The Long-Term Incentive Dilemma of Asset Management Pay

David Mansbach | COMPENSATION
The economic impact of COVID-19 has devastated the hotel industry in myriad ways, from sinking revenues to company restructurings. Hilton announced in June that it was laying off 2,100 employees, about 22% of its corporate staff. In March, Marriott reported it would furlough roughly two-thirds of its 4,000-person corporate workforce. The COVID-19-induced lodging recession has not only dug into property owners’ bottom lines, but it might also have a ripple effect of draining companies of their top-tier asset-management talent. No longer bound to a company with the “golden handcuffs” of long-term incentive plans or even annual bonuses, high-performing asset managers are considering career resets that will leave owners without the talent they’ll need to thrive in Hospitality 2.0—a time sure to be marked by a wave of distressed assets and workouts that demand the attention of talented and experienced asset managers.

Pre-COVID compensation trends

In January, Aethos Consulting Group™ sponsored its biennial Hotel Asset Management Compensation Report, receiving more than 1,500 compensation data points from 240 survey respondents covering base salary, annual bonus, total annual cash compensation, and long-term incentive/equity trends. A variety of participants from the ranks of public lodging real estate investment trusts, private equity groups, owners/developers and asset management advisory firms provided information. Responses were divided in three executive groups: SVP of asset management, VP of asset management, and director of asset management. SVP of asset management earned a median base salary of USD $321,000, USD $150,500 in annual bonus and USD $610,000 in total cash compensation. Moving to VP of asset management, those same numbers fall to USD $208,500 base salary, USD $75,000 in annual bonus and USD $345,000 in total annual cash compensation. Meanwhile, directors of asset management in the same category earned a median base salary of USD $138,625, USD $25,000 in annual bonus and USD $183,500 in total annual cash compensation. Common threads used for annual bonus metrics spanned across gross operating profit, net operating profit, and revenue-per-available-room growth, among others. This data was gathered before COVID-19 devastated the country and industry. One compensation data point where this economic downturn has had a dramatic impact is long-term incentive plans. Pre-COVID, 55% of all asset managers were tied to a long-term incentive and/or equity program. Breaking it down by title: 62% of SVPs of asset management were granted annual long-term incentive/equity awards; 51% of VPs of asset management; and 17% of directors of asset management. Now, asset manager compensation derives predominantly from one spoke—base salary—with annual bonus and long-term incentive packages significantly decreasing in value. What’s more, the lack of clarity about where the economy is heading has made it extremely difficult for companies to reset executive long-term incentive programs in the near future. Public hotel company stock price volatility is unprecedented, and private hotel investment groups are in the midst of conducting mark-to-market exercises to assess the value of their portfolios, which have dropped significantly. What can an owner/employer do in this environment to retain their best asset managers with no golden-handcuff mechanism in place? While a difficult task, it can be done with a little creativity, patience, open communication and collaboration.

Time to get creative

Without a clear line of sight into the near future, owners should wait at least three to six months before considering any revisions to their long-term incentive plans. The marketplace is simply too cloudy right now to make effective decisions. For now, the first order of business should be to communicate with your asset managers that you recognize the predicament, and while long-term compensation redesign is under serious consideration, a “pause” is necessary. With that said, there are many opportunities to create shorter-term, quarter-to-quarter incentives to keep your asset-management team engaged. Within the hospitality industry, the asset management community holds a unique role serving as a key touchpoint between the owner, lender, management company and property-level operating team. If communication, transparency and collaboration are handled in the appropriate manner, you will increase your chances of high performers staying on the boat and riding out the storm. They, like me, strongly believe there are blue skies ahead.