There is little doubt that attorneys are some of the smartest and best credentialed people working in any profession today. But for a variety of reasons, even the most brilliant legal minds often have a blind spot when it comes to fully understanding and evaluating in-house compensation packages. Furthermore, many of the law firm partners who have negotiated some of the biggest and most complex mergers in history are oddly reticent to engage in discussion when it comes to arguably the most personal of agreements, their own compensation. Accordingly, I’ve set out to produce an easily digestible primer on understanding the component parts of in-house compensation and the best practices for negotiating the same.
I hope this piece will provide those aforementioned lawyers with a fresh perspective that recognizes the tradeoff between the relative security of law firm compensation, especially during the lock-step years of being an associate, and the unique economic upside of in-house compensation. Indeed, the equity components of in-house compensation packages give attorneys—from junior counsel to General Counsel—an opportunity to be literally invested in their work. Only by acknowledging this dynamic are attorneys properly equipped to understand and negotiate the in-house compensation they have been offered.
In-House Counsel Base Salary and Bonus
Base salary and bonus (together known as “cash compensation”) are typically lower at in-house legal departments than those at Am Law 100 law firms. Conventionally, the cutback on cash compensation that law firm attorneys experience when going in-house is balanced by lucrative (though oft-underappreciated) equity compensation, which I cover in the next section. I should point out that this cutback on cash compensation varies by industry. In the financial services industry, for instance, in-house legal employers will strive to match the cash compensation of top-tier law firms. In manufacturing, energy, consumer goods, or pharmaceutical industries, in-house attorneys can expect cash compensation that is competitive, but certainly not on par with that of the Am Law 100. In-house counsel roles in media or entertainment industries usually offer even less competitive cash compensation (it’s undeniable that the perceived glamor of the industry makes people more willing to take a pay-cut). And in the pre-IPO technology startup space, it is not uncommon for in-house cash compensation to amount to less than $200,000.
An important feature of in-house cash compensation that law firm lawyers should recognize is the prevalence of “banding” systems. Banding systems tie certain ranges of cash compensation to certain levels of seniority or responsibility. These bands are often adhered to quite strictly, so in-house attorneys should not expect large increases in their cash compensation (beyond inflation adjustments, at least) until moving into a new band via promotion. While there is great variety in the quantity and breadth of the bands in place across in-house employers, it is safe to assume that the larger the organization, the greater quantity of bands available for in-house attorneys to move up through.
“Junior in-house counsel might expect a bonus of 15%-25% of base salary. Mid-levels, such as Associate General Counsel, could expect 30%-45% of base. Deputy General Counsel can expect 50%-75% of base. Finally, General Counsel should expect 75%-100% of base.”
With respect to annual bonuses, there are some key distinctions to explore between law firms and in-house legal. While law firms set bonus payout amounts that are tied to billable hour marks, in-house bonuses are calculated from a target percent of salary and are customarily tied to two metrics: company performance and individual performance. In the vast majority of in-house legal departments, individual performance will be weighted much more heavily than company performance and will be based on previously defined “achievables” that are assessed by the individual’s manager(s) in a year-end performance review.
By and large, these “achievables” are actually achievable and are not designed to be extraordinary feats outside the scope of the individual’s responsibility (unlike, say, someone working in sales, it’s more difficult to set quantitative achievables for an in-house lawyer). It is rare that an in-house counsel will either miss their bonus or receive a bonus greater than their target percent of salary, though on occasion I have seen in-house attorneys paid 1.5x-2x their target percent of salary in cases of exceptional performance outcomes. Generally speaking, in-house counsel can anticipate certain target percentages of salaries based on their seniority. Junior in-house counsel might expect a bonus of 15%-25% of base salary. Mid-levels, such as Associate General Counsel, could expect 30%-45% of base. Deputy General Counsel can expect 50%-75% of base. Finally, General Counsel should expect 75%-100% of base.
I will touch briefly on sign-on bonuses, just to say that they are seldom used other than as a means of recompensing an attorney that would have to forgo either unvested equity or an upcoming bonus if they were to leave their current employer late in the financial year. In the former case, the attorney would share with their potential new employer the details of the unvested equity that would be forgone, enabling the employer to make use of appropriate valuation models (e.g., Black–Scholes) to determine a sign-on bonus figure that would make the attorney whole.
Equity Components of In-House Counsel Compensation
While in-house cash compensation is not as competitive as that of top-tier law firms (with the exception of Fortune 100 companies, a few of which have awarded nine-figure pay days), the equity component of in-house compensation packages presents a longer-term economic opportunity that can significantly outmatch whatever short-term reduction in base salary or bonus a law firm attorney endures in transitioning in-house. By being granted equity in their employer, typically in the form of a combination of stock options and restricted stock, in-house attorneys acquire an investment in their company the value of which has the potential to grow exponentially.
“Initial equity grants, as well as subsequent equity grants received over the course of employment, are commonly comprised at a ratio of restricted stock to stock options between 1:2 and 1:3.”
This is where it gets a bit wonky. For those who, like me, have difficulty differentiating a convertible bond from a convertible BMW, here is a brief summary of the mechanics of stock options and restricted stock. A stock option grant gives the employee the right to a future purchase of a specified amount of the employer’s stock at or below the stock’s market price at the time of the grant (the “strike price”). If and when the employer’s stock price rises in the market, the employee will then be able to cash in on the difference between their strike price and the higher market price, without having had to purchase the stock previously (i.e., before a return on investment was known for certain). A grant of Restricted Stock Units (RSUs), in contrast, is a more straightforward grant of a specified amount of the employer’s stock that, though subject to certain restrictions, is awarded to the employee without them having to purchase it whatsoever. Accordingly, restricted stock is significantly more valuable than stock options, representing perhaps the most lucrative component of the entire in-house compensation package.
Initial equity grants, as well as subsequent equity grants received over the course of employment, are commonly comprised at a ratio of restricted stock to stock options between 1:2 and 1:3. Most importantly, in-house attorneys should expect each of their equity grants to be subject to a traditional “vesting” schedule that gradually deems as earned and exercisable (“vested”) certain incremental amounts of the restricted stock and stock options in the grant. Most equity grants will have a vesting schedule that is between three and five years in total duration and that includes a “cliff” of one year, meaning that the first increment of equity to vest will do so after one year, whereafter the rest of the equity in the grant will vest in more rapidly occurring increments over the remainder of the vesting schedule.
There is one other type of equity that has become increasingly common over the past decade—Performance Based Stock Units (PSUs). PSUs are a type of equity compensation offered by both public and private companies to their employees as another form of incentive pay. One of the main distinctions of PSUs is that PSUs are tied to specific performance goals. Recipients of PSUs must meet certain targets for the units to vest and be converted into shares of company stock. Additionally, PSUs have no strike price for employees to pay, meaning that there is no capital outlay for the employees. Performance goals typically fall into two categories—internal company targets (such as financial targets or more discretionary targets) and targets based on the company’s share performance relative to a peer group of companies or index.
As I indicated in the beginning of this article, understanding and appreciating in-house compensation requires a farseeing perspective that some law firm lawyers have yet to hone. Since the considerable value of both initial and subsequent equity grants is realized only over the long term, it follows that a long-term outlook (at least as long as applicable vesting schedules) with respect to an attorney’s professional and economic aspirations is required. Law firm attorneys considering a transition in-house should take a hard look at both their career and financial goals for the succeeding 10 to 15 years, incorporating into that view the economic opportunity that in-house equity compensation provides. Long-term financial planning is not well served by myopic ruminations over cash compensation cutbacks that prove relatively modest in the face of the outsized potential of equity grants.
Negotiating In-House Counsel Offers
Equity compensation not only deserves pride of place in an attorney’s prudent evaluation of an in-house offer, but it is also the compensation component with which attorneys can extract the most value at the negotiation table. While cash compensation seems to be the first item attorneys are drawn to bargain over, it is often the last item the in-house employer wants to negotiate. Though sometimes there may be wiggle room with base salary and bonus, the rigidity of banding systems is such that attorneys will inevitably capture more economic gain when negotiating over equity.
“There is perhaps a certain cynical expectation of a negotiation hinged on the belief that attorneys are wired by their nature to push back.”
When it comes to negotiating equity compensation, there are two strategies to highlight: negotiating for more stock options and negotiating for stock options to be refashioned into restricted stock. There is more flexibility to be expected on the stock options front than there is with restricted stock, as restricted stock provides a more direct claim of company shares for the employee. From there, if an attorney has exhausted their bargaining room for any outright increase in their equity grant, employers may be amenable to refashioning some of the offered stock options into restricted stock.
For example, consider a candidate that holds an offer for an initial equity grant of 1000 RSUs and 2000 stock options, presenting the candidate with the potential to have a total claim of 3000 shares from this grant. While the employer is not keen on increasing the restricted stock, let us say that the candidate successfully negotiates for 1000 more stock options, for a package of 1000 RSUs and 3000 stock options, bringing the total potential claim to 4000 shares. If the candidate is not yet satisfied, but the employer cannot countenance a total potential claim of more than 4000 shares for this initial equity grant, the candidate may be able to negotiate for a refashioned package of 1500 RSUs and 2500 stock options, capturing greater economic value for the candidate while keeping the total potential claim at the employer’s limit of 4000 shares.
With all that being said, any improvement made to the equity grant upon joining is almost certainly going to be a one-time concession, and the candidate should not expect future grants to be the same. It is also worth noting that annual equity grants are at the discretion of the Board of Directors, and while they are generally consistent and predictable, they are never guaranteed. While many lawyers by their nature understandably want to account for every future possibility, there are some things in life that have to be taken on good faith. Equity grants are one of those things.
As for the process of negotiation, my experience in the in-house legal talent market has revealed to me two distinct categories of negotiating stances taken by in-house employers. On the one hand, we have employers that expect some meaningful amount of negotiation and account for this with an initial offer below that which they know they will eventually be prepared to pay (there is perhaps a certain cynical expectation of a negotiation hinged on the belief that attorneys are wired by their nature to push back). These employers may be comparatively less constrained by banding systems and/or may be willing (if not eager) to see demonstrated the zealous advocacy skills attorneys are wont to cultivate. On the other hand, we have those employers that lead off with their very best offer in anticipation of negligible negotiation. These employers are usually those with their hands tied tightly by narrow banding systems, all too aware that negotiations will yield little for either side, save for wasted time and energy. While I concede that most in-house legal departments will be open to at least one round of negotiation, it is imperative that attorneys identify which category a potential employer falls in, lest the goodwill of the exchange be at risk.
I will conclude by suggesting that the identification of an employer’s negotiation stance, as well as the preparation and conveyance of an attorney’s negotiating positions, are matters in which an experienced legal recruiter can prove invaluable. Legal recruiters can engage as mediators in compensation negotiations, uniquely positioned to make clear to each party the particular negotiating stance of the other, while also communicating the asks and answers of the parties that they may be uncomfortable imparting directly to each other. Law firm attorneys that avail themselves of a legal recruiter liaison—and the foresighted financial perspective proffered above—will not be in jeopardy of squandering the promising economic opportunities that the in-house legal market has to offer.
