How high is high pay? And how high does pay have to be before it is too high?

A new report from Green Street Advisors, a company specialising in real estate shares which is based in California, suggests that shareholders must not let their attention drift too long from the question of executive pay - and from its relationship to rates of return for investors.

For non-US investors, perhaps the most eye-popping feature of the Green Street report is the size of pay packages, not for entire boards of directors, but for the chief executives.

The chief executive officers of the 17 largest US Real Estate Investment Trust (REIT) earned an average compensation package of £2.42 million sterling each in 2000, when the value of salary, bonuses and stock options packages are totalled.

These sums represent a rise of 11 per cent on compensation from 1998, a rate well above inflation.

But, as Green Street points out, this pales in comparison with the 300 per cent increase in compensation levels that has occurred since 1996 - and the 400 per cent increase that has occurred since 1994.

In absolute terms, the highest compensation packages were earned by the chief executives at Vornado, Boston Properties, ProLogis and Equity Office, with the award for the top-paid executive going to Vornado, where the CEO earned $7.7m.

But it is on the question of the relationship between executive pay and shareholder returns that the study is most interesting.

"There is no obvious correlation between pay levels and performance for shareholders," Green Street concludes. "In fact, at the extremes, the evidence is exactly the opposite of what would seem appropriate."

The two companies which paid their chief executives most in 2000 saw their shares underperform the sector index last year, while the two paying their chief executives least, on a size-adjusted basis, outperformed the index.

It is on this point, no matter where investors are domiciled, that a fairly uniform view emerges.

David Gould, director of the investment department at the UK's National Association of Pension Funds, a leading shareholder group, sums up shareholders' views of executive pay.

"Share the gain, share the pain," Mr Gould says. "That's what we believe." He says the NAPF, along with the UK's other leading shareholders' group, the Association of British Insurers, have two guiding principles on the size of pay packets.

Firstly, that high pay should be awarded only in cases of high returns for shareholders, and second, that pay should be structured so as to be motivational. That, however, has not always been the case for UK companies - and property companies are no exception.

Last week, it emerged that John Ritblat, the chairman and chief executive of British Land, was awarded a bonus for the year to March 31 2001, in spite of the fact that the company's shares had underperformed their sector peer group for much of the previous two years.

Mr Ritblat's bonus rose from £250,000 to £300,000, bringing total remuneration to £951,000 for the 2001 fiscal year.

The company's annual report notes that Mr Ritblat also received a further £1.24m, released as the result of "achievement of a performance target agreed following consultation with the ABI and NAPF".

Mr Ritblat and three other executives crystallised their bonuses, selling their awards of the 6 per cent convertible irredeemable bonds on November 30, 2000.

British Land is hardly unique in its executive pay packets. Indeed, companies whose gross assets are a small fraction of British Land award their top executives remuneration packages which, on a pound-for-pound basis, are arguably larger.

The question for shareholders is not how much pay is too much, but what is the purpose of executive pay? Is it to compensate the executive for time and skills? Or is it to motivate them to deliver excess returns?

The ABI and the NAPF say that where there are options or bonuses on top of salary, these should be awarded on the basis of performance - against objective benchmarks.

However, the question is whether the benchmark most commonly used by quoted property companies - growth in net asset value relative to the Investment Property Databank capital growth index - is really the appropriate one.

Arguably, rewarding a company for outperforming the IPD index is to reward it for being big, but not necessarily for being good. Earlier this year, the Department of Trade and Industry announced plans to require companies to spell out the performance benchmarks used to determine bonuses and to illustrate how the company's share price has performed against these.

"What we say is that you can have great pay if you give great returns," Mr Gould says. Soon, managements will have to show they are worth the money they earn.