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With stock options providing less of a lift to pay packages, average compensation for general counsel at Texas’ largest corporations slipped again in 2003, continuing a two-year slide. General counsel at 39 of Texas’ largest corporations made $1,345,332 on average in 2003, a total pay package that is 10 percent less than in 2002, when compensation averaged $1,494,165 for 36 general counsel. The 2003 compensation is 28 percent less than 2001′s average general counsel compensation of $1,869,162 and down 45.5 percent from the boom-year of 1999, when general counsel pay packages averaged $2,379,526 at large Texas corporations. Stock options go a long way toward explaining the dip in compensation. In 2003, the 39 Texas general counsel received stock option awards with an average present value of $324,372. That’s down 53 percent from 2002′s comparable average of $689,891, and a hefty 64.4 percent less than the $911,338 average in 2001. There is a bright side, though, to the decrease in the present value of stock option awards. Stock options, which were coveted during the dot-com-boom of the late 1990s, are uncertain income. They result in take-home pay for general counsel who receive them as part of a pay package only if — and it’s a big if — their employer’s stock soars enough to make the options valuable. But according to a comparison of stock prices on Sept. 28 and the strike price of options, the stock options awarded to 28 of the 39 general counsel in 2003 are “in the money,” meaning the company’s stock price is higher than the exercise price of the stock option. A year ago, only 13 of the 36 general counsel who received some stock options as part of their 2002 pay package were holding options that were then valuable. Despite the overall decline in GC compensation, their pay packages still stack up quite nicely when compared to the profits per partner earned by their counterparts at large Texas firms. While the 39 general counsel in Texas were paid $1.3 million on average in 2003, partners in the 25 highest grossing firms in Texas made profits of $776,000 each on average in 2003, according to Texas Lawyer‘s annual report on firm finance. Those average profits per partner of $776,000 are only 57.7 percent of the average GC compensation. Despite the overall decline in general counsel compensation, more than half of the 39 general counsel, 21 of 39, earned seven-figure pay packages in 2003. In 2002, two-thirds of the best-paid general counsel, or 24 of 36, topped the million-dollar mark. FROM THE TOP For the second year in a row, Raymond G. Smerge, executive vice president and chief legal counsel of Centex Corp. of Dallas, is perched at the top of the list of the best-paid general counsel in Texas, with compensation totaling $5,241,335 in 2003. That figure, which doesn’t include the present value of any stock options, is up 16.7 percent. In 2002, Smerge’s compensation totaled $4,489,582, including stock options with a present value of $1,493,640. Following Smerge on this year’s list are James D. Ellis of SBC Communications Inc. of San Antonio, Joseph Listengart of Houston’s Kinder Morgan Energy Partners L.P., Michelle P. Goolsby of Dallas-based Dean Foods Co., and James C. Reed Jr. of Tesoro Petroleum Corp. of San Antonio. Two other general counsel received pay packages in excess of $2 million in 2003, and 14 others came in above the $1 million magic number, according to Corporate Roster 2004, Texas Lawyer‘s annual report on general counsel compensation in Texas. The present value of stock options accounts for 24.1 percent of the overall average GC compensation of $1.3 million in 2003. That percentage is considerably less than in 2002, when stock options made up 46 percent of the average compensation of the 36 general counsel. Those figures clearly show that general counsel pay packages in 2003 are much lighter on stock options than in 2002. The value of the stock options is calculated with the widely used Black-Scholes formula, which is based in part on the historic volatility of the stock and provides only an estimate of the option’s value. Among the top five on the best-paid list, Smerge, Listengart and Reed received no stock options in 2003 as part of their pay package. Options awarded to Ellis and Goolsby, the other two at the top of the list, were in the money at presstime, according to a comparison to the stock price of their companies on Sept. 28, and the exercise price of the options they received in 2003. Stock options are subject to other restrictions, including vesting. Houston employment lawyer Jeffrey Londa, a shareholder in Ogletree, Deakins, Nash, Smoak & Stewart, says it doesn’t surprise him that the value of stock options going to Texas general counsel is down. Londa, who does employment litigation, says he’s seeing stock options in executive pay packages less frequently. “It’s a combination of post-Enron jitters and also since the high-tech bust, they [options] are not as valuable. Really, from both ends, the employees and the companies have less interest in it,” Londa says. “A lot of companies think they are more trouble than they are worth now. It’s bad PR [public relations].” Londa says stock-option awards are often at issue in suits filed by executives who believe they were wrongfully terminated. In a typical case, he says, the issue is whether the executive was fired with cause. Stock option awards to Texas general counsel were less frequent in 2003. In this year’s Corporate Roster, 28.2 percent of the general counsel, 11 of 39, did not receive stock options as part of their pay package. That compares to 16.7 percent, six of 36, in the previous roster report. Smerge says his pay package in 2003 reflects his pending retirement on Dec. 31. (The compensation reported here is for Centex’s fiscal year that ended on March 31, 2004.) According to information in Centex’s proxy statement, Smerge’s total pay package includes a salary of $395,000, a bonus of $2,234,752 and $2,572,197 in deferred compensation he received in lieu of a stock option award because of his imminent retirement. (He will receive the deferred compensation in January 2005, after his retirement.) Smerge says Centex executives received large bonuses and option awards in 2003 because the company met aggressive performance goals, for instance by increasing earnings by more than 49 percent. Those impressive financial results for Centex, a homebuilding company with interests in the residential mortgage, construction services and investment real estate businesses, comes after a 45 percent growth in net earnings the previous year, which helped explain his robust compensation in 2002 as well. “It’s been a good time for homebuilding for several years now,” Smerge notes. During 2003, Smerge also exercised options for 183,700 shares of stock, realizing a value of $8,952,059, an amount that also includes $92,419 in cash payments for exercising certain options, according to Centex’s proxy statement. Smerge, who is retiring at age 60 after 39 years at Centex, says he exercised options in 2003 because of his retirement. But Smerge is not the only general counsel to exercise stock options in 2003. That information about executives who exercise their stock options and use them to buy stock is reported in the proxy statements corporations file annually with the Securities and Exchange Commission. A total of 14 general counsel, including Smerge, exercised some of their vested and in-the-money options in 2003. While the exercises are reported in the proxy statements, the documents do not make it clear if the GCs retained the stock or sold it and took their profit. Among the 39 GCs on the best-paid list, 17 made more in 2003 than in 2002 and another 17 racked up a smaller total compensation package. The comparison could not be made for five others because their 2002 compensation could not be determined from proxy statements. Joseph Listengart, vice president, general counsel and secretary at Kinder Morgan Energy Partners, posted the largest increase in compensation in 2003 among the best-paid general counsel on the list. Listengart’s pay package increased by 314.3 percent — to $4,799,378 from $1,158,336 in 2002. Neither figure includes any stock option awards. Listengart’s pay rose so dramatically in 2003 because of a restricted stock award valued at $3,766,000. But according to information in Kinder Morgan’s proxy statement, the restricted stock award represents a long-term award intended to last through July 2008, and the company will not make additional awards during that five-year period. Listengart says it’s not like he’s putting nearly $3.8 million in his bank account this year. The restricted stock award has vesting requirements that require him to stay at the company for five years to benefit from it — 25 percent vests after three years and the remainder in 2008 — and objective performance criteria. While acknowledging that the five-year stock award is “a big number,” he also points out that no executive at Kinder Morgan earns a salary larger than $200,000. “At Kinder Morgan, we’ve never been a party to the real excessive executive compensation that you’ve seen across America,” he says. Most other general counsel on the best-paid list posted much smaller percentage increases in total compensation when comparing 2003 numbers to 2002 numbers. One exception is Vincent H. Buckley, executive vice president — to $150,000 from $49,231 — but that’s because he only worked part of 2002 and his pay reflected it. The other general counsel at the top of the best-paid list, SBC’s Ellis, Goolsby of Dean Foods and Tesoro’s Reed, did not return, before presstime on Sept. 29, a telephone message left at their offices. Ellis, according to an assistant, was out of the office the week of Sept. 27. Unlike in previous years, when some general counsel saw their pay dip dramatically, most of the declines in general counsel compensation reported in Corporate Roster 2004 were relatively mild. None of the general counsel saw their compensation dip by even 50 percent in 2003. The compensation of executives such as Smerge and Listengart is included in proxy statements filed by the SEC because they are among the highest-paid executives at their companies. On the other hand, the compensation of other general counsel at Texas companies is not included in the proxy statements because they are not among the five-highest paid executives at their companies. Their total compensation can be estimated only as some amount less than the compensation going to the fifth executive in their corporation’s proxy statement. Frank G. McDonald, vice president, general counsel and secretary of XTO Energy Inc. of Fort Worth, heads the second-tier list, making some amount less than $7,339,005, including options with a present value of $2,023,785, in 2003. That’s not a precise estimate of his pay, but it’s the best that can be derived from information in XTO Energy’s proxy statement. Others directly below McDonald on the second-tier list are Charles W. Matthews, vice president and general counsel of Irving’s Exxon Mobil Corp., who made less than $4,994,588 in 2003, and Thomas B. Green, senior vice president, law and administration and secretary of Dell Inc. of Round Rock, who made less than $4,306,526. Two of the general counsel on the best-paid list in 2003 were on the second-tier list in 2002. They are Mark A. Solls of Wyndham International Inc. of Dallas and Albert O. Cornelison Jr. of Houston’s Halliburton Co. THE NUMBERS BY PROXY For the annual Corporate Roster, Texas Lawyer examines the general counsel compensation at companies on the Fortune 1,000 list, which included 88 companies in Texas this year. Not all the 88 companies have a general counsel on the best-paid or second-tier lists. Some, such as Houston companies EGL Inc. and Enbridge Energy Partners LP, don’t have a general counsel. Group 1 Automotive Inc. of Houston didn’t have a general counsel in 2003, according to M. Jeffrey Cameron, who took the job in August. Two of the Fortune 1,000 companies, Lennox International Inc. of Richardson and El Paso Corp. of Houston, did not file proxy statements before presstime. Both companies informed the SEC that their filings would be late. Also, United Services Automobile Association of San Antonio does not file proxy statements. Other companies did not file proxy statements because of a merger or a transaction that took the company private. (Private companies do not have to file documents, such as proxy statements, with the SEC.) Advance PCS Inc. of Irving merged in March 2004 with Caremark RX Inc. of Nashville and did not file a proxy statement in 2004. Philips Services Corp. and U.S. Oncology Inc., both of Houston, are now private companies and did not file proxy statements. American National Insurance Co. of Galveston does not have an in-house general counsel, but Galveston lawyer Irvin M. Herz Jr., a partner in Greer, Herz & Adams, is outside general counsel, and his firm does legal work for the insurance company. Herz also had been a board member at American National for 23 years, but he did not stand for re-election as a director this year and is now an advisory director for the company. Herz says the company revamped its board in the wake of new rules from the Nasdaq stock exchange that require companies to have a majority of outside directors. Greer, Herz continues as outside general counsel for American National, Herz says. Pilgrim’s Pride Corp. of Pittsburg also doesn’t have a general counsel, but James G. Vetter Jr., a shareholder in Dallas-based Godwin Gruber, is outside general counsel and has been a director since 1981, according to Pilgrim’s Pride’s proxy. The company also reports in the proxy that the company paid Vetter’s firm $61,365 in legal fees in 2003. The compensation of general counsel at two master limited partnerships in Houston could not be determined from proxy filings. Enterprise Products Partners L.P. doesn’t directly employ its management and the company reports in its proxy that Richard Bachmann, the general counsel for the general partner, only spends 60 percent of his time on work for the company. At Plains All American Pipeline, the company is responsible for only a portion of executive compensation, according to its proxy.

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