Median compensation for general counsel increased slightly between 2014 and 2015 at companies ranging from under $1 billion in revenue to more than $15 billion, according to “General Counsel Pay Trends 2016,” a new survey from Equilar, which collects information on 150,000 executives and board members of public companies. The healthcare sector delivered the highest median total direct compensation for GCs at $3 million, as compared to an average of $1.2 million for the S&P 500 as a whole.
Not surprisingly, GC compensation varies considerably by company size, as does the growth rate of compensation. For example, median total GC compensation at companies with revenue above $15 billion was $2.5 million, while it was $725,021 at public companies with less than $1 billion in revenue. The survey also shows that bigger companies have a higher rate of increase, with total comp at the companies with more than $15 billion in revenue rising 3.9 percent, compared to 0.5 percent for companies with less than $1 billion in revenue.
According to commentary provided by BarkerGilmore, a boutique executive search firm dedicated to placing General Counsel, Chief Compliance Officers and their strategic hires nationwide, the GC comp picture reflects the continuing expansion of the roles and responsibilities of top legal officers, a trend confirmed in a separate survey conducted by BarkerGilmore and NYSE Governance Services.
“Historically, the GC was a technical expert in the law who relied on law firms to do much of the heavy lifting,” writes BarkerGilmore, noting that it’s a new game for most in-house legal executives. “By the year 2020, 31 percent of GCs are expected to add the role of Chief Risk Officer and 25 percent will add Chief Government Relations Officer. These new responsibilities are in addition to Corporate Secretary and Chief Compliance Officer, which many GCs hold today.”
The survey also examines the range of components that go into a general counsel’s total direct compensation (TDC), which includes base salary, incentive awards valued at target, and the grant date fair value of equity awards. The challenge, the report says, is to strike a balance between fixed and at-risk compensation to motivate executives. “This pay philosophy aims to align executive interests with short- and long-term company performance without promoting excessive risk-taking.”
According to the survey, base salary increased steadily across each revenue range, but long-term performance incentives differed sharply by company size. For example, fewer than half of GCs at companies with revenue under $ 1 billion received long-term performance incentives, while those at companies with greater than $15 billion in revenue received a median of almost $700,000 in long-term incentives – the single greatest component of their pay.
Perhaps the most interesting aspect of the survey is how the pay mix varies across industry sectors. (See chart below.) BarkerGilmore opines that high-growth industries such as technology and healthcare emphasize hitting key performance targets and deemphasize salary. Lower-growth industries such as utilities and financials put far more emphasis on salary and less on performance metrics. For example, performance incentives are used most in the financial sector and far less in the services sector. Options awards are more prevalent in healthcare than any other sector. Tech companies favor stock awards, while the services sector is partial to annual cash bonus targets.
Given the ongoing trend of GCs playing a more strategic role in their businesses, it’s especially interesting to look at performance-based compensation designed to align executive interests with those of shareholders. The survey reveals significant variation between short- and long-term incentives. By far the most important long-term metric is relative total shareholder return, used by 28.6 percent of companies. That’s more than twice as much as earnings per share, the next most frequently used performance metric at 12.5 percent, followed by return on capital/invested capital (9.9 percent) and revenue (9.7 percent).
In sharp contrast, revenue tops the metrics list for short-term performance incentive compensation at 29.2 percent, closely followed by “other non-financial measures” such as leadership goals, productivity, diversity and strategy at 26.8 percent. Operating income/margin (23.4 percent) and EBITDA (22.8 percent) also frequently figure into the short-term performance metrics companies use for GC compensation.
“Regarding total shareholder return,” concludes BarkerGilmore, “GCs have reduced budgets by increasingly bringing work in-house that was traditionally performed by outside law firms. This has reduced legal expenses, shortened turnaround times, and improved overall support to the business team.”
To review the full survey, see the BarkerGilmore website at www.barkergilmore.com.
Published December 19, 2016.