To keep up with the ever-changing regulatory environment and to manage routine legal needs, high-growth companies are bringing their legal counsel in house earlier. They see the value of having someone at the table who can help with managing both business strategy and risk. Corporations now want lawyers with a strong business orientation in addition to relevant experience and leadership abilities.
To get what they want, companies need to plan to compensate their in-house counsel accordingly. But several factors go into how a General Counsel gets compensated. Base salary is only the starting point and even that will vary based on company size and industry and whether it’s public or private.
At our recent GC Compensation event in San Francisco, we explored these factors as well as trends within the legal industry. Stephen Kim, General Counsel for Marin Software, and Mark "Kaz" Kazmierowski, Sr. Consultant at Towers Watson, shared their experiences and knowledge.
Are there many differences in GC compensation based on industry? For example, would a technology firm GC expect higher compensation than one in a consumer goods company?
Kaz: Compensation levels tend to be influenced by industry and size or scope of company. What we've found is that pharma/biotech/technology industries typically have compensation package "opportunities" that lead "general industry" or consumer packaged goods. The delta in pay is primarily due to the magnitude of the equity component. Those in hot markets and those with a lot of intellectual capital, and where incumbents can directly contribute to value creation of the company, often command premiums in equity and pay in general. Whether a company is public or private also influences overall pay, with public companies often being able to offer more tangible equity (e.g., restricted stock) and equity values in excess of what might be provided under a cash-based plan at a private company. Obviously, if we are in a private startup company on an IPO trajectory, a GC may take a cut to cash pay and bet on the equity play – higher risk with potentially higher reward.
Stephen: The last company I worked for was a consumer packaged goods company. Now I'm back in a technology company and there are significant differences. Consumer packaged goods has a more traditional model, with a greater proportion of the comp package taking the form of base and bonus rather than equity. Tech, however, is more equity driven, often leaning on stock as the largest percentage of compensation. So while total direct compensation may be similar, the geography of the package looks different.
What specific factors are used to assess GC compensation: Number of employees? Number of direct reports? Revenue? Legal budget?
Stephen: Different companies can take different approaches, but for public companies, it depends on what the Board and compensation committee believe to be important. The compensation committees I have worked with have always been data driven, looking at peer groups of similar size in the same industry and market cap to drive the analysis. Focusing on the number of employees can produce irregular results, so we focus on companies that are the same revenue size and then look at the General Counsel in that group to assess the range of appropriate compensation. From there, the softer factors of individual performance, internal pay equity, retention issues and other considerations come into play to decide where in the range the executive should fall.
Kaz: For any market comparison, it is important to start off with defining appropriate criteria and parameters. Sometimes we find that our comparators for talent differ than those that we compete with from a company product/services perspective. "Reasonableness" should rule the day and decision making. Start with industry and revenue size and look to published survey sources or proxy disclosures. Other GC benchmarking considerations could include the number of employees and the company's reliance on outside firms. If a company is bringing new counsel in house and eliminating (or downsizing its use of) outside counsel, then some of that cost needs to be allocated to in house. Benchmarking may also take into consideration if the GC will have additional areas of responsibility or reporting, such as HR or IT or a significant international focus.
Does compensation differ based on whether the GC role in a particular company is more technical or more a consigliore role?
Stephen: Yes, very much so. Sometimes a GC who is more technical is the type of GC that is just keeping trains running on time—the one who is dealing with the tactical needs of the company—and thus is often paid less. That is also the type of GC that may not report to the CEO. There is nothing wrong with that type of role; it just depends on what the company needs.
Kaz: A technical role may not be a direct report to a CEO and may be more day-to-day operations-focused. Their compensation really depends on the size of the team they manage and whether they are looking to outside counsel for assistance.
The GC on the senior management team oftentimes is involved in setting strategy, and in those cases, you do see a pay premium as compared to counsel in an operations role. If a GC is engaged in strategic matters, sits on the executive team and can demonstrate value creation, the pay opportunity will often be structured with that future impact in mind.
Stephen: It's more of a senior advisor role, so at a larger scale company where the stakes are higher and legal has enterprise-wide consequences, the candidate profile is for someone who is more senior and experienced. If that is the need, then a CEO probably is more interested in a senior executive who can hold their own with the executive team and who will have credibility with the Board. If that’s the profile, that person is going to cost more. On the other hand, for earlier stage companies who are ramping up rapidly, the focus for the GC may be to support the commercial side of the business and to get contracting processes in order and help the flow between legal, finance, product and customer service to operate smoothly. If that is what's needed, a company may not need a 20-year veteran, so they would aim for a less experience but up-and-comer profile and pay less.
Today, we see companies hiring at the senior most level—the General Counsel—because they are either experiencing a period of turnover and they have not sufficiently developed a succession plan or they are growing so rapidly that they need to upgrade their executive team. In either case, compensation must be thought through in advance before beginning the hiring process.
If a company is looking to hire someone from outside, they should have an understanding of the market comparables and have budgeted something appropriate that aligns with their own internal compensation structure. In my experience, when there is an internal candidate, his or her opportunity is the same as for an external candidate.
Because the economy is stable, the market is very active right now, and there is a lot of very strong talent on the market. Although it may be a bit counterintuitive, the high activity level means that the best candidates are getting multiple offers. Companies can find it challenging to both find candidates that meet their criteria and have a compensation that is attractive enough to get the candidates they want. Thus in turn, a company needs to be prepared to address compensation and align it with market expectations.
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Judy Allen the Managing Partner of Major, Lindsey & Africa's Northern California offices. Her search practice is focused on senior level and General Counsel positions within Fortune 1000 companies as well as on rapidly growing companies for whom she has created and developed in-house legal departments. Judy has consulted with clients throughout California and across the nation in collaboration with her colleagues.