Hotel companies that paid incentive fees to their management companies paid more in management costs, but saw higher revenues and profits, according to Robert Mandelbaum, CBRE Hotels’ Americas Research director of Research Information Services.

WHILE PREDICTIONS OF slowing RevPAR growth may have some hotel owners looking to control expenses, management fees, which grew faster than the average of all other costs from 2010 through 2015, may be worth keeping, according to an article by Robert Mandelbaum, CBRE Hotels’ Americas Research director of Research Information Services. Mandelbaum said CBRE’s annual “Trends in the Hotel Industry” survey found hotels that paid management fees with incentive pay in 2015 and 2016 made more money at the same time.

In most management contracts, incentive fees are paid in addition to a base fee (which is typically a percentage of total revenues) when profit reaches a certain threshold, according to Mandelbaum. “Incentive fees are designed to make management more conscious of the bottom line since owners achieve their returns and pay their debts from profits, not revenue,” he wrote.

In 2015, hotels that reported paying an incentive fee saw a 6 percent increase in total revenue and a 17.5 percent increase in profits, Mandelbaum said.  At the properties that did not pay an incentive fee, total revenue increased by 4.7 percent, while profits grew by 16.3 percent.

“When analyzing incentive fee payment data over the two year period 2014 and 2015, we see that the intended ‘incentive’ for management companies appears to be working,” Mandelbaum wrote. “Properties that paid an incentive fee in 2015, but not in 2014, saw their profits increase by 30.3 percent in 2015.  Conversely, for properties that paid an incentive fee in 2014 but not in 2015, profits increased by 20.4 percent in 2015.”

The expected slowing of revenue growth in the near future should motivate management companies to increase profit growths to earn more money for themselves, Mandelbaum said. “However, with profit margins currently well above long-run averages, and labor costs on the rise, growing profits will be a challenge,” he said. “For owners that signed contracts with profit-based incentive clauses, these contract terms may prove to be of great value over the next few years.”