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Want to know the secret to taking the top spot in Corporate Counsel’s annual survey of the 100 most highly paid general counsel? Hitch a ride on the profit express. That’s the happy position that Jon Walton, general counsel of specialty metals manufacturer Allegheny Technologies Incorporated, found himself in last year. Buoyed by a prescient decision to invest in titanium, a change in management, and a key acquisition of a rival steel firm, the Pittsburgh-based company’s stock skyrocketed more than 500 percent over the last two years. Net income rose from $360 million in 2005 to $572 million last year. As a result, in 2006, Walton’s total pay package leaped more than 400 percent, to $5.2 million, earning him the number one position on our roster. Almost all of Walton’s boost came in the form of “nonequity incentive compensation”-a bonus that vested in 2006 and that is tied directly to company performance over the previous three-year period. Walton’s year-end bounty of $4.7 million weighed in at more than ten times his annual salary of $400,000, and ranked as the biggest bonus in our 2007 GC Compensation Survey [" Worth the Wait."]. But bonuses aren’t the only way that GCs are benefiting from their company’s profitability. AT&T Inc. general counsel James Ellis earned a sweet $2.1 million bonus last year, but he really scored in the stock award column. Thanks to a 46 percent rise in the price of AT&T shares, Ellis, whose stock award is linked to his company’s performance, got $6.8 million worth of AT&T shares, the biggest such grant on our survey this year. Walton and Ellis aren’t alone. For the first time in the 14 years we’ve reported compensation for the top legal officers of the nation’s Fortune 500 companies, the average bonus approached $1 million�$984,091. In another first, average stock awards topped $1 million. The dual rise of these two forms of compensation can be tied directly to the increasing number of companies opting for pay-for-performance arrangements for GCs and other top executives. At the same time, compensation not tied directly to corporate performance-such as salaries and stock options-has stayed flat or become less popular. Experts say that these changes will stick around for the long haul. The implications for top legal officers? There’s a lot of controversy over how effective pay-for-performance arrangements are in general. And no one has addressed whether they even make sense for general counsel, whose law departments usually aren’t considered profit centers. As a result, GCs can expect to see their fortunes ebb and flow with the financial health of the company they counsel. At least last year, the arrangement worked to the benefit of top legal officers. According to Fortune, the 500 highest-grossing companies gushed profits in 2006, to the tune of $785 billion, a 29 percent increase over 2005. On top of that, in the last year and a half, companies have gotten much better at meeting Wall Street’s expectations, says Linda Amuso, senior vice president with the compensation firm Radford Surveys + Consulting in San Jose. “If you meet your plan, you get your bonus,” she says. The shift towardpay-for-performance, like so many changes in how corporate America does business today, had its genesis in the business scandals of the early 2000s. Outrage over outsize executive pay packages at companies whose stock was plummeting caused investors to push boards to tie top management compensation directly to such financial targets as profit or stock price. “Bonuses and stock [grants] are two places companies can do that,” says Amuso. But that hasn’t always been the case. Until last year, it was difficult to tell from proxy filings whether this was happening. However, in mid-2006 the Securities and Exchange Commission issued a sweeping new set of reforms designed to shed more light on executive compensation. For the first time, the 2006 proxy statements show up front whether bonuses are discretionary or “nonequity incentive compensation” tied to specific financial metrics such as profits, revenue, or operating income. The results were revealing. Seventy-six of the GCs in the top 100 received incentive compensation, while just 41 got discretionary bonuses. Because other kinds of pay, such as retention, sign-on, and relocation bonuses, are lumped in under the discretionary bonus column, 19 lucky GCs actually received both forms of income. For GC remunerationin general, it’s been a slow but steady climb. The average 2006 bonus of nearly $1 million was up an impressive 62 percent from three years ago. Even more astonishing: the seismic shift in the bonus-to-salary ratio. In 2003 the average bonus exceeded salary by just 17 percent. Three years later, it’s a whopping 77 percent more than the average salary. Just to show how critical a component of pay the bonus has become, consider the plight of Thomas Gottschalk, former GC of besieged automaker General Motors Corporation. His lack of a bonus two years in a row pushed him from number 17 in 2004 to 78 in our survey this year (Gottschalk, whose salary edged down from about $1 million in 2005, retired earlier this year). Stock awards, another common way to tie pay to performance, are an increasingly popular form of compensation. In 2006, 85 chief legal officers received stock grants, up from 61 in 2005. Dollar values were also up, reaching $1.1 million in 2006. Part of the jump may be attributable to a change in how values are reported. In the past, companies had to disclose only restricted stock awards; this year, the SEC’s new disclosure rules require all stock awards, such as stock appreciation rights and outright grants, to be listed. But restricted stock-which comes with certain conditions like vesting after a set period of time-comprise the vast majority of stock grants anyway, so the change isn’t all that noteworthy, says Jason Simon, a partner who specializes in executive compensation at the Tysons Corner, Virginia, office of Greenberg Traurig. The rise also dovetails with the sharp increase in company profits. Although the proxies don’t show whether stock grants are being linked to performance, Simon and others say that it’s increasingly common to do so. All these stock grants beg the question: What’s happened to the former darling of GC compensation, the stock option? They’re down but not out. Despite backdating scandals and shareholder pressure, options are still a popular form of compensation for GCs and other top executives. Last year, 87 GCs were awarded options, up from 73 the year before. But these days, in marked contrast to the high-tech boom when everyone including the janitor got a piece of the action, options are strictly limited to top executives. They’re also a lot stingier. This year, the average stock option award weighed in at $795,214, a 31.2 percent drop from last year’s average of $1.2 million. The biggest award, $4.6 million to John Finneran at Capital One Financial Corporation, was 36 percent smaller than the top option grant of 2005. The decline is a direct result of the new set of rules by the Financial Accounting Standards Board that went into effect right before the 2006 financial reporting period. Under the old rules, options valued at the price of stock when awarded did not have to be expensed. Since this meant that the bottom line was unaffected, companies doled out options like candy at Halloween. The new rules put options grants in the expense category along with other stock awards, making them far less appealing. Still, the past popularity of options means that the top GCs are sitting on some generous nest eggs. Fifty-seven GCs took advantage of the Dow’s record highs to exercise their options-two more than last year. The average cashout of $2.8 million was down from last year’s average of $3.1 million. Altria Group, Inc.’s Charles Wall beat out the other GCs for the top spot, scoring $17 million in exercised options. He also won the prize for the biggest take-home package (cash plus stock) last year-$20 million. Unlike Wall, two other cash-out kings did so to fund a comfortable post-GC life. Marriott International, Inc.’s Joseph Ryan and Health Net, Inc.’s B. Curtis Westen, who are both retiring, exercised options worth $10 million and $11 million, respectively. Of all the formsof income, the humble salary comprises the least significant portion of the compensation earned by the top 100 general counsel. Last year, the average salary of $557,360 barely budged from 2005′s average or the year before. Salaries have basically stayed flat for two reasons, says Claudia Poster, executive compensation consultant at Towers Perrin in New York. Since 1993, corporations have been barred from taking tax deductions for any portion of an executive’s salary that exceeds $1 million. Second, salaries represent a fixed cost that cannot readily be adjusted to reflect company performance. Should the company have a terrible year, it won’t have the ability to slash executive pay accordingly, exposing it to the wrath of investors and employees. Experts say these trends will persist. “Compensation committees and boards are making a much more conscious decision to think through how to allocate incentive compensation to drive near-term performance through cash and long-term performance through various equity tools,” says consultant Linda Amuso. In other words, bonuses and stock awards will continue to inch upward, and options downward, she says. For the same reason, we’ll see another shift from time-based to performance-based stock awards. There’s one possible catch. The SEC is still trying to get a handle on how its new rules played out in the 2006 proxies. At some point, the agency is expected to clarify the rules to add further transparency. How that affects GC and other executive pay is an open question. Amuso says that the compare-and-contrast among GCs that will result from enhanced disclosure may actually push up compensation. That possibility, along with the vagaries of corporate performance, means that Jon Walton may not hold on to his top spot for long. Editor’s Note: An earlier version of this story had some incorrect numbers. The version posted on July 25 has correct data.

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