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General counsel compensation at large Texas corporations took a dip in 2002, with pay packages averaging 20.1 percent less than in 2001. The general counsel at 36 of Texas’ largest corporations made an average of $1,494,165 in 2002, including stock options with a present value of $689,891. That compares to total average compensation of $1,869,162, including stock options with a present value of $911,338, paid to 39 Texas general counsel in 2001. The average compensation total for 2002 is 11.7 percent less than the $1,692,347 earned by 40 general counsel at large Texas corporations in 2000, and 37.2 percent less than the $2,379,526 in average compensation paid to 31 Texas general counsel in 1999. The pay packages aren’t all cash — in many cases the general counsel also received stock options so the present value of those options is included in the total compensation. The value of those stock options going to the GCs on the best-paid list in this year’s Corporate Roster declined as well on average. The present value of $689,891 in stock options paid on average to the 36 general counsel in 2002 is 24.3 percent less than the present value of the stock options included in the 2001 pay packages. But, like always, those stock options don’t necessarily mean money in the pocket for the best-paid general counsel. The stock options awarded to many of the general counsel in 2002 are presently worthless — or underwater — because the current price of the company’s stock is below the strike price of the option. A comparison of stock prices on Sept. 29 and the strike prices for the options given to the general counsel in 2002 shows that only 13 of the 36 general counsel could exercise their options today (if those options were vested), and four of those 13 also received other options in 2002 that are presently out of the money. But the decline in general counsel compensation doesn’t mean the GCs are not highly rewarded for their work. The nearly $1.5 million in average compensation stacks up quite favorably when compared to the income of their contemporaries who are partners in large Texas firms. Profits per partner averaged $664,000 in 2002 at the 25 highest-grossing firms in Texas, according to Texas Lawyer‘s annual report on firm finance. That $664,000 is only 44.4 percent of the average general counsel compensation at the 36 large Texas companies. Despite the 20.1 percent decline in average compensation, a third of the general counsel, 24 of 36, earned a pay package totaling more than $1 million in 2002. That compares to 64 percent, or 25 of 39, in 2001. Employment law attorney Linda Headley says corporations are watching their costs closely and that may be translating into lower executive compensation. It’s tough for corporations to justify hefty pay for executives when lower-ranking employees are getting laid off, she says. “The Sarbanes-Oxley law and all of the corporate scandal issues are creating a lot of pressure on all publicly traded corporations to not just engage in wholesale giveaway,” says Headley, managing shareholder for Littler Mendelson in Houston. “People are more sensitive to it because they know they are going to get looked at more. Is that driving it [compensation] down? It probably has had some effect,” she says. $2 MILLION-PLUS Raymond G. Smerge, executive vice president and chief legal counsel of Centex Corp. of Dallas, heads the list of the best-paid general counsel in Texas, with compensation totaling $4,489,582, including stock options with a present value of $1,493,640. Although Smerge tops the best-paid list, his total pay package for 2002 is only about half of the nearly $9 million pay package that went in 2001 to Britton White Jr., former general counsel of Houston’s El Paso Corp. White, who led the best-paid list last year, retired on Dec. 31, 2001. Following Smerge on this year’s list are O. George Everbach, formerly of Kimberly-Clark Corp. of Irving, James D. Ellis, of San Antonio-based SBC Communications Inc., Robert H. Whilden Jr. of BMC Software Inc. of Houston, and Rick Harrington, former senior vice president legal and general counsel of ConocoPhillips of Houston. Three other general counsel received pay packages in excess of $2 million, and 16 others topped the $1 million mark, according to Corporate Roster 2003, Texas Lawyer‘s annual report on general counsel compensation in Texas. The present value of stock options makes up about 46 percent of the average compensation of the 36 general counsel in 2002. That percentage is only slightly less than the 48.8 percent in 2001, suggesting stock options continued to be a large component of general counsel pay in 2002. The value of the stock options is calculated using the Black-Scholes formula. Without taking vesting into account, Smerge, the highest-paid general counsel on the list, received options in his company’s most recent fiscal year that are presently in the money. But the next four general counsel on the list, Everbach, Ellis, Whilden and Harrington, all received options in 2002 that are currently underwater because the strike prices on the options are higher than the current share price. The options Smerge received in fiscal year 2003 — Centex’s fiscal year ended on March 31, 2003 — have a strike price of $70.74, which is well below the stock’s Sept. 29 closing price of $76.30. While not all of those options are vested, Smerge exercised 90,000 in options in 2002, making a profit of $2,363,380. (The money he made off the options also included $439,050 for exercising certain options, according to the proxy statement.) Smerge says his compensation was so robust in 2002 because Centex, a homebuilding company that also has interests in the mortgage, contracting and pest-control businesses, had a great year in fiscal 2003, posting a 45 percent growth in net earnings in the year ended March 31, 2003. He says his compensation reflects the company’s performance. “That’s how it’s supposed to work,” says Smerge, who has been the chief legal officer at Centex Corp. since 1985. “It’s all about performance. Our compensation plans are all performance based.” His pay package is up 56.4 percent from the previous year, when his compensation totaled $2,870,098, including stock options with a present value of $2,574,640. Whilden, the BMC general counsel, posted the greatest increase in total compensation. His 2002 package of $3,348,562 includes stock options that had a present value of $2,586,000 when he received them in May of 2002. But those options, like all the options Whilden has been granted since he joined BMC in January 2000, are presently worthless. “It’s still better than not having them, of course, but in the last three years since I’ve been here, in three-and-a-half years, I have no options … in the money,” says Whilden, 68, who joined BMC after retiring from Houston’s Vinson & Elkins. Whilden, who joined BMC with the expectation of working as general counsel for three to five years, notes he doesn’t have an indefinite time to wait until the options move into the money because he won’t be at the company for the long term. The compensation of general counsel like Smerge and Whilden are reported in such detail in their corporation’s proxy statements filed with the Securities and Exchange Commission because they are among the highest-paid executives at their corporations. But 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. The 33 general counsel on that list are led again by Thomas B. Green, senior vice president law and secretary at Dell Computer Corp. of Round Rock, whose compensation in 2002 was less than $4.4 million. While that’s a broad estimate, at best, the information in the proxy statement doesn’t allow for a more precise estimate of his total compensation. Others close behind Green on the second-tier list are Charles Matthews, vice president and general counsel of ExxonMobil Corp. of Irving, who earned some amount less than $4.0 billion, and David P. Steiner, former senior vice president, general counsel and corporate secretary of Houston’s Waste Management Inc., whose total compensation in 2002 was less than $2.8 million. The proxy statements, which corporations file annually with the SEC, also report statistics on instances when the executives exercise their stock options and use them to buy stock. Nine of the best-paid general counsel, including Smerge, exercised some of the vested and in-the-money options in 2002. The exercises are reported in the proxy statements, but the filings do not necessarily make it clear if the GCs retained the stock or sold it and took their profit. [See the link at right for "Option Exercises."] In addition to Smerge, Harrington, the former ConocoPhillips GC, and J. Rodney Lawrence, executive vice president legal affairs and corporate secretary of Pier 1 Imports Inc. of Fort Worth, realized a value of more than a million by exercising their options, according to information in the proxy statements. TOTAL COMPENSATION While Smerge tops the best-paid list in this year’s version of Corporate Roster, he was seventh on the list last year. Others at the top of this year’s list have been among the highest-paid general counsel in Texas for many years. Ellis, the SBC general counsel, and Everbach, former senior vice president and general counsel of Kimberly-Clark, are among the top five this year and were also in the same grouping last year. So was Harrington. Ellis was out of his office and did not return a telephone call seeking comment before presstime on Oct. 1, and Everbach and Harrington retired in 2003. Whilden, coming in fourth, moved up considerably on the chart, as did Carl Edwards Jr., executive vice president, chief legal officer and secretary at Lennox International Inc in Dallas. His total compensation of nearly $2.5 million increased by 277 percent in 2002, compared to 2001. The big difference is a $1,079,635 award of restricted stock in 2002, compared to no restricted stock in 2001. Another GC with a much higher pay package in 2002 is David A. Schwarte, executive vice president and general counsel of Sabre Holdings Corp. of Southlake. His total compensation of $1.2 million in 2002 is an increase of 240 percent from the previous year. His pay package for 2002 includes stock options with a present value of $819,900, compared to no stock options the previous year. In all, the total compensation of 18 of the GCs increased in 2002, and it declined for 14 of them. The 2001 compensation for four of the GCs could not be determined from information in proxy statements, so no comparison is possible. Although Ellis is the third-highest general counsel on the best-paid list, his compensation declined by 61.5 percent compared to his $8.8 million pay package in 2001. Other GCs with large declines in pay in 2002 are Margaret B. Shannon of BJ Services Co. of Houston, whose pay package declined by 56.7 percent; Lawrence Robinson of Felcor Lodging Trust Inc. of Irving, whose pay package slipped by 57.4 percent; and Hugh Rice Kelly of Reliant Resources Inc. and Kenneth Randolph of Houston’s Dynegy Inc., whose total pay dipped by 60 percent and 89.2 percent respectively. Kelly retired in May 2003 and Randolph retired in March 2003. PROXY STATEMENTS For the annual Corporate Roster, Texas Lawyer examines the GC compensation at companies on the Fortune 1,000 list, which included 82 companies in Texas this year. Not all the companies have a general counsel on the best-paid or second-tier lists. A few simply don’t have a general counsel. Others did not file proxy statements before presstime, including Advance PCS Inc. of Irving, which announced in September an agreement to merge with Nashville’s Caremark RX Inc. Ocean Energy Inc. of Houston merged with Devon Energy in April and did not file proxy materials reporting executive compensation for 2002. Others did not file proxy materials because they have filed a Chapter 11 bankruptcy, including Encompass Services Corp. of Houston and Lewisville’s Fleming Companies Inc. United Services Automobile Association of San Antonio also does not file proxy statements, and executive compensation at Quanta Services Inc. of Houston could not be precisely determined from the proxy statement. 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 $4,057,833 in fees in 2002 and received offices, telephones and office decorations. Also, the compensation of general counsel of two master limited partnerships based in Houston could not be determined from securities filings. According to information in their proxies, Enterprise Products Partners LP doesn’t directly employ its management, and the general partner of All American Pipeline LP provides some of the compensation going to its executives. Six of the general counsel on the best-paid list in 2002 were on the second-tier chart in 2001. They are Schwarte of Sabre Holdings, Shannon of BJ Services, Anne McNamara, formerly with AMR Corp. of Fort Worth, Guy H. Kerr of Dallas’ Belo Corp., Kerry A. Galvin of Lyondell Chemical Co. of Houston, and Christopher A. Korst of Rent-A-Center Inc. of Plano.

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