CHOICE HOTELS INTERNATIONAL INC DE
For the period ended Dec 31, 2023. Filed Apr 15, 2024.
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Dec 31, 2023 · Filed Apr 15, 2024
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Contents
Compensation Program
2023 COMPENSATION PROGRAM
Primary Components
The Company’s executive compensation program consists of four primary components: base salary; short-term cash incentives; long-term equity incentives; and perquisites and other benefits.
| Components | Purpose |
|---|---|
| Base Salary | Provides a level of fixed compensation that is commensurate with role and competitive to attract and retain highly qualified executives |
| Short-Term Cash Incentives | Drives focus and recognition for achievement of Company annual financial and strategic goals that aligns with the Company's long-range plan. |
| Long-Term Equity Incentives | A focus on performance-based equity grants, creates links to share value appreciation and alignment with shareholdersMotivates and rewards executives for sustaining long-term financial and operational performance that increases shareholder value and the value of our brands |
| Perquisites and Other Benefits | Enhance our ability to recruit and retain key executives through market competitive practices consistent with the industry and peer group |
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Base Salary
As the foundation of our compensation program, base salary establishes a competitive level of fixed compensation critical to attracting and retaining highly qualified executives.
Select NEOs received salary increases in 2023, as set forth below. Mr. Pacious and Ms. Wu did not receive an increase. Mr. Dragisich's increase reflects an annual merit increase and his promotional increase to EVP, Operations & Chief Global Brand Officer and Mr. Oaksmith's increase reflects an annual merit increase and his promotions to Deputy Chief Financial Officer and then Chief Financial Officer. Mr. Pepper's, Mr. McDowell's and Mr. Bond's increases reflect annual merit increases.
| December 31, 2022($) | December 31, 2023($) | Increase(%) | |
|---|---|---|---|
| Patrick Pacious | $1,150,000 | $1,150,000 | —% |
| Scott Oaksmith | $420,000 | $525,000 | 25.0% |
| Dominic Dragisich | $650,000 | $750,000 | 15.4% |
| David Pepper | $575,000 | $592,000 | 3.0% |
| John Bonds | $495,000 | $510,000 | 3.0% |
| Simone Wu | $560,000 | $560,000 | —% |
| Robert McDowell | $475,000 | $490,000 | 3.0% |
Short-Term Incentive Compensation
The Company’s Management Incentive Plan (the “MIP”) is a short-term cash incentive program through which financial and strategic objectives are set. The targets for the MIP were set at the beginning of 2023 and for Mr. Pacious and Mr. Dragisich were based 80% on achieving operating income goals and 20% on achieving strategic objectives. For Ms. Wu, her target for the MIP was based 70% on achieving operating income goals and 30% on achieving strategic objectives. For Messrs. Pepper, Oaksmith, Bonds and McDowell, their targets for the MIP were based 60% on achieving operating income goals and 40% on achieving strategic objectives.
SHORT-TERM INCENTIVE TARGET OPPORTUNITIES
Under the MIP, each NEO has a target incentive opportunity equal to a percentage of his or her base salary. The target percentage in 2023 increased compared to 2022 for Mr. Oaksmith and Mr. Dragisich in conjunction with their respective promotions to Chief Financial Officer and EVP, Operations & Chief Global Brand Officer. Mr. Oaksmith's target incentive opportunity increased from 60% to 75% and Mr. Dragisich from 100% to 115%. These changes placed them at the desired positioning relative to their scope of responsibility and the external market for their new roles.
The threshold, target and maximum incentive levels for each of the NEOs for 2023 were:
SHORT-TERM INCENTIVE AS A PERCENTAGE OF SALARY
| NEO | Threshold | Target | Maximum |
|---|---|---|---|
| Pacious | 100.0% | 200.0% | 400.0% |
| Oaksmith | 37.5% | 75.0% | 150.0% |
| Dragisich | 57.5% | 115.0% | 230.0% |
| Pepper | 37.5% | 75.0% | 150.0% |
| Bonds | 32.5% | 65.0% | 130.0% |
| Wu | 30.0% | 60.0% | 120.0% |
| McDowell | 32.5% | 65.0% | 130.0% |
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SHORT-TERM INCENTIVE PERFORMANCE GOALS
| PerformanceMetric | Why Metric is Used | How Goals are Set |
|---|---|---|
| OperatingIncome | Heightens the focus on driving profitable operational revenue growth. | The Board approves the operating income goals in February of the performance year. |
| StrategicInitiatives | Focuses the Company on long-term growth strategy through strategic pillars of brand growth, guest and franchisee value proposition, platform expansion, and talent. | The Board approves the Company's strategic initiative goals in February of the performance year. |
Operating Income
The Committee established operating income of $445.6 million as a performance metric target for the 2023 MIP. The target is calculated to be several percentage points above the compounded annual growth rate of the Company. The recommended target excluded the impact of the Company’s marketing and reservation system activities as these activities are contractually required to break even over the long-term. The 2023 MIP was structured to fund 60% to 80% of the bonus pool at the target bonus level for each NEO upon achievement of the operating income target for the year and to pay and fund a percentage of the target incentive for operating income performance above or below the target. For purposes of our incentive compensation, operating income is calculated in accordance with GAAP, then adjusted by the Committee based on approved exceptions, as noted below. The Committee expected achievement of the operating income target to be at least as difficult as the Committee expected the achievement of the 2021 and 2022 operating income targets to be when established, and recognized the goals are in line with growth and investment strategy to drive significant long term results.
Strategic Initiatives
Mr. Pacious recommended, and the Committee approved, strategic initiatives as a performance goal for the 2023 MIP. The strategic initiatives portion of the 2023 MIP is 20 to 40% of the total bonus for the NEOs and is funded upon the Company's achievement of at least 75% of the operating income target. The remaining percentage of the target incentive for strategic initiatives performance for the NEOs is paid upon achievement of the strategic initiatives target. For purposes of our incentive compensation, strategic initiatives focus on the Company's pillars: brand growth, guest and franchisee value proposition, platform expansion, and talent.
SHORT-TERM INCENTIVE PERFORMANCE RESULTS
| 2023 Performance Level | WeightedPayout % | |
|---|---|---|
| Performance Metric · Threshold · Target · Maximum · Metric Weighting · Payout % | ||
| Operating Income, as adjusted | 120% | 72-96% |
| Strategic Initiatives(1) | 132%(2) | 30-53% |
| Payout Percentage | 123% | |
(1)Strategic Initiatives portion of bonus pool funds at threshold of 75% operating income achievement.
(2)120% overall funding, 132% for NEO achievement.
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Operating Income Results
The Company achieved operating income of $375 million in 2023. Under the MIP, operating income achievement may be adjusted at the discretion of the Committee for certain non-recurring items. After the adjustments discussed below, operating income for purposes of determining the payout of the 2023 MIP Plans was $454.7 million.
OPERATING INCOME ADJUSTMENTS
The Committee approved adjustments in calculating operating income for the purposes of the 2023 MIP. Operating income was increased related to unbudgeted restructuring / severance changes ($6.6 million), mark to market gains on non-qualified retirement plans ($6.3 million), M&A due diligence and transition costs in excess of budget ($58.2 million) and surplus from net reimbursable revenues from franchised and managed properties ($8.5 million). The net effect of the adjustments increased operating income by$79.7 million for purposes of the 2023 MIP.
Strategic Initiatives Results
The strategic initiatives are based on the Company's pillars: brand growth, franchisee and guest value proposition improvement, platform expansion, and talent. Specific initiatives achieved included strategic brand development, acquiring and integrating Radisson Americas, deploying capital for new brand growth, focusing on guest value enhancement, focusing on franchisee profitability enhancement and defining partnership and procurement growth strategies. The entirety of the management team also focused on talent and diversity representation in 2023, and diversity targets were a part of strategic performance goals for all executives. Strategic initiatives results are included in the individual performance summaries below.
INDIVIDUAL PERFORMANCE
Individual performance is evaluated within strategic initiatives. Each NEO contributed significantly to the Company's pillars: brand growth, franchise and guest, value proposition improvement, and platform expansion and talent.
As a result of Mr. Pacious’s leadership, in 2023 the company surpassed our 7-year adjusted EBITDA target established in 2020, 4 years earlier than plan. Specifically, by successfully executing our revenue-intense unit growth strategy and rapidly integrating the Radisson Americas business, we exceeded our 2027 target, delivering Corporate External adjusted EBITDA of $540.5M in 2023, a 13% increase over last year and a 45% increase over 2019. Further, Mr. Pacious led the effective execution against three major initiatives in 2023 that were critical to our long-term success. Specifically, the Radisson technology, commercial, and organizational integration, which was completed ahead of schedule, exceeded expectations by reaching $85M in annual recurring synergies by year-end, surpassing the prior stretch target by 6%. Launching the co-branded credit cards with new accounts exceeding target, and revenue and EBITDA generated by the card exceeding plan by 27% and 39%, respectively. Finally, the successful completion of an organizational transformation to an agile customer-centric structure, facilitating closer ties with guests and franchisees, while increasing career opportunities for associates. Simultaneously, Mr. Pacious lead the achievement of our growth goals and continued improving our guest and franchisee experience, strengthening our position in Upscale, delivering record growth in Extended Stay openings, and maintaining momentum for our core Upper Midscale and Midscale brands.
During 2023, Mr. Oaksmith successfully navigated the transition to his new role including onboarding new members of the financial leadership team, ensuring continuity of leadership and oversight of the company’s financial operations resulting in the company exceeding its financial objectives. Mr. Oaksmith’s leadership was critical in the successful launch of the company’s newest Extended Stay brand, Everhome Suites, which ended the year with 16 hotels under construction and nearly 70 in the pipeline. In addition, he led the effective execution of our capital allocation strategy including ensuring adequate financial capacity to invest in the organic growth of the company, acquire and integrate businesses and return capital to shareholders through the company’s share repurchase and dividend programs.
Under Mr. Dragisich’s leadership as Chief Financial Officer through two-thirds of the year, we delivered record financial performance as we exceeded our budget and the top end of our guidance with a 13% year-over-year increase in adjusted EBITDA to $540.5 million and a 16% year-over-year increase in adjusted EPS to $6.11. Further, Mr. Dragisich oversaw the acquisition and supported the subsequent integration of Radisson ahead of schedule, reaching $85M in annual recurring synergies by year-end and surpassing the prior stretch target by 6%. In his new role as EVP, Operations and Chief Global Brand Officer, Mr. Dragisich successfully completed an organizational transformation to a segment-specific structure with a focus on customer-centricity, facilitating closer ties with guests and franchisees, while concurrently overseeing corporate development initiatives. In his EVP, Operations and Chief Global Brand Officer role, Mr. Dragisich’s teams drove positive domestic and overall portfolio unit growth as well as revenue intense unit growth that exceeded both budget and guidance. Dragisich’s teams also executed plans to grow the Core brand portfolio and improve the franchisee value proposition, including completing a Country Inn & Suites room refresh, developing a new Comfort prototype, and laying the groundwork for a Park Inn re-launch. Further, supporting upscale
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segment growth, Dragisich’s teams opened 9 Cambria’s on target and drove a record year of 61 openings across the Extended Stay portfolio, including 25 WoodSpring new construction openings and 25 Suburban Studios openings, which allowed the brand to achieve a milestone of 100 open hotels.
Mr. Pepper led our in-year brand growth initiative, significantly exceeding (133 openings at year end versus the target of 109) the number of franchise contracts both sold and opened in the same calendar year. Further, in partnership with Ms. Wu, Mr. Pepper led the establishment of a repeatable process to improve opening success and ensure fully compliant development projects. He also supported the enterprise in driving and exceeding our franchisee retention goals.
Ms. Wu
Ms. Wu provided essential strategic and legal support to our Board and management, and her leadership, initiative and counsel impacts across initiatives and functions. She oversaw and managed the increasingly complex legal, regulatory, public policy, and enterprise risk environment associated with Choice’s growing public footprint, including as a result of the acquisition of Radisson Americas and its managed hotel business and the growth of both direct and indirect franchise agreements in international markets. She also played a proactive role in partnership with our other executives in supporting key corporate and business development activities focused on growth, operational initiatives driving company and franchisee success, and shareholder relations and outreach.
In April 2023, under Mr. McDowell’s leadership, we launched the new Wells Fargo co-branded credit card providing richer rewards and benefits to the cardholders and seamlessly integrating with our loyalty program. New accounts exceeded target at 44.7k and revenue and EBITDA generated from the card exceeded plan by 27% and 39%, respectively. Further, the new card received second place for Best Travel & Hotel Credit Card in USA Today’s 2023 Readers’ Choice Awards. Mr. McDowell also led our Platform business expanding partnerships with Bluegreen, Penn and Rokt, while signing agreements for new partnerships with AARP, AAA and Tesla. The expansion of these programs and continued growth of our Procurement business resulted in the company exceeding its EBITDA target by $8.2 million or 13%. Finally, Mr. McDowell led the renegotiation of the Expedia contract that lowered OTA commissions, resulting in significant savings to franchisees.
Per his eligibility under the severance agreement, Mr. Bonds received 100% of target related to his individual strategic component and actual attainment of Company results (120%).
2023 SHORT-TERM INCENTIVE PAYOUTS
As the adjusted 2023 operating income of $454.7 million exceeded the target of $445.6 million, the MIP incentive portion related to operating income for Messrs. Pacious, Oaksmith, Dragisich, Pepper, Bonds and McDowell, and Ms. Wu, was funded at 120%. Because the Company over-performed in relation to strategic initiatives, the MIP bonus portion related to strategic initiatives was funded at 132%.
| Target Incentive(%) | Target Incentive($) | Actual Incentive($)(1) | Actual Incentiveas a Percentof Target(%)(2) | |
|---|---|---|---|---|
| Patrick Pacious | 200% | $2,300,000 | $2,944,000 | 128% |
| Scott Oaksmith | 75% | $323,107 | $405,485 | 126% |
| Dominic Dragisich | 115% | $744,623 | $941,492 | 126% |
| David Pepper | 75% | $441,415 | $547,355 | 124% |
| John Bonds | 65% | $329,523 | $369,066 | 112% |
| Simone Wu | 60% | $336,000 | $423,360 | 126% |
| Robert McDowell | 65% | $318,500 | $367,167 | 116% |
(1)Per his eligibility under the severance agreement, Mr. Bonds received 100% of target related to his individual strategic component and actual attainment of Company results (120%).
(2)For Mr. Oaksmith and Mr. Dragisich, the target incentive is as of December 31, 2023 and does not reflect the incremental adjustments related to promotions during the year.
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Long-Term Incentive Compensation
Long-term incentive compensation is the largest component of total compensation for our NEOs. Linking the greatest portion of total compensation to long-term objectives aligns executives’ interests with the interests of shareholders. The Committee believes this emphasis on the long-term, focuses executives on long-term investment decisions and proactive management of potential risks facing the business. To strengthen the tie between executive compensation and the Company’s performance, each executive’s targeted and actual pay mix may vary by position, with the positions that have a greater impact on performance / operations generally having more pay at risk in the form of long-term incentives.
ALL NEO LONG-TERM INCENTIVE MIX
In 2023, the Committee approved NEO awards of PVRSUs and stock options to the NEOs as follows:
| 75% | 25% |
| PVRSUs(cumulative 3-year EPS with 15% rTSRmodifier, three-year vesting period) | Stock Options(vest in equal installments over four-year period) |
| 100% Performance-Based | |
|---|---|
In 2021, we moved to a 100% performance-based long-term incentive design through the grant of equally weighted PVRSUs and stock options, eliminating the service-based restricted stock component included in previous years. We continued this incentive design for the all NEO grants in 2022. In 2023, we moved to 75% PVRSUs and 25% stock options to further focus on EPS and TSR performance.
PVRSUs
The Company grants PVRSUs with performance conditions based on a financial performance metric, i.e., EPS, as well as a market condition criteria based on the Company’s TSR relative to a predetermined peer group. The vesting of PVRSU awards is contingent upon the Company achieving the EPS performance target and TSR performance relative to a peer group for the performance period, and the employees’ continued employment for a service period. These performance conditions affect the number of shares that will ultimately vest.
The 2023 All NEO PVRSUs granted utilize a combination of cumulative EPS performance (three years), rTSR (three years) and time-based (three years) vesting. Depending upon TSR performance against certain peers over the 3-year period, the PVRSU grant may be increased in value by 15% (if relative TSR is at or above the 75% percentile) or decreased in value by 15% (if relative TSR at or below the 25th percentile).
PVRSUs AWARDED TO ALL NEOs
| Performance Metric | Weighting | Why Metric is Used | How Goals are Set |
|---|---|---|---|
| 3-Year Cumulative EPS | 100% | EPS is used because of its strong alignment with shareholder value creation. | The Committee, in conjunction with its Compensation Consultant, informed by Management's recommendation, approves the EPS goals in February of the performance year. |
| Relative TSR Percentile Rank* | 15% Modifier | The use of a relative TSR modifier reflects the relative performance of the Company against a targeted peer group. | The Committee, in conjunction with its Compensation Consultant, informed by Management's input, approves the TSR peer group in February of the performance year. |
*Peer group for rTSR modifier consists of S&P 400 Consumer Discretionary plus select companies from the “Hotels, Resorts and Cruise Lines” and “Hotel and Resort REITs” GICS sub-industries.
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LONG-TERM INCENTIVE TARGET OPPORTUNITIES
The value of the long-term incentive opportunity granted to each NEO in 2023 was determined based on a fixed amount. Each NEO’s opportunity was determined based on the criticality of the role in achieving the short and long-term, financial and strategic goals of the Company and relative to the competitive market.
The following table sets forth the equity award grant value for the annual February 2023 grants and base salary for each NEO as of December 31, 2023:
| NEO | 12/31/23Base Salary | Target GrantValue | 2023 AnnualEquity AwardGrant DateFair Value(2) |
|---|---|---|---|
| Pacious | $1,150,000 | $2,000,000 | $2,000,146 |
| Oaksmith | $525,000 | $787,500 | $522,063 |
| Dragisich | $750,000 | $2,000,000 | $2,260,097 |
| Pepper | $592,000 | $1,100,000 | $1,100,050 |
| Bonds(1) | $510,000 | $867,000 | $867,125 |
| Wu | $560,000 | $700,000 | $700,062 |
| McDowell | $490,000 | $784,000 | $784,133 |
(1)Mr. Bonds base salary is shown as of the date of his termination, November 10, 2023
(2)Represents annual management grants awarded March 2, 2023.
The fair value of TSR PVRSUs are estimated using a Monte Carlo simulation method as of the date of award grant. Compensation expense is recognized ratably over the requisite service period, regardless of whether the market conditions are achieved and the awards ultimately vest.
PVRSUs GRANTED PRIOR TO 2023
Completed PVRSU Grants
2020-2022 rTSR PVRSUs
Choice utilized a new 2020 rTSR PVRSU to create focus and reinvest in its existing talent who led the company through the pandemic crisis and were critical to its business recovery plans. Given the close alignment of rTSR to shareholder value, Choice continues to use rTSR as both a primary performance metric and as a modifier for EPS-based PVRSUs. The 2020-2022 rTSR PVRSUs paid out at 194.4% of target. These awards vested on March 2, 2023.
2020-2022 EPS-Based PVRSUs
While the 2020-2022 PVRSUs previously had not been expected to achieve threshold performance for payout due to the impact of COVID-19 beginning in early 2020, as a result of the Company's significant achievement in delivering strong financial results, including three straight years of RevPAR growth exceeding the industry, these PVRSUs were achieved just above threshold at 54%. There was no modifier on these EPS-based grants. The cumulative EPS target was $13.48 for the performance period 2020-2022 and the threshold was $12.13. The actual three-year cumulative EPS applicable to the 2020-2022 EPS-Based PVRSUs was $12.28, reflecting 91% of target and a payout of 54% of target. These awards vested on March 2, 2023.
2021-2023 EPS-Based PVRSUs with TSR Modifier
The NEO 2021 PVRSU grant was based on the two-year performance period 2021 through 2022, with eligibility for a three-year TSR modifier. The cumulative EPS target was $5.78 for the performance period 2021-2022 and the threshold was $4.62. The actual two-year cumulative EPS applicable to the 2021-2023 EPS-Based PVRSUs with TSR Modifier was $9.93, reflecting 172% of target and a payout of 200% of target. The company’s relative TSR over the measurement period (2021-2023) totaled 10.8%, representing a rank of 46% compared to the peer set. As a result, there is no modifier applied to the grant vesting. These awards vested on March 2, 2024.
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Outstanding PVRSU Grants(1)(2)(3)
| 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | Status |
| 2020-2022 PVRSUsNEOsCumulative EPS | Vested March 2, 2023 | •Just above threshold; 54% payout | |||||||
| 2020-2022 PVRSUs *NEOsRelative TSR - Tranches lock at end of 2020, 2021, 2022(4) | Vested March 2, 2023 | •First two performance periods certified at 200%, third at 183.3%; total payout 194.4% | |||||||
| 2020-2024 PVRSUsMr. PaciousRelative TSR - Tranches lock and vest at end of 2022, 2023, 2024(1)(4) | Tranche 1 certifies and vests on March 2, 2023 (if earned) | Tranche 2 certifies and vests on March 2, 2024 (if earned) | Tranche 3 certifies and vests on March 2, 2025 (if earned) | •Tranche 1 certified at 266.7% Tranche 2 certified at 76% | |||||
| 2021-2023NEOs2021-2022 EPS, with three year +/- 15% relative TSR modifier(5) | Vested on March 2, 2024 | •Certified at 200%; 0% TSR modifier | |||||||
| 2021-2025Mr. PaciousMr. Dragisich Relative TSRTranches locks and vests at end of 2023, 2024, 2025(4) | Tranche 1 certifies and vests on March 2, 2024 (if earned) | Tranche 2 certifies and vests on March 2, 2025 (if earned) | Tranche 3 certifies and vests on March 2, 2026 (if earned) | •Tranche 1 and 2 certified at 0% | |||||
| 2022 to 2026Mr. Pacious Mr. Dragisich Relative TSR(4)5-year vesting (certifies and vests at 3-year, 4-year, 5-year) first tranche certifies 10%, second 20%, third 70% | Tranche 1 certifies and vests 10% on March 2, 2025 (if earned) | Tranche 2 certifies and vests 20% on March 2, 2026 (if earned) | Tranche 3 certifies and vests 70% on March 2, 2027 (if earned) | Period not yet complete | |||||
| 2022 - 2024 All NEOs Cumulative EPS w 15% modifier(5) | Vests on March 2. 2025 (if earned) | Period not yet complete | |||||||
| 2022 - 2025PepperDeal Value with Hotel OpeningModifier(6) | Vests on March 2, 2026 (if earned) | Period not yet complete | |||||||
| 2023 - 2025NEOsCumulative EPS w 15% TSR modifier(5) | Vests on March 2, 2026 (if earned) | Period not yet complete | |||||||
PVRSU Graphic Notes:
(1)Performance achievement levels relative to threshold, target and maximum are established at the beginning of the performance period, as well as the corresponding percentage of the target grant that will be earned at each achievement level. As a result, the number of PVRSUs that vest during any performance period may range from 0% to 300% of the initial grant.
(2)PVRSU targets tied to strategic and financial goals are set after considering the Company’s business plan and anticipated market performance. Due to competitive reasons, goals will be disclosed after the fact. When granted, we expected the achievement of the targets related to the 2020-2022, 2020-2024, 2021-2023, 2021-2025, 2022-2027, 2022-2024, 2022-2025 and 2023-2025 PVRSU grants to be at least as difficult as we expected the achievement of the 2021 to 2022 performance period EPS target to be when granted.
(3)Certain PVRSUs based on relative TSR require performance at the 65th percentile to pay out at target.
(4)rTSR peer group consists of select companies from the “Hotels, Resorts and Cruise Lines” and “Hotel and Resort REITs” GICS sub-industries.
(5)rTSR peer group consists of S&P 400 Consumer Discretionary plus select companies from the “Hotels, Resorts and Cruise Lines” and “Hotel and Resort REITs” GICS sub-industries.
(6)PVRSU targets deal value calculation with a modifier for hotel openings.
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