UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A

(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

 

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES

EXCHANGE ACT of 1934

(Amendment No.     )

 

Filed by the Registrant þ

 

Filed by a Party other than the Registrant o

 

Check the appropriate box:

 

 

DiamondRock Hospitality Company

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement)

 

Payment of Filing Fee (Check the appropriate box)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 18, 2011

 

Dear Stockholder:

 

You are cordially invited to attend the 2011 annual meeting of stockholders of DiamondRock Hospitality Company, a Maryland corporation. The annual meeting will be held on Tuesday, April 26, 2011 at 11:00 a.m., local time, at the Bethesda Marriott Suites Hotel, 6711 Democracy Boulevard, Bethesda, Maryland.

 

The attached proxy statement, accompanied by the notice of the meeting describes the matters expected to be acted upon at the meeting. We urge you to review these materials carefully and to use this opportunity to take part in the affairs of DiamondRock Hospitality Company by voting on the matters described in this proxy statement. We hope that you will be able to attend the meeting. Following the formal portion of the meeting, our directors and management team will be available to answer appropriate questions.

 

Your vote is important. Whether or not you plan to attend the meeting, please complete the enclosed proxy card and return it as promptly as possible or authorize a proxy to vote your shares by calling the toll-free telephone number or via the Internet. The enclosed proxy card contains instructions regarding all three methods of voting. If you attend the meeting, you may continue to have your shares voted as you have previously instructed or you may withdraw your proxy at the meeting and vote your shares in person.

 

We look forward to seeing you at the meeting.

 

Sincerely,

 

Mark W. Brugger

Chief Executive Officer

DIAMONDROCK HOSPITALITY COMPANY
3 Bethesda Metro Center
Suite 1500
Bethesda, MD 20814

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

To Be Held On April 26, 2011

 

The 2011 annual meeting of stockholders of DiamondRock Hospitality Company, a Maryland corporation, will be held on Tuesday, April 26, 2011 at 11:00 a.m., local time, at the Bethesda Marriott Suites Hotel, 6711 Democracy Boulevard, Bethesda, Maryland, for the following purposes:

 

1. To elect directors nominated by our Board of Directors, each to serve until the next annual meeting of our stockholders and until their respective successors are duly elected and qualify;

 

2. To approve a non-binding advisory resolution on executive compensation;

 

3. To approve a non-binding advisory resolution on the frequency of holding a stockholder advisory vote on executive compensation;

 

4. To ratify the appointment of KPMG LLP as independent auditors of DiamondRock Hospitality Company to serve for 2011; and

 

5. To consider and act upon any other matters that may properly come before the annual meeting and at any postponement or adjournment thereof.

 

You may vote if you were a stockholder of record as of the close of business on March 3, 2011. If you do not plan to attend the meeting and vote your shares of common stock in person, please authorize a proxy to vote your shares in one of the following ways:

 

 

Any proxy may be revoked at any time prior to its exercise at the annual meeting.

 

By Order of the Board of Directors

 

William J. Tennis

Corporate Secretary

 

March 18, 2011

 

TABLE OF CONTENTS

 

PROXY STATEMENT

 

Diamondrock Hospitality Company
3 Bethesda Metro Center
Suite 1500
Bethesda, MD 20814

 

This proxy statement and the enclosed proxy card are being mailed to stockholders on or about March 18, 2011 and are furnished in connection with the solicitation of proxies by the Board of Directors of DiamondRock Hospitality Company, a Maryland corporation (“DiamondRock” or the “Company”), for exercise at the 2011 annual meeting of our stockholders to be held on Tuesday, April 26, 2011 at 11:00 a.m., local time, at the Bethesda Marriott Suites Hotel, 6711 Democracy Boulevard, Bethesda, Maryland, and at any postponements or adjournment thereof.

 

At the annual meeting, stockholders will be asked to vote upon the matters set forth in the accompanying notice of meeting, including the election of directors nominated by our Board of Directors, a non-binding, advisory vote on executive compensation, a non-binding, advisory vote on the frequency of the non-binding, advisory vote on executive compensation and the ratification of the appointment of KPMG LLP as our independent auditors for 2011.

 

All stockholders of record of shares of our common stock at the close of business on the record date (as defined below), or their designated proxies, are authorized to attend the annual meeting. Each stockholder or proxy holder will be asked to present a form of valid government-issued picture identification, such as a driver’s license or passport.

 

If our records show that you were a stockholder of record (i.e., a “registered stockholder”) as of the close of business on March 3, 2011, which is referred to in this proxy statement as the record date, you are entitled to receive notice of the annual meeting and to vote the shares of common stock that you held as of the close of business on the record date. Each outstanding share of common stock entitles its holder to cast one vote on each matter of record to be voted upon.

 

Voting in Person at the Meeting.  If you are a registered stockholder and attend the annual meeting, you may vote in person at the meeting. If your shares of common stock are held by a broker, bank or other nominee (i.e., in “street name”) and you wish to vote in person at the meeting, you must obtain a legal proxy from the broker, bank or other nominee that holds your shares of common stock of record.

 

Authorizing a Proxy for Shares Registered Directly in Your Name.  If you are a registered stockholder, you may instruct the proxy holders named in the enclosed proxy card how to vote your shares of common stock by using the toll-free telephone number or the website listed on the proxy card or by signing, dating and mailing the proxy card in the postage-paid envelope provided.

 

 

 

Authorizing a Proxy for Shares Registered in Street Name.  If your shares of common stock are held in street name, you will receive instructions from your broker, bank or other nominee which you must follow in order to have your shares of common stock voted in accordance with your instructions. The broker, bank or other nominee for your shares is required to follow your voting instructions. Accordingly, you will need to follow the directions you receive from your broker, bank or other nominee. Under the current rules of the New York Stock Exchange, or NYSE, if you do not give instructions to your broker, bank or other nominee, it will still be able to vote your shares with respect to certain “discretionary” items, but will not be allowed to vote your shares with respect to certain “non-discretionary” items. The ratification of KPMG LLP as our independent registered public accounting firm (proposal four) is considered to be a discretionary item under the NYSE rules and your broker, bank or other nominee will be able to vote on that item even if it does not receive instructions from you. The uncontested election of directors (proposal one), the non-binding, advisory resolution on executive compensation (proposal two), and the non-binding, advisory resolution on the frequency of future advisory votes on executive compensation (proposal three) are “non-discretionary” items. If you do not instruct your broker, bank or other nominee how to vote with respect to these items, it may not vote with respect to these proposals and those votes will be counted as “broker non-votes.” Broker non-votes are shares that are held in street name by a broker, bank or other nominee that returns a properly executed proxy but does not have discretionary authority to vote on a particular matter.

 

The presence, in person or by proxy, of stockholders entitled to cast a majority of all the votes entitled to be cast at the annual meeting constitutes a quorum for the transaction of business at the annual meeting. As of the record date, there were 168,283,700 shares of common stock outstanding and entitled to vote at the annual meeting. Votes withheld for director nominees, abstentions or broker non-votes will be counted for purposes of determining whether a quorum is present for the transaction of business at the annual meeting. If a quorum is not present at the scheduled time of the meeting, the chairman may adjourn the meeting to another place, date or time until a quorum is present. The place, date and time of the adjourned meeting will be announced when the adjournment is taken and no other notice will be given unless the adjournment is to a date more than 120 days after the original record date or if, after the adjournment, a new record date is fixed for the adjourned meeting.

 

The rules of the Securities and Exchange Commission, or the SEC, allow for householding, which is the delivery of a single copy of an annual report and proxy statement to any address shared by two or more stockholders. Duplicate mailings can be eliminated by the consent of the household stockholders, or through implied consent if (1) it is believed that the stockholders are members of the same family, (2) the stockholders are notified that householding is to be used and (3) the stockholders do not request continuation of duplicate mailings. If you own shares of common stock in your own name as a holder of record, householding will not apply to your shares. If your shares of common stock are held in street name, depending upon the practices of your broker, bank or other nominee, you may need to contact them directly to discontinue duplicate mailings

to your address. If you wish to revoke your consent to householding, you must contact your broker, bank or other nominee.

 

If you wish to request extra copies free of charge of our annual report or proxy statement, please send your request to DiamondRock Hospitality Company, 3 Bethesda Metro Center, Suite 1500, Bethesda, MD 20814, Attention: Corporate Secretary; or call us with your request at (240) 744-1150.

 

We are not currently aware of any other matters to be presented at the annual meeting other than those described in this proxy statement. If any other matters not described in the proxy statement are properly presented at the meeting, any proxies received by us will be voted in the discretion of the proxy holders.

 

You may revoke your proxy at any time before it has been exercised by:

 

 

Any stockholder of record as of the record date attending the annual meeting may vote in person whether or not a proxy has been previously given, but the presence (without further action) of a stockholder at the annual meeting will not constitute revocation of a previously given proxy.

 

For your review, our 2010 annual report, including a copy of our annual report filed with the SEC on Form 10-K (including financial statements for the fiscal year ended December 31, 2010), is being mailed to stockholders concurrently with this proxy statement. Although our annual report is not part of the proxy solicitation material, we recommend that you review our 2010 annual report prior to voting.

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE STOCKHOLDER MEETING TO BE HELD ON APRIL 26, 2011:

 

Our proxy statement, form of proxy card and annual report on Form 10-K for the fiscal year ended December 31, 2010 are available at www.drhc.com/annual_meeting.asp.

 

Our business is built on relationships — with our investors, with the global brand companies we utilize for our hotels and with the management companies who manage our hotels. We are committed to keeping our relationships strong by communicating openly about our business practices, being transparent about our performance and remaining accountable for our conduct. We take our commitments seriously.

 

At the core of these commitments, of course, is the role of our Board of Directors in overseeing the management of the Company’s business and affairs. We believe that an active, informed, independent and involved board is essential for ensuring our integrity, transparency and long-term strength. We believe that our Board of Directors embodies each of those characteristics. We have assembled a Board of Directors that is comprised of individuals with a wide breadth of experience including: a member with several decades of real estate experience; the retired chairman of Andersen Worldwide; a leading corporate lawyer; a retired chief executive officer, as well as our former Chief Executive Officer; our current Chief Executive Officer; and our President and Chief Operating Officer.

 

We follow through on our commitment by implementing what we believe are sound corporate governance practices, including:

 

Board Structure

 

 

Change of Control

 

 

Stock Ownership Policies

 

 

 

Clawback Policy

 

 

Board of Directors

 

We are managed under the direction of our Board of Directors. Our directors are: Daniel J. Altobello, Mark W. Brugger, W. Robert Grafton, Maureen L. McAvey, William W. McCarten, Gilbert T. Ray and John L. Williams. Mr. McCarten is the Chairman of our Board of Directors and Mr. Grafton is our lead independent director. Each of our seven directors stands for election annually.

 

Director Independence.  Our Board of Directors has adopted Guidelines on Significant Governance Issues (“Corporate Governance Guidelines”), which provide that a majority of our directors must be independent. In order to qualify as an “independent director” under our independence standards, a director must be “independent” within the meaning of the NYSE Corporate Governance Rules, which provide that our Board of Directors must determine whether a director has a material relationship with us (either directly or as a partner, stockholder or officer of an organization that has a relationship with us) and whether, within the past three years:

 

 

In addition, our Board of Directors considers, among other factors, whether the director, or an organization with which the director is affiliated, has entered into any commercial, consulting, or similar contracts with the Company; whether the director receives any compensation or other fees from the Company, other than director fees; and whether we and/or any of our affiliates make substantial contributions to tax-exempt organizations with which the director, or the director’s spouse, is affiliated.

 

Our Board of Directors has determined that each of Messrs. Altobello, Grafton and Ray and Ms. McAvey is an “independent” director under our independence standards and under the NYSE Corporate Governance Rules. These four directors comprise a majority of our seven-member Board of Directors.

 

Meetings.  Our Board of Directors met seven times during 2010. Each of our directors attended at least 75% of the meetings of our Board of Directors. We expect each of our directors to attend our annual meeting of stockholders in person unless doing so would be impracticable due to unavoidable conflicts. In 2010, all of our directors attended our annual meeting of stockholders.

 

Directors who qualify as being “non-management” within the meaning of the NYSE Corporate Governance Rules meet on a regular basis in executive sessions without management participation. The executive sessions occur after each regularly scheduled meeting of our entire Board of Directors and at such other times that our non-management directors deem appropriate. Each director has the right to call an executive session. The executive sessions are chaired by Mr. Grafton, the lead director of our Board of Directors.

Committees

 

Our Board of Directors has established an Audit Committee, Nominating and Corporate Governance Committee and Compensation Committee and has adopted a written charter for each committee. A copy of each of our Audit Committee charter, Compensation Committee charter and Nominating and Corporate Governance Committee charter is available on our website at http://www.drhc.com under the heading “Corporate Governance” and subheading “Committee Charters.” These charters are also available in print to any stockholder upon written request addressed to Investor Relations, c/o DiamondRock Hospitality Company, 3 Bethesda Metro Center, Suite 1500, Bethesda, MD 20814.

 

Our Board of Directors may from time to time establish special or standing committees to facilitate the management of DiamondRock or to discharge specific duties delegated to the committee by our full Board of Directors.

 

Audit Committee.  Our Audit Committee, pursuant to its written charter, assists our Board of Directors in its oversight of (i) our accounting and financial reporting processes; (ii) the integrity and audits of our financial statements; (iii) our compliance with legal and regulatory requirements; (iv) the qualifications, independence and performance of our independent auditors; and (v) the performance of our internal audit function.

 

Our Audit Committee is comprised of all four of our independent directors: W. Robert Grafton (Chairman), Daniel J. Altobello, Maureen L. McAvey and Gilbert T. Ray. Each member of our Audit Committee is “independent” as that term is defined by the SEC and the NYSE. Our Board of Directors determined that each of Mr. Grafton and Mr. Altobello qualifies as an “audit committee financial expert” as that term is defined under the rules of the SEC. In accordance with the SEC’s safe harbor relating to audit committee financial experts, a person designated or identified as an audit committee financial expert will not be deemed an “expert” for purposes of federal securities laws. In addition, such designation or identification does not impose on such person any duties, obligations or liabilities that are greater than those imposed on such person as a member of the Audit Committee or Board of Directors in the absence of such designation or identification and does not affect the duties, obligations or liabilities of any other member of the Audit Committee or Board of Directors.

 

Our Audit Committee met four times during 2010 and each of the members of the Audit Committee attended at least 75% of the meetings of the Audit Committee.

 

The Report of our Audit Committee is included in this proxy statement.

 

Nominating and Corporate Governance Committee.  Our Nominating and Corporate Governance Committee, pursuant to its written charter, is responsible for, among other things: (i) identifying and recommending qualified individuals to become members of our Board of Directors and the appointment of members to its various committees; (ii) overseeing the annual performance evaluation of our Board of Directors; and (iii) developing and recommending to our Board of Directors a set of corporate governance guidelines and policies and a code of business conduct and ethics, and periodically reviewing and recommending any changes to such guidelines and code.

 

Our Nominating and Corporate Governance Committee is comprised of all four of our independent directors, Gilbert T. Ray (Chairman), Daniel J. Altobello, W. Robert Grafton and Maureen L. McAvey. Our Nominating and Corporate Governance Committee met five times during 2010 and each of the members of the Nominating and Corporate Governance Committee attended at least 75% of the meetings of the Nominating and Corporate Governance Committee.

 

Compensation Committee.  Our Compensation Committee, pursuant to its written charter, among other things, (i) reviews and approves corporate goals and objectives relevant to chief executive officer compensation, evaluates the chief executive officer’s performance in light of those goals and objectives, and determines and approves the chief executive officer’s compensation levels based on its evaluation, (ii) reviews and approves or makes recommendations to our Board of Directors with respect to the compensation for our other executive officers and non-employee directors and (iii) is responsible for recommending a successor chief

executive officer to our Board of Directors if that position becomes or is expected to become vacant. Our Compensation Committee has the authority to retain and terminate any compensation consultant to be used to assist in the evaluation of the chief executive officer or other executive officer compensation.

 

Our Compensation Committee is comprised of all four of our independent directors, Daniel J. Altobello (Chairman), W. Robert Grafton, Maureen L. McAvey and Gilbert T. Ray. Our Compensation Committee met five times during 2010 and each of the members of our Compensation Committee attended at least 75% of the meetings of our Compensation Committee.

 

The Report of our Compensation Committee is included in this proxy statement.

 

Stockholder Recommendations.  Stockholders of record of DiamondRock may recommend candidates for inclusion by our Board of Directors in the slate of nominees that our Board of Directors recommends to stockholders. Our Nominating and Corporate Governance Committee’s current policy is to review and consider any director candidates who have been recommended by stockholders in compliance with the procedures established from time to time by our Nominating and Corporate Governance Committee and set forth in its charter. All stockholder recommendations for director candidates must be submitted to our Corporate Secretary at DiamondRock Hospitality Company, 3 Bethesda Metro Center, Suite 1500, Bethesda, MD 20814, who will forward all recommendations to our Nominating and Corporate Governance Committee. We did not receive any stockholder recommendations for director candidates for election at our 2011 annual meeting. All stockholder recommendations for director candidates for election at our 2012 annual meeting of stockholders must be submitted to our Corporate Secretary not less than 120 calendar days prior to the anniversary of the date on which the Company’s proxy statement was released to our stockholders in connection with the previous year’s annual meeting and must include the following information:

 

 

Stockholders also have the right to directly nominate director candidates, without any action or recommendation on the part of our Nominating and Corporate Governance Committee or our Board of Directors by following the procedures set forth in the Bylaws of the Company and described in the section titled “Stockholder Nominations for Director.”

 

Board of Directors Membership Criteria.  Our Board of Directors has established criteria for Board of Directors membership. These criteria include the following specific, minimum qualifications that our

Nominating and Corporate Governance Committee believes must be met by a nominee for a position on our Board of Directors, including that the nominee shall:

 

 

In addition to the minimum qualifications for each nominee set forth above, our Nominating and Corporate Governance Committee will recommend director candidates to the full Board of Directors for nomination, or present director candidates to the full Board of Directors for consideration, to help ensure that:

 

 

Identifying and Evaluating Nominees.  Our Nominating and Corporate Governance Committee may solicit recommendations for director nominees from any or all of the following sources: non-management directors, our chairman and chief executive officer, other executive officers, third-party search firms or any other source it deems appropriate.

 

Our Nominating and Corporate Governance Committee will review and evaluate the qualifications of any proposed director candidate whom it is considering or has been recommended to it by a stockholder in compliance with our Nominating and Corporate Governance Committee’s procedures for that purpose, including conducting inquiries into the background of proposed director candidates. In identifying and evaluating proposed director candidates, our Nominating and Corporate Governance Committee may consider, in addition to the minimum qualifications for Board of Directors membership approved by our Board of Directors, all facts and circumstances that it deems appropriate or advisable, including, among other things, the skills of the proposed director candidate, his or her depth and breadth of business experience, his or her independence and the needs of our Board of Directors. Other than circumstances in which we are legally required by contract or otherwise to provide third parties with the right to nominate directors, our Nominating and Corporate Governance Committee will evaluate all proposed director candidates that it considers or who have been properly recommended to it by a stockholder based on the same criteria and in substantially the same manner, with no regard to the source of the initial recommendation of the proposed director candidate.

 

Criteria and Diversity.  In considering whether to recommend any candidate for inclusion in our Board’s slate of recommended director nominees, including candidates recommended by stockholders, our Nominating and Corporate Governance Committee will apply the minimum criteria set forth above as well as the Board membership criteria set forth in our Corporate Governance Guidelines. We do not have a formal diversity policy. However, our Corporate Governance Guidelines provide that our Nominating and Corporate Governance Committee, when recommending to our Board of Directors the types of skills and characteristics required of Board members, should consider such factors as relevant experience, intelligence, independence, commitment, compatibility with the Board culture, prominence, diversity, understanding of our business and such other factors deemed relevant. Our Nominating and Corporate Governance Committee does not assign specific weights to particular criteria and no particular criterion is necessarily applicable to all prospective nominees. Our Nominating and Corporate Governance Committee may therefore consider a broad range of factors related to the qualifications and background of nominees, which is not limited only to diversity. Pursuant to our Corporate Governance Guidelines, our Nominating and Corporate Governance Committee will confer with our full Board of Directors as to the criteria it intends to apply before a search for a new director is commenced.

Board Leadership Structure.  Pursuant to our Corporate Governance Guidelines, our Board of Directors has not established a fixed policy as to whether the roles of Chief Executive Officer and Chairman of our Board of Directors should be separate. Our Corporate Governance Guidelines permit our Board of Directors to make a choice whether to combine or separate these roles in any manner that it deems best for the Company at a given point in time. Currently, our Board of Directors believes, following the retirement of Mr. McCarten as Executive Chairman, that it is in the best interests of the Company that the roles of Chief Executive Officer and Chairman be separated in order for the individuals to focus on their primary roles. Our Chief Executive Officer, Mark Brugger, is responsible for setting the strategic direction for the Company and the day-to-day leadership and performance of the Company, while William McCarten, our Chairman, provides guidance to our Chief Executive Officer, presides over meetings of our full Board of Directors and, together with the lead director, sets the agenda for Board meetings. In the future, our Board of Directors may determine that it would be in the best interests of the Company to combine the roles of Chairman and Chief Executive Officer.

 

Our Corporate Governance Guidelines provide that our Board of Directors will adopt a “lead director” structure where one independent director is selected to serve as an interface between the Chief Executive Officer and our Board of Directors. Mr. Grafton is our lead director. The lead director is the presiding director when our Board of Directors meets in executive session. In addition, our lead director’s duties include assisting our Board of Directors in assuring compliance with and implementation of our Corporate Governance Guidelines, coordinating the agenda for and moderating sessions of our Board’s independent directors and acting as principal liaison between our independent directors and our Chief Executive Officer on sensitive issues.

 

The Board’s Role in Risk Oversight.  Our Board of Directors plays an important role in the risk oversight of the Company. Our Board of Directors is involved in risk oversight through its direct decision-making authority with respect to significant matters and the oversight of management by the Board of Directors and its committees. Our Board of Directors (or the appropriate committee in the case of risks that are under the purview of a particular committee) administers its risk oversight function by receiving regular reports from members of senior management on areas of material risk to the Company, including operational, financial, legal, regulatory, strategic and reputational risks. In addition, our Board of Directors administers its risk oversight function through the required approval by our Board of Directors (or a committee thereof) of significant transactions and other decisions, including, among others, acquisitions and dispositions of properties, new borrowings, significant capital expenditures, refinancings and the election and retention of DiamondRock’s senior management. There is also direct oversight of specific areas of the Company’s business by the Compensation, Audit and Nominating and Corporate Governance Committees and regular periodic reports from the Company’s auditors and other outside consultants regarding various areas of potential risk, including, among others, those relating to the qualification of DiamondRock as a REIT for tax purposes and DiamondRock’s internal controls and financial reporting. Our Board of Directors also relies on management to bring significant matters impacting DiamondRock to its attention. As part of its charter, our Audit Committee oversees our policies with respect to risk assessment and risk management.

 

Risk Considerations in our Compensation Program.  Our Compensation Committee regularly considers whether our compensation program encourages our executives to prudently manage enterprise risk. DiamondRock’s leadership and culture encourage long-term stockholder value creation, not short-term stockholder-value maximization. We evaluate performance along both quantitative and qualitative factors and review not only “what” is achieved, but also “how” it is achieved. Consistent with our long-term focus, we do not believe that any of our compensation policies and practices for our named executive officers or any other employee encourage excessive risk. In fact, many elements of our executive compensation program serve to mitigate excessive risk taking. For example, we provide what we believe to be a balanced mix of base salary, annual cash incentives and long-term equity grants. Our base salary provides a guaranteed level of income that does not vary with performance. We balance incentives tied to short-term annual performance with equity incentives for which value is earned over a multiple-year period. In this way, our executives are motivated to consider the impact of decisions over the short, intermediate, and long terms. Our long-term incentive program does not overemphasize stock options (in fact we have not granted stock options in the past several years). Long-term incentive compensation is provided through the use of full-value shares and market-based awards, which

encourage our executives to maintain as well as increase stockholder value. Our clawback policy and stock ownership policies further mitigate risk. For more information regarding our compensation program, see the section titled “Compensation Discussion and Analysis.”

 

If you wish to communicate with any of our directors or our Board of Directors as a group, you may do so by writing to them at [Name(s) of Director(s)/Board of Directors of DiamondRock Hospitality Company], c/o Corporate Secretary, DiamondRock Hospitality Company, 3 Bethesda Metro Center, Suite 1500, Bethesda, MD 20814.

 

If you wish to contact our Audit Committee to report complaints or concerns regarding accounting, internal accounting controls or auditing matters, you may do so by writing to the Chairman of the Audit Committee of the Board of Directors of DiamondRock Hospitality Company, c/o Corporate Secretary, DiamondRock Hospitality Company, 3 Bethesda Metro Center, Suite 1500, Bethesda, MD 20814. In addition, you may do so online at www.drhc.com/whistleblower.asp. You are welcome to make any such reports anonymously, but we prefer that you identify yourself so that we may contact you for additional information if necessary or appropriate.

 

If you wish to communicate with our non-management directors as a group, you may do so by writing to Non-Management Directors of DiamondRock Hospitality Company, c/o Corporate Secretary, DiamondRock Hospitality Company, 3 Bethesda Metro Center, Suite 1500, Bethesda, MD 20814.

 

We recommend that all correspondence be sent via certified U.S. mail, return receipt requested. All correspondence received by the Corporate Secretary will be forwarded by the Corporate Secretary promptly to the addressee(s).

 

Code of Business Conduct and Ethics

 

We have adopted a Code of Business Conduct and Ethics, or our Code of Ethics, relating to the conduct of our business by our employees, executive officers and directors. Day-to-day responsibility for administering and interpreting our Code of Ethics has been delegated by our Board of Directors to our general counsel, who is also our compliance officer.

 

Our Code of Ethics contains compliance procedures, allows for the anonymous reporting of a suspected violation of our Code of Ethics and specifically forbids retaliation against any officer or employee who reports suspected misconduct in good faith. The provisions of our Code of Ethics may only be waived or amended by our Board of Directors or, if permitted, a committee of our Board of Directors. Such waivers or amendments must be promptly disclosed to our stockholders in accordance with applicable laws and rules and regulations of the NYSE. We intend to disclose any amendments to our Code of Ethics, as well as any waivers for executive officers, on our website.

 

A copy of the Code of Ethics is available on our website at http://www.drhc.com under the heading “Corporate Governance” and subheading “Corporate Governance Charters.” A copy of our Code of Ethics is also available, without charge, in print to any stockholder upon written request addressed to Investor Relations, DiamondRock Hospitality Company, 3 Bethesda Metro Center, Suite 1500, Bethesda, MD 20814.

 

Corporate Governance Guidelines

 

Our Board of Directors has adopted Corporate Governance Guidelines, a copy of which is available on our website at http://www.drhc.com under the heading “Corporate Governance”, under the subheading “Corporate Governance Charters” and under the document entitled “Guidelines on Significant Governance Issues.” Our Corporate Governance Guidelines are also available, without charge, in print to any stockholder upon written request addressed to Investor Relations, DiamondRock Hospitality Company, 3 Bethesda Metro Center, Suite 1500, Bethesda, MD 20814.

Conflicts of Interest

 

Our Code of Ethics contains a conflicts of interest policy to reduce potential conflicts of interest. Our conflicts of interest policy provides that any material transaction or relationship that reasonably could be expected to give rise to a conflict of interest should be reported promptly to the compliance officer, who must then notify our Board of Directors or a committee of our Board of Directors. Actual or potential conflicts of interest involving a director, executive officer or the compliance officer should be disclosed directly to our Chairman of our Board of Directors and the Chairperson of our Nominating and Corporate Governance Committee. A “conflict of interest” occurs when a director’s, officer’s or employee’s personal interest interferes with our interests.

 

Maryland law provides that a contract or other transaction between a corporation and any of the corporation’s directors or any other entity in which that director is also a director or has a material financial interest is not void or voidable solely on the grounds of the common directorship or interest, the fact that the director was present at the meeting at which the contract or transaction is approved or the fact that the director’s vote was counted in favor of the contract or transaction, if:

 

 

Succession Policy

 

Our Board of Directors recently formalized a succession policy for the Chief Executive Officer to cover emergency and other possible occurrences resulting in a vacancy in the position of Chief Executive Officer. Under this policy, our Compensation Committee is responsible to recommend to our full Board of Directors, in the event of an emergency, an interim Chief Executive Officer and to lead the search for a permanent Chief Executive Officer after the interim position has been filled or when there is sufficient time to fill the position when our Compensation Committee is aware that the position will become vacant for a reason other than an emergency.

 

The following chart summarizes the compensation paid to our non-employee directors in 2010. Directors who are employees receive no separate compensation for being members of our Board of Directors:

 

Director Compensation

 

 

 

 

We compensate our directors through a single annual retainer as opposed to per meeting fees. We have structured their compensation in this manner in order to simplify and clarify director compensation as each of our three standing committees are comprised of the same four independent directors and often a meeting might discuss matters involving the area of responsibility of more than one committee. In July of each year, our Compensation Committee reviews the compensation of our non-employee directors.

 

From July 2007 through June 2010, we paid each of our non-employee directors, other than Mr. McCarten, an annual cash retainer of $50,000. Mr. McCarten was paid an annual cash retainer of $280,000 when he became a non-employee director as of January 1, 2010. Our Compensation Committee considered Mr. McCarten’s annual cash retainer to be appropriate in view of his experience as the former Chief Executive Officer of the Company for over four years and the considerable amount of time he continued to spend advising the executive officers on Company matters. We paid an additional annual retainer to our lead director

($10,000 annual fee) as well as to the Chairpersons of our Audit Committee ($15,000 annual fee), Nominating and Corporate Governance Committee ($7,500 annual fee) and Compensation Committee ($7,500 annual fee).

 

In July 2010, our Compensation Committee engaged an independent consultant, Frederic W. Cook & Co., Incorporated (“F.W. Cook”), to review the compensation paid to members of the board of directors of our competitive set. The study conducted by F.W. Cook showed that the total compensation paid to non-employee directors was near the 25th percentile of hotel REITs and other comparable REITs. Our Compensation Committee approved the following changes to the total compensation of non-employee directors, effective July 1, 2010:

 

 

In addition, F.W. Cook conducted a study of compensation paid to non-executive chairmen of comparable public companies and based on this study our Compensation Committee determined that Mr. McCarten should be paid an annual cash retainer of $210,000 beginning in 2011.

 

The following chart reflects the cash compensation paid to our non-employee directors in 2010.

 

 

As part of their regular annual compensation, each of our non-employee directors receives a grant of fully vested shares of common stock each year. In April 2010, our Board of Directors approved a deferred compensation program, which permits non-employee directors to elect to defer the receipt of the annual fully vested stock award. Under this program, those non-employee directors who elect to defer such awards will instead be granted an award of deferred stock units and the deferred stock units will be settled in shares of stock in a lump sum six months after the director ceases to be a member of our Board of Directors. On May 7, 2010, we issued (i) 5,102 shares of common stock to each of those directors electing to receive the equity award and (ii) 5,102 deferred stock units to each of those directors electing to defer the equity award, both of which had a value of $50,000, based on the closing stock price for our common stock on the NYSE on such day.

 

We reimburse our directors for their reasonable out-of-pocket expenses incurred in attending meetings of our Board of Directors or its committees or attending continuing professional education classes.

In addition, each of the seven members of our Board of Directors is entitled to reimbursement for up to $10,000 of lodging, meals, parking and certain other expenses at all of our hotels as well as at all hotels and resorts managed or franchised by Marriott, Starwood or Hilton, subject to certain limitations. All of such reimbursement was considered taxable income to the director who stayed at the hotel or resort and is disclosed in the “All Other Compensation” column of the chart entitled “Director Compensation.”

 

Under our stock ownership policy, an ownership target is set for each of our non-employee directors. The ownership target establishes, on an annual basis, the number of shares each non-employee director should hold of Company stock. If a non-employee director holds less than the ownership target, he or she is restricted from selling any shares of Company stock until such time as he or she holds shares in excess of the ownership target, except as needed to pay personal taxes related to the issuance of Company stock and except for shares that the director has purchased on the open market.

 

We count towards this minimum equity ownership policy owned shares and deferred stock units. The ownership target for a non-employee director is determined by multiplying the annual cash retainer for that year by three and then dividing that result by the average closing price of the Company’s common stock during the first 10 trading days of the same calendar year ($12.14 per share for 2011). Each of our non-employee directors holds shares in excess of his or her 2011 ownership target.

 

Our “named executive officers” for 2010 were:

 

 

We designed our executive compensation program with the following objectives:

 

 

Straightforward, Transparent, Market-Based Compensation Program

 

We have a strong preference for a simple, transparent, market-based compensation program. Our compensation program consists of base salary, annual cash bonus opportunities, and annual long-term incentive grants. We have not implemented a pension or a nonqualified deferred compensation program and have very limited perquisites.

 

We regularly review competitive compensation practices for executives of other hospitality REITs and REITs of similar size to DiamondRock to ensure our program is market competitive. In addition, before awarding any compensation, our Compensation Committee reviews a “tally sheet” showing the value of all of the compensation granted to our executive team since our formation, utilizing the value of all equity awards both as of the time of each stock grant and as updated for current stock values. Our Compensation Committee evaluates both the competitive information as well as detailed historical compensation by component and in total when making decisions to take into account the interdependence of each compensation element in the total direct compensation opportunities of the named executive officers.

 

In setting our compensation targets our Compensation Committee uses its judgment in a number of respects. Our Compensation Committee sets compensation for the following year, but publicly disclosed data on the competitive sets either relates to the current year or the prior year, so the data needs to be adjusted to reflect known trends. In addition, because the number of firms in our competitive sets is relatively small, individual firms can distort summary statistics. Accordingly, our Compensation Committee uses judgment when we identify apparent anomalies in the data. Finally, we adjust base salaries to reflect our executives’ assigned responsibilities, relevant levels of experience and individual performance compared to other members of the competitive sets.

 

Proper Incentives to Achieve Performance Objectives and Maximize Long-Term Stockholder Value

 

Our compensation program is designed to create incentives for our executive team to maximize long-term stockholder value. Less than one-third of our named executive officers’ total compensation opportunity is in the form of a fixed base salary. The vast majority of our executives’ total compensation opportunity is awarded both through our cash incentive compensation program, which rewards our executives for achieving our annual budget and other corporate and individual objectives, and our annual equity award program, where the ultimate value of the awards is tied to our ability to maximize long-term stockholder value.

 

We believe that our cash incentive compensation program encourages our executive officers to take prudent steps to achieve, and if possible exceed, our budgeted earnings, which we believe will increase stockholder value. In 2010, 50% of our executives’ potential cash incentive award was tied to the achievement

of our annual budget for Adjusted Funds From Operations (or AFFO) per share. We have not guaranteed our executives any minimum cash incentive payments. In the event of poor performance, the executives could receive no cash incentive compensation for the year.

 

The largest individual component of our executive officers’ compensation is equity compensation. Our philosophy is to target total compensation to be competitive with that of our competitive set and to ensure that approximately half of the targeted compensation is in the form of equity. We believe that approximately half of our executives’ compensation should be in the form of restricted stock or other long-term equity grants for several reasons.

 

First, along with our stock ownership policy, equity grants help ensure that a significant portion of each of our executives’ net worth is tied to the value of our stock, aligning the interests of our executives with those of our stockholders. Our view is that, if we have superior long-term operating performance, our executives, through their significant equity compensation, will eventually receive above market compensation from dividends and capital appreciation in our common stock. Conversely, if we do not perform as well as our competitors, our executives’ compensation will prove to be (appropriately) below market over the long-term.

 

Second, we design our equity awards to be total stockholder return vehicles, rewarding our executive officers for both share price appreciation as well as dividends.

 

Third, our equity awards vest over a three-year schedule, thus creating an incentive for our executive officers to remain with the Company.

 

Comply with Sound Corporate Governance Practices

 

In designing our executive compensation program, our Compensation Committee also consults with F.W. Cook, its own independent compensation advisor, to assess our compliance with sound corporate governance practices. For example, we have adopted a “clawback policy” to recover compensation amounts inappropriately paid in the event of a restatement of our financial statements. We have also developed executive and director stock ownership policies to ensure further alignment of stockholder interests with those of our executives and directors.

 

Moreover, we strive to maximize the financial efficiency of our compensation program. For example, the amount of our cash incentive compensation and the size of the equity grants vary based on the degree to which our financial objectives are achieved.

 

Our Compensation Committee is responsible for determining the amount and composition of compensation paid to our Chief Executive Officer and all other executive officers. Our Compensation Committee exercises its independent discretion in reviewing and approving the executive compensation program as a whole, as well as specific compensation levels for each executive officer.

 

Independent Consultant

 

F.W. Cook advises our Compensation Committee on compensation program design and the amounts we should pay to our executives. They provide our Compensation Committee with information on executive compensation trends, best practices and advice for potential improvements to the executive compensation program. F.W. Cook also advises our Compensation Committee on the design of the compensation program for non-employee directors. F.W. Cook does no work for management, receives no compensation from the Company other than for its work in advising our Compensation Committee, and maintains no other economic relationships with the Company. As part of the process of assessing the effectiveness of the Company’s compensation programs, F.W. Cook receives input from our Chief Executive Officer regarding the Company’s strategic goals and the manner in which the compensation plans should support these goals.

Annual Process

 

In the fourth quarter of each year, our Compensation Committee reviews the total compensation of each of our executive officers for the prior year, including an estimate of the incentive plan compensation for the prior year, a summary of all executive severance agreements and a calculation of potential change-in-control costs. Our Compensation Committee, at this meeting, also reviews appropriate compensation studies and surveys.

 

For each of the named executive officers other than himself, Mr. Brugger makes a compensation recommendation to our Compensation Committee and our Compensation Committee considers these recommendations in setting the compensation for the three other named executive officers. Following that review, our Compensation Committee sets an appropriate base salary for the executive officers along with target bonuses and equity awards for the following year.

 

Once the financial results for the prior year are available and the annual budget for the subsequent year is finalized, our Compensation Committee finalizes the prior year bonuses, the structure of the current year annual cash incentive compensation program and the amount of the equity awards.

 

Use of Competitive Sets

 

Each year, our Compensation Committee conducts a review of the executive compensation program in terms of both design and compensation levels. This includes a competitive analysis of our compensation practices versus those of our peers with a focus on other lodging REITs and, to a lesser extent, non-lodging REITs. Our primary competitive set is comprised of the traditionally five largest lodging-focused self-managed REITs. We typically exclude Host Hotels & Resorts, Inc. (NYSE: HST) from our competitive set as it is substantially larger than us, although we review its compensation design. We confirm that our compensation levels are in line with the overall market by evaluating our compensation against a secondary competitive set comprised of fifteen similarly-sized self-managed REITs which invest in a variety of assets, including office, apartment and retail properties.

 

The REITs in each competitive set are:

 

Lodging REIT Competitive Set

 

Non-Lodging REIT Competitive Set

 

 

 

 

In 2010, F.W. Cook conducted a competitive analysis of executive compensation levels against our competitive sets to assist our Compensation Committee in making compensation decisions with respect to target pay opportunities for our executives for 2010. As we target our total compensation to be competitive with that of our competitive set and we seek to ensure that approximately half of the compensation paid to our senior executives is in the form of equity, our executives’ cash compensation may be targeted at a level below or above the median cash compensation paid to members of our primary competitive set. We generally attempt to pay base salaries at levels competitive with that of the competitive sets.

 

Our executives’ actual compensation for 2010 compared to the 2009 compensation from our competitive sets is as follows:

 

Primary Set — Hotel REITs

 

Secondary Set — Other REITs

 

Combined Sets

 

 

Mr. Brugger’s total compensation is below the median in the primary competitive set, around the middle of the secondary competitive set and between the 25th percentile and the median of the combined competitive set. Mr. Brugger’s total compensation and each of the major elements of his compensation for 2010 were generally below the median of the various competitive sets. Our Compensation Committee concluded that in light of the expected continuation of the economic recession throughout 2010 that it was not prudent to adjust Mr. Brugger’s total compensation to a level at or above the median of the various competitive sets.

 

Mr. Williams’ total compensation and each of the major elements of his total compensation are either the highest or second highest of the four members of his primary competitive set. Due to differences in compensation practices for lodging REIT chief operating officers and other REIT chief operating officers, while he is above or near the median of his primary competitive set (which consists only of lodging REIT chief operating officers), he is one of the highest paid members of the secondary competitive set, which results in his being at the 75th percentile of the combined competitive set. In general, our Compensation Committee believes the competitive data for Mr. Williams is less relevant because few of our competitors have an officer with similar responsibilities (i.e., responsible for both acquisitions and operations). Our Compensation Committee concluded that the compensation data therefore is not a reliable indicator of market compensation and our Compensation Committee believes that Mr. Williams’ compensation is appropriate in light of his responsibilities and significant knowledge gained over his nearly three decades of experience in the lodging industry.

 

Mr. Mahoney receives total compensation that is approximately at the 25th percentile of our combined competitive sets. His cash compensation (combined base salary and bonus) is at the lower end of each of the competitive sets while his equity compensation is closer to the median. Mr. Mahoney’s total compensation and each of the key elements of Mr. Mahoney’s compensation for 2010 were generally below the median of the various competitive sets as he was promoted to Chief Financial Officer in September of 2008. Our Compensation Committee concluded that in light of the expected continuation of the economic recession throughout 2010 that it was not prudent to adjust Mr. Mahoney’s total compensation other than to increase his annual cash incentive opportunity for 2010. After the impact of this change, Mr. Mahoney’s total compensation was below the median of the various competitive sets.

 

Mr. Tennis’ total compensation and each of the major elements of his total compensation are either the second or third highest of the five members of his primary competitive set. With over 18 years of experience in the lodging industry, both as a member of Marriott’s legal department and its finance department, Mr. Tennis brings a broad and deep experience to the Company. Our Compensation Committee believes that Mr. Tennis’ compensation is appropriate in light of his responsibilities and significant knowledge gained over his nearly two decades of experience in the lodging industry.

 

We believe that it is important to align the interests of senior management with those of our stockholders. As one concrete step to ensure such alignment, we have a stock ownership policy for each of our senior executive officers, which is substantially the same as the stock ownership policy for our non-executive directors. As part of its periodic review of our corporate governance policies, our Board of Directors revised our stock ownership policy for our senior executives as described below.

 

Under our stock ownership policy, an ownership target is set for each of our covered executives. The ownership target establishes, on an annual basis, the number of shares each covered executive should hold of Company stock. If an executive holds less than the ownership target, he or she is restricted from selling any

Company stock until such time as he or she holds shares in excess of the ownership target, except as needed to pay personal taxes related to the vesting of Company stock and except for shares which the executive has purchased on the open market.

 

We count towards this ownership target only those shares that are owned by an executive, including shares purchased or awarded under our equity compensation program to the extent that such shares are fully vested and otherwise continue to be owned by the executive. The ownership target for an executive is determined on the calculation date (which is March 3, 2011 this year) by calculating a multiple (4 in the case of the Chief Executive Officer and 3 in the case of all other executive officers) of that executive’s base salary for a year and then dividing that result by the average closing price of the Company’s common stock during the first 10 trading days of the same calendar year ($12.14 per share for 2011). Each of our executives (except Mr. Tennis) holds shares in excess of his 2011 ownership target.

 

Our Board of Directors has adopted a policy that, in the event of a restatement of our financial results, our Board of Directors will review all cash incentive plan compensation that was paid to the four most highly compensated executives on the basis of having met or exceeded specific performance targets for performance periods after the adoption of the policy (December 31, 2006). If the bonuses paid pursuant to such cash incentive program compensation would have been lower had the bonuses been calculated based on such restated results, it is the general policy of our Board of Directors to seek to recoup, for the benefit of the Company, the portion of the excess cash incentive program compensation that was received by any individual senior executive who engaged in fraud, intentional misconduct or illegal behavior in connection with the financial results that were restated. Notwithstanding anything stated or implied in the foregoing, our Board of Directors will, in its reasonable business judgment, decide whether to pursue such recoupment from an individual based on those factors that our Board of Directors believes to be reasonable.

 

Section 162(m) of the Code limits the deductibility on DiamondRock’s tax return of compensation over $1 million to certain of our corporate officers unless, in general, the compensation is paid pursuant to a plan which is performance-related, non-discretionary and has been approved by our stockholders. Because DiamondRock is a real estate investment trust that generally does not pay corporate income taxes, the loss of deductibility of compensation does not have a significant adverse impact on us. In 2010, $5.2 million was not deductible under Section 162(m).

 

The following table sets forth the compensation paid for the last three years to our Chief Executive Officer, our Chief Financial Officer and each of the two other named executive officers. The four individuals set forth below were all of our executive officers through December 31, 2010.

 

Summary Compensation Table

 

 

 

 

Our compensation program seeks to promote the philosophy described above through an appropriate mix of four core elements of compensation:

 

1. base salary;

 

2. cash incentive compensation program;

 

3. equity grants; and

 

4. limited perquisites.

 

 

We review our executives’ base salaries annually in the fourth quarter of each calendar year.

 

Our primary compensation philosophy is to target our total compensation to be competitive with that of our competitive sets and to ensure that approximately half of the compensation paid to our senior executives is in the form of equity. As a result, our executives’ cash compensation may be targeted at a level below or above the median cash compensation paid to members of our primary competitive set. During our annual compensation review, we generally attempt to set the base salaries within the range of base salaries paid to members of our competitive sets. However, we adjust base salaries to reflect our executive’s assigned

responsibilities, relevant levels of experience and individual performance compared to other members of the competitive sets.

 

The base salaries for 2011, 2010 and 2009 are as follows:

 

 

For the calendar year 2011, in view of the increase in experience of Mr. Brugger and Mr. Mahoney in their respective roles, the base salaries for each of them were increased so that their respective base salaries were in the median range of the primary competitive set. Mr. Williams’ base salary is among the highest of the primary competitive set due to the unique scope of his role and his extensive industry experience, and our Compensation Committee determined that Mr. Williams’ base salary should not increase for 2011. Our Compensation Committee determined that it was appropriate to increase Mr. Tennis’ base salary by approximately 3 percent.

 

 

We maintain an annual cash incentive compensation program pursuant to which our executive officers are eligible to earn cash bonuses based upon their achievement of certain objective corporate goals as well as certain individual goals set by our Compensation Committee at the beginning of that fiscal year. To date, no cash incentive compensation has been paid to our executives other than in accordance with this program.

 

The chart below shows the bonuses we have paid under our cash incentive compensation program for the named executive officers. We typically pay our bonuses during the first fiscal quarter subsequent to the plan year:

 

 

The performance measures, weightings and goals established by our Compensation Committee for 2010 under our cash incentive compensation program, were as follows:

 

 

 

 

The AFFO component of the Cash Incentive Compensation Program is determined by calculating how well the Company performed against the AFFO target, which is based on the 2010 Budget approved by our Board of Directors. In view of the economic uncertainty in the beginning of 2010, our Compensation Committee determined, similar to 2009, that the weighting of the AFFO component would be 50%, unlike in 2008 when it was 70%. Further, our Compensation Committee used a target “range” rather than a target point where target payout is achieved if the AFFO component falls within a range. In this way, the executive team would receive the same level of compensation for performance near target, without providing a windfall or a shortfall for performance that deviated only slightly from target. For performance that falls between threshold and the target range or between the target range and maximum, bonuses are calculated based on a linear interpolation for achievement in between each of those performance levels. In 2010, the senior executives earned the maximum under this component. In early 2011, due to higher confidence in the economic outlook, our Compensation Committee determined that the weighting of the AFFO component would revert to 70% in 2011.

 

The Relative Hotel Performance component of our Cash Incentive Compensation Program is based on how well each of our hotels performs on market penetration relative to its competitive set, which is established for each hotel in the beginning of the year. The concept is that this component incents the management team to improve relative performance of the hotel regardless of the economic environment. During the year, for each hotel owned at the beginning of year that gains market share against its pre-approved competitive set, as measured by Smith Travel Research, a third party analyst, the executives will earn 1/20th of this component of their bonus. Conversely, for each of the twenty hotels owned at the beginning of the year that fail to gain market share, the executives will not earn 1/20th of this component of their bonus. In 2010, the senior executives earned 35% of this component

 

Our Compensation Committee established individual objectives for each of the executive officers, which objectives varied by individual depending on their specific responsibilities. This component of the Cash Incentive Compensation Program was weighted at 45% in 2010 and 2009, unlike in 2008 when it was weighted at 30%. Our Compensation Committee increased the weighting on the individual component to focus executives on achieving certain strategic objectives that were particularly important during a period of economic uncertainty and volatility. In early 2011, when our Compensation Committee determined to increase the weighting of the AFFO component to 70%, it also determined to reduce the weighting of the individual component to 25%.

 

Each executive officer shared several common objectives. These common objectives were to achieve the 2010 budget, reduce leverage by raising equity, complete at least one hotel acquisition, develop a specific portfolio strategy that prioritizes markets for acquisitions, monitor hotel debt compliance, focus on hotel cost containment and develop a comprehensive plan to address the infrastructure issues at the Frenchman’s Reef & Morning Star Marriott Beach Resort.

 

The other objectives were personal to each executive officer and varied based upon the executive’s position and responsibilities as they related to the Company’s overall business plan. Mr. Brugger’s objectives primarily involved providing leadership in achieving the Company’s 2010 objectives, developing a strategic plan for positioning and growth of the Company and keeping the organization focused and productive through an anticipated challenging year. Mr. Williams’ objectives primarily involved identifying and acquiring hotels that are a strategic fit for the Company, controlling costs and asset managing the Company’s hotels in order to achieve the budgets for each hotel within targets established by our Board of Directors and developing a comprehensive plan to address the capital needs at the Frenchman’s Reef & Morning Star Marriott Resort. Mr. Mahoney’s objectives primarily involved achieving the leverage targets established by the Board by raising additional equity and entering into a new corporate credit facility. Mr. Tennis’ objectives primarily involved ensuring that the Company’s filings with the SEC were timely and compliant, advising senior management on, and managing the process for, all hotel acquisitions, dispositions and other transactions and assessing and advising on the Company’s corporate governance policies, risk management policies and executive compensation.

 

Our Compensation Committee requested that each of the executives prepare a report summarizing individual achievements relative to individual business objectives, and our Compensation Committee asked our Chief Executive Officer to provide his assessment of each officer and a self-assessment of his own

performance. Following the review of the reports and a detailed discussion with our Chief Executive Officer regarding each of the other officers, our Compensation Committee concluded that each of the executives competently completed all of the individual objectives and that it would be appropriate to pay each executive at a level equal to the maximum payout for the individual component of each executive’s bonus.

 

The annual incentive opportunity ranges for 2010 and the actual cash incentive compensation earned for 2010 performance were as follows:

 

 

 

Generally we target paying approximately half of each executive’s total compensation in the form of equity. However, our Compensation Committee determines, in its sole discretion, the actual amount of equity to be awarded to our executive officers each year reflecting our performance in the prior year, individual performance and competitive levels of long-term incentive compensation among our primary competitive set. Our executive officers are not guaranteed any minimum number of shares of restricted stock or other equity grants.

 

The chart below show the aggregate grant date fair value of the equity awards received by the named executive officers over the past three years:

 

 

Types of Awards.  Since our formation, we have mainly issued shares of restricted stock. In 2008, we issued a combination of stock settled stock appreciation rights, or SARs, and dividend equivalent rights, or DERs. In 2009, we granted 100% restricted stock. In 2010, we redesigned our equity award program and, based on a recommendation from F.W. Cook, we granted an award to each executive officer that consisted of 75% restricted stock and 25% market stock units, or MSUs. Each of these types of awards is described in more detail below.

 

 

Each executive officer was granted a target number of MSUs (the “Target Award”). The actual number of MSUs that will be earned, if any, and converted to shares of common stock at the end of the Performance Period is equal to the Target Award plus an additional number of shares of common stock to reflect dividends that would have been paid during the Performance Period on those shares multiplied by the percentage of total stockholder return over the Performance Period based on (x) the 30-day average closing price of our common stock calculated on the vesting date plus dividends paid and (y) the 30-day average closing price of our common stock on the date of grant. There will be no payout of shares of our common stock if our total stockholder return percentage on the vesting date is negative 50% or less. The maximum payout to an executive officer under an award is equal to 150% of the Target Award.

 

Our Compensation Committee decided to incorporate MSUs into our long-term incentive program in an effort to create stronger pay-for-performance alignment. Our Compensation Committee has evaluated several long-term incentive alternatives over the years to determine a mix that best supports our objectives and is effective for us, given our REIT structure. Our Compensation Committee determined that traditional stock options were not an effective long-term incentive vehicle for us because they only reward stock price appreciation and do not reward value creation in the form of a dividend. As a REIT, a significant portion of our total stockholder return is provided in the form of the dividend. In 2008, we granted SARs and DERs in an effort to create a long-term incentive program that would reward total stockholder return. However, due to clarification of deferred compensation rules under Section 409A of the Internal Revenue Code, we were obligated to change the design of the DERs in a manner we deemed less than ideal. In 2010, our Compensation Committee decided to grant a portion of our long-term incentive in the form of MSUs, which enable incentives tied to total stockholder return (not just share price appreciation), but also provide additional pay-for-performance “leverage” (i.e., greater sensitivity to changes in stockholder return). As compared to time-based restricted stock, MSUs provide increased reward for positive total stockholder return, and decreased reward for negative stockholder return.

 

 

The strike price of the SARs was set at $12.59, the closing price of our stock on the NYSE on the grant date. The SARs may be exercised, in whole or in part, at any time after the instrument vests and before the tenth anniversary of its issuance. Upon exercise, the holder of a SAR will receive a number of shares of our common stock equal to the positive difference, if any, between the price of our common stock on the NYSE at the time of the exercise compared to the “strike price”, which is the closing price of our common stock on the NYSE at the close of business on the day the SARs were granted, divided by the price of our common stock on the NYSE at the time that the holder exercises his or her SAR.

 

We issued one DER for each SAR. A DER will entitle the holder to the value of the dividends issued on one share of common stock. No dividends will be paid on a DER prior to its vesting, but upon vesting, the holder of each DER will receive a lump sum equal to all of the dividends paid on a share of common stock from the date the DER was granted to the date the DER vested. After vesting, the holder of each DER will receive a cash payment equal to the value of the dividends paid on a share of common stock at the same time dividends are paid to our common stockholders. The DERs terminate on the 8th anniversary of the grant of the DER.

 

We currently have very few perquisites. Messrs. Brugger and Williams, as members of our Board of Directors, are entitled to reimbursement of up to $10,000 of lodging, meals, parking and certain other expenses at all of our hotels and at all hotels and resorts managed or franchised by Marriott, Starwood or Hilton, subject to certain limitations. See “Director Compensation.”

 

Our named executive officers, along with all of our employees on a non-discriminatory basis, receive: (i) health and dental insurance with the Company paying 100% of the premiums, (ii) a $200,000 group term life insurance policy, and (iii) long-term disability coverage. We maintain a retirement savings plan for all of our employees under section 401(k) of the Code. All of our employees, including our named executive officers, benefit from the same company matching formula.

 

The following chart sets forth the perquisites and all other benefits received by our executive officers over the last three years.

 

 

In March 2007, we entered into severance agreements with each of our current executive officers and in December 2009 we entered into a severance agreement with Mr. Tennis. Prior to entering into these severance agreements, our Compensation Committee reviewed the severance agreements and policies as well as the employment contracts for the eight largest lodging self-managed REITs that were then currently SEC reporting companies. In addition, F.W. Cook reviewed the proposed severance agreements on behalf of our Compensation Committee and provided advice on current market practices and emerging best practices regarding severance agreements. Our Compensation Committee also engaged its own legal counsel to represent the Company in the negotiation of the severance agreements with management.

 

The severance agreements provide each named executive officer with certain severance benefits if his employment ends under certain circumstances. We believe that the severance agreements will benefit us by helping to retain the executives and by allowing them to focus on their duties without the distraction of the concern for their personal situations in the event of a termination of their employment, especially in connection with a possible change in control of the Company.

 

Each executive officer will be entitled to receive cash severance benefits under his severance agreement if we terminate such executive’s employment without cause or such executive resigns with good reason. These severance agreements have so-called “double triggers” as the executives are not entitled to receive any cash severance benefits if, following a change of control, they remain in their position or they resign without demonstrating good reason. If the executive officers are entitled to receive cash severance benefits, they will receive a lump sum payment equal to three times, with respect to Mr. Brugger, or two times, with respect to

each of the other executive officers, the sum of (x) his then current base salary and (y) his target bonus under our annual cash incentive compensation program.

 

In addition, if we terminate such executive’s employment without cause or such executive resigns with good reason, or if the executive dies or becomes disabled, the executive (or his family) will be entitled to (i) a pro-rated bonus under our cash incentive program at target, (ii) continued life, health and disability insurance coverage for himself, his spouse and dependents for eighteen months and (iii) the immediate vesting of any unvested portion of any restricted stock award and any MSUs previously issued to the executive. In addition, the unvested SARs, DERs and MSUs will immediately and fully vest upon the death or disability of an executive and, with respect to the SARs and DERs, may be exercised by the holder, or his estate, until the expiration dates of the SAR and DERs. Following a change in control, if an executive is terminated without cause or resigns for good reason, the SARs and DERs will continue to vest on the original vesting schedule and, once vested, the instruments may continue to be exercised until the earlier of the expiration date of the instrument or the fifth anniversary of the vesting. If there has not been a change in control and the executive resigns with good reason or is terminated without cause, the Board of Directors has sole discretion to decide whether to vest any unvested SARs and DERs. Upon a change in control, regardless of whether there has been a termination of employment, the MSUs will vest as if the performance period had ended on the date immediately prior to the change in control.

 

In the event that the executive retires and has been designated as an eligible retiree by our Board of Directors, the executive will be eligible to continue to vest in any outstanding unvested restricted stock awards, SARs, DERs and MSUs, but the executive will not receive any cash severance or any continued life, health, or disability coverage for himself or his spouse or dependents.

 

For the agreements entered into prior to 2009, in the event that the severance benefits described above are paid in connection with a change in control of the Company and deemed “excess parachute payments” under Section 280G of the Code, the executives, may be eligible to receive a tax “gross up” payment equal to the additional taxes, if any, imposed on the executive under Section 4999 of the Code in respect of such excess parachute payments. This excise tax gross up is available only to the extent that the value of the severance benefits payable to an executive equals or exceeds 110% of the maximum amount the executive could have received without being subject to any excise tax under Section 4999 of the Code (the “safe harbor”). In the event that the value of the severance benefits payable to an executive is subject to the excise tax but does not equal or exceed 110% of the “safe harbor”, the amount of the severance benefits will be reduced to an amount equal to the “safe harbor”. For Mr. Tennis’ agreement, no excise tax gross-up protection is provided.

 

The following table sets forth a summary of our payment obligations pursuant to the severance agreements:

 

 

 

The following chart sets forth the cost that we would have incurred if one of the executives were terminated as of December 31, 2010 under the terms of our severance agreements, assuming a stock price of $12.00, the closing market price on the NYSE on December 31, 2010:

 

Cost of Termination under Severance Agreements(1)

 

 

 

 

The severance agreements contain non-competition covenants that apply during the term and for 12 months after the expiration or termination of such executive’s employment with us to the extent that the executive receives a cash severance payment. The non-competition covenants restrict the executives from working for any lodging-oriented real estate investment company located in the United States. The non-competition covenants will not apply following a change of control.

 

 

 

 

Outstanding Equity Awards
(As of December 31, 2010)