Pay People What They're Worth and Align Long-Term Interests

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The hospitality industry is facing a talent crisis putting at risk the growth of one of hospitality, the world’s biggest industries that represents over 300 million employees or 10% of Global GDP. For hotel brands and their developers, the timing could not be worse. Hospitality is forecast to add another 5 million jobs in the next decade to support a record global pipeline of over 10,000 hotel openings, from China, the UK and Germany to the Middle East and China.

In this first of the series on the talent crisis in hospitality, we will take a closer look at how the proposed change initiative can address the root causes of the talent disruption.

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The point is, ladies and gentlemen, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind.

-Gordon Gekko, The Movie, Wall Street

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Pay People What They Are Worth and Align Long Term Interests

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The U.S. hotel industry made a record $80 billion of profits in 2018. Private equity and real estate investment trusts own over 80% of U.S. hotels and represent over 50% of hotel acquisitions worth more than $10 billion. Interest rates are at historic lows, enabling investors to refinance and pull out cash and distribute it to investors.

The financial engineers, asset managers, real estate investment trusts and family offices are making record profits. But the wealth is not being shared with the people doing the work in the properties. In few, if any, hotels do general managers or hotel executives participate in profit sharing. It remains extremely rare for senior management or employees to have equity, options or a promote. This is a stark contrast to service industry leaders in the airlines, gaming or retail business.

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Despite it being an unprofitable industry, employee profit-sharing has been commonplace in airlines for decades.

In 2019, Delta Airlines paid $1.4 billion of profit sharing, or 14% of their annual compensation to all employees, from stewards to maintenance crew. In fact, despite it being an unprofitable industry, employee profit-sharing has been commonplace in airlines for decades. Southwest Airlines shared $544 million with its employees through the company’s profit-sharing plan in 2018. The reward equaled to approximately 10.8% of each employee’s eligible compensation. This was Southwest’s 45th consecutive profit-sharing award, starting with the first profit sharing payout in 1974.

From 1995 to 2009, Caesars Entertainment, and its predecessor Harrahs, implemented a customer service profit chain system that paid front line workers quarterly bonuses that totalled up to $25 million annually. However, after they were acquired by private equity firms, the program was cancelled and sold internally as not negatively impacting customer satisfaction scores.

Last year, Glassdoor named the grocery chain with a cult-like following as one of the best places to work in the US. Trader Joe’s has made the list every year since 2011. Trader Joe’s employees enjoy high salaries, impressive benefits, and frequent opportunities for promotion. While most Crew Members make $10 to $24 per hour, Captains (store managers) earn more than $100,000 per year. After three months of work, employees receive health insurance (medical, dental, and vision) and a retirement plan in which Trader Joe’s contributes 10% of an employee’s annual salary.

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Real estate capital markets are all about creative destruction.

Airlines and retail are very thin margin businesses and casinos lose money on everything but gaming. In contrast, Hotels are a highly profitable real estate business with highly sophisticated investors who have deal savvy. However, no major hotel private equity firm or owner has implemented a profit sharing or asset specific promote incentive structure at the property level, including its owned and managed properties either in the U.S. or internationally.

While publicly traded hotel companies like Hilton offer restricted shares and stock options to certain Hotel General Managers, real estate owners, including Hilton do not compensate hotel executives for real estate appreciation or profit sharing.

Real estate capital markets are all about creative destruction. But excessive greed is short-sighted and comes back to bite a business every time.

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