2008 Fortune 500 Top-Paid GCs: Party Like It?s 2001

Give Gary Lynch credit for making a dramatic entrance. The chief legal officer for New York-based Morgan Stanley debuted on Corporate Counsel magazine’s annual survey of general counsel compensation with a whopping $6.3 million bonus. That large pot of cash earned him the No. 2 spot overall on our elite roster.

A look at the nation’s 100 top-paid general counsel in 2007, as measured by the 2008 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, the average bonus/nonequity incentive compensation jumped 17 percent, to $1.1 million. That’s double their average salary.

In 2002, the average bonus was $550,397 and exceeded the average salary of $503,545 by 9 percent. Five years later, the average bonus surpassed salary by an eye-catching 100 percent. As for equity — in the popular form of outright stock grants — the trend also is up, by nearly 17 percent.

Only two lawyers on the list did not receive either a stock award or option: Peter Janzen of Land O’Lakes Inc. and Gregory Doody of Calpine Corp. The average stock award topped $1.3 million, compared to $1.1 million the year before. Meanwhile, the less fashionable stock option, the darling of the tech bubble years, fell 10 percent, to a relatively paltry average of $720,470.

Volatility in the stock market didn’t stop 56 attorneys from cashing out their stocks and realizing a gain of an average $2.4 million, though. Overall, these GCs walked away with nearly $304 million in total salary, bonuses and stock cash-outs in 2007, slightly less than the $307 million they took home the previous year.

“Any general counsel who wants big money gets stock,” said 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, said Jason Simon, a partner who specializes in executive compensation at the Tysons Corner, Va., office of Greenberg Traurig.

Truth is, no one can be sure how much GC compensation will be affected by recent economic troubles, said 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’s 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 Corp., Exxon Mobil Corp., Citigroup Inc., Anheuser-Busch Cos. Inc., General Electric Co. and Wal-Mart Stores Inc.

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

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

Our survey shows a rise in nonequity 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 nonequity incentive compensation, 36 received the less-lucrative discretionary bonus, and 22 got both. Incentive cash averaged $1,039,931, while the average discretionary bonus was $713,970, down from $777,383 in 2006.

It might appear to the casual observer, or an activist shareholder, as though general counsel are as overpaid as some CEOs, Morrison said. 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 said.

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

“The likelihood is that very high levels of bonuses are probably 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 $6.6 million cash payout. His $6.3 million 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 U.S. investment bank announced that it had turned a profit in its second quarter, but earnings were down 61 percent from last year, with profits falling to $1 billion, down from $2.58 billion 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 Corp. and Thomas Russo at Lehman Brothers Holdings Inc. both got sizable nonequity incentive compensation. Dwyer pulled in an extra $2.7 million, a 112 percent increase over the year before. That brought her total cash compensation to $3.2 million, and she jumped to the 11th spot on this year’s list, up from 26th place in last year’s survey. While Lehman Brothers has been struggling, Russo’s compensation held steady. He took home the same incentive compensation he did the year before: $4.6 million. That brought his total cash compensation to $5 million. He also made $5.4 million by selling stock, although his total compensation was 43 percent less than the $9.5 million he made the year before.

Not everyone in the financial sector had such a soft landing. Take John Finneran Jr., at the credit giant Capital One Financial Corp., for example. In 2007 Finneran’s total take-home pay shrank by almost half, to $1.4 million. His discretionary bonus alone dropped 46 percent, to $690,000, compared to $1.3 million the year before. He made $42,029 by cashing in his stock options, a fraction of the $850,485 he cashed out in 2006.

GCs in booming sectors of the economy fared better. The Irving, Texas-based Fluor Corp. designs and builds everything from hospitals to power plants, but the oil and gas sectors account for about 50 percent of its annual sales. And like the record-breaking profits of oil and gas companies, Fluor’s stock price rose from $109 a share last summer to about $186 at press time. The nonequity incentive compensation for the company’s GC, Lawrence Fisher, skyrocketed nearly 275 percent, to $1.6 million.

It’s no surprise that the largest incentive bonus of $7.7 million went to Jon Walton, general counsel of specialty metals manufacturer Allegheny Technologies Inc. The company’s net income rose 30 percent last year, to $747 million, and Walton walked away with $8.1 million in salary, bonus and stock sales — 55 percent 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 fiscal quarter of this year. The Pittsburgh-based diversified metals producer had a net income of $142 million, compared to $197.8 million in the same period a year ago.

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 attorneys for big media companies earned a cushy average bonus of $2.2 million. Only the $3.5 million bonus awarded to The Walt Disney Co.’s Alan Braverman was tied to company performance.

Bonuses, incentive pay, whatever it’s called — cash? — is all good. But it’s still not how most chief legal officers amass their wealth. Indeed, equity remains a draw to life in-house. And while how shares are doled out has changed, its popularity has not — and this year’s survey numbers prove it. Average stock awards increased nearly 17 percent this year, to $1.3 million, up from $1.1 million in 2006. Overall, 94 GCs received stock awards that totaled more than $124 million, a 23 percent increase over 2006. James Ellis of AT&T, who retired in 2007, got the largest stock award of $12,389,605. That award alone was 83 percent 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 $4 million, which is higher than any other industry. The six telecommunications lawyers were next on the list. They got an average stock award of $3.9 million, thanks in large part to Ellis’ sizable stock award. Without that award, the average would be $2.2 million.

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 percent, to $720,470. The biggest award, $5.3 million given to Mark Bobak at St. Louis-based Anheuser-Busch, was 15 percent 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 $139 million when they cashed in stock options last year. The year before, 56 GCs cashed in their options for a total of $155 million. The biggest winner was Donald de Brier of Occidental Petroleum Co., who made $21.6 million when he cashed out options. The year before, de Brier made nearly $10 million cashing in.

Top lawyers in the aerospace and defense industries earned millions by cashing in their stock options, too. Their six general counsel made an average of $3.5 million each by selling their stock in 2007. Roger Cook of Portland, Ore.-based Precision Castparts made the most, $5 million.

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 $1 million. And if the company has a difficult year, they typically don’t 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 will likely 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 $6 million man, Gary Lynch, or any top lawyer at an investment bank, will make it to the top of the list next year.