Based on our pay-for-performance model - Steve Bollenbach was underpaid by 120%, in 2005. The model takes into consideration three primary criteria, EBITDA/FFO growth, market capitalization and stock appreciation, and compares that to total compensation.

The lodging industry is booming again and CEOs are reaping the benefits. Capital continues to pour into the industry pushing asset prices higher. Interestingly enough, many companies are going private with the help of private equity firms. Our annual review of CEO compensation has as many as twelve new companies. Most of the top ten performers ran small-cap companies and were paid modestly. The exception was the top performing CEO, Steve Bollenbach at Hilton Hotels Corporation. His overall performance is a testament to his deal making skills and a strong relationship with investors. Steve proves that the issue is not the size of the paycheck but whether the company's performance warrants it.

Top Performers

Based on our pay-for-performance model, Mr. Bollenbach was underpaid by 120% or nearly $7 million in 2005. The model takes into consideration three primary criteria, EBITDA/FFO growth, market capitalization and stock appreciation, and compares that to total compensation. The outcome is a pay-for-performance index that determines how much a CEO was over or under paid. This is the second time Bollenbach has won our top spot as he also won back in 1996. Repeat top performers included Hasu Shah of Hersha Hospitality (last year's winner), CHIP REIT's CEO, Edward Pitoniak, Roger Sonnabend at Sonesta and George Donovan with Bluegreen.

Top Appreciators

The best investments over the past three years include, Royal Caribbean, Hilton, Bluegreen, Sonesta and American Ski. These companies had the best stock appreciation from December 2002 to December 2005. This is Royal Caribbean's first year in the survey and CEO, Richard Fain ranked very well. William Fair turned around a seasonal company in American Ski. The other are holdovers from last year's survey.

Top Salaries and Bonuses

The average CEO salary decreased to $575,000 in 2005, or 9% from the previous year. We suspect that salaries decreased due to the number of new entries in our survey, a lack of inflation and a focus on incentive pay. Shareholders continue to show a combative posture towards what they perceive as excessive pay practices. The largest base salary was paid to Isadore Sharpe at $1.8 million. Rounding out the list of top salaries included J.W. Marriott Jr., Stephen Bollenbach, Steve Heyer and Michael D. Eisner, each earning over $1 million in base salary.

Bonus compensation for hotel CEOs increased again in 2005. The average bonus was nearly $1 million, which is almost double the average salary. We believe that bonus schemes will continue to be a much larger part of compensation planning. With more shareholders scrutinizing stock grants, many companies are moving more variable pay into bonus plans. Michael Eisner had the largest cash bonus at $9 million. Other multi-million dollar bonuses were paid to Steve Heyer at Starwood, Steve Bollenbach, Mickey Arison and Richard Fain.

Top Stock Incentives

It appears that the use of stock options over that last year diminished. The use of restricted stock was much more prevalent. We believe this is due to the abundance of REITs, which use restricted stock more often. Chris Nassetta at Host Hotels & Resorts received the largest long-term incentive worth nearly $5 million of restricted stock grants. Other multi-million dollar incentives were doled out to Marriott, Arison, Ledsinger and Bollenbach. Many investors are awaiting the succession at Hilton, as it appears heir apparent Matt Hart is in the wings.

Other leaders who received million dollar awards included Aron, Alter, Geller, McCarten, Boyd, Bennett and Fisher.

Richest CEOs

Two billionaires top our richest list, with Arison worth $11 billion, Marriott amassing $1 billion and Henry Silverman of Cendant dropping out of the survey. Marriott also had the dubious honor of having the most "other" compensation with a total of $1.8 million. Rounding out the top five included Eisner, Sharpe and Jonathan Tisch at Loews.

Compensation continues to be a lightning rod issue for investors and scarcely a day goes by that the business press is not writing headlines about excessive CEO pay. Furthermore, new SEC rules are making compensation more transparent than ever before. Compensation committee members are becoming some of the hardest working directors in the public markets. Companies will also have to name their third-party consultants and you will see the HVS name on many. We continue to push lodging companies to make pay more transparent and have executives paid based on performance measures that investors can understand.

Keith Kefgen, HVS International executive Search, New York - KKefgen@hvs.com www.hvs.com