March 2003

 The Grim Outlook

In-House Counsel Compensation Remains Flat as Economy Slumps

By Amy I. Stickel

 

FORGET RAISES, bonuses and stock options this year.  If you have a job, you should be grateful.

    "There are a lot of unemployed in-house counsel out there," says Martha Fay Africa, managing director of Major, Hagen & Africa—a legal placement firm based in San Francisco.  "A lot of talented people are on the market.  And a lot of people are available who will work for less money."

    Kathryn Parker, a director at PricewaterhouseCoopers, says the view in New York is about the same.  "People are sitting put, happy they have a job," she says.

    And those who don't have a job right now are feeling the pressure.

    A former partner in the legal department of Arthur Andersen, R. Peter Fontaine lost his job in August 2002.  Fontaine spent the first 16 years of his 22-year legal career at the now-defunct Digital Equipment Corp. before moving to Andersen.  He has launched his own consulting business, NewGate Partners, and splits his time between Chicago and Boston.  It was a better option than most of the in-house counsel opportunities he has seen, particularly for a lawyer who has been tainted by the sin of working at Andersen when it imploded.

    "Going to work as a staff attorney at an insurance company at the same level as people six years out of law school would not be fun for me," Fontaine says.

    If the right opportunity came along, Fontaine would consider returning  to in-house work.  But the position would have to carry enough responsibility and challenge, and those sorts of positions aren't easy to find these days.  So for now, he would rather build up his own business advising legal departments on a variety of matters—from how to better integrate themselves into the business to learning how to listen, rather than advocate.

    Some of his former coworkers cannot afford the luxury of pursuing such a dream.  Fontaine knows of many Andersen lawyers with sterling backgrounds who are quickly running out of money as they struggle to find a decent paying job.  And for the lucky few who have found work, they often have to take a significant pay cut.  For instance, one of his colleagues took a $40,000 pay reduction to go to work in a law firm, on top of having to relocate from Wisconsin to the more expensive Chicago area.

    "In a market like this, it's very difficult to get consensus that a company should hire a lawyer from Arthur Andersen," he says.  "So people are taking jobs that are less than what they had, in terms of sophistication or money.  But they go to work because they need the money."

    Of course, Fontaine acknowledges, it may be even harder for former in-house counsel from Enron to find gainful employment.

A Dearth of Options

But the job and salary market of the past couple of years hasn't been good for even those in-house counsel whose companies have been untouched by scandal, according to our analysis of hiring trends and compensation reports.  This time last year, some experts predicted the recession would end by 2003, and corporate performance—and, by extension, in-house counsel salaries—would be more robust.

    But a look at salaries, bonuses and other forms of compensation from 2002 shows that in-house remuneration generally continues to drag, as the economy stubbornly refuses to improve.  And this year, no one seems optimistic that the economy is on the verge of a turnaround.

    For this year's compensation report, we examined four different sources of information on in-house counsel salaries:  The Abbott, Langer & Associates Inc. Survey of Compensation of Legal & Related Jobs; The Altman Weil Inc. Law Department Compensation Benchmarking Survey; The William Mercer Finance, Accounting & Legal Compensation Survey; and The PricewaterhouseCoopers U.S. Law Department Spending Survey, which analyzes data from 207 companies.

    In addition, Pricewaterhouse provided us with three years' worth of data from 82 companies that have responded to the survey each year from 2000 to 2002.  This gave us a glimpse at the ups and downs of in-house counsel salaries, including base salaries, bonuses and long-term compensation, across a variety of industries.

    The survey's findings?  (Before you read on, remember what we said about being glad to have a job, if you do indeed have one.)  Compensation is, generally speaking, down across all seniority levels and is showing no signs of regaining its former health.  And other surveys report similar findings, although that is not a universal consensus.  Partly, that is due to timing—some surveys were conducted earlier than others, for example, and the full fallout of the economy is not necessarily reflected in the results.

    According to the PricewaterhouseCoopers report, grand total cash compensation (which includes base salary, bonus and long-term cash compensation) was less in 2002 than in 2000 at four different staffing levels.  In 2000, chief legal officers made a median grand total cash compensation of nearly $1.1 million; in 2002, it was $675,603.  Senior counsel in 2000 made a grand total of $209,821.  Last year, it was $185,022.  And staff attorneys, who made $159,154 in 2000, made $152,718 last year.

    The hit comes not so much from a drop in salary and bonuses.  In fact, cash compensation for general counsel, senior counsel and staff attorneys increased in 2002, compared to 2000—although general counsel and staff attorneys made less in 2002 than they did in 2001.

    It's the value of long-term incentives, such as stock options, that plummeted as the economy soured and the dot-coms went belly up.  Chief legal officers saw long-term incentives as a percent of grand total compensation drop from 44.8 percent in 2000 to 29.6 percent in 2002.  For staff attorneys, nearly a quarter (23.9 percent) of their 2000 salaries consisted of long-term incentives.  Last year, that fell to 12.6 percent.

    The impact may be harder on staff attorneys than on chief legal officers—even though the drop in actual dollar amounts were far more severe for the most senior of legal officers.  (Staff attorneys saw the value of long-term incentives fall from $33,850 in 2000 to $9,273 in 2002, compared with a drop for chief legal officers from $459,873 to $75,027).

    "At the highest levels, there was almost an expectation that long-term incentives could fluctuate," Parker says.  "At the lower seniority levels, there was probably more dependence on the incentives.  Proportionally, the decrease hits them more."

    And few expect bonuses to provide much of a cushion in the next year or so.

    The Altman Weil survey found that bonuses were actually up for chief legal officers and senior attorneys and down only slightly for high-level specialists.  But Altman Weil released its survey in October 2002, and the results don't necessarily reflect the economy's continued faltering.

    "These bonuses we saw in 2002 are lagging behind the downturn in the economy," says James Wilbur, a principal with Altman Weil.  "If our economy stays down throughout 2003, I'd be very surprised to see any increases in corporate counsel compensation, whether we're talking about base salary or bonuses."        

    Those in-house counsel who put money ahead of other factors are now paying the price for playing roulette with their careers, according to Aaron Williams, president of Aaron Consulting, Inc.—a nationwide attorney-recruiting firm based in St. Louis.  He describes the dot-com boom as one where 30-year-old CEOs hired 27-year-old lawyers to be general counsel.

    "Dot-com companies were not reality," Williams says.  "They were a pure gamble."

    Now, according to Williams, many in-house counsel candidates see the importance of getting back to basics.  In-house counsel who are searching for jobs are looking at established companies where they understand the business plan, trust their employers and enjoy the mix of work.

    "You have to do your homework on how this company is making its money and whether it is making money," he says.  "Everyone wants to make money, but other things come into play."

    "Options are nice, but they are not putting food on the table," he adds.

    Corporate legal departments are now more receptive to signing bonuses, an approach his firm has advocated for years.

    "More companies see it's a fair thing to do, especially if there are relocation issues," he says.

    However, many companies that are hiring don't have relocation issues, according to Africa.  Since so many lawyers are looking for work, legal departments are having few problems finding lawyers in their geographic area.

    And legal departments that use headhunters can afford to be extremely picky right now, she says.

    "They are demanding, for example, that candidates be associate general counsel from a Fortune 100 company who managed a $1 million to $2 million budget and oversaw the corporate secretary function," she says.  "Then, they get started on the true requirements."

It Pays to Specialize

If there is an upside for anyone in this grim job market, it is for those in-house counsel who have a specialty that is in demand—those who have what Fontaine calls "a very narrow, crisp, technical focus."

    "There are virtually no jobs for generalists," Fontaine says.  "And that doesn't bode well for in-house counsel, who tend to be generalists."

    A strong intellectual property background, particularly with a healthcare emphasis, is in demand, as are lawyers who have experience with Food and Drug Administration regulations, according to several experts.  And those with experience in the corporate secretary function or with government relations experience have found their skills are now highly desirable in the post-Sarbanes-Oxley corporate world.

    According to those companies that responded to the PricewaterhouseCoopers survey for the past three years, however, in-house counsel who focus on bankruptcy, mergers and acquisitions and finance saw the biggest jumps in total cash compensation in 2002.  That's probably not a surprise, considering the demand for bankruptcy and transactions lawyers.

    Bankruptcy attorneys saw their pay jump a median of 10.4 percent, M&A attorneys received 6.4 percent more and finance lawyers earned 7.9 percent more.

    Those who earned the smallest increase were benefits/ERISA/executive compensation attorneys and tax lawyers, who each got a 0.5 percent bump in pay from 2001.

    But then again, lawyers who understand executive compensation may just find fatter paychecks next year, because their skills may be in demand in the wake of recent corporate scandals.

    All of this may not bode well for those seeking junior level positions, especially as law students begin to flood the market with their résumés.  In fact, Africa predicts in-house counsel may never see another market like the dot-com boom again, and she worries whether those who are still flocking to law schools will have jobs when they graduate.

    If those students do find jobs, they, too, will almost certainly have to cope with diminished expectations.  The big firms in Silicon Valley and New York aren't signing first-year associates to six figure salaries plus bonuses anymore.

    But even the glory days for in-house counsel may not have been as wonderful as we all thought, at least compared to other executives, according to Lee McCullough, a senior consultant with Mercer Human Resource Consulting in New York.

    The Mercer study examines the compensation of not only legal departments, but also of finance and accounting departments.  That survey has found that lawyers have not necessarily done as well financially as their counterparts with MBAs, even during the heyday of the late 1990s.

    Partly, that has to do with the large number of lawyers practicing today.

    "It's been a supply and demand situation," McCullough says.  "It's almost as if the searchlight hasn't been on legal."

    But as in-house counsel study their pay stubs, they can take a little vindictive pleasure that the current market isn't much kinder for their coworkers in finance and accounting.

    "Incentives for everyone have been down, since corporate performance has been down," McCullough says.