General Electric Co. didn’t mince words in its most recent proxy statement. Summing up general counsel Brackett Denniston III’s performance, it says: “Mr. Denniston had a strong year in 2012.”
It must have been a very strong year indeed. In fact, Denniston, GC of the Fairfield, Conn.–based company since 2004, took home $10.9 million in total cash compensation in 2012. After a three-year absence from Legal affiliate Corporate Counsel‘s GC Compensation Survey, Denniston returned in style — finishing ahead of the year’s other 99 highest-paid legal chiefs.
He’s not alone. There can be just one winner, but there was plenty of good news to go around. After across-the-board declines the previous year, compensation bounced back up in 2012 in every category of GC pay the survey measures. Average total cash received rose 6.7 percent to $1,853,671, which is the highest figure the survey has seen to date. (Note: highest since 2000, anyway.)
What’s the explanation?
Aaron Boyd, head of research at executive compensation analysts Equilar Inc. in San Francisco, said, “A lot of it has to do with the fact that the economy continues to chug along and to perform better and better — at least as far as the stock prices are concerned.” The stock market posted double-digit gains in 2012, and in a more stable environment, he said, executives were able to hit their targets. So long as their companies were thriving — and many were — it was a good year to be a GC in America.
Let’s break down those beefed-up general counsel pay packets into their component parts.
The average stock award increased a whopping 64.8 percent, to $2,350,219, after a 10.9 percent decline in last year’s survey. Speaking of good years, Apple Inc.’s Bruce Sewell can take most of the credit for the drastic swing. He received a $66,571,750 stock grant in 2012.
Boyd has seen more companies shifting compensation away from cash and toward equity in an effort to align pay with performance. Apple is a prime example. In its proxy, the company stressed a strong preference for long-term equity awards over other forms of compensation. The company has no long-term cash bonus program, no “golden parachutes,” no employment or severance agreements of any kind. Its stated philosophy is that the “executive compensation program should be simple and directly linked to performance.” Apple’s stock bounced around quite a bit last year, the first full year of operations after the death of co-founder Steve Jobs. But the electronics giant met its performance goals and doled out awards to its executives accordingly.
And what about once-lucrative option awards? Even they are doing better, if not anywhere near their historic levels. Last year’s average increased 21 percent, to $888,313. But some of the GCs on this year’s survey were in-housers back when the option was a real prize. In 2000, the average award was $4,217,566. “That has been an equity vehicle that’s been falling out of favor with a lot of companies, as they’re looking to give more value in stock awards,” Boyd said. The trend, he said, is to move toward performance shares.
At the risk of sounding repetitive, the reality is that it’s now a pay-for-performance world. Any general counsel who wants to earn those megabucks is going to have to jump through a few hoops first. Meeting goals is a given. Now, if they’re among the company’s top five earners, their compensation package will be subject to say-on-pay as well. Todd Sirras, managing director of executive compensation consultants Semler Brossy in Los Angeles, said a “new normal has been established” as far as shareholder input is concerned.
Three years into the nonbinding say-on-pay votes, which were created by the Dodd-Frank Wall Street Reform and Consumer Protection Act, most companies seem to be getting the hang of the practice. “There’s a much better understanding on both the issuer side and the investor side about what the expectations are and the kind of analysis that will take place,” Sirras said.
A simple majority is all that’s required for passage, and according to Sirras, if you were to examine 100 of the lowest scorers from year to year, there would be very little overlap. Just three companies didn’t get a majority for three consecutive years — Nabors Industries Ltd., Tutor Perini Corp. and Kilroy Realty Corp. At press time, 55 companies had failed their most recent vote.
Now, to examine some of the pieces of the compensation pie that really count. (Equity awards are featured in the survey because they’re a large component of the overall pay package, but the rankings are based solely on cash compensation.)
Base pay tends to be the steadiest portion of the executive pay packet. Other components of GC compensation have bounced wildly up and down throughout the past decade, particularly in the post-recession era. But salary has tended to fluctuate by just a few percentage points — with the largest swings all being in the positive direction.
Given base salary’s penchant for relative stasis, Sirras was surprised to see salary spike 7.4 percent. “That’s a big increase,” he said. After a 1.8 percent dip the previous year, top-paid GCs earned an average of $656,607 in 2012.
The highest-salaried general counsel on this year’s list was GE’s Denniston, who earned just under $1.6 million. Incidentally, that was about the same annual pay enjoyed by Philip Morris International Inc.’s outgoing GC, David Bernick, last year’s top earner. New Philip Morris general counsel Marc Firestone landed at number seven on the list this year, earning a starting salary of $758,366.
Traditional bonuses of the discretionary kind made one of the biggest comebacks in this year’s survey. After an 11.8 percent dip in 2011, the average surged 50 percent this year. Boosted by handsomely rewarded GCs like CBS Corp.’s Louis Briskman, whose $5.2 million bonus was the highest for a second straight year, the average hit $1,117,400. The CBS general counsel also took home the most cash overall, $24,862,448, for the second year in a row.
Bonus plus nonequity incentive compensation, the now-popular pay handed out to those who meet performance goals (think: bonus retooled for say-on-pay resolutions), made more modest gains. On the heels of a 7.7 percent decline a year earlier, the 2012 average went up 6.4 percent, to $1,197,065. The average approached the decade-high $1,219,586 set in 2010.
Some GCs managed to cash in big on meeting performance targets. The bonus plus nonequity combo constituted most of Denniston’s enviable chunk of change last year. The board’s compensation committee awarded him $9.3 million for contributions including effective management of major litigation, strengthening data and IP protection, and bolstering the company’s legal, governance and compliance functions. The GC received $6.7 million as part of a long-term incentive plan spanning three years.
Denniston ranked third when he last made the list in 2009. The amount of his compensation couldn’t be determined for survey years 2010 through 2012 because he wasn’t one of the company’s top five named executive officers. The SEC requires only the public disclosure of company CEOs and the next four highest-paid individuals, and GCs don’t always make the cut.
But that could be changing. Boyd said general counsel are increasingly showing up in those elite quintets. “We’ve seen them become more and more prevalent as far as being listed publicly in the top five for some of the largest companies,” he said.
As general counsel advance into named executive territory, Boyd said they tend to be displacing chief operating officers and VPs of operations. Equilar’s compensation studies in recent years have also shown that the growth of total GC compensation has been outpacing the growth of CEO and chief financial officer pay.
Why? Cybersecurity risks, intellectual property litigation and a morass of regulatory do’s and don’ts are becoming bigger corporate concerns. As companies increasingly require guidance in those areas, Sirras said general counsel are gaining appreciation. “It’s a critical position,” he said.
In certain sectors, chief legal officers are becoming especially valuable. In technology fields, for example, Sirras said, identifying and protecting IP is becoming a more integral part of corporate strategy. “It requires a different type of expertise,” he said. Companies operating in highly regulated industries are also leaning more heavily on their general counsel. “The amount of regulation is not going down anytime soon,” noted Sirras. “You need a general counsel who knows what they’re doing. They have to understand and be able to work within a developing and onerous regulatory regime.”
The highest-paid general counsel on this year’s list worked in industries that are complex from a legal and regulatory standpoint. But those corporate sectors are also home to high-revenue earners, and they tend to be fairly consistent year to year. In 2012, clusters of the mostly highly compensated lawyers were found in the entertainment, pharmaceutical, insurance, aerospace and telecommunications industries, to name a few.
Will GCs in these industries pull even further ahead of their peers in next year’s survey? What’s the forecast for GC pay more generally — will it continue its upward trend?
A lot will depend on the economy. Uncertainty about the future continues to affect the way companies do business — primarily evidenced by their persistent failure to hire. Sirras sees a cautious optimism among businesses. “Companies are establishing goals, and they’re hopeful that they can have the kind of business activity that they’re planning for,” he said. “But it’s cautious. There’s still a ton of unknown in there.”
This article first appeared in Corporate Counsel, a Legal affiliate based in New York.