Counsel in the Spotlight

Next in line for scrutiny: the role of in-house attorneys, especially their pay. How much separation should exist between the pay of the CEO and that of the top in-house lawyer?

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New York Attorney General Eliot Spitzer’s recent lawsuit against Richard Grasso, the highly paid former head of the New York Stock Exchange, marks a turning point in executive compensation. Spitzer’s suit, attempting to recover a chunk of Grasso’s $187.5 million pay package, reflects the public’s shifting attitudes toward the astronomical pay packages that have become the corner-office norm. But while executive compensation is in the spotlight, the compensation of chief legal officers could be in line for particular scrutiny. The unique role of in-house attorneys has already led to new rules for reporting corporate fraud to outside regulators. Some compensation experts say a re-evaluation of the top lawyer’s pay package, to ensure that the legal officer’s interests are adequately aligned with the company’s, would not be a surprising development. Former Tyco International General Counsel Mark Belnick’s compensation package was recently aired in public during his grand larceny trial in New York State Supreme Court. According to published reports, Belnick’s package set his annual bonus at one-third that of Chief Executive Officer L. Dennis Kozlowski. Such a mutual linking of fortunes can create a serious conflict of interest, testified Thomas Lee Hazen, a professor at the University of North Carolina School of Law, during the trial. The company, not the chief executive, is the general counsel’s client, said Hazen. According to Tyco prosecutors, Belnick protected Kozlowski from federal investigators and from auditors within the company and pocketed an illegal bonus totaling between $12 million and $17 million. It’s unclear how prevalent the Tyco general counsel bonus system is at other companies. Many experts say they have never heard of such an arrangement. “It seems unique to me,” says Jonathan Ocker, an executive compensation partner at Orrick, Herrington & Sutcliffe in San Francisco. In today’s environment, notes Ocker, a linked bonus would be especially unlikely to pass muster. “The reason I don’t think you’d see it in this environment is it puts pressure on the general counsel to do what the CEO wants, which is contrary to his duty to do what’s best for the company,” says Ocker. For senior executives of all stripes, today’s compensation packages are lighter on the bells and whistles than a few years ago. Gone, for instance, are the generous no-interest loans companies once extended to senior managers. “I think executive compensation generally is being reviewed in the context of the post-Enron environment, but I don’t see that the general counsel has been singled out in any way,” says Ann Baskins, the senior vice president, general counsel, and secretary of the Hewlett-Packard Co. But some experts note that the GC’s unique role within the company requires special safeguards. “Whenever the officers of a corporation can affect not only the compensation but also the quality of life of the general counsel, there’s always a danger that the general counsel will go soft on them, even if that’s not in the company’s interest,” says New York University School of Law professor Stephen Gillers. Independent compensation committees determine or review the general counsel’s pay package at most public companies. But oftentimes the review can be more perfunctory than rigorous, with the chief executive’s recommendation carrying a lot of weight. And at some companies, the GC’s salary is set entirely by the chief executive. “I think the way to avoid a failure on the part of the general counsel is to make sure that the board is involved in the process,” says Gillers. The fortunes of general counsel are on the rise. According to a report by legal consulting firm Altman Weil Inc., the median total cash compensation of a top legal officer in 2003 was $370,000, up 9 percent from the prior year. Compensation and in-house counsel experts say compensation committees could take a more active role in setting the legal officer’s pay as a means of adding an extra layer of separation between the chief executive and the top in-house lawyer. “It wouldn’t necessarily be surprising,” says Frederick Krebs, the president of the Association of Corporate Counsel, though he notes that he has yet to hear any specific talk. The new reporting and compliance requirements under the Sarbanes-Oxley Act have already prompted some compensation experts to brainstorm new compensation packages. Michael Kesner, the head of Deloitte & Touche’s executive compensation practice, recently crafted a pay package for a newly appointed internal auditor and compliance officer at one of his client companies. Instead of a bonus, the executive received a higher base salary. And stock options were replaced with a grant of shares that do not vest until six months after the executive leaves the company. The idea, says Kesner, is to disconnect the compliance officer from the day-to-day fluctuations of the company’s stock and to eliminate any temptation to cook the books. The compliance officer can come from the ranks of the company’s legal or finance departments, but the person will not likely be the general counsel, says Kesner. “Maybe somebody in the GC’s office ought to be focused on compliance, but it shouldn’t be the GC,” says Kesner. “They get so much more value by thinking strategically.” Even if the general counsel is not specifically designated as the compliance officer, some predict the new Sarbanes-Oxley rules will start to affect the top lawyer’s paycheck. At most companies, the top legal officer’s compensation is set using the same formula employed for the rest of the executive brass. Incentive plans for bonuses and stock options are based on companywide metrics like revenues, market share, and stock price. Certain law department-specific concerns may also come into play, depending on the company, such as the litigation track record or the management of the intellectual property portfolio. As a result of Sarbanes-Oxley, an extra set of benchmarks could be used to determine the size of the top in-house lawyer’s paycheck. “Now, more of the compensation will depend on [the general counsel] enforcing the company’s rights,” predicts Ocker, the Orrick executive compensation attorney. Avoiding shareholder complaints and Securities and Exchange Commission probes is something that a general counsel will increasingly be measured by and compensated for, Ocker says. “The law now aligns the general counsel with the company as a legal watchdog to enforce shareholder rights, which is brand new.” Alexei Oreskovic is a reporter at The Recorder, the American Lawyer Media newspaper in San Francisco, where this article first appeared.

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