Compensation soars for casino executives

By Liz Benston

Monday, June 7, 2004 | 11:19 a.m.

Large grants of restricted stock and sales of millions of dollars' worth of stock options boosted compensation for casino executives to record highs last fiscal year, with experts attributing much of the rich pay increases to savvy profit-taking and impressive gains in casino stocks.

Mandalay Resort Group Chief Executive Michael Ensign and director William Richardson easily topped the list with $46.8 million in total compensation apiece, according to an analysis of executive compensation by In Business Las Vegas, a sister publication of the Sun. By comparison, Ensign and Richardson reported total compensation of $2.8 million and $2.7 million, respectively, in 2002.

Each unloaded about 6.8 million shares in 2003, though only a fraction of those shares were obtained by exercising options. Both retain stock options and also recently were granted a total of 700,000 shares of restricted stock by the company.

The sales alarmed some analysts and investors, though many others remain bullish on the company's management and future prospects. The officers aren't required by law to disclose the reason for the sales. They have remained mum on the subject, but company representatives have said the officers remain committed to the company and aren't planning on leaving in the near future.

Ensign's total compensation included long-term compensation of $43.7 million and short-term compensation of $3.1 million. Richardson's compensation included long-term compensation of $43.9 million and short-term compensation of $2.9 million.

Total compensation consists of both long-term and short-term compensation as well as other compensation such as severance payments, contributions to retirement plans and moving expenses, among other things. Long-term compensation consists of grants of restricted stock as well as gains from exercised stock options. Short-term compensation includes the executive's annual salary and bonus.

Mandalay Resort Group President and Chief Financial Officer Glenn Schaeffer was No. 5 on a list compiled by In Business of Southern Nevada's highest paid executives. Schaeffer earned about $12.8 million in total compensation, $10.7 million of that in long-term compensation and $2.2 million in short term compensation. That was less than Schaeffer's $17.6 million total compensation in 2002 -- most of that earned from share grants or gains from exercised options.

Comparing one year to the next often doesn't fully reflect compensation trends because share grants and exercised options can vary widely from year to year, experts say.

The hefty compensation totals at Mandalay Resort Group are part of a broader trend of stock selling by gaming executives over the past year amid strong share prices, said Jeremy Aguero, a principal with Applied Analysis, a consultant in Las Vegas.

"You saw a lot of profit-taking in the past year," Aguero said. "It's not a good or a bad thing. It's just prudent investment policy."

Those sales still occurred well below stock prices that peaked several weeks ago, he said.

Strength in stocks

Gaming stocks began to rebound a year ago amid a period of turmoil for the stock market, Aguero said.

"In the face of SARS, in the wake of military conflict and in an uncertain period where a lot of folks were fearful about the economy ... gaming executives were able to hold it together," he said.

Of the largest Nevada-based gaming companies, Mandalay Resort Group stock experienced one of the highest price increases from 2002 to 2003. Mandalay shares rose about 46 percent over that period. Shares rose 86 percent over the past 12 months ended Wednesday.

All other major gaming stocks in the state experienced increases of at least 14 percent and as high as 88 percent from 2002 to 2003. Over the past 12 months, shares have increased at least 32 percent. By comparison, the Standard & Poor's 500 Index of large-cap companies rose 26 percent in 2003. The index rose 14 percent over the past 12 months.

For the most part, ballooning pay packages don't appear to be agitating investors or registering on Wall Street, where analysts have applauded impressive gains in casino stocks compared with other industries such as manufacturing and technology.

Over the past year, companies such as Station Casinos Inc. and MGM MIRAGE have touted executive pay packages that reward long-term performance by granting shares that must be held for a certain period of time before they can be sold. Companies also typically offer performance-based bonuses that depend on meeting certain financial threshholds.

Public companies aim to balance executive rewards against company performance with the understanding that investors will react when the balance gets out of whack, said Bill Eadington, director of the Institute for the Study of Gambling and Commercial Gaming at the University of Nevada, Reno.

"As long as share prices are going up and shareholders aren't raising concerns, it's difficult to make a big deal out of it," Eadington said.

Executive pay still can be a significant issue that has political overtones, especially in an industry facing daunting legal and regulatory hurdles in some states, Eadington said.

"I wouldn't be surprised if (Harrah's Entertainment Inc. Chief Executive) Gary Loveman's salary became an issue when Illinois pushed up (casino) taxes last year and the year before," he said.

Stock performance is often used as an excuse to raise executive pay, though there's actually little statistical relationship between total compensation and stock performance, said Graef Crystal, a former compensation consultant and columnist for Bloomberg News.

Last month, Crystal analyzed 494 large public companies in an attempt to correlate executive pay in 2001, 2002 and 2003 with the size of the company and with stock performance return over those three years. In theory, companies that generate more revenue would pay their executives more, as would companies with stronger earnings, Crystal said.

In reality, the analysis showed that the amount of revenue generated by a company accounted for only about 16 percent of variation in pay packages, he said. Stock performance had little correlation with pay packages, however. Crystal calculated compensation packages using the value of options when they were granted rather than the value of exercised gains.

MGM MIRAGE rewarded its executives about 29 percent higher than the average of the other large companies in the study. Pay at Caesars Entertainment was about 44 percent lower than the group's average, and Mandalay Resort Group -- whose stock rose higher than the other two -- was about 5 percent above the average in executive compensation, he said.

Executive pay "is really up to the CEO," he said. "It's more of an idiosyncratic, personal decision" than one based on research and comparative analysis, he said.

The only major public discussion of executive pay last year occurred during Station Casinos' annual meeting, when the Culinary Union urged company shareholders to vote down a plan to award more stock options to executives. Critics dismissed the move as a tactic to organize the nonunion company. Culinary Union officials said they singled out the company because the option grants reward company insiders but dilute future earnings for other shareholders. The union hasn't criticized the gains reaped by Mandalay executives.

Several gaming chief executives made In Business' top 50 list of highest paid executives in Southern Nevada in 2003.

Station Casinos Chief Executive Frank Fertitta III was No. 3 on the list, with $28.2 million in total compensation. That includes $3.2 million in short-term compensation and $24.8 million in long-term compensation. Fertitta reported total compensation of $2.4 million in 2002.

Station Casinos Chief Financial Officer, Chief Accounting Officer and Treasurer Glenn Christenson was No. 4 on the list with $18.2 million in total compensation, including $1.1 million in short-term compensation and $17.1 million in long-term compensation. That compares with total compensation of $2.8 million in 2002.

Station Casinos President Lorenzo Fertitta was seventh on the list at $9.1 million, including $2 million in short-term compensation and $7 million in long-term compensation. Chief Operating Officer Stephen Cavallaro was No. 11, earning $5.5 million including $4.2 million in long-term compensation. Fertitta and Cavallaro reported total compensation of $1.3 million and $1.5 million, respectively, in 2002.

Station Casinos stock rose 73 percent compared with 2002 -- one of the highest increases of any major gaming company. That growth has accelerated over the past 12 months, when shares rose 102 percent.

MGM MIRAGE Chairman and Chief Executive Terry Lanni was sixth with $12.1 million, $7.2 million of that in long-term compensation. John Redmond, chief executive and president of subsidiary MGM Grand Resorts LLC, was No. 9 with $8.7 million. Bobby Baldwin, chief executive and president of subsidary Mirage Resorts Inc., was No. 16 at $3.5 million. Lanni, Redmond and Baldwin reported total compensation of $17.2 million, $9.6 million and $6.4 million, respectively, in 2002.

Shares of MGM MIRAGE rose 14 percent in 2003 from the previous year and jumped 56 percent over the past 12 months.

Harrah's Entertainment Chief Executive Gary Loveman, who topped the list in 2002 with $18.2 million, fell to 17th place with $3.1 million in total compensation.

Shares of Harrah's Entertainment rose 26 percent in 2003 from 2002 and increased 33 percent over the past 12 months.

Hard Rock Hotel Inc. Chairman and Chief Executive Peter Morton was 19th and earned $2.9 million in total compensation, all of it short-term compensation. Morton earned $2.4 million in total compensation in 2002.

Shuffle Master Inc. Chief Executive Mark Yoseloff was No. 21 with $2.6 million, including long-term compensation of $2 million. Yoseloff, who became chief executive in June 2001, earned $403,000 in 2002.

Shuffle Master stock jumped 81 percent in 2003 and increased 36 percent over the past 12 months.

Caesars Entertainment Chief Executive Wally Barr, No. 24 on the list, earned the least of his competitors at the largest four casino companies. Barr reported total compensation of $2.3 million, including short-term compensation of $2.2 million.

Barr replaced chief executive Tom Gallagher, who resigned in November 2002 amid concerns about lagging financial performance and a slumping stock price. Shares of Caesars Entertainment rebounded in 2003, climbing 76 percent from 2002 and rising 29 percent over the past 12 months. Gallagher reported total compensation of $7.9 million in 2002.

Barr tied with Venetian resort owner Sheldon Adelson, who reported short-term compensation of $2.3 million and no long-term compensation, and Ed Herbst, chairman and chief executive of Herbst Gaming Inc., who reported $2.3 million in total compensation including $1.8 million in short-term compensation. Adelson reported total compensation of $3 million in 2002 and Herbst reported total compensation of $466,412 that year.

Neither Venetian owner Las Vegas Sands Inc. nor Herbst Gaming has publicly traded stock.

Craig Nielsen, chairman and chief executive of Ameristar Casinos Inc. was No. 28 with $2.1 million in total compensation, $2 million of it short-term compensation. Nielsen reported $1.4 million in total compensation a year ago.

Shares of Ameristar Casinos rose 74 percent in 2003 and jumped 99 percent over the past 12 months.

T.J. Matthews, chief executive, chief operating officer and president of Reno-based International Game Technology, reported the same compensation as Nielsen. IGT wasn't included in last year's analysis.

Matthews, former chief executive of slot maker Anchor Gaming, replaced IGT chief executive Tom Baker in October 2003. The world's largest stock maker, IGT experienced the greatest share price appreciation in 2003 compared to 2002. IGT shares rose 88 percent over that period. Over the past 12 months ended Wednesday, shares climbed 92 percent.

Bill Boyd, chairman and chief executive of Boyd Gaming Corp., was No. 33 with $1.9 million in total compensation, $1.1 million of that in short-term compensation.

Shares of Boyd Gaming increased by 15 percent in 2003 and rose 59 percent over the past 12 months.

Robert Miodunski, chief executive and president of Alliance Gaming Corp., was No. 35 with $1.7 million in total compensation.

Alliance Gaming, considered the second-largest slot machine and slot systems maker in the United States behind IGT, experienced a 45 percent share price increase in 2003 and a 39 percent jump in prices over the past 12 months.

William Westerman, chairman and chief executive of Riviera Holdings Corp., was No. 41 with $1.5 million in total compensation.

Steve Wynn, chairman and chief executive of Wynn Resorts Ltd., was No. 42 with $1.3 million in total compensation.

Only a few non-gaming executives made the top 50 in pay. They include Sierra Health Services Inc. Chairman, Chief Executive and President Anthony Marlon and Michael Maffie, chief executive of Southwest Gas Corp. Marlon earned $8.9 million, including $5.9 million in long-term compensation. Maffie earned $1.6 million in total compensation, most of that in short-term compensation.