Top Hotel Industry Performers in a Turbulent Time

Last year, the trend towards private equity was the hot topic in the hotel industry. This year the focus is on the economy. The hospitality industry has undoubtedly been affected by the faltering economy and more specifically, the credit markets. First of all, capitalization rates are on the rise. Additionally, the demand for hotel rooms is slowing, indicating a decline in occupancy and ADRs over the foreseeable future. Has the economy affected CEO pay?

This year, thirty-one companies were included in our survey, down from thirty-seven last year and fifty-two six years ago. This trend illustrates the increasingly popular shift towards companies going private. The remaining group was a mix of large, mid, and micro-cap companies. Our top performing CEO in 2007 was Jon E. Bortz of LaSalle Hotel Properties.

Top Performers
Based on our pay-for-performance model, Mr. Bortz was underpaid by 111.9% or nearly $2.1 million in 2007. This model takes into consideration three primary criteria, EBITDA/FFO growth, market capitalization and stock appreciation, and compares that to total compensation. The result is a pay-for-performance index that determines how much a CEO was over or under paid in a given year. Other top performers included Paul Schulte with Supertel Hospitality, Stephanie and Peter Sonnabend of Sonesta International, William McCarten with DiamondRock (last year’s winner), and Arthur Coffey of Red Lion Hotels (who recently announced his retirement). Although out winner was a mid-cap company, the rest of our top performers were small-caps. It is not surprising that large-cap companies did not make this list as many have pay programs that are well aligned with performance. This makes it more likely for small and mid-cap companies to underpay their CEOs.

Top Appreciators
The best investments over the past three years include Sonesta International, Priceline.com, Vail Resorts, Red Lion Hotels, LaSalle Hotel Properties and Loews Hotels. These companies had the best stock appreciation from December 2004 to December 2007.

Sonesta continues to appreciate in value and be a leader in this category for 3 years in a row following their January 2005 announcement to partner with Fortune International Realty to redevelop its Sonesta Beach Resort in Key Biscayne, Florida. Although the stock price more than tripled from $7 a share to well over $23, we don’t know that this trend will hold under current economic conditions.

In contrast, Bluegreen was the second highest appreciator in 2006 and second to last in 2007. Their sudden depreciation in July of 2007 corresponded to the public announcement of David Siegel’s increase in ownership to around 32.1%. Many companies’ stock value suffered from the troubled market climate, and we foresee a similar trend in 2008-09.

Top Salaries and Bonuses
The average CEO salary increased to $721,000 from $631,000, or 14.3%. This follows an 8.2% increase in CEO salary from the previous year. We believe this is due to the increasingly competitive talent pool as well as more systematic and balanced approach to compensation directives. This year the largest base salary was paid to Robert Iger of Disney for the second year in a row at $2 million. Rounding out the list of top salaries included Steven Heyer, Jonathan Tisch, J.W. Marriott, and Richard Fain, each earning around $1 million in base salary. All were CEOs of large-cap companies.

Bonus compensation for hotel CEOs increased again in 2007. The average bonus was nearly $1.2 million, which is almost double the average salary. Similar to our survey last year, these results lead us to believe that shareholders will continue to request performance-based compensation packages. For the third year in a row, Robert Iger of Disney topped our list with the largest cash bonus at $13,671,000. Iger’s bonus was nearly five times greater than the second highest bonus, which went to Royal Caribbean CEO Richard Fain at nearly $2,991,000. Other top bonuses in the $2 million range include Mickey Arison, J.W. Marriott Jr. and Jonathan Tisch. Clearly, large-cap companies are paying more in this category, which verifies the theory that company size dictates pay size.

Top Stock Incentives
The CEO receiving the honor for top stock incentive is Robert Iger with Walt Disney. Mr. Iger received nearly $10,175,000 in long-term incentives. Other multi-million dollar incentives were J.W. Marriott Jr. and Mickey Arison. Stock awards were also dominated by the large-cap companies.

Richest CEOs
Like the previous two years, the spot for richest CEO is a battle fought by our two billionaires, Mickey Arison and J.W. Marriott Jr. Arison takes the lead again, but interestingly enough, Arison’s fortune is down from $11 billion in 2005 to $8.4 billion this year. Marriott is also down, from $3 billion in 2005 to $2 billion in this year’s survey. The CEO’s rounding out our list of the richest include Charles Ratner of Forest City, Jonathan Tisch of Loews Hotels, and Richard Fain of Royal Caribbean.

CEO compensation continues to be one of the most scrutinized topics in corporate America. Shareholders are increasingly attempting to regulate multi-million dollar compensation awards to underperforming CEOs. Large shareholders have actively petitioned corporate boards regarding CEO compensation as they want a greater say on CEO pay.

By Keith Kefgen and Becca Ickowicz

July 10, 2008