2008 turned out to be one of the most challenging years in recent history for the hospitality industry. Following a year of unprecedented growth and prosperity, the summer of 2008 brought record energy prices pushing both business and leisure travelers to seek alternatives to travelling by car or plane. This launched the creation of the “staycation” and the substitution of conference calls and video phones for corporate meetings and appointments. Hotels started to see a decrease in occupancy and rate.
In the fall, the high energy prices were replaced by the focus on the mortgage crisis and sharp declines in the stock market. Hotels saw their REVPARs shrink as stocks took a dive on Wall Street. Hotel and gaming stocks shrank to a fraction of their price just months before. Las Vegas Sands plummeted from a 52 week high of $117 per share to under $7 per share, while FelCor dropped from a high of $17.23 per share to under $2 per share. The brands have suffered a similar fate with Starwood trading at about a third of its 52 week high.
In the last few months of 2008, several media pundits questioned whether financial industry CEOs deserved bonuses after a year marked by investor losses and massive employee layoffs. While the criticism focused on the financial sector in light of a taxpayer bailout, the debate over bonus payouts is relevant to companies of all sizes and industries. How will chief executives in the hospitality industry fare?
Although it is still too early to tell what public hotel companies paid their executives for 2008 performance, we argue that proper compensation planning answers the above question regardless of the economic condition. If a bonus plan is sound and based on quantifiable performance measures, a bonus will be paid if deserved and no bonus will be paid if the goals are not met. We argue that despite consistent industry-wide declines in occupancy, ADR and RevPAR, those who performed better (or less bad) than their competition should be rightfully rewarded.
In the December 16 Wall Street Journal article “Pay Raises Seen Taking a Hit”, employers said they’ve made minimal or no changes to their bonus plans for 2009, as it is still necessary to retain and encourage high performers. This theory makes sense as executives who perform well under a tough economic environment are of great value to any company. If they become undervalued by their current employers, these top performers become attractive recruits to competitors.
We asked several hospitality HR executives to weigh in on the issue of bonuses in a struggling economy and their overall message is consistent with our view on pay for performance bonuses. Robert Mellwig, Senior Vice President of Human Resources at Destination Hotels and Resorts, said, “We believe in rewarding performance and the important role incentive compensation plays in our talent management strategy.” When asked about paying bonuses during troubled financial times, Melwig responded, “Our incentive compensation plans are focused on quantifiable, metrics focused and numerically driven formulas where possible. This balanced approach includes a focus on our associates and how we lead our teams, our guests and how we serve our customer base and our ownership returns and profitability measures. With 'profit integrity' cemented into our plan design, we are pleased to mathematically calculate and sign off on bonus checks.”
In the restaurant industry, Alain Ane, Vice President of Fox Restaurant Concepts based in Scottsdale, AZ said, “In my opinion, the times that we are experiencing validate how good or bad a solid incentive plan is (in its design). At the end of the day, if a company is not delivering on the financial performance expectation then executive bonuses would not be awarded.”
Companies should be careful to stick to their bonus plans and reward those in the company that have met their goals and continue to be high performers. All companies should review their bonus plans to make sure they are fair and reasonable. Bonuses are important during tough times as they keep employees and executives motivated and offer a tangible goal to help the company through an economic slowdown. The worst thing a company could do is suspend all bonus payouts; stick with your bonus plans and as long as they are based on sound metrics, all parties will be well served.