Dick Grasso Hits the Jackpot!

Saving Money the NYSE Way:
What a deal!
$140 Million and a New Contract 

SHAWN TULLY / Fortune 2sep03

[Forbes & WSJ articles below]

Here's a news flash that got lost in the pre-Labor Day furor over the New York Stock Exchange's decision to buy out chairman Dick Grasso's old compensation package for a mind-bending $139.5 million: His paymasters think they got a really good deal. They even have a point, as long as you understand the surreal world of NYSE compensation. Under Grasso's original deal, the Big Board had guaranteed him a fat return, reportedly 8%, on the deferred-comp account where he parked his annual bonus. As interest rates tumbled, the NYSE found itself forced to pay Grasso far more than he could have collected by investing in, say, Treasuries. The new arrangement cancels the fund and hands Grasso cash, so the NYSE no longer has to pony up millions a year to keep his pot growing. Says director Ken Langone, a co-founder of Home Depot: "This deal will save the exchange lots of money."

That still leaves this question: Why pay the guy so much in the first place? Grasso's salary and bonus last year were around $12 million, equivalent to 43% of the NYSE's profits. His accrued pension, now Grasso's own to invest as he pleases, is even more extreme. Grasso, 57, can expect to collect more than $5 million a year if he retires at 65. That matches the pension Dennis Kozlowski was supposed to get from Tyco and the kingly package of Terrence Murray, retired CEO of FleetBoston, a giant bank holding company that earns 40 times as much as the NYSE. Grasso boasts a strong record, and the deal includes a new contract that extends his term two years to 2007. But the heat from the pay disclosure could sorely test the directors' devotion even to the hairless hero of Sept. 11.

source: http://www.fortune.com/fortune/print/0,15935,480850,00.html 8sep03

Dick Grasso And The Company He Keeps

DAN ACKMAN / Forbes 7may03

NEW YORK - The reason chief-executive pay has spun so wildly out of control isn't hard to understand: CEO pay is determined by boards of directors--many of whom are also CEOs or aspiring CEOs who, guided by compensation consultants, seek to have their boss paid at least as well as the next boss. When the boss next door earns more, so too must their boss. It's a one-way ratchet.

Enter Dick Grasso, chairman of the New York Stock Exchange. He received a 2002 pay package valued at more than $10 million, according to The Wall Street Journal. This package came despite an economic downturn, declining share prices, weakening earnings at the Big Board itself and mini-scandals in which several NYSE board members were forced to resign. But at least with his CEO-style compensation, Grasso, 56, and a lifetime staffer at the NYSE, can hold his head high amidst the company he keeps--that is, other CEOs.

His fans will point to his leadership of the world's leading stock exchange, which the NYSE was before Grasso arrived. They will say he pulled together Wall Street after the Sept. 11, 2001, terrorist attacks--though the rest of New York and the country did the same. (Besides, post 9-11, the market took a dive.)

Grasso's earnings are actually substantially more than the average CEO. The Forbes study of executive pay indicates that the CEOs of the 500 largest companies on average made about $6.2 million last year in total compensation (which includes bonuses, stock options and grants as well as salary). Grasso's compensation (which the NYSE, a private not-for-profit institution, does not make public) would put him solidly in the top 100, with a package similar to John Kanas, CEO of North Fork Bancorp (nyse: NFB - news - people ), David D'Alessandro of John Hancock Financial (nyse: JHF - news - people ) and Kenneth Lowe of E.W. Scripps (nyse: SSP - news - people ). The NYSE counts nearly 3,000 companies among its members, so their average CEO compensation is presumably much less.

But if Grasso is compared to other members of the NYSE board, his compensation begins to look more ordinary. NYSE board member Henry Paulson, CEO of Goldman Sachs (nyse: GS - news - people ), earned $8 million last year, a down year for him. Mel Karmazin, president of Viacom (nyse: VIA.B - news - people ), earned $20.2 million. William Harrison of J.P. Morgan Chase (nyse: JPM - news - people ) earned $9.1 million. These CEOs can also build equity in ways Grasso cannot.

Grasso sits on the board of Home Depot (nyse: HD - news - people ). That company paid its CEO, Robert Nardelli, $20 million last year. Grasso also sits on the boards of nine or so nonprofits such as the Economic Club of New York, the National Italian American Foundation, the Congressional Medal of Honor Foundation, the Centurion Foundation, the New York City Police Foundation, the Trooper Foundation for the State of New York and New York University. These posts no doubt give Grasso access to a steady supply of war heroes and police officers to ring the Big Board bell. But when it comes to establishing his pay scale, Grasso must prefer to look at his own board rather than, say, the Baruch College School of Business advisory council. His members in turn look at their own paychecks and decide that Grasso, nice fellow that he is, should be treated likewise.

source: http://www.forbes.com/2003/05/07/cx_da_0507topnews.html 8sep03

Grasso's Giant Payday

Wall Street Journal 4sep03

New York Attorney General Eliot Spitzer's latest foray into territory that rightly belongs to the Securities and Exchange Commission concerns some peculiar trading privileges offered by several mutual funds to a hedge fund, Canary Capital. We'll let the ink dry on Mr. Spitzer's complaint before assessing it in detail, but on the surface it would seem properly to concern itself with the mutual fund industry's true customer, the small investor.

Isn't this the job of the SEC? So why is Chairman Bill Donaldson instead busying himself by demanding an explanation of the compensation of Dick Grasso , the New York Stock Exchange boss, who was recently allowed to cash out nearly $140 million in long-term compensation as part of an agreement to keep him on the job until 2007?

Mr. Grasso works for the board of the exchange, controlled in turn by the "specialist" firms that essentially own the exchange. The relevant question is why they'd want to pay him that much. One answer may be that not long ago the NYSE's floor-trading model was thought to be doomed by technology.

Not only was rival Nasdaq operating an allegedly lower-cost and more transparent automated trading system. But coming along were the ECNs -- electronic communications networks -- which contained the requirements of a stock market in the innards of an off-the-shelf personal computer. Suffice it to say, the NYSE has not gone the way of the Model T, and much of the credit goes to Mr. Grasso.

We won't rehearse here the virtues of the floor-screaming model of stock trading versus the quietly humming room of computers model. To some observers, the NYSE persists with its system of privileged specialists, who are supposed to keep trading orderly for the benefit of the public, mainly because it benefits the specialists, not the public. These columns have also complained about SEC rules that make it easier for the NYSE to fight off competition.

But it's also true that the exchange couldn't have maintained its position if it weren't able to provide execution cheap, fast and reliable enough to meet the needs of the trading public. The exchange may be a public utility in some sense, but it's also a business. In threading this needle, Mr. Grasso has evidently made the business's owners a lot of money. They, in turn, evidently are willing to spend a lot of money to keep him in harness a few years more.

How much anyone makes in our society is, to oversimplify, usually related to how much they can make for someone else. Mr. Grasso's pay package may well be seen by some as evidence itself that the specialist system is a costly anachronism. Indeed, many of the exchange's critics have been clamoring for it to "de-mutualize" -- that is, become a publicly owned, profit-seeking business itself. Then its governance wouldn't be dominated by constituents who have their own profit-seeking interest in perpetuating what many consider an obsolete business model.

But that's what good disclosure is for. One reason the world now knows enough about Mr. Grasso's rich pay package to deplore it is because of new disclosure obligations agreed to by the NYSE. Rather than harrumphing about Mr. Grasso's giant payday, the SEC ought to be applauding its disclosure. Now we know how much Mr. Grasso's efforts to preserve the NYSE franchise are worth to those who benefit most directly.