Executive compensation the answer to alignment
 
Executive compensation the answer to alignment
22 OCTOBER 2019 7:21 AM

Are hotel owners and operating teams aligned? Executive compensation may be the answer.

It’s officially budget season. Dread.

Is there a better way? Not to date myself, but the budgeting process hasn’t changed much since I started in the 1990s. If anything, it’s gotten more complicated. We start earlier to get ahead of it, and often revise during the fourth quarter. And, when it’s done, we measure first quarter against it (slam dunk!)–and then put it in a file and focus on the reforecast. The budgeting process feels like a dinosaur, and in an age ripe for disrupting outdated business models, perhaps it’s time to turn it on its ear.

Now, an owner might ask, the budget is one of my only levers to influence business decisions—how could I possibly give that up? I have the right to approve key personnel, performance termination rights, the right to approve the budget, and maybe terminate at sale or will. How do I influence business decisions without the right to approve an annual budget?

Well, one answer might lie in a hotel’s executive committee compensation. At its basic level, compensation should provide an incentive for the compensated executive to do what the compensating organization wants them to do. Which begs the question: Who is the “compensating organization”? The hotel industry is unique in that different groups brand, manage and own the hotel. The management company is the employer, but the owner pays the bills. If you think of the owner as the “compensating organization,” then the next question is: What does the owner need them to do?

Most owners have an investment plan that can span anywhere between three years to indefinite generational wealth creation. The point being it’s a multi-year plan, and ownership goals and objectives often take longer than a single year to realize. So, why not focus on a three-year plan and have some portion of the executive committee’s incentive tie to the longer-term objectives that an owner would approve? This might make for better alignment of interests and offer a different lens for decision making.

Recognizing current limitations of legacy language prevalent in most management contracts and the current operating environment, changes of this magnitude are no easy task. Parity is important to management companies, as is a balanced scorecard approach. It helps them maintain bench strength and balance the many facets of our complicated business. Owners understand this, but more transparency on executive committee compensation is needed. Owners are often paying for base, bonus and long-term incentive (not including funding relocation and often task force support as turnover occurs at the executive level). But does the overall compensation package align with the objectives the owner is looking to accomplish?

Other areas to consider are the ratio of base salary to incentive compensation. In certain circumstances, we might consider shifting compensation out of base salary into an oversized bonus program that ties to three-year objectives. Timing of payout should be considered, as well. Perhaps we reconsider paying bonuses in a mix of quarterly, annual/interim and three-year increments to better tie incentive to owner objectives. Forecast accuracy, flow-through, guest satisfaction and other shorter-term measures could be paid out quarterly, and success of return-on-investment projects can be paid out at pre-determined interim intervals based on payback period. Stabilization metrics, repositioning goals, capital planning and other long-term measures might be paid out over a three-year basis.

In conclusion, perhaps we (owners) loosen the reigns on annual budgeting and shift the focus to a rolling three-year planning cycle, allowing for more transparency and input on executive incentive compensation, while adjusting the timing of payouts to span quarterly to three-year intervals to better align operator/owner interests. As the industry looks to innovation as a staple for future growth and performance, owners too should insist that innovative thinking be extended into revisiting legacy language in hotel management agreements, as we work toward creating balance between all key stakeholders.

Diane Tanner Fox is SVP, Asset Management of CHMWarnick, the leading provider of hotel asset management and owner advisory services. The company asset manages more than 70 hotels comprising approximately 29,000 rooms valued at roughly $15 billion, and currently advises on development projects valued at over $2 billion. CHMWarnick’s hotel owner advisory services include asset management, hotel planning and development, acquisition due diligence, owner-entity accounting, management/operator selection and negotiation, capital planning and disposition strategy. CHMWarnick has nine offices nationwide, including locations in Boston, Chicago, Fort Lauderdale, Honolulu, Los Angeles, New York, Phoenix, San Francisco and Washington, D.C. For more information, contact 978.522.7000 or visit www.CHMWarnick.com. For the latest company news, follow CHMWarnick on Twitter @CHMWarnick and LinkedIn.

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