The Association of U S West Retirees



CEO pay gone wild
By Steven Syre, Columnist
Boston Globe
Tuesday, January 10, 2006

What do you give the chief executive who has everything?

Heritage Property Investment Trust of Boston, a leader on this nagging business question, may have finally painted itself into a corner with pay packages awarded to chief executive Thomas Prendergast.

Prendergast was already established as a lavishly compensated executive when the modest-size real estate investment trust he leads ran into a problem last fall.  His cash compensation, benefits, and stock awards have averaged just under $9 million annually over the previous three years.  Of course, there were stock options too.

Heritage gave Prendergast 530,000 options over the past three reported years, but that wasn't all.  It promised to pay his taxes on the profits when he exercised those options, an unusual added benefit.  The real problem:  Heritage had failed to account properly for the perk and was forced to restate past earnings reports last fall.  Investors who were already grumbling about Prendergast's compensation hit the roof.

Analyst David Fick of Stifel Nicolaus & Co. asked Prendergast on an Oct. 21 conference call whether he would be willing to waive the benefit.  ''You are already the highest paid CEO in the sector and make more than double what any of your [peers] make," he said.

Another analyst, Louis Taylor of Deutsche Bank Securities, scoffed at Prendergast's vow to do the right thing.  ''How can you say integrity and character are fundamental values when this company seems to be run with the shareholders as really an afterthought?" he asked on the same call.

The issue was settled for good last week, when Prendergast agreed to surrender the perk, for a price.  Heritage will write him a check for $6.4 million, roughly what the tax benefit is worth based on the trust's current stock price.

Real estate investment trusts generate plenty of fat executive paychecks, but Heritage still stands out among its peers.  A report published last month by Wachovia Securities rated REITs on executive pay in relation to shareholder returns and found Heritage to be among the industry's five worst.

I reviewed CEO compensation at five REITs larger than Heritage but in the same specific business:  managing portfolios of shopping centers.  Prendergast easily topped the list.

The future may pose more challenges.  Analyst Jeffrey Donnelly of Wachovia, in a separate report in October, said coming consolidation and increased competition would favor highly capitalized national developers and owners of blue-chip local portfolios.  ''Heritage does not fit either profile," Donnelly wrote.

Before it went public in 2002, Heritage was a private real estate investment trust owned principally by the New England Teamsters & Trucking Industry Pension Fund.  The pension fund remains the largest Heritage stockholder today, with a 41 percent stake.

Prendergast was chief of the predecessor organization going back to 1980.  At one time his brother-in-law, former Teamsters international president William McCarthy, was chairman of the New England Teamsters pension fund.  Prendergast's brother, Robert Prendergast, is chief operating officer of Heritage today.

Heritage explains Prendergast's compensation package, dominated by big equity awards, in the context of that long history.  ''Unlike his peers, historically, our CEO had zero stock ownership in a company he had built over 30 years," said Robert Watson, chairman of Heritage's compensation committee.

Watson said the stock, a one-time award approved in 2002 to be rationed out over five years, was meant to align management interests with those of stockholders.  He said Prendergast's compensation, excluding the stock award, was average compared with peers.

Add the numbers up and Prendergast will probably make more than $50 million in total compensation over Heritage's first five years as a public REIT.  So exactly who made out when Heritage decided to go public in the first place?

Steven Syre is a Globe columnist. He can be reached at