The lodging industry is in vogue. Capital has been pouring into the industry in unprecedented numbers and the beneficiaries have hotel buyers and sellers. In particular, hotel REITs have benefited. REIT executives have also been rewarded for their efforts. Our annual review of CEO compensation demonstrates that REITs have been a solid investment relative to executive pay. Six of the top ten performing lodging CEOs are running REITs. Hasu P. Shah, CEO of Hersha Hospitality leads the pack this year, turning a family business into an industry force.

Top Performers

Based on our pay-for-performance model, Mr. Shah was underpaid by 121% or nearly $275,000 in 2004. The model takes into consideration three primary criteria, EBITDA/FFO growth, market capitalization and stock appreciation, and compares that to total compensation. The outcome is a pay-for-performance index that determines how much a CEO was over or under paid. This is the first time Shah made the top performing list and it was a very visible entrance. Repeat top performers included Joseph P. Martori of ILX Resorts, Bob Winston at Winston Hospitality, Arthur Coffey of WestCoast and CHIP REIT under new CEO, Edward Pitoniak.

New names to the top 10 list included Jim Francis of Highland Hospitality, Roger Sonnabend at Sonesta, George Donovan with Bluegreen, Jon Bortz of LaSalle and George Whittemore, the former CEO at Humphrey Hospitality. All of the top performers were associated with small and mid cap companies avoiding the pay packages typically given to large cap CEOs.

Top Appreciators

The best investments over the past three years besides Hersha included Bluegreen, LaSalle, Wyndham and Choice. These companies had the best stock appreciation from December 2001 to December 2004. It appeared that Fred Kleisner at Wyndham has accomplished one of the toughest turnarounds in the industry and is ready to put Wyndham in play. We also predict that Roger Sonnabend will be the beneficiary of condo hotel boom as Sonesta's stock rose from $6.20 to nearly $43.00 upon the announcement of their Key Biscayne conversion. Chuck Ledsinger at Choice continues to be a model of consistency, ranking high in CEO value as well as stock appreciation.

Top Salaries and Bonuses

The average CEO salary increased to $631,000 in 2004, a very modest 1.1% increase over last year. We suspect that salaries were flat due to a lack of inflation and a focus on incentive pay. Shareholders continue to show a combative posture towards what they perceive as excessive pay practices. The largest base salary was paid to Henry R. Silverman for the fourth year in a row at $3.3 million. Rounding out the list of top salaries included Isadore Sharpe, J.W. Marriott Jr., Stephen Bollenbach and Michael D. Eisner. Each earning over $1 million in base salary.

Bonus compensation for hotel CEOs increased substantially in 2004. Although bonuses did not double as they did last year, a healthy 10.4% increase was realized. We believe that bonus schemes continued to be a much larger part of compensation planning. With more shareholders scrutinizing stock option grants, many companies are moving more variable pay into bonus plans. Henry Silverman also had the largest cash bonus at $15 million. Other multi-million dollar bonuses were paid to Michael Eisner, Barry Sternlicht, Steve Bollenbach, Mickey Arison and John Emery, who took Great Wolf public.

Top Stock Incentives

It appears that the use of stock options over that last two years has leveled out at 30% of the survey group companies. The dramatic drop occurred soon after the enactment of Sarbanes-Oxley in 2002. Barry Sternlicht at Starwood received the largest long-term incentive worth nearly $29 million. The incentive was made up of restricted stock grants worth $13 million and stock options with a Black-Scholes value of $16 million. A stock option grant of that size as he announces his retirement seemed very curious. Why grant an option to an executive who will have no impact on long-term value? Other multi-million dollar option grants were doled out to Marriott and Emery. The Emery grant at least makes sense as he took the company public in 2004 and hopes to create long-term value for shareholders.

Other leaders who received significant long-term incentives included Paul Whetsell, Arison, Bob Alter, Laurence Geller, Joe Houssian and Bill Fatt, each earning $2-5 million in long-term incentives.

Richest CEOs

Three billionaires top our richest list, with Arison worth $11 billion, Marriott amassing $2 billion and Silverman just touching the $1 billion mark. Silverman also had the dubious honor of having the most "other" compensation with a total of $5.5 million. What the Cendant compensation committee has been thinking is beyond me. The Cendant board should heed the warning now before they become a target of the compensation watchdogs.

Compensation continues to be a lightning rod issue for investors and scarcely a day goes by that the business press is not writing headlines about excessive CEO pay. Boards can protect themselves by doing solid market due diligence and justifying their pay-for-performance metrics. Otherwise, beware.

1 Minimum of $225,000 in total compensation to be included
2 "Other" includes other annual compensation
3 "Long Term Stock Grants" is the Black-Scholes value of stock options granted in 2004, restricted stock awards and LTIPS
4 "Value of In-The-Money Options" includes both exercisable and unexercisable options
5 "HVS Pay-For-Performance Index" is based on an average of 100.0
Stock market data garnered from Smart Money and based on years ending December 31, 2001-2004

*No longer CEO
**Canadian Dollars
***A portion of Mr. Tisch's compensation is earned for serving in the Office of the President of Loews Corporation (parent of Loews Hotels)

SOURCE: HVS Executive Search

This article is a reprint from its original publication in Hotel Business (August 7-20, 2005 issue).