BEDFORD PROPERTY INVESTORS INC/MD - Proxy Statement (definitive) (DEF 14A) COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

Overview

The Compensation Committee (the “Committee”) is responsible for the general compensation policies of the Company and, in particular, is responsible for setting and administering the policies that govern executive compensation. The Committee evaluates the performance of management and determines the compensation levels for all executive officers.

The primary objectives of the Company’s compensation policies and programs are (i) to attract and retain key executives, (ii) to reward performance by the executives and (iii) to align the financial interests of the Company’s executive officers directly with those of the Company’s stockholders. The primary elements of executive officer compensation are base salary, annual cash bonus and stock option and restricted stock awards.

In reviewing the compensation of the Company’s executive officers, the Committee relies on comparisons of each element of an officer’s compensation, and each officer’s total compensation package, against the compensation of individual executive officers of other publicly traded office and industrial real estate investment trusts. These comparisons are completed through an analysis of data in various public filings, as well as through a review of the results of the REIT Executive Compensation Survey sponsored by the National Association of Real Estate Investment Trusts and other industry compensation surveys.

Salaries

Base salaries for the executive officers are reviewed annually and adjusted based on the recommendations of the Company’s Chief Executive Officer following his review of the individual’s performance with respect to Company and individual performance objectives, increases in the individual’s responsibilities, and changes to base salaries of similar positions in comparable companies within the industry.

The Committee takes the Chief Executive Officer’s recommendations into consideration, and makes its own determination based in part on its own evaluation of compensation paid by other real estate investment trusts, the performance of the Company relative to its peers, and the individual performance of the executive officer.

In 2004, the Committee did not adjust the salaries of any of the Company’s Named Executive Officers (as defined below), other than the Chief Executive Officer, because the Committee determined that the estimated total compensation packages for these officers for fiscal year 2004 was reasonable in light of the total compensation packages of similarly situated executives within the industry. The adjustment to the Chief Executive Officer’s base salary is discussed below in this report.

Annual Bonuses

Annual cash bonuses are awarded on a discretionary basis and reflect both Company and individual performance. In December prior to the start of the fiscal year, the Committee sets a formula for determining the bonus pool for all eligible employees, including our Named Executive Officers. The formula incorporates quantitative measures of the Company’s performance for the applicable bonus year, including the proceeds from the Company’s acquisition and sales programs, the collection of rents owed to the Company, the amount of financing obtained by the Company, the completion of development projects, the amount of shares repurchased, and the growth in the Company’s funds from operations. At the close of the fiscal year, the Committee uses this formula to calculate the size of the bonus pool based on actual

performance of the Company. The Committee then determines the individual awards to all eligible employees, including the Named Executive Officers, based on criteria including individual performance, individual level of responsibility comparisons to bonuses awarded at peer companies for similarly situated employees and recommendations from management.

The bonuses awarded for 2004 to the Named Executive Officers reflect the Company’s achievements in its sales and acquisitions programs and financing goals during the course of the year, individual performance and responsibility and peer company comparisons, as well as the fact that no bonuses were paid to the Named Executive Officers for fiscal year 2003.

Stock Option Awards

Stock options have historically been utilized by the Company to provide an incentive to the executive officer and to align the interests of the executive officer with those of the Company’s stockholders, by providing him or her with a financial interest in the Company. Options granted by the Committee under the Company’s 2003 Employee Stock Plan are generally made at fair market value on the date of the grant, vest over four years and expire after ten years. In making grants, the Committee has historically taken into account the executive officer’s contributions to the Company, scope of responsibilities, base salary, the number of options or shares previously granted and the level of option grants awarded to executive officers employed by peer group companies.

In 2004, the Company did not grant any options to its employees, but instead granted restricted stock awards, as described below. The Committee believes that stock options are a less effective tool in retaining its employees than grants of restrictive stock, because of the dividend paying nature of the Company’s Common Stock. The Committee believes that this view is shared by other real estate investment trusts. Of the 35 office and industrial real estate investment trusts for which the Committee analyzed equity compensation data, 23 of them did not grant any options in 2003.

Restricted Stock Awards

The Company makes restricted stock awards to its executive officers as part of their total compensation package in order to provide a retention incentive and to align the interests of the executive officer with those of the Company’s stockholders, by providing him or her with a financial interest in the Company.

Restricted stock awards are generally subject to vesting, as determined by the Committee. Grants made prior to 2004 generally vested based on continued service over five years. The Committee extended this vesting period for awards in 2004 to seven years in order to provide retention value for a longer period of time and to reduce the annual expense of the restricted stock to the Company. Award recipients are entitled to all dividends issued in respect of the shares, provided such dividends are subject to the same vesting schedule as the underlying shares.

The Company issued an aggregate of 145,725 shares of restricted stock to its employees on January 14, 2005, in recognition of services rendered in 2004, of which 65,000 shares of restricted stock were granted to the Named Executive Officers. The criteria used in determining the size of each Named Executive Officer’s award of the total share pool included the Committee’s review of the total compensation package offered to each such officer in 2004, past equity awards to each Named Executive Officer, and equity awards made to officers in comparable positions in peer group companies. The Committee believes that the value of the individual restricted stock award to each of the Company’s Named Executive Officers was equal to or less than the average values of the 2003 restricted stock grants awarded to executives in comparable positions at peer group real estate investment trusts. However, the Committee believes that the

size of these awards is appropriate when viewed in light of the value of the total compensation packages awarded to the Named Executive Officers.

Option Exchange Program

In September of 2004, the Board began to consider various strategic alternatives, including the sale of the entire Company or of a significant number of individual properties. The Board recognized at the time that were it to undertake the sale of a substantial number of individual properties, it would likely result in the payment of a large special dividend to stockholders. The Board also recognized that after the payment of such a special dividend, the Company’s Common Stock price would likely decline by an amount comparable to the per share amount of the special dividend and that such a decline in value could decrease or eliminate the value of the outstanding employee options. In effect, our employee-optionholders would have been penalized for the success of the Company in recognizing the value of its assets, and the outstanding options would cease to be effective employee retention tools.

In order to avoid the loss of the retention value of outstanding stock options in the event that the Board did decide to sell a significant number of individual properties (as opposed to selling the entire Company), the Committee recommended allowing all Company employees, including the Named Executive Officers, and directors the right to elect to exchange all or part of their vested options for restricted stock awards. The Committee set an exchange ratio based on the fair market value (the average of the high and low trading price) of the Company’s Common Stock on September 22, 2004, which value was $31.405 per share. Surrendered options were valued based on the difference between the fair market value of the Company’s Common Stock on September 22, 2004 and the exercise price per share of the surrendered option. Under the terms of the exchange program, on September 27, 2004, each participant was issued that number of shares of our Common Stock with a value equal to the aggregate value of those vested options he or she surrendered for cancellation. The restricted stock issued under this exchange program is subject to vesting at the rate of 20 percent per year over five years following the grant date.

The executive officers that elected to participate in the program, the number of option shares each surrendered, and the number of shares of restricted stock received in exchange, are set forth in the table below.

Executive Officer	Number of Shares of Common Stock Underlying Options Surrendered		Number of Shares of Restricted Common Stock Issued in Option Exchange
Peter Bedford		135,000		45,240
James Moore		7,500		1,152
Stephen Silla		15,000		4,257
Dennis Klimmek		7,500		1,152

CEO Compensation

With respect to setting the base salary of the Chief Executive Officer, the Committee considers a number of factors, the most important of which are the level of compensation paid to chief executive officers of other similarly situated real estate investment trusts, the success of the Company’s recent acquisitions and sales, the return on development of new properties, and his importance to the Company’s efforts to raise capital in the public markets, as and when needed. The Committee increased the base salary

for Mr. Bedford, the Company’s Chief Executive Officer, for 2004 to $300,000 per year, which was 60% of the average salary reported in 2003 for chief executive officers of peer group real estate investment trusts. While still significantly below the base salary levels at other peer firms, the Committee decided that it was necessary to increase Mr. Bedford’s salary in order to recognize his contributions to the business and also to better balance the internal parity of the Chief Executive Officer’s compensation with the compensation of other executive officers.

In determining the portion of the bonus pool to be paid to the Chief Executive Officer for 2004, the Committee evaluated his contribution with respect to the various factors used to determine the total pool amount, the level of bonuses paid to chief executive officers of other similarly situated real estate investment trusts, and the overall performance of the Company against its peer group. The Committee awarded Mr. Bedford a bonus in 2004 of $200,000, which was 63.7% of the average bonus reported in 2003 for chief executive officers of peer group real estate investment trusts.

The Committee also awarded Mr. Bedford 25,000 shares of restricted Common Stock, issued January 15, 2005, for 2004 performance (excluding shares received pursuant to the option exchange program). These shares are subject to vesting over a seven year period, based on continued service with the Company. The Committee believes this award is reasonable and not excessive, in light of the total compensation package offered to Mr. Bedford in 2004, past equity awards to Mr. Bedford, and equity awards made to chief executive officers of peer group companies.

The Committee deems Mr. Bedford’s total compensation to be reasonable and not excessive. The aggregate estimated value of his base salary, bonus and restricted stock awards for 2004 (excluding shares of restricted stock received pursuant to the option exchange program) is approximately 82% of the average value of the total compensation reported in 2003 for chief executive officers of peer group real estate investment trusts. In 2004, Mr. Bedford’s cash compensation (salary and bonus) was 1.5 times the average cash compensation of the other Named Executive Officers of the Company and his total compensation was 2.2 times the average total compensation of the other Named Executive Officers of the Company. In 2004, Mr. Bedford’s cash compensation (salary and bonus) was 14.0 times the cash compensation of the lowest paid full time employee of the Company and his total compensation was 31.9 times the total compensation of the lowest paid full time employee of the Company.

Section 162(m)

The Company intends that compensation paid to its executive officers will be deductible under Section 162(m) of the Internal Revenue Code.

	Respectfully submitted,

	THE COMPENSATION COMMITTEE

	Anthony M. Frank (Chairman)
	Peter Linneman
	Bowen McCoy

INFORMATION ABOUT THE EXECUTIVE OFFICERS

Executive Officers of the Company

The following persons serve as executive officers of the Company:

Name and Title	Age	Business Experience
Peter B. Bedford Chief Executive Officer	67	Mr. Bedford has been the Company’s Chairman of the Board since May 1992 and Chief Executive Officer since November 1992. Mr. Bedford has been engaged in the commercial real estate business, primarily in the Western United States, for over 40 years and has been responsible for the acquisition, ownership, development and management of an aggregate of over 26 million square feet of industrial, office and retail properties, as well as land, in 14 states. Mr. Bedford serves on the board of directors of Bixby Ranch Company, a real estate investment company, and First American Title Guarantee Co., a title insurance company. Mr. Bedford is the recipient of numerous awards recognizing his contributions to the real estate industry and serves as a governor of the Urban Land Foundation. His previous experience also includes serving on the board of directors of the Bank of America from 1986 to 1999 and on the board of Kaiser Aluminum & Chemical Company from 1980 to 1986. He has served as Vice Chairman of the National Realty Committee and of the Hoover Institution and as Chairman of the Real Estate Advisory Board of the Wharton School of Business. Mr. Bedford received his B.A. in Economics from Stanford University.
James R. Moore President	64	Mr. Moore has been the Company’s President since March 13, 2003 and Chief Operating Officer since January 1998. From January 1998 to March 2003, Mr. Moore was Executive Vice President of Property/Asset Management. From June 1997 to January 1998, Mr. Moore was Senior Vice President of Property/Asset Management. From September 1995 to June 1997, Mr. Moore was Vice President of Property/Asset Management. From 1983 to 1994, he was Managing Director of the San Francisco office of Cushman and Wakefield, an international commercial real estate services firm. Mr. Moore was also a branch manager and commercial real estate broker at Cushman and Wakefield. He served on the board of trustees of The Lindsay Museum from 1984 to 1999. Mr. Moore has the CCIM designation and has lectured at the University of San Francisco and San Francisco State University. He served as an officer in the United States Marine Corps and received a B.A. in History from the University of California at Berkeley, an M.B.A. from the University of San Francisco and a Doctorate in Business Administration from Golden Gate University.

Stephen M. Silla Executive Vice President and Chief Operating Officer	53	Mr. Silla has served as the Company’s Executive Vice President and Chief Operating Officer since January 24, 2005 and Senior Vice President of Acquisitions since September 2002. From December 1998 through August 2002, he served as a Vice President of Bedford Acquisitions, Inc., a company wholly owned by Peter Bedford. From 1992 to 1998, Mr. Silla served as Vice President and General Manager for Kemper Real Estate Management Company and ZKS Real Estate Partners, both of which were affiliates of Zurich/Kemper Life Insurance, where he was responsible for development, leasing and sales of all of Zurich/Kemper’s real estate in Hawaii. From 1986 to 1992, Mr. Silla was Vice President and Regional Manager of Bedford Properties Holdings, Ltd., a company wholly owned by Mr. Bedford, in Southern California and Hawaii. From 1990 to 1991, he served on the board of directors of the Rancho California Water District. He received a B.S. in Engineering from the University of California at Davis and an M.B.A. from St. Mary’s College.
Dennis Klimmek Executive Vice President, General Counsel and Secretary	60	Mr. Klimmek has served as the Company’s Executive Vice President since March 13, 2003, and Secretary and General Counsel since September 2002. From September 2002 to March 2003, Mr. Klimmek served as the Company’s Senior Vice President. From October 1997 through August 2002, he served in various capacities, including as Vice President, Secretary and General Counsel, at Bedford Acquisitions, Inc., a company wholly owned by Peter Bedford. From 1992 to 1997, Mr. Klimmek served as Vice President and General Counsel of Kemper Real Estate Management Company and its affiliated real estate companies, which included real estate development, management and home building companies. From 1986 to 1992, he was Vice President and General Counsel of Bedford Properties Holdings, Ltd., a company wholly owned by Mr. Bedford. Mr. Klimmek has been a member of the California Bar since 1974. He received a B.S. in Business Administration from Pepperdine University, a M.S. in Engineering from the University of Southern California and a J.D. from Loyola University.
Hanh Kihara Senior Vice President and Chief Financial Officer	57	Ms. Kihara has been the Company’s Senior Vice President and Chief Financial Officer since January 1999. From May 1993 to December 1998, Ms. Kihara served as the Company’s Vice President and Controller. From 1990 to 1993, she was Controller and Assistant Controller of Bedford Properties Holdings, Ltd., a company wholly owned by Mr. Bedford. From 1986 to 1990, Ms. Kihara was a Manager at Armstrong, Gilmour & Associates, a certified public accounting firm. Ms. Kihara has been a Certified Public Accountant since 1989. Ms. Kihara received a B.S. in Administration and Accounting from California State University of Hayward.

Anne L. Hoffman Senior Vice President and Chief Development and Marketing Officer	52	Ms. Hoffman has been the Company’s Chief Development and Marketing Officer since January 2005, Senior Vice President of Development from March 1998 to January 2005, and an employee of the Company since September 2002. From March 1998 through August 2002, she was a Vice President and an employee of Bedford Acquisitions, Inc., a company wholly owned by Peter Bedford. Ms. Hoffman has personally managed the development of over two million square feet of suburban office, R&D, warehouse and service buildings. In the four years immediately prior to joining the Company, Ms. Hoffman was the principal of a real estate consulting practice providing a variety of services to corporate and developer clients. From 1992 to 1994 Ms. Hoffman was Vice President of Sales and Marketing for HQ Network System, the franchise organization for HQ Business Centers. From 1984 to 1991 Ms. Hoffman was a Partner and Project Manager for the Philadelphia based Rouse & Associates.
Rod Diehl Senior Vice President of Acquisitions	40	Mr. Diehl has served as the Company’s Senior Vice President of Acquisitions since January 24, 2005, Vice President and Regional Manager since June 1997 and has been employed by the Company since February 1996. He has worked for the past 15 years in the commercial real estate industry, focusing on asset management and leasing, primarily in the San Francisco Bay Area. From October 1993 to January 1996, Mr. Diehl worked for Koll Management Services first as an Account Executive for Koll’s Corporate Advisory group and later as manager of a portfolio of retail properties. From December 1988 to September 1993, he worked for Cushman & Wakefield as a research analyst, a broker and as an asset manager. Mr. Diehl is a licensed real estate broker in the State of California and is a member of BOMA and NAIOP. He received a B.A. in Economics from the University of California at Davis and an M.B.A. from St. Mary’s College.
Krista Rowland Vice President and Controller	39	Ms. Rowland has been the Company’s Vice President and Controller since January 1999. From May 1996 to December 1998, she served as the Company’s Assistant Controller. From 1992 to 1996, Ms. Rowland served as Portfolio Accounting Manager of Kemper Real Estate Management Company of Lafayette, California. From 1990 to 1992, Ms. Rowland was a Senior Accountant for Armstrong, Gilmour & Associates, a certified public accounting firm. Ms. Rowland received a B.S.B.A in Accounting from the University of North Florida in Jacksonville and has been a Certified Public Accountant in the State of California since 1992.

Andy Albrecht Vice President and Regional Manager of the Northwest Region	39	Mr. Albrecht has been the Company’s Vice President and Regional Manager for the Northwest Region since January 2003. He joined the Company in August 2000 as Vice President and Area Manager. Prior to joining the Company, Mr. Albrecht was employed by Orca Enterprises, LLC in real estate development and management in the Puget Sound area from 1999 to 2000. From 1998 to 1999, Mr. Albrecht was Real Estate Manager for Paccar Automotive, Inc., where his duties included property transactions, leasing and project management in the western United States. From 1989 to 1998, Mr. Albrecht was Property Manager and Leasing Agent for Morris Piha Management Group, Inc. Mr. Albrecht received a B.A. in Political Science from the University of Washington.
Henry Baldenegro Vice President and Regional Manager of the Southwest Region	58	Mr. Baldenegro has been the Company’s Vice President and Regional Manager of the Southwest Region since January 2002. Mr. Baldenegro joined the Company in May of 1996 as Area Manager of the Southwest Region. During this period, Mr. Baldenegro has been responsible for the asset management of a portfolio in excess of 1.5 million square feet of suburban office, R&D, warehouse and service buildings. In the five and one-half years immediately prior to joining the Company, Mr. Baldenegro was Property Manager for a joint venture of the Company and Kemper Insurance. Prior to the joint venture, Mr. Baldenegro spent 10 years as Senior Marketing Consultant with Grubb & Ellis, a real estate brokerage company, and 10 years with the Xerox Corporation as a Sales Executive.
Linda Mott Vice President and Regional Manager of the Denver Region	42	Ms. Mott has been the Company’s Vice President and Regional Manager since January 2004, Vice President and Area Manager since January 2003 and Area Manager since January 2002. She joined the Company in July 2000 as a Property Manager. In the two years immediately prior to joining the Company, Ms. Mott was an asset manager for BetaWest, Inc., a real estate asset management firm. From 1989 to 1998, she was a property manager for BetaWest, Inc. She earned her B.S. in Business Administration at The University of Colorado at Denver and has the CCIM designation. She is a member of NAIOP and has an RPA designation from the Building Owners and Managers Institute.
Mark Yorita Vice President and Regional Manager of the Southern California Region	48	Mr. Yorita has been the Company’s Vice President and Regional Manager for Southern California since June 1997 and Regional Manager for Southern California since May 1994. From August 1992 to April 1994, he served as senior project manager for Kemper Real Estate Management Company. From May 1988 to July 1992, he served as senior development and property manager for Bedford Properties Holdings, Ltd., a company wholly-owned by Mr. Bedford. Mr. Yorita has worked in the real estate industry since 1986. Prior to that he worked in various capacities in the construction industry for Standard Oil of Ohio and Fluor Corporation. Mr. Yorita received an M.B.A. from the University of California at Berkeley and a B.S. in Engineering from University of Hawaii.

Changes in Management

On March 9, 2004, the Company announced that Mr. Moore, the Company’s President and former Chief Operating Officer, plans to retire in July 2005. Effective as of January 31, 2005, Mr. Silla has assumed the position of Chief Operating Officer. Mr. Diehl has assumed Mr. Silla’s property acquisition responsibilities.