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General counsel at 39 of Texas’ largest companies made more money in 2001 than the previous year, getting an average bump of 10 percent to their pay package. Those 39 general counsel made an average of $1,869,162 in 2001, including stock options with a present value of $911,338. The total is up 10.4 percent from the average of $1,692,347 earned in 2000 by 40 general counsel at large Texas corporations, but still 21.4 percent below the average of $2,379,526 paid to 31 Texas general counsel in 1999. Those sums are mind-boggling, but unfortunately for many of the general counsel, they can’t go to the bank with much of it. The stock options granted to 25 of the general counsel in 2001 are worthless — under water in financial lingo — because of declining stock markets this year. A comparison of stock prices on Sept. 24 and the strike prices for the options given to the general counsel reveals that only eight of them received options in 2001 that could be exercised today, assuming there are no other restrictions to exercising them. The fact that so many of the stock options are under water today points out the risky nature of high-level executive compensation when it includes stock options and other incentive-based, long-range compensation. But the pay is still exceedingly good. Even without the value of the stock options, the average general counsel on the best-paid list made more than the average partner at one of the 25 highest-grossing firms in Texas. Profits per partner at those firms were $625,000 on average in 2001, according to Texas Lawyer‘s annual report on firm finance. With the boost in average total compensation in 2001, 25 of the general counsel made more than $1 million in 2001. That’s 64 percent of the 39 general counsel, up slightly from the 60 percent figure in last year’s Texas Lawyer report on general counsel compensation. Britton White Jr., former general counsel of Houston’s El Paso Corp. heads the list of the best-paid general counsel in Texas, with total compensation in 2001 of $8,965,641, including stock options with a present value of $6,564,913. White retired on Dec. 31, 2001. Following White on the list are James D. Ellis of SBC Communications Inc. of San Antonio, Kenneth E. Randolph of Houston’s Dynegy Inc., O. George Everbach of Kimberly-Clark Corp. of Dallas and Mark C. Hill of RadioShack Corp. of Fort Worth. All received large stock option grants in 2001, boosting the total value of their compensation packages. Four other general counsel received pay packages in excess of $2 million in 2001, according to Corporate Roster 2002, Texas Lawyer‘s annual report on general counsel compensation in Texas. [See related chart: Texas' Best-Paid General Counsel.] Stock options comprise nearly half, on average, of the compensation going to the general counsel who are among their corporation’s most highly compensated executives. The 39 best-paid general counsel received options with an average present value of $911,338 in 2001, up 20.8 percent from the average of $754,303 going to the general counsel on last year’s best-paid list. Stock options make up 48.8 percent of the average compensation in 2001 going to the general counsel on the best-paid list. The value of the options is calculated using the Black-Scholes formula. That’s why the under-water nature of the options is so significant. Vesting aside, none of the five highest-paid general counsel on the best-paid list could presently exercise their options because the strike prices for the options they received in 2001 are higher than the stock prices. For instance, White, the former executive vice president and general counsel at El Paso, received option grants with strike prices of $62.98 and $46.28. Using the Black-Scholes formula, the options had a present value estimated at $6.5 million at the time of the grants in 2001. But the battered stock of El Paso closed at $7.51 a share on Sept. 24, meaning White’s options are far from valuable. (His options have other restrictions, including vesting over two years for one of the grants and three years for the other.) White’s compensation in 2001 also included a salary of $502,088, a bonus of $935,000 and $875,000 in retention payments awarded for work on El Paso’s $24 million merger with The Coastal Corp. of Houston in 2001. The proxy also indicates that White entered into a consulting agreement with El Paso through the end of 2002; he will be paid $43,833 a month for those services. White says he has been handling a number of legal matters this year for El Paso. White says the numbers in El Paso’s proxy statement don’t tell the full story of his 2001 compensation. Not only are his stock options under water, but White says he faces a huge tax bill in 2003 for the millions of dollars worth of restricted stock he received after retirement at the end of 2001. White says he had been taking all of his annual bonuses in restricted stock for five or six years, and it was deferred until he retired. At retirement, though, he received the stock, and he has to pay tax on it. Fortunately, White says, he had the foresight to sell some of the stock in early 2002, at what he thought at the time were depressed prices, to be able to cover his pending tax bill. And, with the way the market has been going, White doubts he ever will be able to exercise the options he received in 2001. Because he retired, they will expire early, he says. “There’s no prayer on any of those options,” White says, ruefully. White’s compensation is reported in such detail in El Paso’s proxy statement because he was one of the five highest-paid executives at the energy company in 2001. The other 38 general counsel on the best-paid list are also among the five highest-paid executives at their corporations. The compensation of other general counsel at Texas companies is not included in proxy statements because they are not among the five executives with the highest pay. Their total compensation only can be estimated as some amount less than the compensation going to the fifth executive in their corporation’s proxy statement. [See related chart: The Second Tier.] The 43 general counsel on that list are led by Thomas B. Green, senior vice president law and administration and secretary at Dell Computer Corp. of Round Rock, whose compensation in 2001 was less than $14.5 million. Clearly, that’s a broad range for Green’s pay, but the information in the proxy statement doesn’t allow for a more precise estimate of his total pay package. Other general counsel who might be vying for the top of the best-paid list, if their compensation was only public record, include Charles W. Matthews, vice president and general counsel of ExxonMobil Corp. of Irving; Gil Friedlander, senior vice president general counsel and secretary of Electronic Data Systems Corp. of Plano; and Margaret B. Shannon, vice president, general counsel and corporate secretary of Houston’s BJ Services Co. The proxy statements, which corporations file annually with the Securities and Exchange Commission, also report statistics on instances when the executives exercise their stock options and use them to buy stock. Several of the best-paid general counsel did take the opportunity during 2001 to exercise some of their vested and in-the-money options. The exercises are reported in the proxy statements, but the filings do not necessarily make it clear if the executives retained the stock or sold it and took their profit. [See related chart: Option Exercises.] Four of the Texas general counsel on the best-paid list realized a value in excess of $1 million by exercising options — Robert K. Reeves of Ocean Energy Inc. of Houston, Roger F. Thomson of Brinker International Inc. of Dallas, Jeffrey R. Moreland of Fort Worth’s Burlington Northern Santa Fe Corp. and Raymond G. Smerge of Centex Corp. of Dallas. With options comprising nearly half of the average compensation of Texas’ best-paid general counsel, it’s clear Texas corporations continued in 2001 to rely on stock options for executive pay. But that could be changing, particularly since companies are not only voluntarily beginning to expense them, but shareholders are questioning the motivations executives have in pushing up stock prices. Jeffrey Londa, a shareholder in the Houston office of employment law firm Ogletree, Deakins, Nash, Smoak & Stewart, says he expects corporations to back off their reliance on stock options as a way of compensating executives. He cites the problems coming out of bankrupt companies such as Enron Corp. and WorldCom, and the Sarbanes-Oxley Act, Congress’ effort to prevent corporate fraud, as reasons for companies to rethink how they pay their top employees. “I think a lot of shareholders are going to say that one of the things that led to executives falsely pumping up numbers of companies, to get the stock value up, was this tremendous reliance on stock options as a part of the compensation,” Londa says. “Salaries will go up more because there’s going to be real concern with the stock options,” he says. AT THE TOP Ellis, the SBC general counsel, has been at or near the top of the best-paid list for several years. His 2001 compensation of $8,751,331 includes stock options with an estimated value of $4,531,000. Those options, with strike prices ranging from $39.89 to $50.55, are currently out of the money with the company’s stock closing at $22.71 on Sept. 24. Ellis’ compensation for the year also includes nearly $2.4 million in retention pay for achievements from 1996 through 1999. “If I would have left, I would have forfeited it,” he says. He says SBC’s size — revenues were $45.9 billion in 2001 — and the scope of his responsibilities factor into his annual compensation. Ellis is in his 13th year as general counsel, and SBC has about 260 lawyers worldwide. The third general counsel on the list, Dynegy’s Randolph, also points out that Dynegy’s stock price is way below the strike price of his options. Like Ellis and Randolph, many of the highest-paid general counsel have shown up before on the annual report on general counsel compensation that Texas Lawyer has produced for 10 years. The five lawyers who top this year’s Corporate Roster were among the seven highest-paid general counsel on the best-paid list for 2000. The lawyer who topped the best-paid list in 2000 is no longer in his general counsel job, and not on this year’s list. Curtis Huff, former executive vice president chief financial officer, general counsel and secretary of Houston’s Weatherford International Inc., left Weatherford in 2001 to become president and chief executive at a spinoff in The Woodlands. Huff’s compensation in 2000 totaled $6,184,491, including options with a present value of $5,236,170. Of the 39 on this year’s best-paid list, 20 racked up higher compensation, and 10 made less. The 2000 compensation of the other nine could not be determined from proxy statements. Peter Altabef, vice president, general counsel and secretary of Perot Systems Corp. of Plano, posted the highest increase in total compensation, a jump of 290.5 percent from 2000. His 2001 compensation totaled $1,211,120, including options with an estimated value of $720,720. Others with big increases in compensation in 2001 include White, whose pay went up by 140.9 percent, and James Shaddix, former general counsel of Houston’s Pennzoil-Quaker State Co., whose compensation increased by 127.7 percent in 2001. Like White, Shaddix retired on Dec. 31, 2001. Also, William Schwer, executive vice president and general counsel of Imperial Sugar Co. of Sugar Land, received compensation 102.5 percent higher than in 2000. General counsel with large drops in total compensation between 2001 and 2000 are John H. Spurgin II of Administaff Inc. of Kingwood, and Charles R. Lotter of J.C. Penney Co. of Plano, with declines of 49 percent and 47.2 percent respectively. Other general counsel with relatively large declines in pay packages in 2001 include William C. Lemmer of Cooper Cameron Corp. of Houston and Diane K. Schumacher of Cooper Industries Inc of Houston. TO GC OR NOT GC For the annual Corporate Roster, Texas Lawyer looks at the 95 Texas companies on the Fortune 1,000 list, but not every company has a general counsel on the best-paid list or the second-tier list. Some of the companies do not have a general counsel, including D.R. Horton Inc. of Arlington, Group 1 Automotive Inc. of Houston, Pilgrims Pride Corp. of Dallas and Daisytek International Corp. of Allen. Others just got them. At Wyndham International Inc. of Dallas, Mark A. Solls was appointed general counsel on Sept. 23, filling a spot that’s been vacant for months. And David Hurst, a longtime outside lawyer for Adams Resources & Energy Inc. of Houston, says the company hired Vincent Buckley as general counsel in August 2002. Galveston-based American National Insurance Co. doesn’t have a GC either, but Galveston lawyer Irwin Herz is a board member. The insurance company reports in its proxy statement Herz’s firm, Greer, Herz & Adams, is outside general counsel and was paid $4,447,258 in fees in 2001, along with offices, phones and office decorations, with the value offsetting future fees. Houston’s Enron Corp., which filed a Chapter 11 in December 2001, didn’t file a proxy statement this year. Neither did another large Houston company, Compaq Computer Corp., which merged in May with Hewlett-Packard Co. of Palo Alto, Calif., and Software Spectrum Inc. of Garland, which was acquired by Level 3 Communications Inc. of Broomfield, Colo., in May. United Services Automobile Association of San Antonio doesn’t file a proxy statement either. The compensation of two publicly traded master limited partnerships in Houston, Plains All American Pipeline and Enterprise Products Partners, could not be determined from proxy statements. According to information in their proxies, EPP doesn’t directly employ its management, and the general partner of Plains All American provides some of the compensation going to its executives. Seven of the general counsel on the best-paid list in 2001 were on the second-tier chart in 2000. They are Rick Harrington of Conoco Inc. (now ConocoPhillips) of Houston, Donald Fay of Triad Hospitals Inc. in Dallas, Albert D. Hoppe of Noble Affiliates Inc. of Houston, Robert H. Whilden Jr. of Houston’s BMC Software Inc., Carl E. Edwards Jr. of Lennox International Inc. of Richardson, Michael G. Fortato of Trinity Industries Inc. of Dallas and Elaine Flud Rodriguez of Carrollton’s CellStar Corp. Related charts: Texas’ Best-Paid General Counsel The Second Tier These general counsel from Texas-based companies were not among their companies’ five highest-paid executives in 2001. Option Exercises These best-paid Texas general counsel exercised options to buy stock in 2001. A Pretty Penny While these current and former GCs didn’t rank among their company’s highest-paid employees, they still made a pretty penny through their 2001 stock sales.

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