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In 2002, the board of directors at The AES Corporation took herculean steps to put the company back on track. The Arlington, Virginia�based energy business’s stock price had lost 87 percent of its value in ten months, the company was in danger of defaulting on its massive debt, the Brazilian government was investigating AES for allegedly colluding with Enron Corp. to manipulate the energy market, and plaintiffs attorneys were poised to bring shareholder class action suits. Desperate to change course, the AES board, following the advice of outside consultants, ordered several changes, including sharply changing the compensation structure for its senior management. Previously, senior executives were rewarded like dot-com rock stars: lots of stock options and a decent, if not spectacular, salary. With the energy market in tatters, however, AES decided to reward top executives with performance-based bonuses instead of options, and as a consolation prize, a more industry-competitive salary. As a result, AES general counsel William Luraschi got a stunning 262 percent raise (receiving $706,767 in salary and bonus) last year. That money earned him a spot on our 2003 GC Compensation Survey, a study of what the 100 highest-paid legal heads in the Fortune 500 are making. Luraschi says, AES thought that “in this time of crisis, I would assume some additional responsibilities to return the viability of this company.” It seems to have worked. As the GC took on more business functions this year, as well as more litigation management and increased financial reporting duties, AES stock has steadily risen and the company has made its debt payments. Luraschi isn’t alone. As corporate scandals and the Sarbanes-Oxley reform law increased GCs’ visibility and duties, Fortune 500 companies have been reminded that their chief legal officers are crucial to their businesses. And they’re putting their money where their mouths are: Most of the GCs on our compensation survey are making more in salary and bonus than ever before. What’s more, this year’s data, culled from proxy reports and financial statements, showed a surprising trend [see "Behind the Curtain" ]. The spike in salaries and bonuses was greatest for GCs at the bottom of our list (those ranked 76 � 100) like Luraschi (94) � 17 percent on average. Overall, GC compensation jumped 9 percent in 2002, as the average salary and bonus package passed the $1 million mark for only the second time in the survey’s ten-year history (the other was 2000; there was a slight dip in 2001). Last year saw quite a change from 2001, when GC salaries were effectively frozen, and bonuses plunged by 12 percent. In 2002, the average salary grew 6 percent, from $474,448 to $503,545, and the average bonus surged 13 percent, from $489,107 to $550,397. That’s the good news. But stock options � the enticement that drew big-firm lawyers in-house during the bubble years � plummeted. Option grants to GCs declined 30 percent in two years’ time, from an average $2 million in 2000 to $1.4 million in 2002. The last time that stock options were this low for GCs was 1996. More hard cash, less cold stock: a formula that’s in vogue in boardrooms everywhere. And with shareholders in open rebellion, wielding proxy proposals on expensing stock options in record numbers, many compensation experts believe this isn’t a short-term fad. “We are just starting to see a change in the compensation mix,” says Claude Johnston, managing director at New York�based compensation consultant Pearl Meyer & Partners. BIG MONEY Ten years ago, when Corporate Counsel first reported on chief legal officer compensation, GC salaries were hardly known outside the legal department. The top 100 lawyers made on average, $511,909 in combined salary and bonus and $466,921 in stock options in 1993. Since then, cash compensation soared 106 percent, and stock options mushroomed 197 percent. Some GCs benefited handsomely from this spike. General Electric Company’s Benjamin Heineman, Jr., tops our survey for the second time with $1.35 million in salary and $2.58 million in bonus in 2002, almost half a million better than his compensation in 2001. Chasing Heineman in salary were Cablevision Systems Corporation’s GC Robert Lemle ($1 million; he recently left the GC job), American Financial Group, Inc.’s James Evans ($990,000), and Viacom Inc.’s Michael Fricklas ($960,000). The big bonus winners in 2002, other than Heineman, were Owens Corning’s Maura Abeln Smith ($1.33 million), The Coca-Cola Company’s Deval Patrick ($1.25 million), and Viacom’s Fricklas ($1.20 million). Smith, who is now the GC of International Paper Company, also holds the distinction of being the top-paid woman on the survey this year, out of the ten women in the Top 100. Bonuses were the prime reason that many of the GCs on the survey’s lower tier saw hefty boosts in compensation. For example, Health Net, Inc.’s B. Curtis Westen (86) received a $308,000 bonus. He didn’t get one the previous year. LESS IS MORE It used to be that stock options lured and kept talent in-house. But with the market in the doldrums, companies have moved to the New New Thing: restricted stock. Last year, continuing the aftershocks since the stock market went kaboom, stock option grants slumped an average 16 percent, from $1.7 million in 2001 to $1.4 million last year. Fewer GCs earned them, too. Eighty-two companies on our list doled out stock options last year versus 87 the previous year. In part, companies are reacting to shareholder complaints. Eric Larre of New York human resources consulting firm Towers Perrin, says that many Fortune 500 shareholders are now holding proxy votes on how their companies dish out stock options and account for them. Still, some companies ran counter to this trend. Leading the pack was Cablevision’s Lemle, who enjoyed a $12.6 million options grant. Anheuser-Busch Companies, Inc.’s Stephen Lambright welcomed stock options worth more than $7 million, and also had the biggest cash-out last year ($9 million). But most GCs preferred to sit on their options: Only 32 of 100 cashed out, realizing a total of $48 million, a far cry from the $127 million that the GCs on our list tapped in 1999 [see "Staying Afloat"]. With stock options under such intense scrutiny, companies looked for other ways to offer long-term compensation last year. Some opted for restricted stock grants. Thirty-two businesses on our survey handed out restricted stock last year, as opposed to 27 the year before. Advocates say that restricted stock is a better way of aligning executives’ interests with shareholders’. Recipients get the stock’s full value, but restrictions can include long vesting periods, guaranteed terms of service, and performance guarantees before the GC can cash out. “Our company decided to switch from stock options to restricted stock, and I think it was an excellent move,” says the former GC (and recently named executive vice president and chief of business operations) of USA Interactive, Julius Genachowski, who received $1.8 million in restricted stock last year, the fifth-largest grant on our survey. “Yeah, I’ll have to wait a bit longer until the stock vests, but it’s good for our company that I won’t automatically be turned into a seller on the market.” Genachowski’s restricted stock came in place of the nearly $5 million in options he received in 2001. SPEED BUMPS AHEAD? According to many estimates, chief legal officers are also doing extremely well compared with their bosses � if not in actual cash in hand, then in the rate of compensation increases. Aon Corporation executive vice president and chief counsel Raymond Skilling got a 65 percent cash compensation increase, from $560,000 in 2001 to $922,446 last year. His boss, CEO Patrick Ryan, stayed flat at $1,125,000. There were six lucky GCs (at ConocoPhillips Company, Edison International, The ServiceMaster Company, The First American Corporation, The Williams Companies, Inc., and Consolidated Edison) who earned a raise while their superiors took pay cuts. According to Rees Morrison, legal consulting director of Somerset, New Jersey�based Hildebrandt International, CEO pay is tied more more tightly to a company’s stock price than a GC’s compensation package. So, with rising stature and better paychecks, GCs can only get richer, right? Not so fast, claim compensation experts. They say that shareholders increasingly are taking aim at executive compensation. In fact, according to the Investor Responsibility Research Center, a Washington, D.C.�based research firm, 324 stockholder proposals dealing with executive compensation in the first half of 2003 appeared, a threefold increase from 2002. For GCs that likely means even more scrutiny going forward. AES’s Luraschi popped up on Corporate Counsel’s radar, and our charts, because of his $324,000 bonus in 2002. It didn’t hurt that his salary jumped jumped from $195,000 to $382,917, too. A shy Luraschi laments, “This is actually my first year in the company’s proxy [filing to the SEC], which I hated. I could have avoided this if [my compensation] was slightly less.” He laughs and then adds, “But I guess it wasn’t worth giving up a substantial amount of money to avoid.”

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