General Counsel Compensation

Compensation Trends & Reward Practices Presented by Major, Lindsey & Africa and Towers Watson

November 2014

General Counsel Compensation

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The following is a summary of the recent trends in General Counsel compensation.

What has been the trend regarding executive compensation – including general counsel compensation – in the past seven years?

There has been significant volatility in executive compensation – including general counsel compensation – in recent years.

Pre-downturn (2007 and before), compensation was increasing due to favorable macro-economic conditions, such as liquidity and easy credit

In 2008, compensation (especially actual compensation) declined as corporate financial results declined – particularly annual incentive pay

In 2009, compensation (actual and target) either continued to decrease or stayed flat, as LTI was reduced to limit dilution

– The dramatic decline in market capitalization required many companies to reduce LTI awards

In 2010, compensation (both actual and target) began a moderate increase again, as companies achieved operating performance goals (sometimes at reduced levels), and share prices recovered

In 2011, compensation continued to increase, particularly when pay decisions were made early in the year before the dampening effect of the European debt crisis and concern for a second recession

From 2012 through 2014, compensation has flattened out except in cases where there has been very strong organizational performance, though stock price gains have resulted in higher realized value for outstanding equity awards

Have there been certain factors effecting compensation trends?

Pay sensitivity has been driven by two factors:

Annual incentives – sensitive to financial, budgeted performance – have varied up and down as the economic recovery has slowly progressed, and typically tracks closely to organizational performance

Long-term incentives – sensitive to stock market growth and volatility; as the stock market has improved, award values have generally been climbing, though more weakly in recent years

What are the trends so far in 2014 compensation data?

Recently released compensation surveys (such as the Towers Watson Compensation DataBank) show modest increases in General Counsel pay in 2014 (and similar for other executives):

Base salaries are growing moderately (~3.0%), in line with recent years

– Merit budgets are edging up only modestly each year; increases for 2015 are projected at 3.0%, up slightly from the 2.9% budgeted for 2014 (per WorldatWork)

– Energy industry companies are projecting larger budgets than the broader market

Technical employees have seen higher increases than non-technical employees with the energy industry

Annual incentive targets are consistent year over year, with actual payouts up slightly in 2014

Long-term incentive values have stabilized in 2014, rather than continue the trend of increases seen in recent years

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What specific factors drive general counsel pay?

The same factors that drive the compensation of other executives – as always, size matters. Companies with revenues greater than $20 billion typically pay total compensation (base plus annual and long-term incentives) at a level almost twice that of a company with revenues less than $5 billion

The strategic importance of the general counsel to the company/industry

– Heavy regulation of the company’s capital structure or operations (particularly during periods of prolonged change or intense scrutiny)

– Restructuring activity

– High degree of intellectual capital (i.e., need to protect) and constant improvement or change in the intellectual capital

– Regular/recurring M&A activity

How does general counsel compensation compare to other officers?

General Counsels, if they are NEOs, tend to be in the top 3 ‒ 5 paid positions – always paid less than a business unit head, usually paid less than the CFO if the CFO has equal or longer tenure.

What are some of the specifics regarding general counsel compensation?

Here are some specifics on general counsel compensation based on Fortune 1000 data collected by Equilar1

The information from the largest 1,000 US companies, where data for 262 general counsel were reported regarding compensation:

– Median annual revenue ‒ $7.0B

– Median market cap ‒ $7.8B

– Median number of employees – 16,089

Reporting Relationships:

Of the 262 general counsel reported:

– 232 (88.6%) report to the CEO

– 30 (11.5%) do not report to the CEO

Year over year growth:

Total compensation increased by ~ 5% for general counsels who were in the role both years

– Median total compensation was $1.6 million versus $1.5 million in 2012

1 Equilar, Inc. General Counsel Compensation Report, 2013

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Company Size: Consistent with typical executive compensation trends, company size is the largest driver of compensation, with the largest companies (over $20 B) paying 51% more than companies with $5 ‒ 10 B revenue.

Source: Equilar, Inc.

Tenure: Longer serving general counsels tend to receive a pay premium, with the longest serving (10+ years) earning a 22% premium over GCs with 3 ‒ 10 years’ experience.

Source: Equilar, Inc.

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Industry: Industries with more leverage and more value-added activities tend to have pricing power, with the result being that these industries generally pay more for executive services. To the extent general counsels are involved in the industry value-creating or intellectual capital creation or protection activities, their pay tends to be greater. The top three industries reflect more of the “change” factors

1 Finance & Insurance

2 Healthcare & Life Science

3 Technology, Media & Telecom

Source: Equilar, Inc.

What pay components are currently provided to executives, including general counsel, i.e., how is pay divided among base, bonus and LTI at large organizations?

The mix of pay between base salary, annual or target incentive, and long-term incentive (typically equity) for the general counsel (at median) is as follows (based on proxy data available in late 2013):

Base ‒ $472,500

AIP ‒ $318,100 (AIP is approximately 67% of base)

LTI – $823,021 (LTI is approximately 174% of base)

This results in a pay mix of approximately

Base – 30%

AIP – 20%

LTI – 50%

Source: Equilar, Inc.

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What equity vehicles are most frequently used?

In recent years, performance-based stock has become the most common award alongside time-based restricted stock and RSUs

Source: Equilar, Inc.

Do most companies use more than one type of equity award?

Most companies use a combination of two or three award types:

Two unique awards – 45%

Three awards – 30.9%

One award – 19.5%

Source: Equilar, Inc.

Are there typical combinations of awards?

Time-based Options, Time-based Stock, & Performance Stock – 21.8%

Time-based Option, and Time-based Stock – 7.3%

Time-based Stock and Performance-based Stock – 21.0%

Time-based Options and Performance-based Stock – 10.7%

Others – 39.2%

Source: Equilar, Inc.

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What are the typical vesting periods for LTI awards?

Time-based awards tend to vest over a 3 or 4 year period. Because of tax considerations, stock awards tend to vest annually on a graded basis or at a cliff, while options typically use graded vesting

Source: Equilar, Inc.

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LTI has seen more performance-based awards; how are those awards structured? What are the performance periods and metrics for award types?

The vast majority of performance plans operate using a three year performance period. Common performance metrics include EPS, Revenue, Operating Income, and TSR

Source: Equilar, Inc.

Finally, what does GC compensation look like at privately-owned companies?

Lack of LTI – when considering total direct compensation (base, annual incentive and long-term incentive) compensation is less than at comparably-sized publicly-listed companies because there are not recurring annual grants of equity compensation

Generally, because of the lack of equity compensation, total direct compensation may be reduced by as much as 40% to 50% of the amount of the compensation at a publicly-listed company