Top company lawyers take a pay hit

July 31, 2012: 1:34 PM ET

Last year's surprising 30% drop in compensation for in-house counsel could set the stage for cuts in CEO pay as shareholder ire over executive compensation grows.

By Elizabeth G. Olson

FORTUNE -- Top company lawyers make great money, but their compensation has taken a sizeable hit recently, even as corporate coffers bulge. And last year's surprising 30% drop in overall compensation for in-house counsel could ripple out and set the stage for CEO pay to be the next belt-tightening measure in the corner office.

Dozens of chief legal officers named in the newly released Corporate Counsel pay survey still made well over $1 million last year. But the overall plunge in legal officer compensation packages has sprung from the still-uncertain economy and pressure from shareholders who want more demonstrable links between performance and pay.

The blockbuster 28.7% rise in cash bonuses in 2010, according to the survey in the August issue of Corporate Counsel, was knocked aside last year when cash bonuses sank 7.7% to an average of $1.13 million, for chief legal officers.

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"The drop reflects the retrenchment in the larger economy," says James Wilber, a principal at Altman-Weil, a legal management consulting firm. "You saw significant compensation increases in 2010 because people thought the recovery was beginning, and issues like what is happening in Europe were not even on the radar. Now it is becoming common to see companies giving less guaranteed money."

Last year, corporate counsels saw their salaries dip by 1.8% to an average of $611,411. In addition to the decline in cash compensation -- which the survey ranked -- the average stock award for the highest-level legal beagle fell by 10.8%, to $1.43 million, and the average stock option award dropped by 18.7%, to $732,453.

Annual cash awards had been used by companies to reward upfront performance without being committed to a defined salary level for the executive's entire tenure -- a kind of insurance against slipups like an affair with an underling or padding travel expenses.

Even so, chief legal officers did very well for themselves. David Bernick of Philip Morris International, Inc. (PM), who has since resigned, had the highest salary, $1.6 million last year. Russell Deyo, general counsel at giant Johnson & Johnson (JNJ), received cash compensation of $4.9 million.

CBS Corp.'s (CBS) Louis Briskman's $5.2 million included the most cash bonus and non-equity incentive compensation, according to the survey. (He actually took home $14.6 million because he also exercised some stock options.) Google's (GOOG) chief counsel, David Drummond, scooped up $8.4 million stock grants and $6.2 million in stock option awards for last year. Although the technology sector often pays at the top level, Facebook's (FB) general counsel was not included because he was not listed as one of the top five highest-earning executives at the company.

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The survey also includes restricted stock grants, which typically can only be cashed in after a period of time. That compensation mechanism is supposed to help tie pay with performance and keep executives for longer periods of time.

Legal officers are definitely in the 1%, but their CEO bosses can haul down a lot more; S&P 500 chief executives brought home an average $12.1 million in compensation in 2011. GMI Ratings, an organization that tracks executive compensation, says its preliminary review of CEO pay last year found about A 3% salary uptick, but overall compensation grew by 15%, largely because stock options granted in lean times in 2008 and 2009 were now vesting. The GMI conclusions were based on a comparison of proxy filings for 817 CEOs.

"This year, we are beginning to see CEOs benefiting from equity granted in the financial crisis when stock prices were depressed," says Greg Ruel, the GMI Ratings report's author.

As the economy continues to wobble, share performance remains lackluster, and IF shareholders demand better evidence of performance, the CEO pay party could come to an end. And company lawyer compensation could be a harbinger of a slowing of the startling growth in posh pay packages.

"There is no direct connection between them now," notes Wilber, but he adds that the persistently dismal economy makes across-the-executive-suite cutbacks more plausible.

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Corporate compensation committees typically decide executive pay levels, including stock grants. And their decisions are under more scrutiny than ever, a development underscored by the recent resignation of an independent compensation consultant to Best Buy's (BBY) board. Don Delves, who worked with the company's compensation committee for seven years, left when the flailing consumer electronics chain awarded more than 100 managers retention bonuses that were not linked to performance.

So far, corporate compensation committees continue to pay their CEOs and other top executives at -- or above -- industry norms. Sky-high CEO salaries are still commonplace, as more than a few board members are committed to protecting the person who selected them to serve in the first place.

General counsel pay is also based on industry norms, and their power has been on the upswing as companies have been bringing in-house legal work that had long been farmed out to outside law firms, and hiring more inside legal help to handle it.

That expansion has been a refuge for some newly minted lawyers who have not found open legal slots elsewhere, but, as is the case at law firms, the top-dollar legal pay packages of recent years look like they just might have a ceiling.

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