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When Internet retailer IAC/InterActiveCorp.’s profits soared by a cool 431% last year, it rewarded its general counsel accordingly. Much of the company’s growth came from the high-profile acquisition of Ask Jeeves Inc. (renamed Ask.com) and the spinoff of Expedia.com-two deals that IAC’s GC, Gregory Blatt, helped seal. What was surprising about Blatt’s pay package, however, was that the New York company opted to award him nearly $6 million in restricted stock grants, in addition to his already impressive $442,500 salary and $2 million bonus. Blatt, who declined to comment for this story, is not the only GC who received big-if restricted-grants of company shares in a survey conducted by Corporate Counsel, an affiliate of The National Law Journal.But he is leading the charge. Companies are embracing these stock grants-which come with certain conditions, like vesting only after a number of years-in an effort to compensate and retain top-performing chief legal officers. While the survey showed some notable stock-option grants-Occidental Petroleum Corp.’s Donald de Brier received nearly $7.2 million in stock options in fiscal year 2005, and MGM Mirage’s Gary Jacobs got a sweet $5.5 million-they continue to fall out of favor overall. Just 73 of the 100 general counsel on the survey were awarded options as part of their total compensation package-six fewer than last year. Surge in restricted stock While that may not sound like much, the decline in options is mirrored by a surge in restricted stock grants. Sixty-one GCs on the list received some amount of restricted stock in 2005, and the average award rose by 35%, to nearly $1 million. “It is the echo of a trend that started last year,” said Jannice Koors, managing director of the New York-based compensation consulting firm Pearl Meyers & Partners. Koors and other compensation experts say restricted stock grants have only one trajectory-up. Every year since 1994, Corporate Counselhas reported compensation for the chief legal officers of the nation’s Fortune500 companies. The survey has revealed trends in corporate counsel and executive compensation. Corporate Counselcharted the rise of stock options in the mid-1990s as the key to luring top legal talent to hot start-ups. And the survey tracked the decline of options in the last few years as Silicon Valley lost its luster. After Sarbanes-Oxley was passed in 2002, cold, hard cash in the form of big-time bonuses made a serious comeback. So what’s new in this year’s survey? The real action lies in those bundles of restricted stock. The average grant reached $987,269 in 2005, more than $250,000 higher than in 2004. Blatt’s restricted stock grant alone was double the highest award of 2004. “Restricted stock has more guarantees for long-term employees,” said Koors. And, companies hope, more guarantees that top talent will stick around waiting for their shares to vest.
A five-year look at restricted stock
Year Average value of restricted stocks Percentage change of average value of RS No.of GCs receiving restricted stocks Overall value of restricted stocks Percentage change of dollar value of RS
2001 $1,084,210 +41.0% 27 $29,273,679 +15.34%
2002 $940,408 -13.3% 32 $30,093,054 +2.80%
2003 $732,681 -22.1% 51 $37,366,739 +24.17%
2004 $730,703 -0.3% 55 $40,188,669 +7.55%
2005 $987,269 +35.1% 61 $60,223,431 +49.85%
Source: Corporate Counsel

The rush to restricted stock isn’t just the result of recent corporate scandals, or a response to aggressive shareholder groups. And the trend started too early to be a reaction to recent investigations into backdating options at companies like UnitedHealth Group Inc. (whose general counsel, David Lubben, had the largest value of exercisable options on the Corporate Counselsurvey this year). Instead, credit is due to a new set of rules by the Financial Accounting Standards Board (FASB) that went into effect just in time for 2006′s financial reporting periods. The rules require companies to charge options as expenses-a rude shift for many corporations. Under the old accounting rules, options equal to the price of stock when they were awarded did not have to be expensed. As a result, companies were happy to reward their top executives with them, because the business didn’t have to take a hit on the bottom line. However, the new FASB rules dictate that when options are awarded, their value for the vesting period must be calculated and expensed based on the value of the stock the day it was awarded. Companies can choose to expense options all at once, or over the entire vesting period, which could soften the blow a little. Still, fewer big businesses are viewing options as the most cost-effective reward for a job well done. In addition to changes in the reporting rules, FASB now requires companies to use the Black-Scholes method for computing the value of the options for fiscal year 2006. That formula takes specific variables into account, like company performance and stock value, rather than the old-school calculation, which banked on a fixed-percentage increase (usually 5% or 10%) in the price of the options per year. Anticipating ‘Black-Scholes’ Companies have been anticipating the adoption of Black-Scholes; almost half of those who made the list this year already used this more complicated formula. Rees Morrison, a law department consultant at Somerset, N.J.-based Hildebrandt International, said the Black-Scholes method is more transparent than the old calculation, but it also makes stock options more expensive for companies-another reason for options’ diminished popularity. There were other notable findings on this year’s survey. Thanks to the S&P 500′s strong year, stock-option cash-outs were up 24% in 2005. Fifty-five of the top 100 GCs cashed out options-six more than in 2004. The total value of option grants exercised was $171.1 million-$49 million more than in the previous year. The average gain increased from $2.5 million in 2004 to $3.1 million in 2005. Lehman Brothers Holdings Inc.’s chief legal officer, Thomas Russo, was the cash-out king on this year’s list; he took home $16 million. Others, like Burlington Northern Santa Fe Corp.’s executive vice president of law and government affairs, Jeffrey Moreland, and UnitedHealth Group’s general counsel, Lubben, cashed out an impressive $10.5 million and $12.1 million, respectively. Bonuses remained one of the prime ways to reward GCs; they were up 16% from 2005-nice, although below the 30% rise that was reported last year. Compensation experts attributed the slow but steady rise to both heightened in-house responsibility in a post-Enron world and a general trend toward performance-based executive compensation. The average bonus on the list came to $906,820. Why are bonuses so popular, while simple salary raises aren’t? James Wilber, a principal at the Newtown Square, Pa.-based legal management consulting firm Altman Weil Inc., said companies prefer to hold a little back and then reward good performance later: “[Companies] don’t front-load the salary to start.” And indeed they don’t: The average salary of $564,612 was up a paltry 1% from 2004. Take Lehman Brothers, for example. According to the investment bank’s annual report, 2005 was a record-setting year “by almost all measures,” with net income and earnings per share going through the roof. The company saw a 26% increase in revenue alone. Lehman’s Russo came in at an impressive No. 2 overall on the list, and was awarded a $4.5 million bonus as a result of his company’s record growth. With that bonus, he also logged the second-highest take-home pay (salary plus bonus) on the list, $5 million. But Russo’s salary has remained a constant $450,000 since it was first reported in 1994. And while he’s not exactly washing cars yet, take a look at what the absence of a bonus can do to a GC’s compensation: Thomas Gottschalk of the embattled Detroit automaker General Motors Corp. didn’t receive one, and he took the biggest dive on the list, from No. 17 to No. 71. Benjamin Heineman Jr., the legal chief of General Electric Co., once again topped the overall compensation list. With cash compensation of a little more than $5 million-up a bit from 2004-he managed to edge out Russo. Then again, Heineman’s reign is about to end. He’ll be off the list next year after retiring from GE this winter.

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