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InsideCounsel consulted with a range of legal recruiters and consultants to gauge the in-house compensation climate and explore the issues most impacting paychecks today. Selected compensation results from consultancy Hildebrandt International’s 2008 Law Department Survey accompany the story. More than 220 companies participated in the survey, with the median responding company reporting $9 billion in revenues, a 30-lawyer legal department, 18,605 employees and $28.4 million in total legal spending. Fifty-four percent are in the Fortune 500.

Hildebrandt’s data predates the worst days of the credit crisis–respondents provided base salary data as of mid-March 2008, and data on incentives applied to compensation earned in 2007 (even if it paid in 2008).

Yet even before the crisis had seized the economy, Hildebrandt’s data suggests legal departments may have adjusted compensation at early inklings that the financial markets were not right. While total cash compensation continued to increase, it was at a slightly decreased rate (8 percent) from last year (10 percent).

Whether such slowdowns are simply the result of year-to-year survey respondent intricacies or the first rumblings of a macroeconomic catastrophe, it’s clear that in the coming year budget concerns, coupled with other considerations, will force legal departments to rethink the compensation status quo.

Cutting Costs

As the economy goes south, corporate America has, to put it mildly, hit a rough patch. Reports of more layoffs across the corporate landscape appear in the news almost daily, and companies that have not resorted to layoffs still face ever-tightening budgets. In-house legal departments are not immune to the slump–and by many accounts, neither is lawyer compensation.

“We can certainly expect the pay schedules and the pay levels to remain rather flat,” says Vanessa Vidal, president of ESQ Recruiting. “In terms of in-house salaries, I predict a downward shift and certainly a freeze with current salaries.”

Hildebrandt’s survey data shows that since 2004, the median change in total cash compensation has been fairly steady among all in-house attorneys, only slightly drooping in the 2008 survey. Hildebrandt Vice President Jonathan Bellis is hesitant to interpret any declines in growth as early reaction to the economic crisis that came to a head in recent months. Rather, he sees these pre-recession survey results as part of a broader movement toward cost controls.

“We’ve seen growing sophistication on the part of general counsel and law department managers, and pressure to manage and control costs,” says Bellis, who is chair of Hildebrandt’s Law Department Consulting Practice.

One much-discussed law department strategy has been to eliminate as much outside spending as possible by handling more work in-house.

“On the in-house side, corporations are actively looking for ways to manage workflow internally,” says Charles Volkert, executive director of Robert Half Legal. “They are looking for candidates with in-house, intellectual property and corporate compliance/governance backgrounds, and they certainly are looking to pay those candidates the appropriate salary.”

But traditionally, the legal department lacks competitive salaries because management tends to see the department as a black hole of expenses. Although Vidal says departments are putting more value in their in-house attorneys and looking for counsel with broader experience to get more bang for their buck, corporate cutbacks mean that it will be hard for companies to translate such sentiment into increased compensation in the near future.

“I don’t expect that there will be tremendous raises or salary wars of that nature,” she says. “If anything, companies are going to be able to hire outstanding attorneys without having to engage in a lot of salary augmentation.”

Coveted Credentials

Lawyers in a few key practice areas are often treasured in corporate legal departments. While in-house departments almost always seek out good generalists, experts cite litigation and intellectual property as traditionally in-demand practice areas–so it should come as little surprise that Hildebrandt shows in-house lawyers with IP litigation backgrounds as pulling in the highest compensation.

Meanwhile, litigation specialists have become even more valuable as companies scramble to keep up with e-discovery, and regulatory and compliance lawyers have been essential since Sarbanes-Oxley passed in 2002.

Emerging industries have also created a demand for special experience. “Hedge fund regulation, biotechnology, nanotechnology–things that are very cutting edge that you don’t see a lot of,” says Robert Major, founding partner of legal search firm Major, Lindsey & Africa. “Facebook asked me to look for somebody with social networking experience–that’s a new practice area.”

And when a company needs a certain background, it may be willing to pay for it. “We certainly have seen increasing salaries in the hot practice areas,” says Charles Volkert, executive director of Robert Half Legal. “Candidates with those skill sets … can command higher salaries in the marketplace.”

However, with lawyer compensation increases expected to hit a major speed bump in the faltering economy, some say companies will seek out broader experience. “[Companies hiring additional counsel] are going to be focusing on generalists, with a combination of regulatory, corporate experience, some litigation, some IP experience, trying to get the most value out of their hires,” says Vanessa Vidal, president of ESQ Recruiting.

Salaries won’t necessarily reflect this increased value, however. Even among the most coveted lawyers, Vidal predicts compensation packages will remain flat due to the growing pool of talented candidates.

Deal Sweeteners

Hildebrandt’s survey shows cash bonuses continuing their mostly steady increase of recent years, and across all attorney levels, actual bonuses met or well exceeded their target amounts. Of course, those numbers do not yet represent life under the current recession.

In times of prosperity, huge bonuses symbolized corporate success and excess, but in the current economy they have become a harbinger of shaky performance and general Wall Street woes. Ninety-two percent of Hildebrandt respondents say attorney bonuses are tied to the overall financial performance of the company.

“Since we know that bonuses are derived primarily from company performance, they will certainly be the hardest hit,” says Vanessa Vidal, president of ESQ Recruiting. “And I think in terms of the overall compensation scheme, this is where the attorneys are first going to feel the pinch.”

As a result, incentives such as stock options and bonuses are becoming less attractive. But recruiting top talent went beyond cash even before economic issues arose.

“I would say that corporations and law firms that are attracting and retaining top talent are not just focused on salaries and bonuses, but they’re also looking for other key components that are driving forces right now with candidates accepting jobs and looking for new opportunities,” says Charles Volkert, executive director of Robert Half Legal, citing carrots from close mentoring to flexible hours to gym memberships.

CLOs and GCs, who according to Hildebrandt derive the greatest percentage of their total cash compensation from traditional cash bonuses and the greatest percentage of total compensation from long-term incentives, will most acutely feel the change.

Such declines should come as no surprise to anyone remotely in tune with their company’s financial performance. Major, Lindsey & Africa founding partner Robert Major cites a lawyer from a “name-brand Silicon Valley company” who saw her bonus shoot up from $45,000 three years ago to $345,000 last year. “The candidate has acknowledged that there’s no way her bonus is going to be anywhere near that this year,” he says.

Cashing Out

In-house counsel have long griped about sky-rocketing associate salaries at top law firms. The bloated paychecks not only nudge up outside spending but make cynics wonder why–when an entry-level associate can make nearly as much as an in-house attorney with a decade of experience–anyone would choose to go corporate.

In 2008, a first-year associate at a law firm with more than 75 attorneys, on average, had a salary between $111,750 and $137,000, according to Robert Half Legal’s 2009 Salary Guide. The Big Law standard starting salary remained around $160,000.

In comparison, Hildebrandt’s legal department survey shows a 2007 law school graduate pulling in $91,795. Even a more experienced in-house lawyer falls short of his or her law firm counterpart: A 1998 law school graduate made an average of $151,815 in-house, while a law firm attorney with 10 to 12 years experience made between $167,500 and $234,000.

Although experts say law firms will continue to pay significantly more than corporate legal departments, many believe starting associate salaries have reached the ceiling–and the current economy has sealed the deal.

“Large law firms have pretty substantially increased salaries, particularly in the past seven years,” says Stephen Seckler, managing director of BCG Search. “Corporations have had to bump up salaries to compete for talent, but they’re not growing at the same rate as law firm salaries–up until we hit this brick wall that we’re at right now.”

Still, corporations continue to feel the influence of law firms on compensation. The recent spate of law firm layoffs and dissolutions–as well as in-house layoffs–has left scores of attorneys unemployed, which could depress compensation in-house as well as at firms.

“Compensation packages are going to be quite flat, simply because they’re going to have so many candidates to choose from,” says Vanessa Vidal, president of ESQ Recruiting. “It’s going to be very much an employers’ market. I think companies won’t necessarily have to stretch the way they had in the past to make themselves attractive.”

Robert Major, co-founding partner of Major, Lindsey & Africa, says corporations aren’t hesitating to use this leverage. During a recent search for an in-house lawyer, he says, the company offered a relatively low salary for the experience level it wanted.

“The company said, ‘Don’t they understand there’s a recession? Don’t they understand that they’re lucky to have any job?’” he says. “[Candidates'] bargaining power has been eviscerated by the headlines of the Wall Street Journal.”

Big-Pay Backlash

In October, as troubled insurance giant American International Group Inc. quickly blew through an $85 billion government loan, focus turned to its former CEO Martin Sullivan, who–following two quarters of record losses–reportedly walked away from the company in June with a $15 million severance package, $28 million in long-term incentives and a $4 million bonus.

The anger on Capitol Hill and among the public was loud enough that AIG backtracked, saying in October that it would freeze $19 million in payments to Sullivan while New York Attorney General Andrew Cuomo investigated the company’s executive compensation practices. In late November, the company announced its top executives would receive no bonuses this year and that many more executives would not see pay raises in 2009–a gesture that appeared empty days later when newspapers reported AIG managers would receive not bonuses but “cash awards,” including at least one totaling $3 million.

In these times of skyrocketing unemployment rates, widespread layoffs and 12-figure government bailouts for corporations, it should come as no surprise that the public, with good reason, has focused squarely on the excesses of the upper echelon of corporate America. While CEO pay has been the bull’s-eye, it remains to be seen how an executive compensation backlash could affect general counsel of large companies.

“Everyone in the United States is very, very focused on the pay of the top group, and that pay is being cut back in ways that are very visible and some ways that are not so visible–and usually the CLO or GC makes it into the top 10 executives,” says Michael Melbinger, chair of the employee benefits and executive compensation practice at Winston & Strawn. Combined with budget cuts and a surplus of lawyer talent, he says, “All in all that amounts to significant downward pressure [on compensation at the highest levels].”

Major, Lindsey & Africa founding partner Robert Major says this may be true for the top of the top GC earners, but generally the “gaudy” numbers top CEOs pull in act as lightning rods away from GC compensation. And GC compensation, he says, rarely measures up to much-publicized CEO salaries, or even the pay of the highest-profile GCs at the country’s largest corporations. According to October 2008 SEC filings, Disney GC Alan Braverman’s base salary alone will total $1.1 million in the coming year.

“In the world of general counsel I work in, those compensation numbers are just fantastic,” Major says.

But even in smaller companies, heightened scrutiny of executive compensation could complicate the GC’s already tricky task of keeping an eye on compensation agreements. Although favorable executive compensation packages could clearly benefit the GC him- or herself, Melbinger points out that “in these days of everyone understanding how to search documents on EDGAR … the GC really has to take off the personal hat for a moment and say, ‘I can negotiate this language pretty favorably to myself; however, I’m going to have to live with not being able to enforce a noncompete or a clawback on the next 20 people I hire. And that’s going to make my life miserable.’”