Starwood 2007 Annual Report Download - page 28

than the Chief Executive Officer, base salary typically accounts for approximately 20% of total compensation at
target, i.e., total compensation excluding benefits and perquisites, and is generally targeted at the median of the
Company’s peer group. In the case of Mr. Van Paasschen, base salary for 2007 was limited to $1 million in order to
keep this element of his compensation below the levels established by Section 162(m) of the Internal Revenue Code
of 1986, as amended (the “Code”) which limits the deductibility of non-performance-based compensation above
that amount. As a result, base salary accounted for approximately 12.5% of total compensation at target for Mr. Van
Paasschen. Base salary serves as a minimum level of compensation to Named Executive Officers in circumstances
when achieving Company financial and strategic/operational objectives becomes challenging and the level of
incentive compensation is impacted. Salaries for Named Executive Officers are generally based on the
responsibilities of each position and are reviewed annually against similar positions among a group of peer
companies developed by the Company and its advisors consisting of similarly-sized hotel and hospitality
companies as well as other companies representative of markets in which the Company competes for key
executive talent. See the Background Information on the Executive Compensation Program — Use of Peer
Data section beginning on page 24 below for a list of the peer companies used in this analysis. The Company
generally seeks to position base salaries of our Named Executive Officers at or near the market median for similar
positions.
Incentive Compensation. Incentive compensation includes annual incentive awards under the Company’s
Annual Incentive Plan for Certain Executives (the “Executive Plan”) as well as long-term incentive compensation in
the form of equity awards under the Company’s 2004 Long-Term Incentive Plan (“LTIP”). Incentive compensation
typically accounts for approximately 80% of total compensation at target (87.5% for Mr. Van Paasschen), with
annual incentive compensation and long term incentive compensation accounting for 20% and 60%, respectively
(25% and 62.5% for Mr. Van Paasschen, respectively). The Company’s emphasis on incentive compensation results
in total compensation at target that is set at approximately the 65th percentile level relative to the Company’s peer
group, but that is highly dependent on performance. The Company believes that this structure allows it to provide
each Named Executive Officer with substantial incentive compensation opportunities if performance objectives are
met. The Company believes that the allocation between base and incentive compensation is appropriate and
beneficial because:
• it promotes the Company’s competitive position by allowing it to provide Named Executive Officers with
competitive compensation if targets are met;
• it targets and attracts highly motivated and talented executives within and outside the hospitality industry;
• it aligns senior management’s interests with those of stockholders;
• it promotes achievement of business and individual performance objectives; and
• it provides long-term incentives for Named Executive Officers to remain in the Company’s employ.
Annual Incentive Compensation. Annual incentives are a key part of the Company’s executive
compensation program. The incentives directly link the achievement of Company financial and strategic/
operational performance objectives to executive pay. Annual incentives also provide a complementary balance
to equity incentives (discussed below). Each Named Executive Officer has an annual opportunity to receive an
award under the stockholder-approved Executive Plan. If and when earned, awards are typically paid to Named
Executive Officers partly in cash and, unless the Compensation Committee otherwise elects, partly as deferred
equity awards in the form of deferred stock units (under the Executive Plan). The deferred stock units vest over
a three year period. See additional detail regarding these deferred equity awards in the Long-Term Incentive
Compensation section below.
Minimum Thresholds.
For the Named Executive Officers, the annual incentive award for 2007 was paid under the Executive
Plan. Each year, the Compensation Committee establishes in advance a threshold level of earnings before
interest, taxes, depreciation and amortization (“EBITDA”) that the Company must achieve in order for any
bonus to be paid under the Executive Plan for that year (the “EP Threshold”). The Executive Plan also specifies
a maximum bonus amount, in dollars, that may be paid to any executive for any 12-month performance period.
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