Street Sleuth: Grasso's Pay Topped Most Peers', Drained Profit

Former Chief of Big Board
Did Better Than Executives
Who Set His Compensation

June 2, 2004; Page C3

Dick Grasso has suggested the compensation he received while head of the New York Stock Exchange wasn't out of line with what other Wall Street executives were earning at the time.

But his total compensation edged out most of his self-identified peers in the last several years of his tenure. By one measure, compensation compared with the net income of his employer, Mr. Grasso was far ahead.

Last week, New York Attorney General Eliot Spitzer demanded that Mr. Grasso return more than $100 million of the more than $200 million in compensation the Big Board gave or promised him, saying the pay package violated state law governing not-for-profit groups. Mr. Grasso responded to the lawsuit in a column on The Wall Street Journal's editorial page. "Reasonable people can disagree about what an executive should be paid, but the directors who evaluated my performance were well aware of the market for executive compensation on Wall Street, because that is where many of them worked and earned their own substantial income," he wrote.

Mr. Grasso's defenders also point to his record of accomplishment at the NYSE. The value of a membership seat on the Big Board went from $935,000 when Mr. Grasso took the helm in 1995 to $1.9 million when he left. Listings nearly doubled and trading volume surged. Also, the exchange plays an important role in financial markets world-wide, and Mr. Grasso played a large role in getting the NYSE up and running following the Sept. 11, 2001, terror attacks.

The belief that Mr. Grasso's pay should be commensurate with what is earned by the heads of Wall Street firms appears to have been held by at least one of the Wall Streeters who sat on the NYSE's compensation committee between 2000 and 2002, when Mr. Grasso's pay shot substantially higher.

"Conceptually, there was always a strong feeling as long as I was on the compensation committee that Grasso be paid comparable to a CEO on the Street," former Merrill Lynch & Co. Chairman and Chief Executive David Komansky told The Wall Street Journal in May 2003.

Whether other Wall Street executives on the compensation committee shared this belief is unclear -- neither they nor Mr. Komansky commented for this article. It also is unclear whether they knew exactly how much Mr. Grasso was being compensated. Mr. Spitzer's suit contends they weren't fully aware of Mr. Grasso's total compensation. A spokesman for Mr. Grasso wouldn't comment for this article.

Wall Street chief executives are among the best-compensated executives anywhere, receiving big slices of their companies' bonus pools as well as generous stock grants, says Ira Kay, the New York-based head of executive-compensation consulting at Watson Wyatt Worldwide.

From 2000 to 2002, the NYSE expensed $130 million in compensation and benefits for Mr. Grasso. The Wall Streeters who sat on the exchange's compensation committee didn't do nearly as well during that period.

The best paid of the group was Bear Stearns Cos. Chairman and Chief Executive James Cayne, who received $75 million in total compensation and benefits during that period. Goldman Sachs Group Inc. Chairman and Chief Executive Henry M. Paulson Jr. received $40 million. Mr. Komansky received $49 million. Lehman Brothers Holdings Inc. Chairman and Chief Executive Richard Fuld received $24 million. Robert Murphy, who stepped down as chief executive of LaBranche & Co. last fall, received $1 million in 2001, when he joined the company, and $1.7 million in 2002. Representatives for Mr. Cayne and Mr. Fuld declined to comment. Mr. Paulson, Mr. Komansky and Mr. Murphy didn't return calls seeking comment.

All of these firms earned substantially more in the three years ended 2002 than the NYSE's reported net income $132 million, with Bear Stearns posting total net of $2.3 billion, Goldman and Merrill each earning $7.5 billion and Lehman earning $4.1 billion. Even the much smaller LaBranche, a "specialist" stock-trading firm that matches buy and sell orders on the exchange floor, earned much more than the Big Board, pulling in $241 million.

The $130 million in compensation and benefits the NYSE expensed for Mr. Grasso for the years 2000 to 2002 was equal to 98% of the NYSE's reported income of $133 million. Mr. Cayne's salary was equal to about 3% of Bear Stearns' profit over the same period, and the incomes of Messrs. Paulson, Komansky and Fuld came to less than 1% of their firms' earnings. Mr. Murphy's total compensation at LaBranche in 2001 and 2002 came to about 2% of net income. "When you look at [Mr. Grasso's] level of pay, it was a huge hit to profit," says Frank Glassner, chief executive of New York consultants Compensation Design Group.

The NYSE also is supposed to function as a regulatory institution, and for that reason some observers have said it is inappropriate for its chief to be considered a "peer" with the heads of Wall Street firms. "It is exactly the wrong thing to do to compare Grasso's job to the heads of Wall Street firms," Mr. Glassner says.

Mr. Grasso's pay also differed from Wall Street compensation packages in that it was cash, rather than a combination of cash and stock typical on Wall Street, meaning a weak share price could undercut a Wall Street chief's compensation. Because Mr. Grasso's compensation was cash-based, his pay wasn't dependent on the future success of the NYSE.

Write to Justin Lahart at justin.lahart@wsj.com