Soaring bonuses and stock awards are driving compensation for elite GCs in the US to record levels. But can the boom survive the credit crunch? And will Europe's top lawyers ever reap similar rewards? Amy Miller reports

Give Gary Lynch credit for making a dramatic entrance. The chief legal officer for New York-based Morgan Stanley debuted on Corporate Counsel's annual survey of general counsel compensation with a whopping $6.3m (£3.15m) bonus. That large pot of cash earned him the number two spot overall on our elite roster. A look at America's 100 top-paid general counsel in 2007, as measured by the 2008 general counsel (GC) compensation survey, shows that he's in good company. Simply put, the top legal officers at Fortune 500 companies raked it in. And that was true even for those heading the law departments at such financial institutions as Morgan Stanley, which are reeling after the collapse of the subprime mortgage market.

Once again, general counsel can thank lucrative cash bonuses that swell year after year. While the average salary stayed essentially stagnant at $567,195 (£283,600), the average bonus/non-equity incentive compensation jumped 17% to $1.1m (£550,000). That's double their average salary. In 2002, the average bonus was $550,397 (£275,200) and exceeded the average salary of $503,545 (£251,800) by just 9%. Five years later, the average bonus surpassed salary by an eye-catching 100%. As for equity – in the popular form of outright stock grants – the trend also is up, by nearly 17%. Only two lawyers on the list did not receive either a stock award or option: Peter Janzen of Land O'Lakes and Gregory Doody of Calpine Corp. The average stock award topped $1.3m (£650,000), compared to $1.1m (£550,000) the year before.

Meanwhile, the less fashionable stock option, the darling of the tech bubble years, fell 10%, to a relatively paltry average of $720,470 (£360,200). Volatility in the stock market didn't stop 56 lawyers from cashing out their stocks and realising a gain of an average $2.4m (£1.2m), though. Overall, these GCs walked away with nearly $304m (£152m) in total salary, bonuses and stock cash-outs in 2007, slightly less than the $307m (£153m) they took home the previous year.

"Any general counsel who wants big money gets stock," says Rees Morrison, president of Rees Morrison Associates, a consulting firm for legal departments. "That's where the huge money is. If you're a GC, your money is in equity."

But will the good times last? Was 2007 like 2001, the year the tech bubble burst, sending balance sheets and shares prices to the basement? That's become an important question as more and more of the bonuses, stock awards and stock options, which make up the bulk of GC compensation packages, are tied to their company's performance, says Jason Simon, a partner who specialises in executive compensation at US law firm Greenberg Traurig.

Truth is, no-one can be sure how much GC compensation will be affected by recent economic troubles, says Joel Henning, a senior vice president and head of Hildebrandt International's Chicago office. At least not yet: "Right now, the sense that I get from GCs is that it is really too early to tell how bad things are going to get."

The practice of tying pay to performance came in response to the business scandals of the early 2000s, after criticism of fat compensation packages for executives who failed to perform. Big institutional shareholders such as mutual funds, pensions and foundations have asked for 'say-on-pay' votes at some 100 companies recently, including General Motors, Exxon Mobil, Citigroup, Anheuser-Busch Cos, General Electric and Wal-Mart Stores.

Whether these pay-for-performance arrangements really achieve the intended goal is debatable, especially when it comes to chief legal officers, says Simon. Corporate legal departments aren't revenue generators, so there is typically a disconnect between a GC's job performance and the company's performance on Wall Street, he adds.

Whether they are effective or not, the trend is not abating. It became easier to track when, in mid-2006, the Securities and Exchange Commission (SEC) began requiring that proxy statements indicate whether bonuses are discretionary or 'non-equity incentive compensation', which means they are tied to specific financial metrics, such as profits, revenue or operating income.

Our survey shows a rise in non-equity incentive compensation, but the new SEC rules did not affect all companies in 2006 as they gradually switched over to the new reporting method. Then, 76 GCs in the top 100 received incentive compensation and 41 got discretionary bonuses. This year 85 got non-equity incentive compensation, 36 received the less-lucrative discretionary bonus and 22 got both. Incentive cash averaged $1,039,931 (£520,000), while the average discretionary bonus was $713,970 (£357,000), down from $777,383 (£388,700) in 2006.

It might appear to the casual observer, or an activist shareholder, as though general counsel are as overpaid as some chief executive officers (CEOs), Morrison says. But some of the top earners on this year's list have been with their companies for decades and, with all the demands placed on them, they deserve to reap some benefit for their years of service. "They've survived tough times," Morrison says.

Still, generous bonuses for executives at financial institutions, for example, are likely to come under closer scrutiny, Henning says. Between early 2004 and mid-2007, seven of the nation's largest financial companies, including Morgan Stanley, made $254bn (£127bn) in combined profits. Since last July, their assets have been cut by $107.2bn (£53.6bn), and they face lawsuits from investors and regulators.

"The likelihood is that very high levels of bonuses are not going to be seen as much in the banking industry over the next year or two," Henning says.

Until now, general counsel for banks and financial institutions have had few reasons for financial worries. Lynch, for example, went home with a total $6.6m (£3.3m) cash payout. His $6.3m bonus, the biggest discretionary bonus on the list, wasn't explicitly tied to Morgan Stanley's performance on Wall Street. In June the second-largest US investment bank announced it had turned a profit in its second quarter, but earnings were down 61% from last year, with profits falling to $1bn (£500m), down from $2.58bn (£1.29bn) a year earlier.

Lynch wasn't the only executive at a struggling financial company to earn a hefty bonus last year. Carrie Dwyer at Charles Schwab and Thomas Russo at Lehman Brothers both got sizable non-equity incentive compensation. Dwyer pulled in an extra $2.7m (£1.35m), a 112% increase over the year before. That brought her total cash compensation to $3.2m (£1.6m), and she jumped to the 11th spot on this year's list, up from 26th place in last year's survey. While Lehman has been struggling, Russo's compensation held steady. He took home the same incentive compensation he did the year before: $4.6m (£2.3m). That brought his total cash compensation to $5m (£2.5m). He also made $5.4m (£2.7m) by selling stock, although his total compensation was 43% less than he made the year before.

Not everyone in the financial sector had such a soft landing. Take John Finneran, at the credit giant Capital One Financial, for example. In 2007 Finneran's total take-home pay shrank by almost half, to $1.4m (£700,000). His discretionary bonus alone dropped 46%, to $690,000 (£345,000), compared to the year before. He made $42,029 (£21,000) by cashing in his stock options, a fraction of the $850,485 (£425,000) he cashed out in 2006.

GCs in booming sectors of the economy fared better. The Irving, Texas-based Fluor designs and builds everything from hospitals to power plants, but the oil and gas sectors account for about 50% of its annual sales. And like the record-breaking profits of oil and gas companies, Fluor's stock price rose from $109 (£54) a share last summer to about $186 (£93) at press time. The non-equity incentive compensation for the company's GC, Lawrence Fisher, skyrocketed nearly 275%, to $1.6m (£800,000).

It is no surprise that the largest incentive bonus of $7.7m (£3.8m) went to Jon Walton, general counsel of specialty metals manufacturer Allegheny Technologies. The company's net income rose 30% last year and Walton walked away with $8.1m (£4.05m) in salary, bonus and stock sales, 55% more than what he took home last year. That kept him securely seated in the survey's top spot for the second year in a row.

But the future may not be so promising for Walton if the price of metals continues to rise. The rising cost of raw materials pulled down the company's profits in its first quarter of this year.

Another trend to watch: entertainment companies have mostly bucked the recent trend of tying bonuses to company performance. Most entertainment companies on this year's list still gave their GC traditional discretionary bonuses not tied to any performance indicators. The five legal heads for big media companies earned a cushy average bonus of $2.2m (£1.1m). Only the $3.5m (£1.75m) bonus awarded to Walt Disney's Alan Braverman was tied to company performance.

Bonuses, incentive pay, whatever it's called, is all good. But it is still not how most chief legal officers amass their wealth. Indeed, equity remains a draw to life in-house. And while the way shares are doled out has changed, its popularity has not – and this year's survey numbers prove it. Average stock awards increased nearly 17% this year, to $1.3m (£650,000), up from $1.1m (£550,000) in 2006. Overall, 94 GCs received stock awards that totalled more than $124m (£62m), a 23% increase over 2006. James Ellis of AT&T, who retired in 2007, got the largest stock award of $12.38m (£6.2m). That award alone was 83% larger than the highest stock award last year.

The chief legal officers for financial securities companies once again received some of the meatiest stock awards, an average of $4m (£2m), which is higher than any other industry. The six telecommunications lawyers were next on the list. They got an average stock award of $3.9m (£1.95m).

Meanwhile, stock options continue their downward course – but haven't disappeared altogether, despite backdating scandals and shareholder pressure. This year 87 GCs received
option awards, the same as the previous year, but the average award fell about 10%, to $720,470 (£360,000). The biggest award, $5.3m (£2.65m) given to Mark Bobak at St Louis-
based Anheuser-Busch, is 15% higher than the top option award of 2006.

The declining popularity of option awards stems from new rules issued by the Financial Accounting Standards Board that went into effect in 2006. Under the old rules, options valued at the price of stock when awarded didn't have to be expensed. Companies' bottom lines weren't affected, so for
a time, companies gave them to everyone from janitors to CEOs. Now options must be listed as expenses, along with other stock awards, making them much less appealing to corporate bean counters.

Make no mistake, though: while option grants are falling out of favor, option cash-outs, along with stock awards, are still making GCs very rich. Despite the ups and downs of the stock market last year, 56 general counsel made more than $139m (£69.5m) when they cashed in stock options last year. The year before, 56 GCs cashed in their options for a total of $155m (£77.5m). The biggest winner was Donald de Brier of Occidental Petroleum, who made $21.6m (£10.8m) when he cashed out options.

Top lawyers in the aerospace and defence industries earned millions by cashing in their stock options, too. Their six general counsel made an average of $3.5m (£1.75m) each by selling their stock in 2007. Roger Cook of Portland, Oregon-based Precision Castparts made the most – $5m (£2.5m).

Lost amid all this talk of bonuses and stock is the lowly cash salary. In fact, salaries continue to make up the least significant portion of GC salaries. They held steady in this year's survey. Why? Corporations can't take tax deductions for any portion of a salary that exceeds $1m (£500,000). And if the company has a difficult year, they typically do not trim the salaries of top earners, preferring to trim the extras like bonuses and stock grants.

But one thing remains clear this year. Bonuses and stock awards are likely to continue to inch upward, but they'll be increasingly tied to market fluctuations and their company's performance on Wall Street for years to come. That means that it's anyone's guess whether or not the survey's $6m man, Gary Lynch, or any top lawyer at an investment bank, will make it to the top of the list next year.

Overpaid but not over here

It may be accepted that the role of general counsel in Europe has risen in prominence in recent years but the depressing fact for in-house lawyers on this side of the pond is that, benchmarked by pay, their US counterparts are pulling away.

So while Corporate Counsel's 2008 GC Compensation survey, outlining the pay of America's top 100 earning GCs, shows this elite band are among the best paid lawyers in the world, in the UK general counsel pay has failed to keep pace with sharp rises in private practice.

Chris Cayley, a recruiter with First Counsel, says that there is no sign of the gap closing any time soon, commenting: "Anecdotally GCs at the top of the range in the UK may take home in excess of £1m and maybe up to £1.5m. There is still a significant disparity between US and Europe."

Ricky Mui, director of legal recruitment with consultant Robert Walters, says the last decade has seen comparatively modest growth for European GCs, a sharp contrast to the surging bonus packages on offer at top American companies.

He says: "Overall, general counsel salaries within commerce and industry in the EMEA have risen by 10%-15% in the last five years, however these increases recently plateaued due to the ongoing effects of the credit crunch."

The main reason for the disparity is the lack of any equivalent bonus culture, which is increasingly where top company lawyers in the US earn the bulk of their remuneration.

According to Badenoch & Clark's Colin Loth, GCs in Europe are more likely to benefit from a large pension contribution rather than substantive share-based packages.

He says: "Sometimes in the UK you may get a higher basic, in place of formal bonuses, and more of a pension on top. Top FTSE 100 GCs may get £50,000 to £60,000 put into their pensions each year."

While it is acknowledged that bonuses in the UK may not reach the levels that they can in the US, it was agreed that the top domestic companies, in certain sectors, offer strong bonus structures.

Samantha Mediratta, a director with Hays Legal, says that bonus structures are largely dependent on the industry, with financial services offering the closest comparison to the bonus model on offer in the US.

"Investment banking and financial services GCs will, as in the US, have bonus, share grant or option-driven packages. It is less so in other sectors, where bonus potential could be as little as 20% to 30% in reality," she says.

Cayley adds: "The wages of some GCs at the very top are quite-bonus driven. The bonus element could reach up to 50% or more for some senior legal heads – some GCs in the banking sector receive £500,000 to £600,000 in bonuses with a base of around of £150,000 to £160,000."

While some of the top GCs in traditionally high-paying sectors are commanding relatively attractive wages and bonuses; the question remains as to whether the US model of remuneration will ever be imported into Europe and the UK.

Mediratta says the issue is complex and that the level of compensation hinges on the role itself. "In any event, sector is not the deciding factor on remuneration. Breadth of role – is it a pure legal role or does it encompass company secretary or other functions such as compliance, risk, audit, complexity of role, sphere of influence and international scope – is more likely to influence the overall package."

A version of this article appeared in the August edition of Corporate Counsel.