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General counsel compensation underwent a seismic shift in 2003. Combined, salaries and bonuses rose 6 percent for the 100 best-paid general counsel, according to an annual survey by Legal Times‘ 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 $1,162,692 in salary and bonus in 2003, but his options grants plunged almost 70 percent. 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 says. Corporate Counsel‘s survey was based on Securities and Exchange Commission filings and includes those GCs at Fortune 500 companies who are among the five-highest paid employees at the company. In 2003, Fortune 500 companies gave their top lawyers smaller chunks of stock option grants. To reward these executives, businesses looked to the 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. 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,” says 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 the Corporate Counsel list earned $1,116,398 in 2003, compared with $1,053,941 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 million salary and $2.89 million bonus, he exercised $3,597,750 worth of options last year. 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. [The highest-paid D.C.-area general counsel was Thomas Donilon of Fannie Mae at No. 26. His compensation was $1.2 million.] Fred Krebs, president of the Association of Corporate Counsel, says GCs are still being rewarded for their role in Sarbanes-Oxley compliance, but “things are tailing off now,” he says. “Companies are in compliance or have systems in place. Now companies are in more of a maintenance mode.” 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’s 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. 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. These trends will continue next year, according to pay experts. “Across the board, executive increases in salaries will be a modest 2 to 4 percent,” says Claude Johnston, a compensation expert at Pearl Meyer & Partners in New York. For companies that choose to expense options, 2004 will be a transition year, with restricted stock awards as the long-term incentive of choice. But other businesses will wait and see if the option expensing regulation becomes mandatory in 2005. Says compensation expert executive pay consultant Brian Foley of White Plains, N.Y.-based Brian Foley & Co.: “There are a group of people who do not want to run across the bridge until they absolutely have to.” Highest-Paid General Counsel 1. Benjamin Heineman Jr. • General Electric Co. • $7,962,750 2. Thomas Russo • Lehman Brothers Holding Inc. • $5,098,419 3. Charles Wall • Altria Group Inc. • $2,223,154 4. Michael Fricklas • Viacom Inc. • $2,204,327 5. Thomas Geiser • WellPoint Health Networks Inc. • $1,783,379 6. Thomas Gottschalk • General Motors Corp. • $1,779,167 7. Christopher Kearney • SPX Corp. • $1,739,138 8. Jeffrey Kindler • Pfizer Inc. • $1,729,400 9. James Ellis • SBC Communications • $1,669,500 10. Richard Baer • Qwest Communications International • $1,662,625 Helen Coster is an assistant editor at Corporate Counsel magazine, where this article first appeared in the July issue.

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