Shifts in Compensation – the 2007 Gaming Industry CEO Study

The past year was another busy one in the gaming industry with Macau surpassing Las Vegas as the top gambling market in the world and international expansion of U.S.-based companies heating up.

Domestically, the gaming industry continued to lead many of the redevelopment efforts in the Katrina-ravished Gulf Coast, providing much-needed economic stimulus through new construction and employment opportunities. Las Vegas continued to grow as the mega-projects like MGM Mirage’s CityCenter began pushing skyward, and new projects were announced. Wall Street saw the value in gaming stocks, pushing many to new highs such as MGM Mirage, Harrah’s Entertainment, Las Vegas Sands and Pinnacle.

Gaming continued to expand throughout the United States with additional tribal gaming developments announced as well as new markets approving gaming expansion-especially slots and casinos. After a number of fits and starts, the much-anticipated announcement of the Pennsylvania casino licenses came out just in time for the holidays. But the biggest news of the year was the announcement that Texas Pacific Group and Apollo Management were acquiring Harrah’s Entertainment for nearly $28 billion.

With all this good news, how did gaming CEOs fare?

Top performers

The annual study analyzes CEO performance by comparing financial results relative to total compensation. Using our proprietary pay-for-performance model, each CEO was compared to their industry peers. The resulting AETHOS Value Index indicates whether a CEO earned their pay or not. View the complete findings here.

TOP TEN PERFORMING CEOs

The year’s top-performing CEO was Daniel Lee of Pinnacle Entertainment, Inc. whose AETHOS Value Index¬© rating of 160.0 indicates that he was underpaid by 60 percent. Under Lee’s leadership, Pinnacle continues to expand its operations, highlighted by the acquisition of prime Atlantic City property on which they plan the first new boardwalk casino in years.

Last year’s winner, James Perry, is on the sidelines currently after leaving the CEO position at Trump Entertainment Resorts. We hope Perry chooses to bring his exceptional leadership to another organization soon, and we will refrain from adding to the speculation surrounding his departure from the Trump organization. The bottom performers on a pay-for-performance basis were Thomas Hodgson of Magna Entertainment and Lyle Berman of Lakes Entertainment.

Top salaries and bonuses

The list of the industry’s top salaries has remained essentially the same from last year. The average salary among the top five increased very slightly from $1,548,000 in 2005 to $1,746,430 in 2006. The average salary for the entire group increased significantly to $747,082 from $625,345, a 19.5 percent increase from 2005.

Bonuses for CEOs at the top end saw a huge jump from $3,922,000 in 2005 to $5,066,000 in 2006. The big driver here was Steve Wynn joining Terri Lanni in the $6 million bonus club. Furthermore, the average bonus for all CEOs grew to $1,061,368 from $751,709.

As we noted last year, this upward trend supports our expectation that cash incentives would be increasing in reaction to increased scrutiny and new accounting procedures for stock option awards implemented in 2004.

Top stock incentives

The trend away from stock options continues with essentially a 50/50 split of companies offering stock options versus those that did not. Eleven of the companies in this year’s survey did not provide any stock incentives at all, neither grants nor options. Only three companies opted for options entirely over stock awards, 13 companies included both options and awards for their CEOs, and seven organizations went exclusively stock awards.

TOP STOCK INCENTIVES

The average value of long-term incentives to the top five CEOs was down dramatically from 2005, coming in at $2,728,560 versus $8,989,000 one year ago. New SEC reporting regulations will continue to shine light on the size and scope of long-term compensation packages for the industry’s top executives.

RICHEST CEOs

Our list of CEOs with the largest value of In-The-Money Options was lead again by Lorne Weil of Scientific Games at a value of $58 million. The average value of In-The-Money Options for the top five was $45,400,000, up from $41,914,000 last year.

FORTUNES-IN-WAITING

With the precipitous increase in the stock price of Las Vegas Sands, Sheldon Adelson takes over the top spot as richest CEO from Mickey Arinson. Adelson’s personal fortune increased by several billion dollars last year as the LVS stock surged over 2006 to end the year at $89.48 from $39.47.

Pay-for-performance

There was virtually no change in average total compensation for CEOs in 2006 from 2005. Based on our value formulas, 10 of the 35 CEOs were actually underpaid by at least 10 percent. Conversely, 13 CEOs were overpaid by at least 10 percent and six of them were overpaid by more than 50 percent.

Overall, shareholders should be pleased by the pay-for-performance they are getting from gaming CEOs. With only a few exceptions, compensation was in line with what we would expect. Further supporting our belief that uncovering the hidden value in many gaming companies will continue to drive the successful growth of the business for all of us.

 
 

Keith Kefgen, New York
CEO & Managing Director


[email protected]


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