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by Keith Kefgen & Paula Keung, October 1997

When Hollywood studios want a surefire summer blockbuster, they hire high profile stars and pay big bucks, right? But what happens when the movie is an Ishtar or Waterworld? They take huge write-offs. Historically, the casino industry has had a similar attitude, where high profile executives got paid big bucks, win, lose or draw. However, we now see evidence that gaming companies are taking steps to corral executive pay, by tying compensation to company performance. We think it's about time. As we see it, the issue has never been the size of the paycheck, it's about earning the paycheck.
 
 

For the past four years, we have been tracking executive pay in the gaming industry and raising questions about the link between CEO compensation and company performance. Our annual survey of CEO compensation uses a proprietary pay-for-performance model to rank individual performance.

The critical measurement is a CEO's ability to create shareholder value. We modified our other performance criterion slightly, whereby we now track growth in EBITDA rather than net income and return-on-equity. We shifted our focus in order to reflect investor's increasing interest in EBITDA.

Using our performance model, CEOs yield an HVS Value Index, which ranks them against their industry peers. We included only those CEOs who earned at least $200,000 in cash compensation, and were in their position for at least one year.

Fifty nine gaming CEOs met the criteria to be included in this year's survey. The HVS Value indices ranged from 1.4 to 206.0. thirty gaming CEOs ranked above the average rating of 100.0 and 29 ranked below.

A Wynning Performance

This year's hottest stars were Steve Wynn, CEO of Mirage Resorts and Stan Fulton, CEO of Anchor Gaming (see "Best performing CEO" table. Wynn was the best performing operator with an index of 140.0 while Fulton led all gaming suppliers with an index of 206.0.

Suppliers as a group outranked their operating peers - a clear reflection of overall stock performance. Supplier stocks performed much better in 1996 as gaming operators fell out of favor on Wall Street.

Wynn's performance was particularly significant in the face of this investor pessimism, proving our point that even with total compensation of 3.75 million, it's possible for a CEO to be underpaid.

Fortune Magazine recently acknowledged Wynn's successful performance as leader when it named Mirage Resorts one of America's most admired companies.

The stellar stock performance of Anchor Gaming propelled Fulton to star status this year. Over the last three years, Anchor's stock has gone from $13.75 to $40.25 per share. Another notable performance was turned in by William Malloy of Scientific Games, who makes the best performing CEOs list for the second year in a row, increasing his HVS Index nearly 20 points over last year. All other top performers were newcomers to the list, proving that it's not easy to maintain consistent performance.

Bombs and Bonuses

The list of the worst performing CEOs is dominated by operators and small cap suppliers ( See Worst Performing CEO Table).

John Connelly of President Casinos led the pack with an HVS Value Index of only 1.4, indicating that he should have been paid next to nothing for President's dismal performance. Butler National's foray into Indian Gaming management produced very little and investors trounced the stock in the process.

On the Rise

The average CEO salary rose 3% this year, to just under $500,000. The top salaries were all earned by large operators, ranging from Steve Wynn's $2.5 million to Terrence Lannis's $1.0 million (See Top Salaries Table).

The average bonus for a gaming CEO increased 7% to approximately $290,000, with the largest bonus ($3.1 million) going to Guy Snowden of GTECH (see Bonus Babies Table). The 10% annual gain in cash compensation (salary plus bonus) seemed rather insignificant though, compared to the 39% increase Business Week Magazine reported for all CEOs in 1996.

Stock Grants Dip

Average total compensation (salary plus bonus plus long-term incentives) for a gaming CEO was $1.6 million, a far cry from Business Week's stated average of $5.7 million for all CEOs.

The average total compensation for gaming CEOs actually decreased by 43% in 1996, primarily due to less generous stock option grants by many gaming companies. The biggest total compensation package went to Lyle Berman of Grand Casinos ( See 1997's Gaming Industry's Top 59 table).

Not far behind Berman was Rand Araskog of ITT, who earned second place in last year's total compensation ranking as well and first place in 1994. Araskog has also made this year's top five lists for base salary, bonus and long-term stock incentives. Too bad ITT's performance hasn't been as rich as Araskog's paycheck.

Berman's rise to the top compensation spot was due largely to his stock option award in 1996 (see Top Stock incentives table). His grant of 1.0 million shares eclipsed the average grant by nearly 750,000 shares.

Other large grants were given to Steve Bollenbach, Charles Mathewson, Araskog and Phil Satre. Interestingly, Bollenbach's pay package seems to be well worth the investment as Hilton has doubled its market capitalization under his leadership. In Fact, Bollenbach was the top rated CEO in our annual rating of the lodging industry.

Stars Own Studio

Many of gaming's executive stars founded the companies they now lead. All five CEO's in "Piece of the Action" table fit this description.

Even when it comes to stock grants, many of these CEO's received aggressive packages. Wynn, for instance has nearly $200 million coming to him in the form of long-term incentives. (See Fortunes in Waiting Table).

But we remind you not to get caught up in the size of some of these paychecks what really matter is whether or not  the paycheck was earned. In Steve Wynn's case, clearly he earned every penny!

Go to the 1996 Gaming Industry CEO Compensation Study "The Men with the Golden Touch"

HVS Executive Search is a Mineola, NY based human resources consulting firm. The firm is headed by Keith Kefgen, President, and Rosemary Mahoney, Director. HVS Executive Search provides retained executive search, compensation consulting, employee-opinion surveys and organization development.

For additional information contact the firm at: