As we do every year, we evaluated the performance of CEOs in the hotel industry using our proprietary “pay-for-performance” model. Our goal is to determine whether a CEO deserves his or her pay relative to their industry peers. Many would argue that all CEOs are overpaid, but we disagree. We think the issue is about value creation and supply & demand. While the government tries to regulate executive pay, we recommend boards and shareholders view pay as a function of these two factors. Why would we suggest that Bob Iger at Disney is fairly paid at $40 million, while Warren Haruki of Maui Land is overpaid at $300K? The answer is in the concept of value creation. The model looks at how a company performed financially (stock price, EBITDA, market capitalization) in relation to CEO pay. The result is a pay-for-performance index that shows whether a CEO was over or underpaid. The index has an average of 100; meaning a CEO at an index of 100 would have been paid exactly what they deserved.
This year’s study saw Jim Francis at Chesapeake Lodging Trust, with an index of 173, as the most underpaid hotel boss. Jim could have been paid an additional 73% based on Chesapeake’s performance over the past three years. Other top performers included Monty Bennett at Ashford, Colin Reed at Ryman (the former Gaylord Entertainment Company) and John Murray at HPT.
The study showed that the median cash compensation rose over the past year by 3.8%. Not much different than the standard increase for all employees. Median bonuses on the other hand, went up nearly 24%, demonstrating that bonus metrics were exceeded in most cases through better fundamentals. The median long-term incentive stayed relatively unchanged, albeit a nice chuck of change, at $2 million. Large company CEOs dominate the list of top salaries with Bob Iger at $2.5 million, Steve Holmes and Fritz van Paasschen at $1.2 million, and Arne Sorenson, Mark Hoplamazian and Richard Fain at just over a $1 million. The most lucrative bonuses went to Iger and Laurence Geller. Geller’s $16 million short-term incentive was clearly a function of his exit from Strategic Hotels, but wow! Jeff Boyd got over $5 million, but Priceline continues to be one of the best performing stocks in the market.
Long-Term incentives are sometimes difficult to evaluate on an annualized basis. In many cases, L-T incentives tend to get bulked into larger but less frequent grants. Interestingly, twenty-two CEOs in our survey were granted an LTIP in excess of a $1 million. Iger got the most at $17 million, Tom Baltimore got $6.8 million and Steve Holmes received $6 million. Mickey Arison is still the richest guy in the group with a net worth over $6 billion. Next comes Jonathan Tisch at $372 million and Iger at $127 million.
We anticipate a strong 2013 financial year, especially the REITs and a few new players (Extended Stay & Hilton in particular). It also appears that a few of the small cap companies should privatize or merge. It is simply getting too expensive to be public. It will also be interesting to see how government regulation impacts the industry. We doubt healthcare reform will affect CEO pay much but watch out down the organization chart. In fact, we think that Obama Care, and healthcare costs in general, could be one of the most significant drags on profitability.