July 1999 - Just a few decades ago, gaming was restricted to Atlantic City and the state of Nevada. Today, 48 states allow some form of legalized gaming and as many as 21 offer a Las Vegas style gaming experience. With the incredible growth of the industry, the need for  experienced management talent has become acute. In turn, upward pressure on executive compensation continues to exist We recently completed our 1999 HCE Annual Report©, a biennial report on how corporate and property level casino executives are paid.

Corporate Compensation

We have profiled six of the 19 corporate positions which we surveyed. The positions include: CEO, CFO COO, executive vice president, senior vice president of operations, and vice president of sales and marketing. Table A examines the national levels of Total Cash Compensation (TCC) for these executives. We define
TCC as the sum of base salary and bonus pay. Compensation data from 84 gaming corporations was included in the analysis and was self-reported or garnered from public documents.
 

There was a great deal of disparity from minimum to maximum  compensation levels,  which clearly depicts the difference between the large and small players in the gaming industry. For example, one COO in our study earned a paltry
$47,000 last year, while another earned more than $1 million in TCC.

Furthermore, a number of the CEOs in the survey earned less than $200,000 in TCC, while others were paid in excess of $2 million. To put matters into perspective, we separated the data into two categories: Small and large cap companies. In all six positions, there was a remarkable difference in TCC between the small and large companies.

There has been notable increase in average salaries for the executives surveyed since our last compensation study in 1996. COOs, for example, saw their average base salary increase by nearly 16%, or $47,000. Average base salaries for CEOs also rose significantly, up 20% from 1996.

In addition to short-term incentives (cash bonuses), gaming executives were awarded long term incentives in record numbers. Table C illustrates the average number and value of stock options paid out to gaining executives last year.

We used the Black-Scholes Valuation model to calculate the dollar value of stock options granted in 1998. For all six executive positions, the average value of stock option grants equaled near-ly 50% of Total Direct Compensation. The average number of stock options granted for gaming executives has increased in most cases. In 1996 we reported that CEOs averaged 197,535 stock option grants, while in 1998 CEOs were granted an average of 232,637. Likewise, the option size for COOs has risen from 74,137 to 193,873. The exception is the average number of options granted for CFOs. In 1996, CFOs were given an average of 86,678 options versus the 78,793 options last year.
 

Property Compensation

Our analysis of property-level executives included six of the 29 surveyed positions, including CEO / general manager, vice president of casino operations, and top property casino operations, sales and marketing, finance, human resources, and hotel operations. Table D provides a national perspective for these positions relative to base and bonus compensation. As expected, the highest-paid, on-property executive is the CEO / general manager, while the lowest-paid of the six surveyed was the top property human resources executive. The heftiest bonuses also went to casino CEO/general managers, who earned more than $70,000 in average bonus pay last year. The top property hotel operations executive earned the
smallest cash bonus, followed closely by the top property human resources manager.

In Table E, we separated casinos by venue land-based versus riverboat casinos) and found that land-based casino executives earned more in both salary and bonus pay. land-based casinos tend to be larger facilities, located in major markets, while river-boats tended to be smaller in size and situated in secondary markets.
 

We also analyzed compensation for the three primary gaming markets, Atlantic City, Las Vegas, and Mississippi. Geographically, Atlantic City and Las Vegas executives earned more than their Mississippi counterparts by a wide margin. The average Atlantic City CEO/general manager, vice president of casino operations, and top sales and marketing executives were paid more than their Las Vegas colleagues. On the other hand, Las Vegas finance, human resources, and hotel operations executives out earned their Atlantic City colleagues.

Compared to 1996 national levels, executive pay at casino properties appears to have stagnated. We surmise that, with the expansion of smaller markets and Native American gaming,  our national results were populated with lower earning executives.

To alleviate the potential skew of the data, we separated data by the two large markets (Las Vegas and Atlantic City). As we expected, compensation actually rose in these markets by as much as 21% for general managers, 28% for human resource executives, and 7% for vice presidents of casino operations. Clearly, location and size matter when comparing compensation levels. Bonuses remain fairly consistent as a percent of base salary, with general managers continuing to make almost 30% while other executives tallied between 20% to 25%.

As the gaining industry grows and matures, the escalation of executive pay seems inevitable. What does this mean for gaming companies? Higher payrolls, a greater utilization of incentives, and an overwhelming need to retain management talent. The successful organizations will attack these issues with a vengeance, while the industry pretenders will continue to stick their heads in the sand.

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Keith Kefgen is president of HVS Executive Search, a division of HVS International. HVS Executive Search, the Mineola, NY - based human resources consulting firm, also produces the Hospitality Compensation Exchange Annual Report.