<PAGE>   1
                                                                     EXHIBIT 10

 
                     ASSOCIATED ESTATES REALTY CORPORATION
                      DIRECTORS' DEFERRED COMPENSATION PLAN

         Associated Estates Realty Corporation (the "Company") desires to
establish a Directors' Deferred Compensation Plan (the "Plan") to assist it in
attracting and retaining persons of competence and stature to serve as
Independent Directors by giving those directors the option of deferring receipt
of the fees payable to them by the Company for their services as directors and
creating an opportunity for appreciation of fees deferred based on appreciation
of the Company's Common Shares.

         Therefore, the Company hereby adopts the Plan as hereinafter set forth:

         1. EFFECTIVE DATE. The Plan is effective as of the date of its
adoption. Elections to defer will be effective for all director's annual and
meeting fees payable with respect to periods commencing with the Company's
fiscal quarter that begins October 1, 1996.

         2. PARTICIPATION. Each director of the Company who (a) is duly elected
to the Company's Board of Directors and (b) receives fees for services as a
director (an "Eligible Director"), may elect to defer receipt of fees otherwise
payable to that director, as provided for in the Plan. Each Eligible Director
who elects to defer fees will be a Participant in the Plan.

         3. ADMINISTRATION. The Company's Board of Directors appoints Jeffrey I.
Friedman and Dennis W. Bikun, directors or officers, or both, of the Company who
are not eligible to become Participants, to act as the Administrators of the
Plan (the "Administrators"). The Administrators will serve at the pleasure of
the Board of Directors and will administer, construe and interpret the Plan. The
Administrators will not be liable for any act done or determination made in good
faith. The Board of Directors has the power to designate additional or
replacement Administrators at its discretion.


<PAGE>   2



         4. DEFERRALS.
            ----------

            (a) DEFERRAL ELECTION. Prior to January 1 of each year, any Eligible
Director may file with the Administrators of the Plan, an election in writing to
participate in the Plan and to defer all or a portion of the fees otherwise
payable to that director for that year or for that year and succeeding years (a
"Deferral Election"). Upon adoption of the Plan, Eligible Directors may elect to
defer fees otherwise payable for the fiscal quarter that begins October 1, 1996
by making a Deferral Election prior to October 1, 1996. Each director who first
becomes eligible to participate after the date of the adoption of this Plan may
make a Deferral Election for the portion of the year in which that director
first became eligible with respect to fees for services to be rendered after the
date of that election. When a Deferral Election is filed, an amount equal to all
or a portion (as designated in the Deferral Election) of the fees otherwise
payable to a Participant for the year (or portion thereof) or for that year and
for succeeding years (as designated in the Deferral Election) will be credited
to a deferral account maintained on behalf of that Participant (a "Deferral
Account"). A Deferral Election must also state a distribution commencement date
and method of distribution (lump sum or four equal annual installments). If a
Deferral Election has been filed to participate in the Plan for succeeding years
and a Participant wishes to discontinue deferral, an election in writing to
terminate participation in the Plan for any year must be filed with the
Administrators prior to January 1 of that year.

            (b) ACCOUNTING. The Deferral Accounts will be maintained by the
Company and will list and reflect each Participant's credits and valuations. The
Company will provide each Participant an annual statement of the balance in that
Participant's Deferral Account. The Company will credit to each Participant's


                                       -2-


<PAGE>   3



Deferral Account an amount equivalent to the fees that would have been paid to
the Participant if the Participant had not elected to participate in the Plan.
The credit will be made on the date on which the fee would have been paid absent
a Deferral Election. No funds will be segregated into the Deferral Account of
Participants; the Deferral Accounts represent a general unsecured obligation of
the Company.

            (c) VALUATION. Until the first distribution to a Participant,
amounts credited to a Deferral Account of that Participant will be increased or
decreased as measured by the market value of the Company's Common Shares plus
the value of dividends or other distributions on the Company's Common Shares.
Each amount credited to a Deferral Account will be assigned a number of Share
Units (including fractions of a Share) determined by dividing the amount
credited to the Deferral Account, whether in lieu of payment of fees for service
as a director or as a dividend or other distribution attributable to those Share
Units, by the Fair Market Value of the Company's Common Shares (as defined
below) on the date of credit. Fair Market Value of the Company's Common Shares
means: (i) the closing price of the Company's Common Shares on the principal
exchange on which the Company's Common Shares are then trading, if any, on the
date of credit, or, if shares were not traded on the date of credit, then on the
next preceding trading day during which a sale occurred; or (ii) if the Common
Shares are not traded on an exchange but are quoted on NASDAQ or a successor
quotation system, (1) the last sales price (if the Common Shares are then listed
as a National Market Issue under the NASD National Market System) or (2) the
mean between the closing representative bid and asked prices (in all other
cases) for the Common Shares on the date of credit as reported by NASDAQ or a
successor quotation system, or (iii) if the Common Shares are not


                                       -3-


<PAGE>   4



         publicly traded on an exchange and not quoted on NASDAQ or a successor
         quotation system, the mean between the closing bid and asked prices for
         the Common Shares, on the date of credit, as determined in good faith
         by the Chief Financial Officer; or (iv) if the Company's Common Shares
         are not publicly traded, the fair market value established by the Chief
         Financial Officer acting in good faith. Each Share Unit will have the
         value of a Common Share of the Company. The number of Share Units will
         be adjusted to reflect stock splits, stock dividends or other capital
         adjustments effected without receipt of consideration by the Company.

         5. DISTRIBUTION. A Participant must elect in writing, at the time each
Deferral Election is made under subparagraph 4(a), the date on which
distribution of the amounts credited to the Participant's Deferral Account to
which that Deferral Election relates will commence and the method of
distribution, as permitted hereunder. Payment may be made in one lump sum or
four equal annual installments based on the number of Share Units attributable
to the applicable Deferral Election determined as of the December 31 immediately
preceding commencement of distribution. The time of and method of distribution
of benefits may vary with each separate Deferral Election, but each Deferral
Election will be irrevocable. The Deferral Accounts do not represent rights to
acquire the Company's Common Shares; payment will only be made in cash.

         6. DEATH OR DISABILITY.

            (a) In the event a Participant's service is terminated by reason of
     death or disability prior to the distribution of any portion of that
     Participant's Deferral Account, the Company will, within ninety (90) days
     of the date of service termination, commence distribution of amounts
     credited to the Deferral Account to the Participant (or to the beneficiary
     or beneficiaries in the event of death). Distribution will be made


                                       -4-


<PAGE>   5



         in accordance with the method of distribution elected by the
         Participant pursuant to paragraph 5 hereof. In the event a
         Participant's death or disability occurs after distribution of amounts
         credited to the Deferral Account hereunder has begun, the Company will
         continue to make distributions to the Participant (or to the
         beneficiary or beneficiaries in the event of death) in accordance with
         the methods of distribution elected by the Participant pursuant to
         paragraph 5 hereof.

            (b) Each Participant has the right to designate one or more
         beneficiaries to receive distributions in the event of Participant's
         death by filing with the Company a Beneficiary Designation Form. The
         designated beneficiary or beneficiaries may be changed by a Participant
         at any time prior to that Participant's death by the delivery to the
         Company of a new Beneficiary Designation Form. If no beneficiary has
         been designated, or if no designated beneficiary survives the
         Participant, distributions pursuant to this provision will be made to
         the Participant's estate.

         7. ASSIGNMENT AND ALIENATION OF BENEFITS. The right of each Participant
to any account, benefit or payment hereunder will not, to the extent permitted
by law, be subject in any manner to attachment or other legal process for the
debts of that Participant; and no account, benefit or payment will be subject to
anticipation, alienation, sale, transfer, assignment or encumbrance.

         8. AMENDMENT OR TERMINATION. The Board of Directors of the Company may
amend or terminate this Plan at any time and from time to time. Any amendment or
termination of this Plan will not affect the rights of a Participant accrued
prior thereto without that Participant's written consent.


                                       -5-


<PAGE>   6


         9. TAXES. The Company is not be responsible for the tax consequences
under federal, state or local law of any election made by any Participant under
the Plan. All payments under the Plan are subject to withholding and reporting
requirements to the extent permitted by applicable law.

         10. NO RIGHT TO CONTINUED MEMBERSHIP ON THE BOARD. Nothing in this Plan
confers upon any director any right to continue as a director of the Company or
interferes with the rights of the Company and its shareholders, which are hereby
expressly reserved, to remove any director at any time for any reason
whatsoever, with or without cause.

         11. APPLICABLE LAW. This Plan is governed under the laws of the State
of Ohio.

         IN WITNESS WHEREOF, the Company has caused this Plan to be executed by
its Chairman, President and Chief Executive Officer this _____ day of ____,
1996.

                                ASSOCIATED ESTATES REALTY CORPORATION

                                By: 
                                       ------------------------------------
                                       Jeffrey I. Friedman, Chairman, President
                                         and Chief Executive Officer



                                       -6-