Executive Compensation at the NYSE

“The NYSE didn’t move fast enough from its roots as a Gentleman’s Club (involving
the odd crook, to be sure – i.e. Richard Whitney) to the ‘grotesque governance’ of the
1990s. To be head of the NYSE was considered an honor for which one was paid a
‘numeraire’ by a board composed of people who reflected honor on the institution. The
scarecrow from the past was badly outmatched in the world of Langone, the corrupt
consults, the languid board, and the feral greed of Grasso.
It is not at all clear that the NYSE should have a CEO with so much power that he
can establish his own salary and that he can help his friends (specialists fi rms) to maintain
their power to extract significant monopoly profits from their positions in NYSE trading.
The NYSE’s preliminary pre-tax earnings were likely to be about $53 million for
the first five months of 2005, versus $22 million in the same period the previous year.
They weren’t even earning as much as they paid their CEO.
It is difficult in the context of a non-profit to determine the CEO’s ‘value added.’
In the case of a non-profit, this is almost an oxymoron. To the extent that he prolonged
the ‘legal’ monopoly through which a few people ‘skim’ the transactions of one trillion dollars-
a-day for their own benefit, he was worth a lot, but can that be accepted as the
last word?”
-Robert A.G. Monks

In the early twenty-first century, the New York Stock Exchange was not a government
agency, a private entity, a nonprofit or publicly traded company. It was a little bit of all of
them. Like a government agency, it operated as an SRO (self-regulatory organization),
exercising the delegated regulatory and enforcement powers of the SEC and operating close
to a monopoly. Like a private company, it operated without the public disclosure
requirements and oversight of companies that sell stock to the public. While it was not a
charitable organization, it operated as a not-for-profit, but when it came to paying its CEO,
Richard Grasso, it was like a public company. In August of 2003, the NYSE announced that it
would make Grasso a lump-sum payment of nearly $140 million in deferred compensation
and retirement benefits as part of a new contract extending his tenure by two years. The
response from regulators, members of the Exchange, the press, and the public was
immediate and furious.

The NYSE decided to underwrite a study of its executive compensation system. The study is
called the Webb Report, after its chairman, Dan K. Webb, Winston & Strawn, LLP. The report
included significant recommendations in the public interest but was written as a self-study.
Over Grasso’s objections, it was made public.

WAS THE PAY OUT OF LINE?

Grasso’s predecessor, William Donaldson, who was chairman of the SEC when Grasso’s
compensation was revealed, never made more than $2 million a year in that position.
Grasso, however, reportedly with the encouragement of compensation committee member
Ken Langone, decided he should be paid like the CEOs of the companies listed on the
Exchange.
Grasso worked for the Exchange for his entire career. His annual income went up
consistently over the years. In 1995, he was named CEO and chairman and his pay was
slightly over $2 million, but by the time of the shocking 2003 disclosure, the compensation
included various components of deferred salary and pension funds, some with an
exceptionally generous guaranteed internal rate of return (see table 7.7). The compensation
arrangements were approved by the compensation committee and referred to the full board
of the NYSE for approval in the February meeting following the compensation year (i.e. in
2000 for 1999 compensation). In some cases (the long-term incentive plan, for example), a
plan was not intended to include the CEO. However, Grasso arranged through negotiations
for his contracts to be included.
The board members were all busy men and women and were placed on the board of the
NYSE for reasons other than their expertise in financial and personnel matters. The Webb
Report, the internally funded consultant report, notes that a worksheet provided to committee
members and to the full board did not include CAP figures. The Mercer Report provided the
figures, as shown in table 7.7, with the following note at the bottom of the data: “Mr. Grasso
will also receive a capital accumulation award equal to 50 percent of the variable
compensation.” At least one compensation committee member, former New York State
Comptroller Carl McCall, admitted that he had no idea what the total number was.

The use of comparables for the NYSE compensation started in 1995 (for the year 1994). A
new list was presented to the compensation committee and the NYSE board every year by
Hewitt, one of their compensation consultants. In the year 2003 (for 2002), the list included
16 firms:
Aetna Inc.
AIG
Allstate
American Express
Chubb Corp.
CIGNA
Citigroup
Fannie Mae
Federal Home Loan Bank
Fleet Boston Financial
Freddie Mac
GE Capital
GMAC
Mellon Financial
Merrill Lynch
Wells Fargo

In what way are these firms comparable? Where are the other “non-profits” in the list?
They included the quasi-governmental organizations (Federal Home Loan Bank, FNMA, and
Freddie Mac) as “the best we can do.” The studies on nonprofit fi rms almost always
conclude that executive compensation depends on the size of the organization (and not,
surprisingly, the complexity of the organization). One way in which companies on this list are
comparable was that several were in trouble with the SEC, including Fannie Mae and AIG.
Note, also, which of these firms was represented on the NYSE board. The CEO of AIG, for
example, was on the NYSE board.
Look at these fi rms by category of business.

Investment bankers:
Mellon Financial
Merrill Lynch
Wells Fargo

For-profit financial institutions:

Aetna
American Express
CIGNA
Citicorp
Fleet Boston Financial
GE Financial
GMAC

Government-sponsored entities, GSEs (not-for-profit):

Fannie Mae
Federal Home Loan Bank
Freddie Mac

Other:
AIG
Allstate
Chubb
GMAC

Grasso spent years as the CEO, developing relationships and creating a friendly board. He
was the boss at the NYSE, so he also influenced the human resources people (who worked
with the compensation consultants and the board committee in making annual salary
recommendations). Grasso had all the power he needed to manipulate his earnings through
the NYSE people, the compensation consultants, and the board.

Source: D. Jeanne Patterson, CASE STUDIES: CORPORATIONS IN CRISIS