Compensation Philosophy for Inside Counsel: Not as Obvious as You Might Think

Abstract

For compensation purposes, most companies probably treat their inside lawyers just like everyone else. This means that they do market studies to determine what “market” compensation is for different levels of attorneys, and then they use a combination of base salary, annual incentive bonus and some kind of long-term equity incentive (either restricted stock or stock options that will not vest for a number of years). The amount of the annual incentive bonus, within market norms, will be impacted by the quality of an individual lawyer as determined by his or her annual review and may also be impacted by the company’s financial results. In the nature of things, a company that is doing well financially will be more likely to be more generous with its bonuses, for all employees, than a company that is not. Accordingly, the company will create a bonus “pool” for its legal team that may lead to compensation that is “above market” and that delivers compensation beyond what an individual lawyer’s performance would otherwise have driven. In extreme cases, a company that has done extraordinarily well may de-couple actual compensation from market norms to a significant degree. As a result, the lawyers as a whole will get the message that the company’s financial performance can make a significant contribution to their own individual net worth. From the company’s perspective, that is exactly what it is trying to do and indeed the normal CEO and head of Human Resources will be very vocally proud of having delivered this result to their employees, lawyers included. They also will promote the fact that they have kept a large part of their compensation variable, which will automatically reduce if the company’s financial results take a turn for the worse.

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