NOTICE IS HEREBY GIVEN that the 2014 Annual Meeting of Stockholders (the “Annual Meeting”) of AvalonBay Communities, Inc., a Maryland corporation (the “Company”), will be held on Wednesday, May 21, 2014, at 9:00 a.m., local time, at the offices of the Company, Ballston Tower, 671 N. Glebe Road, Suite 800, Arlington, VA 22203, for the following purposes:

Any action may be taken on the foregoing matters at the Annual Meeting on the date specified above, or on any date or dates to which, by original or later postponement or adjournment, the Annual Meeting may be postponed or adjourned.

The Board of Directors has fixed the close of business on March 7, 2014, as the record date for determining the stockholders entitled to receive notice of and to vote at the Annual Meeting and at any postponements or adjournments thereof. Only holders of record of the Company’s common stock, par value $0.01 per share (the “Common Stock”), at that time will be entitled to receive notice of and to vote at the Annual Meeting and at any postponements or adjournments thereof.

You are requested to authorize a proxy to vote your shares by completing and signing the enclosed proxy card, which is being solicited by the Board of Directors, and by mailing it promptly in the enclosed postage-prepaid envelope. You may also authorize a proxy to vote your shares by telephone or over the Internet by following the instructions on your proxy card. Any proxy delivered by a holder of Common Stock may be revoked by delivering written notice to the Company stating that the proxy is revoked or by delivery of a properly executed, later dated proxy. Holders of record of Common Stock who attend the Annual Meeting may vote in person, even if they have previously delivered a signed proxy or authorized a proxy by telephone or over the Internet, but the presence (without further action) of a stockholder at the Annual Meeting will not constitute revocation of a previously delivered proxy.

By Order of the Board of Directors

Edward M. Schulman
Secretary

Arlington, Virginia
April 11, 2014

 

The Board of Directors recommends a vote FOR each director nominee.

The Board of Directors recommends a vote FOR ratification of the selection of Ernst & Young by the Audit Committee of the Company’s Board of Directors to serve as the Company’s independent auditors for 2014.

The Board of Directors recommends a vote FOR the resolution to approve, on a non-binding, advisory basis, the compensation paid to the Company’s Chief Executive Officer and other officers named in the Summary Compensation Table on Page 35 (the “Named Executive Officers”).

The Board of Directors recommends a vote FOR approval of performance goals under the AvalonBay Communities, Inc. 2009 Stock Option and Incentive Plan.

The Board of Directors recommends a vote AGAINST this resolution, if properly presented at the meeting.

The Company’s 2013 Annual Report to Stockholders and a copy of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the Securities and Exchange Commission (“SEC”) are being mailed to stockholders concurrently with this Proxy Statement. The Annual Report to Stockholders and Form 10-K, however, are not part of the proxy solicitation material. A copy of any or all exhibits to the Company’s Form 10-K may be obtained free of charge by writing to AvalonBay Communities, Inc., Ballston Tower, 671 N. Glebe Road, Suite 800, Arlington, VA 22203, Attention: Chief Financial Officer or by accessing the “Investors” section of the Company’s website (www.avalonbay.com).

Under the Internal Revenue Code (the “Code”), U.S. publicly-held companies are not permitted to obtain tax deductions for compensation of more than $1 million paid in any year to the chief executive officer and any of their three other most highly paid executive officers (other than the chief financial officer) unless such payments are “performance-based” as defined in the Code. One of the requirements for compensation to be performance-based under those laws is that the Company must obtain stockholder approval from time to time of the material terms of performance goals for such compensation. In accordance with the Code, the material terms that the stockholders approve constitute the framework within which our Compensation Committee can, if it deems appropriate and desirable, establish programs and awards under which compensation provided by the Company can qualify as “performance-based” compensation for purposes of the tax laws.

The Board is requesting stockholder approval of the material terms of performance goals in this proposal to enable the Company to continue to have a stockholder-approved arrangement under which it may receive tax deductions for compensation paid to senior officers of the Company. The goals pertain to the following specified forms of compensation that may be awarded to the senior officers of the Company under the Company’s 2009 Stock Option and Incentive Plan (the “2009 Plan”): (1) restricted stock units; (2) restricted stock and (3) performance shares.

As required by the Code, stockholders must approve each of the material terms of performance goals if the Company is to obtain tax deductions for the specified forms of performance-based compensation for executives whose total annual compensation exceeds $1 million, including (i) the employees eligible to receive compensation, (ii) the description of the business performance criteria on which the performance goals are based and (iii) the maximum amount of performance-based compensation that can be paid to an employee. Each of these aspects is discussed below.

The group of employees eligible to receive performance-based compensation includes the Company’s senior officers, including the executive officers required to file reports under Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Although the Code limits deductibility only for compensation paid to the chief executive officer and the three other most highly paid executive officers (other than the chief financial officer), we may grant performance-based compensation to all senior officers in the event that any of them becomes a covered employee during the time he or she holds an award covered by this proposal.

The 2009 Plan provides that the performance criteria used to determine the vesting of awards may include one of the following criteria, applied to either the Company as a whole or to a business unit, division, group or subsidiary, either individually, alternatively, or in any combination, and measured either annually or cumulatively over a period of years, in absolute terms or as compared to any incremental increase or as compared to the results of a peer group. The performance criteria that will be used to establish performance goals are currently limited to the following: (i) earnings before interest, taxes, depreciation and amortization; (ii) net income (loss) (either before or after interest, taxes, depreciation and/or amortization); (iii) changes in the market price of our common stock; (iv) cash flow; (v) funds from operations or similar measures; (vi) sales or revenue; (vii) acquisitions or strategic transactions; (viii) operating income (loss);

(ix) return on capital, assets, equity, or investment; (x) total stockholder returns or total returns to stockholders; (xi) gross or net profit levels; (xii) productivity; (xiii) expense; (xiv) margins; (xv) operating efficiency; (xvi) customer satisfaction; (xvii) working capital; (xviii) earnings per share of our common stock; or (xix) lease up performance, net operating income performance or yield on development or redevelopment communities. Stockholders are also being asked to approve “leverage” as an additional metric that can be used to establish performance goals under the 2009 Stock Incentive Plan (measured as a ratio based on debt or interest expense to earnings before interest, taxes, depreciation and amortization (EBITDA) or to total market capitalization, or similar measures), and if this proposal is approved the Board will amend the 2009 Plan in this regard.

The Compensation Committee, in its discretion, may adjust or modify the calculation of performance criteria in order to prevent the dilution or enlargement of any outstanding awards (x) in the event of, or in anticipation of, any unusual or extraordinary corporate item, transaction, event or development, (y) in recognition of, or in anticipation of, any other unusual or nonrecurring events affecting the Company or the financial statements of the Company, or (z) in response to, or in anticipation of, changes in applicable laws, regulations, accounting principles, or business conditions, provided however, that the Compensation Committee may not exercise such discretion in a manner that would increase the award granted to a senior officer.

The maximum performance-based award that can be granted to any senior officer for any performance period is 300,000 shares of our common stock (subject to adjustments for stock splits and similar changes) if payable in shares, or $4 million if the award is payable in cash.

Only holders of record of Common Stock as of the close of business on the Record Date are entitled to vote on this proposal. Proxies will be voted “FOR” the approval of performance goals under the AvalonBay Communities, Inc. 2009 Stock Option and Incentive Plan unless contrary instructions are set forth on the enclosed proxy card. A majority of the votes cast on the proposal at the Annual Meeting is required to approve the proposal. Under Maryland law, abstentions and broker non-votes are not treated as votes cast. Accordingly, an abstention or broker non-vote will have no effect on the result of the vote.

The Central Laborer’s Pension Fund, P.O. Box 1267, Jacksonville, IL 62651-1267, beneficial holder of approximately 1,753 shares of common stock of the Company as of the date of submittal of its proposal, has given formal notice that it intends to introduce the following resolution at the 2014 Annual Meeting and has furnished the following statements in support of its proposal:

The Board has carefully considered the stockholder proposal and unanimously recommends a vote AGAINST it.

The Board believes that any decision to separate the roles of Chairman and CEO should be based on the specific circumstances of a corporation; the independence, role, and capabilities of its directors, including its Lead Independent Director; and the leadership provided by its CEO. The Board does not believe that separate roles for the Chairman and CEO should be required by policy or that such a separation would, by itself, provide any additional benefit to stockholders.

The Board further believes that the Company and its stockholders are currently best served by having Mr. Naughton serve as both Chairman and CEO. Among other benefits, Mr. Naughton’s role as CEO enables him, working with the Lead Independent Director, to act as a bridge between management and the Board, helping management and the Board to act with a common purpose. Mr. Naughton’s combined roles as CEO and Chairman promote unified leadership and direction for the Company. Mr. Naughton’s knowledge of the day-to-day operations of the Company, perspective on competitive developments, understanding of stockholder interests, and relationships with business partners and employees allow him to provide effective leadership in his role as Chairman as CEO.

The Board has taken several steps to ensure that the Board effectively carries out its responsibility for the oversight of management. The Board has appointed a Lead Independent Director (currently Lance Primis, an independent member of the Board). The Lead Independent Director:

In addition, Mr. Naughton is the only director who is a member of management, and each standing committee, other than the Investment and Finance Committee, is made up solely of independent directors.

The Board believes that its current governance structure provides unambiguous accountability and allows the Company to effectively execute its strategy and business plans to maximize stockholder value.

For these reasons, the Board believes that the adoption of a policy requiring that, whenever possible, the Chairman of the Board should be an independent director who has not previously served as an executive officer of the Company is not in the best interests of the Company’s stockholders.

Only holders of record of Common Stock as of the close of business on the Record Date are entitled to vote on this proposal. Proxies will be voted “AGAINST” the stockholder proposal described above, if properly presented at the Annual Meeting, unless contrary instructions are set forth on the enclosed proxy card. A majority of the votes cast on the proposal at the Annual Meeting is required to approve the proposal. Under Maryland law, abstentions and broker non-votes are not treated as votes cast. Accordingly, an abstention or broker non-vote will have no effect on the result of the vote.

The Board of Directors does not know of any matters other than those described in this Proxy Statement that will be presented for action at the Annual Meeting. If other matters are presented, proxies will be voted in the discretion of the proxy holders.

H. Jay Sarles (Chair)
Glyn F. Aeppel
Alan B. Buckelew
John J. Healy, Jr.

During fiscal years 2012 and 2013, the Company retained its principal independent auditors, Ernst & Young, to provide services in the categories and for the approximate fee amounts shown below:

Each metric independently accounts for one third of the total potential payout, with threshold, target and maximum achievement levels of 50%, 100% and 200%.

The Company’s Total Shareholder Return for the three year period ending on December 31, 2013, was 5.4% (below threshold), 531 basis points below the FTSE NAREIT Equity Index (below threshold), and 37 basis points below the FTSE NAREIT Apartment Index (77.2% of target). As a result, achievement under the Long Term Incentive Award Program for the awards maturing on December 31, 2013 was determined to be 25.7% of Target overall, with 0% of Target for absolute TSR, 0% of Target for performance relative to the FTSE NAREIT Equity Index, and 77.2% of Target for performance relative to the FTSE NAREIT Apartment Index. Therefore, our executives’ compensation included restricted stock for only 25.7% of the performance units maturing at the end of 2013.

For a reconciliation of FFO and related disclosure, see page 46 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. For a reconciliation of Operating FFO to FFO, see the Supplemental Appendix to Compensation Discussion and Analysis on page 34 of this Proxy Statement.

 

In summary, under the metrics established for the Annual Bonus program, the Company’s performance, along with the individual performance of our named executive officers and the performance of their business units, where applicable, was judged to have exceeded target and therefore payouts under the Annual Bonus program exceeded target awards. At the same time, the Company’s Total Shareholder Return performance failed to meet our goals under the Long-Term Incentive program, and therefore actual payouts under that plan were below target. During the first quarter of 2014, our named executive officers also received supplemental restricted awards in respect of the successful integration of the Archstone acquisition, the largest acquisition in Company history, which enabled us to largely meet our geographic portfolio allocation objectives, increase brand penetration within our footprint, and enhance G&A and operating synergies at the corporate and site level.

The component elements of each named executive officer’s annual compensation for 2013 are set forth in the following table:

Following were the base salaries established for 2013 for each of the named executive officers.

The following table sets forth the target, threshold and maximum annual bonus established in February 2013 and the actual bonus award made in February 2014 with respect to performance in 2013 for each of the named executive officers. These goals and achievements are discussed further below.

The actual bonuses awarded above reflect (1) the achievement of specific Company performance goals, (2) the performance of the officer’s business unit, where applicable, and (3) the performance of the individual officer. Various weightings are applied to each category based on each officer’s position and his or her ability to impact performance for the Company as a whole or a particular business unit.

For 2013, the following categories of performance goals and relative weightings were approved for the annual bonus program:

The corporate component of the annual bonus included four categories of performance goals, with weightings applicable to each goal set in advance. The following corporate goals were established for 2013:

performance, and exceeding budgeted NOI by 3.0% was maximum performance. In 2013 budgeted Development NOI was approximately $30.9M and actual Development NOI achievement was $33.9M. In 2013, budgeted Redevelopment NOI was approximately $43.8M and actual Redevelopment NOI was $45.8M.

These goals, metrics and achievement are graphically illustrated in the following charts:

Overall, achievement of the corporate component of performance for 2013 for annual bonuses was determined to be 147% of target.

Our multi-year, long-term incentive award program began in 2013. Under this program, it is anticipated that performance awards will be granted each year with a target number of restricted stock units that may be reduced or increased at the end of the performance period depending on achievement against the set metrics. For 2013, the metric was TSR measured on an absolute and a relative basis over a three-year performance period. To transition to the new long term incentive program, in February 2013 the Board granted three performance awards to each participant. Each award measures TSR over a three-year period, with one award maturing on December 31, 2013, one on December 31, 2014 and one on December 31, 2015. An officer must be employed with the Company at the end of the performance period to receive a payout under the performance award for each period.

 

The absolute and relative metrics under the performance awards made in 2013 are as follows:

Each metric independently accounts for one third of the total potential payout, with the threshold, target and maximum achievement levels of 50%, 100% and 200%.

Officers have the right to elect, prior to the end of a performance period, that employee stock options (valued at the Black-Scholes value of an option at the end of the performance period, as adjusted for changes in the stock price through the date of the actual award) be awarded in lieu of 25% of the value of the restricted stock that would otherwise be awarded in respect of that year’s annual bonus and maturing performance award. Restricted stock and options awarded at the end of the performance period are subject to vesting over three years.

To address the transition to the new program, restricted stock awarded in February 2014 in respect of the 2013 annual bonus and maturing long-term performance award had the following vesting schedule: 15% on March 1, 2014 and 42.5% on the next two anniversaries of that date.

The following table sets forth the target number of restricted stock units awarded each named executive officer in February 2013 for their performance awards associated with the performance periods ending on December 31, 2013, December 31, 2014, and December 31, 2015.

The Company’s Total Stockholder Return (on an annualized, compounded three year basis adjusted to reflect use of the average stock price and index value for 20 trading days at the beginning and end of the performance period) as of December 31, 2013, was 5.4%, while TSR for the same period for the FTSE NAREIT Equity Index was 10.7%, and for the FTSE NAREIT Apartment Index was 5.8%. As a result, achievement under the Long Term Incentive Award Program for the awards maturing on December 31, 2013 was determined to be 25.7% of Target overall, with 0% of Target for absolute TSR, 0% of Target for performance relative to the FTSE NAREIT Equity Index, and 77.2% of Target for performance relative to the FTSE NAREIT Apartment Index.

Based on these results, the named executive officers received the following number of shares of restricted stock on February 13, 2014, in respect of the performance awards maturing on December 31, 2013, representing 25.7% of the restricted stock units relating to such period as described above. These shares have the following vesting schedule: 15% on March 1, 2014, and 42.5% on each of March 1, 2015, and March 1, 2016.

Also in the first quarter of 2013, in consideration of the significant efforts and accomplishments associated with the closing of the Archstone acquisition, our Board approved the following special grants of restricted stock and employee stock options to the named executive officers:

The following table shows one way in which our Compensation Committee looks at the compensation paid and awarded to each of the named executive officers for service and performance with respect to 2013. This table differs from the Summary Compensation Table provided on page 35, which includes several items that are driven by accounting and actuarial assumptions that are not necessarily reflective of the compensation actually realized by the executive in a particular year. The primary difference between this supplemental table and the Summary Compensation Table is the method used to value long-term performance award units, stock options and stock awards. SEC rules require that the grant date fair value of all performance award units, stock options and stock awards be reported in the Summary Compensation Table in the row for the year in which they were granted, regardless of which year the awards were made with respect to or which year the awards pay out in the form of restricted shares of stock. As a result, a significant portion of the total compensation reported in the Summary Compensation Table relates to awards made for performance in prior years or, in the case of performance awards, awards for future years in which performance has not yet been determined and for which the value is uncertain (and which may end up having no value at all). In contrast, this table is provided to illustrate the actual cash, restricted shares of stock and employee stock options received by each named executive officer for service and performance in 2013. Note that the amounts reported below differ substantially from the amounts determined under SEC rules and reported in the Summary Compensation Table on page 35 and this table is not a substitute for the Summary Compensation Table.

The following compensation will apply for the named executive officers with respect to 2014 performance, other than for Mr. Sargeant, who has announced that he will retire effective May 31, 2014: