MB Feb | Casino firms not getting ‘bang for buck’

Macau’s gaming industry is paying top dollar to those running the casino firms but a recent study hints operators are being short-changed. And experts warn that the control held by these larger-than-life entrepreneurs does little to help improve companies’ corporate governance and transparency

By: Vítor Quintã

Macau casino operators pay their Chief Executive Officers (CEOs) some serious dough but according to a recent study they did not get maximum bang for their buck in 2016 as the gaming industry was only just exiting a two-year slump. Last month, Aethos Consulting Group released its 11th annual study on the pay of gaming CEOs, looking at 36 listed companies.

This pay-for-performance model compares stock appreciation and earnings growth over a three-year period as well as a company’s size, says Aethos MD Keith Kefgen. “It’s much tougher to steer a huge company like LVS [Las Vegas Sands] and turn it around versus some small cap company which you can easily double the size of by doing one transaction,” he explained to Macau Business.

Then Aethos compares the results with the CEO’s pay package, which includes base salary, bonuses and stock grants, and drafts an index of their performance, looking at the industry as a whole. “If the index is below 100, they were probably overpaid. If it’s above 100, they’re actually underpaid, even if they were indeed paid a lot of money,” says Kefgen.

The index for 2016 makes for grim reading, with four of Macau’s gaming CEOs posting an index of below 66. The exception was the lowest paid on the list, Lui Che Woo, chairman of Galaxy Entertainment, who posted an index of 168.7 but took home only US$6.3 million (50.7 million patacas). A far cry from the US$28.1 million earned by Steve Wynn, the founder of Wynn Resorts, and the highest-paid gaming CEO in the world.

Cash concerns

Aethos created this model “because of the very issues that tend to crop up when talking about CEO pay,” says Kefgen; namely, that executives are paid mind-boggling figures, many times what an average worker in the same company is paid. The chairman of Melco Resorts, Lawrence Ho, for instance, took home the highest base salary in the industry worldwide in 2016 at a cool US$3.4 million. That’s almost 15 times higher than the median wage in Macau’s casinos of 231,600 patacas a year, according to official data.

“It’s more important to understand if someone earns their pay rather than the simple size of the pay check,” says Kefgen, emphasising the impact gaming CEOs have on the city’s economy. Sheldon Adelson, for instance, “took some very big risks going into Macau and turned it into a business that didn’t exist before,” says the executive, recalling how the Sands China chairman was the first to envision Cotai as a new casino strip.

Corporate governance watchdogs are not nearly so ready to praise Macau casino operators. Back in 2012, GMI Ratings gave Las Vegas Sands an F, its lowest grade, as it highlighted ‘ongoing concerns’ over Adelson’s compensation and transactions made with companies owned by the CEO. That same year, the agency gave Wynn Resorts a slightly better rating, a D, while criticising the millions of dollars in wages paid to the relatives of Steve Wynn’s ex-wife.

But it is not just US firms which face such problems, Adrian Lei, a corporate governance researcher at the University of Macau (UMAC), says Sociedade de Jogos de Macau (SJM) is a major example of how a Chinese family business can go public but still maintain its culture. “A lot of the owners still think they can just take the cash directly out of the company’s bank account,” he told Macau Business.

Adrian Lei: “A lot of the owners still think they can just take the cash directly out of the company’s bank account”

Even Lawrence Ho, son of SJM founder Stanley Ho, expressed his frustration during a conference call last May, criticising the operator’s billions of patacas in cash reserves. “I would suggest all institutional shareholders and analysts get the company to pay a bigger dividend and act like a normal company,” he told them.

Adrian Lei

Window dressing

Adrian Lei says these issues are an inevitable by-product of having a CEO who is also a company’s major shareholder. “There’s one dominant decision-maker” who seeks to protect his or her interests, the researcher adds, often harming smaller shareholders. Another UMAC professor, Carlos Noronha, agrees that such a concentration “is not positive” because it removes the “healthy struggle and competition between different interests” brought by various executives, board members and shareholders.

The Corporate Social Responsibility (CSR) expert says this explains a lack of transparency in casino operators’ dealings. Noronha admits there has been “a large increase” in disclosures due to “government pressure” in connection with the mid-term review of the casino concessions launched in 2015. But, he bemoans, many disclosures are “very superficial, just a kind of window dressing”.

Carlos Noronha: many disclosures are “very superficial, just a kind of window dressing”

And not all gaming firms responded the same, says the CSR expert, with different operators “favouring different stakeholders”. For example, he adds, while MGM focused their disclosures mostly upon culture, Wynn was mainly geared towards compliance with the law. Perhaps not surprising, given that the company is still facing legal probes concerning the removal of Japanese businessman Kazuo Okada from the board and a 1.1-billion pataca donation to UMAC.

But things are changing, says Kefgen, who is also the compensation consultant of record for Las Vegas Sands. He believes casino operators’ internal committees are spending more time deciding upon pay. “There’s a renewed sense of responsibility; they don’t want to be seen as just rubber-stamping things,” says the Aethos managing director.

He admits the gaming industry “used to be a lot more Wild, Wild West” when it came to compensation but says “it’s a lot more buttoned up today than it probably ever was”. The executive singles out as “a good sign” that seven of the 36 companies included on the study paid no bonuses to their CEOs. That includes Iao Kun Group, the loss-making VIP promoter which left the gaming industry last year, and Entertainment Gaming Asia, an electronic gaming machine subsidiary that Lawrence Ho’s Melco took private last year.

Lawrence Ho, for instance, took home the highest base salary in the industry worldwide in 2016, a cool US$3.4 million. That’s almost 15 times higher than the median wage in Macau’s casinos

168.7 Lui Che Woo Galaxy Entertainment 1.4 million 2 million 0 2.9 million 6.3 million
65.5 James Murren MGM Resorts 2 million 5.7 million 7.4 million 1.5 million 16.6 million
61.8 Sheldon Adelson Las Vegas Sands 1 million 4.3 million 3.6 million 3.7 million 12.7 million
60.9 Lawrence Ho Melco Resorts 3.4 million 3.4 million 3.6 million 2000 10.4 million
60.8 Steve Wynn Wynn Resorts 2.5 million 12.5 million 12.5 million 657000 28.2 million