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Law360 (April 14, 2020, 3:45 PM EDT) -- As voluntary pay cuts sweep through corporate legal departments in response to the coronavirus crisis, some in-house counsel will soon see federally imposed pay freezes and pay caps if their organizations accept government loans — restrictions that could remain in place even after the economy recovers.
General counsel and other executives who earn above certain thresholds will see pay freezes or cuts if their companies accept direct federal loans under the stimulus package passed in March.
General counsel and other in-house leaders are no exception to the restrictions, and there are a number of general counsel in hard-hit industries that regularly earn more than $3 million in compensation a year.
Walt Disney general counsel Alan Braverman, for example, earned $13.7 million in total compensation in 2019, SEC filings show. Braverman's base salary has already reportedly been cut by 30% as a result of the crisis, but base salary is a small portion of overall compensation for executives like Braverman.
If a corporation like Walt Disney accepts federal loan money under the Coronavirus Aid, Relief and Economic Security, or CARES, Act to continue operating during the crisis, a general counsel earning $13.7 million in 2019 would not be permitted to earn more than $8.35 million in total compensation until a year after the loan is paid back under the law's formula for calculating the pay cuts.
"Having access to cash and loans is very attractive, but you have to weigh that against the strings the government imposes. A major string is going to be these executive pay cuts," said Jason Winmill, managing partner at corporate legal department consultancy Agropoint.
"Not being able to pay executives the market rate of what they would earn elsewhere is going to be a major consideration," Winmill added.
Under the new law, executives such as general counsel earning between $425,000 and $3 million in 2019 will see a pay freeze for the life of the federal loans, plus one year. Those who earned more than $3 million will not be permitted to earn more than the sum of $3 million plus one-half of the amount that their compensation in 2019 exceeded $3 million.
So, if they earned $5 million in 2019, their pay would be capped at $4 million, which is the sum of $3 million and one-half of the $2 million that their pay exceeded $3 million.
Total compensation under the law is defined as salary, bonuses, awards of stock and other financial benefits.
According to a 2019 report by legal recruiting firm BarkerGilmore, the average compensation for general counsel at corporations with revenue exceeding $5 billion was $1.4 million. At companies with revenue between $1 billion and $5 billion, the average was $720,000.
A 2019 report by executive pay consultancy Equilar found that the 10 highest-paid general counsel the year before earned between $10.9 million and $47.3 million, with Alphabet Inc.'s GC earning the most.
According to Winmill, the pay limits could play out a couple different ways when it comes to general counsel retention.
First, the crisis may kick off a recession, which would mean pay levels across the board would likely be constrained over a long period of time, regardless of which companies accepted the loans. Second, the economy could rebound and companies that have not taken loans will be able to offer raises and other perks.
"If we emerge into a rosy scenario and the economy bounces back and some companies have taken bailouts and are constrained in what they can pay top talent, I would expect those executives wouldn't be retained and would in many cases be lured away by opportunities that offer them market-based compensation," Winmill said.
Some general counsel that see pay freezes or cuts may choose to stay with their companies, working to get the companies back to a healthy place financially, according to Todd Sirras, managing director of executive pay consultancy Semler Brossy Consulting Group. And that may have its own perks, he said.
"One thing we know about crises is they create tremendous opportunities for people to step up and earn their stripes and alter their career path upward," Sirras said. "While you may need to take a short-term constraint on pay, if you do a bang-up job, then in the future they might say, 'That person helped keep us afloat and we will think about them very strongly in terms of a promotion.'"
Additionally, moving could be difficult for those in the hardest-hit industries, according to Equilar director of research Courtney Yu, because of the high levels of specialization and regulation in some sectors, which could limit transitions to other industries.
But even if some corporations do experience attrition, the situation could present opportunities, he said.
"Companies that do take federal loans and have a GC leave their position could open up the opportunity for those who are looking to become general counsels, even if the pay is limited," Yu said.
--Editing by Kelly Duncan and Amy Rowe.
For a reprint of this article, please contact reprints@law360.com.
