Casino executives top Nevada pay scale

By Liz Benston

Friday, June 13, 2003 | 11:09 a.m.

Executives of Las Vegas' largest casino companies dominated a list of Southern Nevada's highest paid local executives last year, rocketing up the compensation scale mainly by exercising millions of dollars' worth of stock options.

Compensation in the gaming industry appeared to follow other broader market trends, including flat to relatively small increases in base salaries compared to larger increases in long-term incentives such as stock grants and options.

Gary Loveman, who became chief executive of Harrah's Entertainment Corp. in January, topped the list with $18.2 million in total compensation last year, including long-term compensation of $13.8 million and annual compensation of $4.4 million, according to an analysis of company proxy statements and annual reports compiled by In Business Las Vegas, a sister publication of the Las Vegas Sun.

Annual compensation includes yearly salary and bonuses. Long-term compensation includes awards of restricted stock and exercised stock options. Restricted stock is often awarded to management as a performance incentive and may not be immediately sold. Other compensation includes recurring and one-time miscellaneous payments such as health insurance premiums and company contributions to retirement plans. Stock options may either be exercised right away or may not vest for several years.

The casino industry numbers appear large compared to the single-digit compensation packages executives reported in 2001, especially given last year's difficult recovery from the Sept. 11 terrorist attacks, experts say.

Still, the numbers can be deceiving. Base salaries and bonuses indicate how bosses are being rewarded for current performance. But grants of restricted stock -- which can't be sold right away -- reflect payment for future services. The value of option gains, on the other hand, reflects payment for past services.

Adding them into a grand total is "mixing apples and oranges," said Jim Hughes, a senior vice president of Clark Consulting in Los Angeles.

Making strict year-to-year comparisons can skew the numbers by including incentive grants that often need to be accounted for over several years, said Hughes, who specializes in the casino industry.

"When it shows up in one year it looks like a lot of money -- and it is a lot of money," he said.

Other gaming executives also raked in long-term incentives last year:

Many companies -- including those in the gaming industry -- appear to be feeling pressure from investors to better align pay with performance, experts say.

That means capping base salaries or raising them minimally while relying more on long-term incentives that pay off when the company does well, said Graef Crystal of Las Vegas, a former compensation consultant and a columnist for Bloomberg News.

Of 209 U.S. chief executives whose companies generated at least $1.5 billion last year, the median pay raise in 2002 was 2.8 percent compared to the previous year, Crystal said. When the economy peaked a few years ago, pay raises might have been 20 percent or more, he said.

An alternative that has yet to take hold in the gaming industry is a shift away from stock options and, in some cases, away from stock and into the safety of cash, he said.

Companies say shareholders support incentive plans because their executives have produced healthy returns. Compensation plans, especially long-term grants of options or shares, lock in executives and align their performance to company performance, they say.

Last year, MGM MIRAGE drew up four-year contracts that granted its five top executives $2.6 million in annual pay raises and 400,000 shares of stock valued at around $14 million.

Competition for talent has intensified as gaming has expanded worldwide, company spokesman Alan Feldman said. The incentive plan allows the company to maintain the same management team that engineered the successful merger of MGM Grand and Mirage Resorts in 2000, he said.

Executive compensation is based on the performance of the company, including stock price and attainment of internal financial targets, Harrah's spokesman Gary Thompson said.

In the nearly five years since Loveman joined the company, Harrah's has been the best performing of the big-cap casino operators, "due in large part to the strategy he formulated and implemented along with (former chief executive) Phil Satre," Thompson said.

"Shareholders recognize the value that Gary has brought to the company," he said.

Last year, Harrah's return on equity ranked in the 90th percentile among major gaming company peers and its net income topped the competition, in addition to beating broader market indexes, Hughes said.

"Why do they pay the most? You could argue that they perform the best, based on certain measures," he said.

Last year, Las Vegas casino stocks significantly outperformed the broader market, yielding greater returns for stockholders.

Compared to a 22.1 percent drop in the Standard & Poor's 500 Index, MGM MIRAGE was up 14.2 percent, Harrah's was up 7 percent, Mandalay Resort Group was up 43 percent and Station Casinos Inc. was up by 58.2 percent. Park Place fell by 8.4 percent.

While many executives from other industries chose not to exercise options last year because of lousy returns, many gaming chiefs chose to obtain stock, Crystal said.

"Under those (market) circumstances, all these fields they planted with options are blooming beautifully," he said.

More companies have begun to shrink the size of option grants and move to share grants, Hughes said.

Investors have complained that options can potentially dilute future earnings for shareholders. Market volatility also creates problems for shareholders as executives exercise options and then immediately sell their shares, flooding the market, he said.

Granting chiefs shares rather than large option grants avoids the potential cost involved in expensing options and means less dilution of earnings by reducing the potential number of shares outstanding, he said.

Some companies also are moving toward grants of "free shares" that can be sold immediately, Crystal said.

Executives may obtain free shares for downside protection because they still make money if the stock drops. Options may be a bet that the stock will rise, he said.

A number of other current and former gaming company chiefs made the In Business list this year. They include:

Executives of the largest non-gaming companies in Las Vegas also made the list. They include: