00%		99.70%
Capital Deployment (1)		$400MM		$500MM		$550MM		$1,338MM
AFFO per Share (2)		$3.30		$3.35		$3.42		$3.45

 

(1)

Per the 2019 Cash Bonus Program, capital deployment includes acquisitions and revenue producing capital expenditures made in accordance with the Company’s Investment Guidelines and stock repurchases made in accordance with the Company’s Stock Repurchase Program. In 2019, there were no stock repurchases made by the Company, and accordingly the above “Actual Number” for this metric is comprised entirely of real estate acquisitions and revenue producing capital expenditures.

 

(2)

Per the 2019 Cash Bonus Program, actual AFFO per share was to be adjusted to reflect the loss of SMTA-related revenues in the event of an SMTA change in control. The above “Actual” number for AFFO per share reflects an $0.11 AFFO per share adjustment as a direct result of the loss of SMTA revenue in connection with SMTA’s early termination of the SMTA asset management contract on September 20, 2019.

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

Metric Selection

Details regarding the rationale for and results for each 2019 Key Performance Measure for the 2019 Company Performance Bonus are detailed below:

Debt to EBITDA Leverage

Weighting: 20%

Goals:

 

Threshold			5.4
Target			5.1
Maximum			5.0

Why does this measure matter? Debt to EBITDA Leverage is a common measure used by REIT analysts and investors to assess and compare balance sheet health, access to the capital markets, cost of capital, ability to service debt and credit worthiness. The Compensation Committee believed these goals were appropriately challenging as the Debt to EBITDA Leverage ratio at the end of 2018 was 5.1, the Company had not meaningfully accessed the capital markets since 2016 and it was critical to achieving the Company’s desired cost of capital.

Result: Achieved Maximum Performance Goal. Our 2019 Debt to EBITDA Leverage was 4.9, exceeding the maximum performance goal. The result was largely due to actions led by our Named Executive Officers, principally our equity and debt transactions whereby we issued almost $1.9 billion in securities, leading to our credit upgrade to BBB.

AFFO Per Share

Weighting: 20%

Goals:

 

Threshold		$	3.30
Target		$	3.35
Maximum		$	3.42

Why does this measure matter? AFFO per share is a common measure used by REIT analysts and investors to assess on-going operating performance. AFFO is a non-GAAP number which is reconciled to and mostly closely associated with net income. The goals were consistent with our public guidance and the Compensation Committee believed these goals were appropriately challenging due to the uncertainty of resolving SMTA, necessity to access the capital markets, and the requirement to close accretive acquisitions.

Result: Achieved Maximum Performance Goal. Our 2019 AFFO per share for purposes of this metric was $3.45 which, per specific adjustments set forth in the Compensation Committee’s approved 2019 Cash Bonus Program, reflects $0.11 more than the Company’s actual reported AFFO of $3.34. This $0.11 adjusts the AFFO per share for purposes of this metric by including the amount of AFFO per share that would have been received by the Company had SMTA not undergone a change of control and had paid the Company the amounts owed as Asset Manager through December 31, 2019. The variance between our actual results and our pre-established goals was largely due to actions led by our Named Executive Officers, principally our $1.3 billion in accretive acquisitions and capital expenditures, approximately $1.9 billion in equity and debt issuance, lower interest expense, and significant reduction in percentage of lost rent.

Occupancy

Weighting: 20%

Goals:

 

Threshold			97.50	%
Target			98.25	%
Maximum			99.00	%

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

Why does this measure matter? Occupancy is a common measure used by REIT analysts and investors to assess and compare the health of a REIT’s real estate portfolio, including lost rent, property cost leakage, defaults, renewals and relets. Declining occupancy can indicate deterioration in the overall quality of the portfolio, specifically the quality of the real estate and the quality of the tenant, as well as poor management of specific assets in the portfolio. The Compensation Committee believed these goals were appropriately challenging as attaining 97.5%–99.0% occupancy requires strong credit underwriting, industry research, property rankings and asset/tenant management.

As mentioned in more detail herein, we have removed occupancy from our 2020 cash bonus program to address shareholder concerns regarding the rigor of this particular metric.

Result: Achieved Maximum Performance Goal. Our occupancy for 2019 was 99.3%-99.7%, exceeding the maximum performance goal. The result was largely due to actions led by our Named Executive Officers, principally our integrated approach to the asset lifecycle, which includes input from credit and underwriting, deal execution and asset/tenant management.

Capital Deployment

Weighting: 20%

Goals:

 

Threshold		$	400 million
Target		$	500 million
Maximum		$	550 million

Why does this measure matter? Effective capital deployment is essential to the operational and financial performance of REITS. Disciplined capital allocation through accretive acquisitions, complemented by equity and debt issuances at attractive cost of capital levels, reflect a REIT that has access to capital at an attractive cost relative to the returns generated by new acquisitions and the existing portfolio. Capital is also effectively deployed through the accretive repurchase of stock.

Result: Achieved Maximum Performance Goal. Our 2019 Capital Deployment was approximately $1.3 billion, all of which were real estate acquisitions and revenue producing capital expenditures (there were no stock repurchases made by the Company in 2019). The variance between our actual results and our pre-established goals was largely due to actions led by our Named Executive Officers, principally our $1.3 billion capital expenditure in accretive acquisitions which was achieved through the disciplined, integrated process of credit underwriting, research, and efficient execution by the closing department.

Our 2019 performance exceeded the maximum performance objectives set under the 2019 Cash Bonus Program in the case of each of the 2019 Key Performance Measures.

2019 Individual Bonus

Individual performance under management

objectives established for each Named Executive Officer

Weighting: 20%

Goals:

When determining the amounts paid pursuant to the 2019 Individual Bonus, the Compensation Committee considered performance of each executive as it relates to: (i) the specific goals set forth below for each individual Named Executive Officer; (ii) leadership, (iii) development and execution of overall business strategy, (iv) risk management, and (v) effective communications with the Board, in each case considering the challenges confronting each individual executive officer and the Company throughout 2019.

In addition, the Compensation Committee considered the successful execution of three key Company objectives in 2019 in determining the individual performance component of our Named Executive Officers’ 2019 Cash Bonus: (1) becoming a simplified net lease REIT through the resolution of SMTA, (2) strong operating results, and (3) robust capital deployment through accretive acquisitions.

In addition to overall executive leadership and managerial performance, below are the specific goals that were set for each Named Executive Officer as to determination of the 2019 Individual Bonus. Individual objectives relate to areas of special emphasis within the executive’s particular responsibilities and duties, such as achieving certain departmental and Company

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

strategic, financial and operating goals, achieving other extraordinary or unusual accomplishments or contributions, and appropriately managing the Company’s risk. For each Named Executive Officer, the individual goals were rated by the Compensation Committee or the Board according to a 1-5 ranking system in order to generate an overall rating for each Named Executive Officer.

Jackson Hsieh, President and Chief Executive Officer

Mr. Hsieh’s individual goals and results for 2019 were generally as follows:

 

Goal
1.		Accretive resolution of SMTA through the strategic alternatives process
2.		Ensure consistent and predictable operating performance
3.		Promote a stable and motivated organization
4.		Improved investor and stakeholder communication
5.		Effective allocation of capital and deal allocation flow
6.		Enhanced focus on proxy-related matters
7.		Focus on long-term succession plan
Overall Rating – 5: Exceeds Expectations

Michael Hughes, EVP and CFO

Mr. Hughes’ individual goals and results for 2019 were generally as follows:

 

Goal
1.		Improved investor relations and communications efforts
2.		Management of the company’s capital plan, including issuance of debt and equity
3.		Effective board communication
4.		Providing insight as to company strategy
5.		Effectively manage direct reports and critical functions to ensure effective controls and procedures are in place and working as designed
Overall Rating – 5: Exceeds Expectations

Ken Heimlich, EVP of Asset Management

Mr. Heimlich’s individual goals and results for 2019 were generally as follows:

 

Goal
1.		Execute 2019 Disposition Plan–Meet (i) targeted timing, (ii) gross proceeds and (iii) blended execution cap rate
2.		Establish sound credit practices for (i) new acquisition underwriting and (ii) portfolio monitoring
3.		Clear, timely and accurate communication with FP&A on all asset management matters impacting SRC’s income statement and/or balance sheet
4.		Develop departmental (i) bench strength and (ii) domain expertise
5.		Develop personally as an executive leader
Overall Rating – 5: Exceeds Expectations

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

Jay Young, EVP and General Counsel

Mr. Young’s individual goals and results for 2019 were generally as follows:

 

Goal
1.		Facilitate sale of SMTA assets and wind up of SMTA
2.		Facilitate accretive acquisitions
3.		Continue to develop legal and closing department teams
4.		Facilitate improvements to the proxy and annual meeting disclosures and process and enhancements to third party governance scores
5.		Oversee the implementation of multiple HR initiatives related to company culture and employee development
6.		Effective presentation of legal, risk and HR matters for Board at regularly scheduled meetings
Overall Rating – 5: Exceeds Expectations

Why does this measure matter? A review of each Named Executive Officer’s individual accomplishments enables our Compensation Committee to evaluate the specific contributions of the Named Executive Officer to our success and more closely link pay to performance.

Overall Result: Between Target and Maximum Performance. Each of our Named Executive Officers outperformed with respect to his tailored individual objectives. Despite this outperformance, all Named Executive Officers received a payout for the 2019 Individual Bonus portion of the total 2019 Cash Bonus that is between target and maximum. Payment of a bonus based on individual performance metrics that is between target and maximum in a year of strong individual performance is consistent with the Board’s philosophy; despite what we deem to have been an extraordinary year, we felt it was appropriate to recognize the strong efforts of the team and funded bonuses lower than maximum levels.

The table below shows the total target cash bonus, the actual bonus received, and the actual cash bonus compared to the target cash bonus, expressed as a percentage, for each Named Executive Officer under the 2019 Cash Bonus Program:

 

Named Executive Officer		2019 Target Cash Bonus (% Base Salary)				2019 Target Cash Bonus ($)				Total 2019 Cash Bonus Actually Received ($)				Total 2019 Cash Bonus Actually Received (% of Base Salary)
Jackson Hsieh			175				1,575,000				2,992,500				332.5
Michael Hughes			125				579,375				892,238				192.5
Ken Heimlich			125				485,903				748,290				192.5
Jay Young			125				457,063				703,876				192.5

 

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