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General counsel compensation underwent a seismic shift in 2003. The change didn’t show up in lawyers’ paychecks. Combined, salaries and bonuses rose by 6% for the 100 best-paid general counsel, according to the annual survey of NLJ sister publication Corporate Counsel. But the big news in this year’s findings is the changing role of equity compensation. Last year, Fortune 500 companies were much stingier about doling out coveted stock options. Instead, they rewarded their top lawyers with restricted stock, which has fewer risks than options, but usually less of an upside, too. That’s what happened at PacifiCare Health Systems Inc. General Counsel Joseph Konowiecki took home a total of $1,162,692 in salary and bonus in 2003, but his options grants plunged by almost 70%. The company awarded him just $1,109,532 last year, compared with $3,498,900 in 2002. To make up some of the difference, the Cypress, Calif.-based business gave him restricted stock worth $571,000. Why the shuffle? In 2002, PacifiCare started expensing its options in an effort to make the company’s financials more transparent. Concurrently, the health insurer reconfigured its executive pay packages. The GC isn’t complaining, at least publicly, about the steep drop in pay. “If it’s good for the company . . . then it’s good for me,” Konowiecki said. Smaller option grants At least he’s not alone. In 2003, Fortune 500 companies gave their top lawyers smaller chunks of stock option grants, 32% less in 2003 than in 2002, according to the companies’ 2004 proxy statements. To reward these executives, businesses looked to less appealing restricted stock grants. (If a stock is heading up, the employee is likely to make more money from exercising his options and cashing them out than from selling his restricted shares.) Just more than half of the top 100 highest-paid GCs received restricted stock, compared with less than a third who got them in 2002. In another sign that the heyday of stock options is coming to an end, many of the GCs who were able to cash in some of their options did so. The average cash-out in 2003, for the 39 GCs who exercised options, was $2,424,399, a 63% increase over our 2002 survey participants. As the specter of new accounting regulations looms over public companies, and as stockholders become increasingly critical of lavish executive options grants, more businesses are remixing their equity compensation packages. “The days are over when corporate officers could pretend that there are no costs to the rewarding of options to employees,” said Joel Henning, senior vice president and general counsel of Somerset, N.J.-based consulting firm Hildebrandt International Inc. Make no mistake. Company lawyers are still being well compensated for their efforts. The average general counsel on our list earned $1,116,398 in 2003, compared with $1,053,941 in 2002. Even the lawyers on the bottom of our roster had thicker wallets in 2003. Last year, the 100th-ranked GC made $691,667, compared with $665,475 in 2002. Former General Electric Co. GC Benjamin Heineman Jr. occupied the No. 1 spot on our overall compensation list for the third year in a row. Along with his $1,475,000 salary and $2,890,000 bonus, he exercised $3,597,750 worth of options last year. That was his first time cashing out GE stock since 1999. Still, Heineman barely put a dent in his coffer. He sits on $18,402,005 worth of exercisable stock appreciation rights and options. In January, Heineman assumed a new position as GE’s senior vice president for law and public affairs, relinquishing the GC spot to Brackett Denniston III. But few lawyers, even other Fortune 100 GCs, make Heineman-level money. The average lawyer on our list saw his or her bonus rise by only 7% last year, to $605,773. It’s quite a change from 2002, when bonuses skyrocketed by 16%. According to Fred Krebs, the president of the Association of Corporate Counsel, GCs are still being rewarded for their role in Sarbanes-Oxley Act compliance, but “things are tailing off now,” he said. “Companies are in compliance or have systems in place. Now companies are in more of a maintenance mode rather than the all-consuming compliance efforts made over the past couple of years.” Still, a few GCs defied the trend. After Heineman, Thomas Russo, the chief legal officer of New York-based Lehman Brothers Holdings Inc., earned the second-highest bonus on the list. Although his $450,000 salary remained the same in 2002 and 2003, Russo’s bonus more than doubled-from $1,050,000 to $2,550,000. “Bonus is tied in to overall performance of the firm and things that I’ve been responsible for,” Russo said. “A lot of things turned out really well in terms of litigation. The board, the chairman and the compensation committee were pleased.” Lehman Brothers was not parsimonious with its other top executives, either. The two chief operating officers and the CEO received bonuses in the $5 million to $6 million range. Companies were also more conservative about stock-option grants. In 2003, the size of the average award was $1,162,556-32% smaller than 2002′s amount. Corporations were more restrained because of concerns about unseemly executive pay and the controversy over whether options should be expensed. The Financial Accounting Standards Board is considering requiring that all public businesses expense their options, which in turn would lower earnings. Some companies, like Microsoft Corp., have voluntarily begun to expense options. Others haven’t formally made a decision, but are realigning their executive compensation to downplay options anyway. Alltel Corp. doesn’t expense its options. Nevertheless, Francis “Skip” Frantz, the general counsel of the Arkansas-based company, saw his option grants drop from $5,289,318 in 2002 to $3,789,971 in 2003. By e-mail, Frantz said that he suspects the overall decline in options “can be explained primarily by the Sarbanes-Oxley Act-induced corporate governance scrutiny of executive compensation and the specter of a change in the accounting treatment of options.” But not every corporation felt that way. Three top lawyers who were involved in their companies’ key deals last year received generous options grants. Stephen Lambright, the GC of St. Louis-based Anheuser-Busch Cos., received an option grant of $7,062,329 in 2002 and a grant of $7,394,857 in 2003. (Lambright announced his retirement at the end of June.) GCs who also saw an increase in their options grants are Viacom Inc.’s Michael Fricklas, who received $2,289,750 in 2003, and MGM Mirage’s Gary Jacobs, who got $4,807,271. With stock options facing intense scrutiny from shareholders, 2003 saw more companies turning to restricted stock grants. Unlike options grants, which can be worthless if a business’ share price falls below the option’s strike price, restricted stock can usually be cashed in for some value as soon as the executive’s vesting period ends. (Unless the share price falls to zero.) The biggest winners of restricted stock awards were David Frick of Anthem Inc. ($8,060,700), Lehman’s Russo ($2,857,314) and Frank Fernandez of The Home Depot Inc. ($2,046,900). But while more general counsel received restricted stock in 2003, the average award was lower, $735,569, down by 22% from $940,408 the year before. “The value is down because the stock price [was] down,” said one expert, executive pay consultant Brian Foley of White Plains, N.Y.-based Brian Foley & Co. Inc. “Roughly 75% of companies make grants during the first quarter, which was down in 2003.” But for general counsel who cashed out their options in 2003, the average gain of $2.4 million was higher, up almost a million dollars from the year before. Paul Sandman, the general counsel of Boston Scientific Corp., exercised the highest amount of options on the list ($19,629,911), while Intel Corp.’s F. Thomas Dunlap Jr. ($8,254,800) and UnitedHealth Group Inc.’s David Lubben ($6,003,760) also took home prodigious profits. These trends will continue next year, according to pay experts. “Across the board, executive increases in salaries will be a modest 2% to 4%,” said Claude Johnston, a compensation expert at Pearl Meyer & Partners in New York.

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