Health Care REIT

Proxy issued:                     3/27/2015

Annual meeting:              5/07/2015

On April 13, 2014, former director Thomas DeRosa was appointed as CEO of Health Care REIT, and his total compensation for FY 2014 is $8,176,821, down from that of former CEO George Chapman who retired suddenly last year. The appointment of DeRosa, who had joined the board in 2004, to the CEO position surprised some at the time, since he had no CEO background. He had been chief financial officer, and director of The Rouse Co., a Maryland-based real estate and mall developer, but left that position in November 2004 when Rouse merged with General Growth.

As a member of the Health Care REIT board he was on the nominating committee and chair of the compensation committee.

Upon his hire the board signed an employment agreement with him, and given his history it is difficult to see how that could truly have been an arms’ length negotiation. The April agreement was amended in December to clarify the “other benefits” provided under the agreement.

The agreement provided for, among other things: a one-time grant of $1,000,000 of restricted stock units (15,618 units) on July 30, 2014; a lease of an automobile while he remains with the company; a relocation and transition allowance of $100,000, and an unusual perk of cash payment of up to $12,000 a year if he opts not to receive insurance under the company health plans.

Most problematic in the contract, however, are guarantees as to what he will receive if he is terminated by company without good reason or resigns for good reason.  Under those conditions he would receive two year’s salary and target bonus (so even if the company is faring poorly he would receive a bonus as if it were achieving targets and as if he remained employed).

Also of note, the employment agreement locks the board into paying at current rate since “a material diminution in the Executive’s total compensation opportunity” is one of the events that would allow DeRosa to depart with the generous package described above.

DeRosa may in fact be a fine CEO, but the point here is that circumstances suggest that the board did not need to make these generous promises to lure him. My personal guess is that he would have taken the position without the perks and stock grants. Much of high CEO pay is put in place when employment agreements are signed. And it is when these conversations are being had that the Chair of the Compensation Committee serves such an important role. And who serves that role? Well, until last year, it was DeRosa.