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When the U.S. economy tumbled in 2008, the crisis was akin to an earthquake. Rattled by mounting financial uncertainties, businesses scrambled to stabilize themselves with serious cost reductions.

As the dust settles–with most economic experts declaring the recession over–the aftereffects of the crash are evident across all corporate sectors, including in-house legal departments. Staffs are smaller, workloads are heavier, budgets are tighter and salaries are somewhat stagnant.

But it’s not all doom and gloom.

InsideCounsel discussed in-house compensation trends with legal recruiters and consultants, who are reporting some
positive signs.

Hildebrandt Baker Robbins’ 2010 Law Department Survey, which gauges in-house compensation on multiple levels, shows that although salary increases are slowing, cash bonuses are returning to their pre-recession levels, which means the in-house bar has a clear incentive to perform well. And some lawyers are doing just that. Total compensation, including base salary, cash bonuses and long-term incentives, had a median increase of 4.4 percent among all in-house lawyers, compared to just 1.7 percent in 2009.

Hildebrandt surveyed 252 companies, 65 percent of which are in the Fortune 500. The median participating company reported $9 billion in revenues, 20,000 employees, 31 lawyers and $33 million in total legal spending. Survey respondents provided compensation data as of March 2010.

Do GCs stand to gain in 2011? As our report indicates, their financial future depends on their actions.

Salary Slowdown

Not surprisingly, legal department consultants, staffing firms and compensation experts interviewed for InsideCounsel’s January 2009 compensation report, “Salary Slump,” predicted layoffs, budget cuts and salary freezes across the nation’s law departments as the recession became a grim reality.

“Legal departments experienced exactly the same woes as every other department within companies,” says Michael Melbinger, a partner at Winston & Strawn and chair of the firm’s employee benefits and executive compensation practice.

Having to adjust quickly to the changes–whether they liked them or not–was essential for survival, notes Vanessa Vidal, president of ESQ Recruiting. “There is a sense of resignation and acceptance when it comes to low base salaries and freezes,” she says. “Counsel have no choice in the matter, because no one else is offering anything different, and jobs remain hard to come by.”

The rate of in-house salary increases has noticeably slowed. From 2004 to 2008, lawyers across all staff levels saw an average salary increase of 5 percent to 6 percent, according to Hildebrandt’s survey data. That rate dropped to 3.4 percent in 2009, and it dipped again in 2010 to 2.6 percent. The median base salary increase for GCs in 2010 was 1.8 percent.

Vidal predicts base salary increases will remain flat in 2011, noting that “the bleeding and heavy cost cutting has already happened.” But Charles Volkert, executive director of Robert Half Legal, says he is seeing some small increases, particularly among lawyers with four to nine years of experience who have the most sought-after skills. “Where the [base salary increase] percentage is going to be higher is within those in-demand practice areas and among those who are able to maximize the legal work for the dollars being spent,” he says.

Melbinger says there won’t be general salary spikes anytime soon, but select legal positions will see increases. “Just today, I read about a CLO who was appointed CEO of a company,” he says. “There is a continuing trend of treating some higher-level legal team members better [in terms of salary] because they are seen as potential management candidates.”

What They Want

Knowing what skills employers desire in potential employees is a must in any industry. In the in-house field, sought-after expertise depends highly on the legal hurdles companies are facing. The practice areas earning the heftiest paychecks in 2010 were reflective of corporate America’s preoccupation with precaution.

Charles Volkert, executive director of Robert Half Legal, says companies are hiring individuals with experience in specific practice areas, particularly IP, regulatory and compliance. Having a broad legal knowledge base and strong communication abilities is also imperative for job-seeking lawyers.

“Companies continue to look for lawyers with business-development skills and strong interpersonal skills,” he says, adding that litigation, bankruptcy and foreclosure continue to drive the need for bringing on new talent. “Twenty-nine percent of lawyers we interviewed [in the Robert Half Legal 2011 Salary Guide] planned on adding and hiring in their legal departments. That bodes well for the legal profession.”

The most highly compensated practice area in Hildebrandt’s survey was mergers and acquisitions. Vanessa Vidal, president of ESQ Recruiting, says that companies looking for new growth will likely consider small acquisitions as opposed to multibillion-dollar deals, which will mean an overall uptick in M&A activity over the next couple years. “Some of the bigger deals will most likely occur in consolidating industries, such as energy and health care,” she says. Vidal also predicts that “emerging markets will lead the M&A surge in 2011, with Asia in the lead.”

Intellectual property lawyers specializing in licensing earned the second largest amount of money. They also had the highest median base salary, $193,738. “We’re seeing significant demand for top talent in the IP arena,”
says Volkert.

Lawyers specializing in securities litigation saw the largest median base salary increase (3.3 percent), as well as the largest median cash bonuses, which amounted to $71,000.

Demonstrable Value

Ninety-three percent of companies in Hildebrandt’s survey said salary increases at all attorney levels are based on merit–meaning they want their lawyers to prove their worth. This mindset certainly isn’t new, but the data is a reminder to in-house counsel that they must work hard to earn rewards and ensure job security.

Michael Melbinger, a partner at Winston & Strawn and chair of the firm’s employee benefits and executive compensation practice, says the best way lawyers can boost the possibility of a cash bonus or salary increase is by helping the company save money. Oftentimes, this means taking on more work in-house.

“The No. 1 skill that we see [being rewarded] is the ability to minimize the use of outside counsel,” says Melbinger. “Companies are rewarding legal departments that are able to do the work themselves and build their skills. Sometimes this means spending more hours and taking on more work with fewer people. But what it comes down to is that if he or she can save money, then that should be rewarded.”

Vanessa Vidal, president of ESQ Recruiting, says companies are frequently recognizing counsel who demonstrate flexibility and adaptability. “They are what I call the ‘MacGyvers’ of the legal world–counsel who can come up with creative strategies to accomplish their goals with few resources available,” she says.

Charles Volkert, executive director of Robert Half Legal, says that lawyers who strive to build their skills by learning about other practice areas will gain personal success in two ways: They will show their employers they are dedicated to their profession, and they will shape future growth and career opportunities. “We’re seeing a lot of in-house lawyers who are now experts in litigation because they made a point to build their strong e-discovery knowledge and familiarity with technological tools that maximize productivity as they mine through documents,” he says.

And as for requests for raises or bonuses, Volkert says appropriateness and confidence is key. “Timing is everything when asking for either of those,” he says. “[If they] possess some of those in-demand skills, that can allow them to be a bit more aggressive.”

Working for Bonuses

Scanning through Hildebrandt’s annual law department salary survey, one data set practically pops off the page. Bonuses, the survey results indicate, have jumped an average of 73.5 percent between 2009 and 2010. Even the significantly lower median increase of 10.2 percent is enough to make jaws drop in envy.

But numbers can be deceiving, cautions Lauren Chung, director in the law department consulting practice at Hildebrandt. What, at first glance, looks like an anomalous surge in bonus payouts is actually just a return to standard levels after a recession-motivated low in 2009, she says.

“There was a pretty significant apparent increase in bonuses, but in reality, it was just compared to the prior year when bonus levels were so low,” she says. “I don’t think people are actually getting more bonuses this year than we’ve seen historically. Last year was the anomaly.”

In 2009, Chung explains, most companies paid minimal bonuses or none at all. In 2010, however, cash bonuses averaged about $57,000 for all in-house attorneys, making them a significant portion of total compensation packages–and a draw for potential employees.

Robert Major, founding partner at Major, Lindsey & Africa, navigates legal compensation packages for a living, placing lawyers with firms and legal departments. Compensation is obviously a big factor in a lawyer’s decision to accept or decline an offer, and though bonuses are once again becoming an attractive component of such packages, he says they aren’t always negotiable–some companies have a standard bonus for all C-level employees.

This can be a blessing or a curse. On the one hand, it closes an avenue for compensation negotiations, but on the other, it guarantees internal fairness. While market issues, like the recent recession, naturally affect the compensation packages lawyers are willing to accept, Major says most in-house lawyers look for compensation comparable to others in the same level of management at a company.

“A lawyer needs to feel that he or she is compensated at an equal level to similarly situated people within the company,” Major says. “For example, if market factors lead a general counsel to accept a $300,000 base with a 50 percent bonus, but they find out that the VP of sales and marketing, who is on the same level in the management structure, is making $800,000 with a 200 percent bonus potential, I guarantee you that you’re going to have a very unhappy lawyer.”

Long-Term Incentives

Long-term incentives–deferred compensation such as stock and equity–may not have returned to pre-recession levels, but they’re likely to become increasingly important components of compensation packages in years to come.

Lauren Chung, director in the law department consulting practice at Hildebrandt, says the emerging trend is to tie law department performance to overall company performance. As a result, bonus payouts also are becoming more closely linked to company performance.

“What we’re seeing is, particularly at the GC level, significant portions of compensation being bonus and long-term incentives,” she says. “I expect that the role of long-term incentives in overall compensation may become more important in the future, but the value of long-term incentives is not at the levels they used to be–at least not yet.”

While the value of long-term incentives–which often include stock options–is down overall due to the recession, some companies are still offering strong long-term incentive packages in the form of equity. Some lawyers have opted to go in-house at Silicon Valley start-ups, where the earning potential can be much higher–and faster–than in a law firm, says Robert Major, founding partner at Major, Lindsey & Africa.

“I did the general counsel search for Facebook,” Major says. “That was a relatively modest base [salary], but good grief, look at the potential for the equity. So, the lawyer who got that job actually took a sizeable pay cut in terms of his base, but I don’t think you’re going to hear Ted Ullyot complain about his compensation package simply because of the equity.”

The potential for reward is great with these start-ups. Major estimates that 60 to 70 lawyers placed by his firm alone have become millionaires thanks to the booming success of Internet companies such as Google, Yahoo! and Facebook. Great reward doesn’t come without great risk, though. For every Facebook, there are hundreds of start-ups that fail to deliver on expectations.

“How many lawyers have I talked to who have said, ‘Oh you know, I’ve got 100,000 options but they’re all under water’?” Major says. “If I had a dollar for every time I’ve heard that, I would be a magnificently wealthy man.”

Supply and Demand

One thing that didn’t change during the recession was law firms’ dominance in the salary arena for legal professionals. Even as law firm salary growth has slowed, it has outpaced in-house salaries, and it continues to be true that experienced law firm attorneys who make the move in-house typically face salary cuts.

In 2010, according to Hildebrandt’s annual law department salary survey, the average base salary for all attorney levels in-house was approximately $174,000. The median was even lower at about $167,000. While such six-figure salaries are nothing to sneeze at, it can be difficult for in-house counsel to suppress the sniffles when comparing those figures to law firm salaries. According to the 2011 Robert Half Legal Salary Guide, first-year associates at large law firms will earn, on average, between $107,250 and $132,000 this year. When a first-year associate can make nearly the same salary as an experienced in-house attorney, it’s easy to wonder why anyone would go in-house.

Robert Major, founding partner at Major, Lindsey & Africa, says it’s actually the overwhelming demand among lawyers to go in-house, though, that keeps the salary gap so wide.

“It’s a supply and demand issue,” he says. “There’s no need to substantially raise in-house salaries where there is an overwhelming supply of lawyers who are willing to go in-house at the lower rate. There is no shortage of good candidates for every in-house position that we handle [at Major, Lindsey & Africa]. That acts as a disincentive for companies to really ratchet up their salaries.”

Major adds that, while he doesn’t expect law department salaries to catch up to law firms, some firms are exploring alternative salary structures that might lead to an overall decrease in bloated first-year associate salaries. Some firms are shifting the first-year focus from billable hours to training. The result is lower compensation for first-year associates, in exchange for less of what Major describes as “drudgery work.”

“We certainly have heard larger law firms in particular looking at different ways to hire and retain first-, second- and third-year associates,” says Charles Volkert, executive director at Robert Half Legal. “There are some firms out there that are paying less almost as an apprenticeship over the first couple of years. There’s a lot of discussion happening out there amongst law firms, as well as their corporate clients, on how to handle the cost of legal work.”

As an alternative, Volkert says, some firms and law departments are delegating more work to paralegals, and some law departments are even arranging to have work done by first-year associates billed as paralegal work. For most first-year associates, this isn’t terrible news, Major predicts.

“From an associate’s perspective, putting aside those people who are in dire economic straits because of student loans or other types of encumbrances, I think there’s a number who feel that they’re being overpaid,” he says. “They don’t like to talk about it. It’s like the dirty little secret no one likes to talk about, but I think when you read the blogs and you talk to these people, there’s a strong sentiment in some sectors that they would be much more willing to be off some of those dollars for greater job security.”

Check out how things have changed in the past two years. Read “Salary Slump,” published in 2009.