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General counsel compensation underwent a seismic shift in 2003. The change didn’t show up in lawyers’ paychecks. Combined, salaries and bonuses rose 6 percent for the 100 best-paid general counsel, according to Corporate Counsel‘s annual survey. But the big news in this year’s findings is the changing role of equity compensation. Last year Fortune 500 companies were much stingier about doling out coveted stock options. Instead, they rewarded their top lawyers with restricted stock, which has fewer risks than options, but usually less of an upside, too. That’s what happened at PacifiCare Health Systems Inc. General counsel Joseph Konowiecki took home $1,162,692 in salary and bonus in 2003, but his options grants plunged almost 70 percent. The company awarded him just $1,109,532 last year, compared to $3,498,900 in 2002. To make up some of the difference, the Cypress, Calif.-based business gave him restricted stock worth $571,000. Why the shuffle? In 2002 PacifiCare started expensing its options in an effort to make the company’s financials more transparent. Concurrently, the health insurer reconfigured its executive pay packages. The GC isn’t complaining, at least publicly, about the steep drop in pay. “If it’s good for the company … then it’s good for me,” Konowiecki says. At least he’s not alone. In 2003 Fortune 500 companies gave their top lawyers smaller chunks of stock option grants, 32 percent less in 2003 than in 2002, according to the companies’ 2004 proxy statements. To reward these executives, businesses looked to the less appealing restricted stock grants. (If a stock is heading up, the employee is likely to make more money from exercising his options and cashing them out than from selling his restricted shares.) Just over half of the top 100 highest-paid GCs received restricted stock, compared to less than a third who got them in 2002. In another sign that the heyday of stock options is coming to an end, many of the GCs who were able to cash in some of their options did so. The average cash-out in 2003, for the 39 GCs who exercised options, was $2,424,399, a 63 percent increase over our 2002 survey participants [see "Last Call?" page 86]. As the specter of new accounting regulations looms over public companies, and as stockholders become increasingly critical of lavish executive options grants, more businesses are remixing their equity compensation packages. “The days are over when corporate officers could pretend that there are no costs to the rewarding of options to employees,” says Joel Henning, senior vice president and general counsel of Somerset, N.J.-based consulting firm Hildebrandt International Inc. Make no mistake. Company lawyers are still being well compensated for their efforts. The average general counsel on our list earned $1,116,398 in 2003, compared to $1,053,941 in 2002. Even the lawyers on the bottom of our roster had thicker wallets in 2003. Last year the hundredth-ranked GC made $691,667, compared to $665,475 in 2002. Former General Electric Co. GC Benjamin Heineman Jr. occupied the No. 1 spot on our overall compensation list for the third year in a row. Along with his $1,475,000 salary and $2,890,000 bonus, he exercised $3,597,750 worth of options last year. That was his first time cashing out GE stock since 1999. Still, Heineman barely put a dent in his coffer. He sits on $18,402,005 worth of exercisable stock appreciation rights and options. In January Heineman assumed a new position as GE’s senior vice president for law and public affairs, relinquishing the GC spot to Brackett Denniston III. But few lawyers, even other Fortune 100 GCs, make Heineman money. The average lawyer on our list saw his bonus rise only 7 percent last year, to $605,773. It’s quite a change from 2002, when bonuses skyrocketed 16 percent. According to Fred Krebs, the president of the Association of Corporate Counsel, GCs are still being rewarded for their role in Sarbanes-Oxley compliance, but “things are tailing off now,” he says. “Companies are in compliance or have systems in place. Now companies are in more of a maintenance mode rather than the all-consuming compliance efforts made over the past couple of years.” Still, a few GCs defied the trend. After Heineman, Thomas Russo, the chief legal officer of New York-based Lehman Brothers Holdings Inc., earned the second-highest bonus on our list. Although his $450,000 salary remained the same in 2002 and 2003, Russo’s bonus more than doubled — from $1,050,000 to $2,550,000. “Bonus is tied in to overall performance of the firm and things that I’ve been responsible for,” the CLO says. “A lot of things turned out really well in terms of litigation. The board, the chairman and the compensation committee were pleased.” Lehman Brothers was not parsimonious with its other top executives, either. The two chief operating officers and CEO received bonuses in the $5 million to $6 million range. Companies were also more conservative about stock option grants. In 2003 the size of the average award was $1,162,556 — 32 percent smaller than 2002′s amount. Corporations were more restrained because of concerns about unseemly executive pay and the controversy over whether options should be expensed. The Financial Accounting Standards Board is considering requiring that all public businesses expense their options, which in turn would lower earnings. Some companies, like Microsoft Corp., have voluntarily begun to expense options. Others haven’t formally made a decision but are realigning their executive compensation to downplay options anyway. Alltel Corp. doesn’t expense its options. Nevertheless, Francis “Skip” Frantz, the general counsel of the Arkansas-based company, saw his option grants drop from $5,289,318 in 2002 to $3,789,971 in 2003. By e-mail, Frantz said that he suspects the overall decline in options “can be explained primarily by the Sarbanes-Oxley Act-induced corporate governance scrutiny of executive compensation and the specter of a change in the accounting treatment of options.” But not every corporation felt that way. Three top lawyers who were involved in their companies’ key deals last year received generous options grants. Stephen Lambright, the GC of St. Louis-based Anheuser-Busch Companies Inc., received an option grant of $7,062,329 in 2002 and a grant of $7,394,857 in 2003. (Lambright announced his retirement at the end of June.) GCs who also saw an increase in their options grants are Viacom Inc.’s Michael Fricklas, who received $2,289,750 in 2003, and MGM Mirage’s Gary Jacobs, who got $4,807,271. With stock options facing intense scrutiny from shareholders, 2003 saw more companies turning to restricted stock grants. Unlike options grants, which can be worthless if a business’ share price falls below the option’s strike price, restricted stock can usually be cashed in for some value as soon as the executive’s vesting period ends. (Unless the share price falls to zero.) The biggest winners of restricted stock awards were David Frick of Indianapolis-based Anthem Inc. ($8,060,700), Lehman’s Russo ($2,857,314), and Frank Fernandez, of The Home Depot Inc. ($2,046,900). But while more general counsel received restricted stock in 2003, the average award was lower, $735,569, down 22 percent from $940,408 the year before. “The value is down because the stock price [was] down,” says one expert, executive pay consultant Brian Foley of White Plains, N.Y.-based Brian Foley & Co. Inc. “Roughly 75 percent of companies make grants during the first quarter, which was down in 2003.” But for general counsel who cashed out their options in 2003, the average gain of $2.4 million was higher, up almost a million dollars from the year before. Paul Sandman, the GC of Boston Scientific Corp., exercised the highest amount of options on our list ($19,629,911), while Intel Corp.’s F. Thomas Dunlap Jr. ($8,254,800) and UnitedHealth Group Inc.’s David Lubben ($6,003,760) also took home prodigious profits. These trends will continue next year, according to pay experts. “Across the board, executive increases in salaries will be a modest 2-4 percent,” says Claude Johnston, a compensation expert at Pearl Meyer & Partners in New York. For companies who choose to expense options, 2004 will be a transition year, with restricted stock awards as the long-term incentive of choice. But other businesses will wait and see if the option expensing regulation becomes mandatory in 2005. Says compensation expert Foley: “There are a group of people who do not want to run across the bridge until they absolutely have to.”

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