THE QUESTIONS ARE BELOW IN BOLD. On September 17, 2003, Richard A. Grasso resigned his position as chairman and CEO of the New York Stock Exchange (NYSE). At the time of his resignation, Grasso had not been charged with doing anything illegal. Rather, he was forced to resign on the grounds that his compensation was excessive. In other words, Grasso was paid too much.

How did charges of overcompensation become grounds for resignation? After all, the NYSE board had approved Grasso's latest pay package just 41 days earlier. The approved package allowed him to transfer $140 million in retirement and bonus money to his personal account before he retired. Critics of Grasso's compensation package, however, argue that the board's decision was based on Grasso's deception as well as a series of errors in governance.

Grasso was not born wealthy. His father abandoned his mother when he was a very young child. Grasso dropped out of college and later began his career as an $80-a-week clerk for the chairman of the NYSE. In other words, he was a person who worked very hard his entire life and overcame many obstacles to achieve success. If anyone had a right to feel entitled, perhaps Grasso did. When he resigned, Grasso had been at the NYSE for 36 years.

Compensation the Key Dispute Issue

A key issue in Grasso's pay dispute was whether the CEO of the NYSE should be paid a salary comparable to that of a major corporate CEO. In 1995, the chairman of NYSE's compensation committeewho at the time was Stanley Gault, the CEO of Goodyearargued that the CEO's pay should be comparable to the pay of CEOs at major corporations. Gault's concern was that the NYSE would lose talented employees to the private sector if it was unable to match the private sector's compensation for comparable jobs. Gault prevailed in spite of the fact that the NYSE is not really comparable to a major for-profit corporation. Instead, it is a relatively small not-for-profit organization whose primary purpose is regulation. There are huge differences between the NYSE and a large for-profit-corporation in terms of the number of employees, responsibility, and revenues.

Grasso began his tenure as CEO of the NYSE in 1995. Under Grasso's 1995 contract, he received a base salary of $1.4 million plus a bonus. The bonus amount was calculated as follows: As a benchmark, consultants calculated the median pay for the CEOs of selected companies (which included huge corporations like Citigroup and AIG). This amount was first reduced by 10 percent and then multiplied by a performance score called the Chairman's Award. Grasso had a voice in determining that score, which could cause Mr. Grasso's pay to exceed the median pay earned by CEOs at the selected companies.

The bonus became even more generous under the direction of Ken Langone, whom Grasso himself appointed chair of the compensation committee in 1999. Langone's philosophy was you can't pay a great manager enough money. In 2000, for example, the board unanimously approved the compensation committee's recommendation for a bonus award that reportedly exceeded the benchmark by $15.7 million. Grasso made $26.8 million that year. After September 11, 2001, when Grasso was lauded as a hero for getting the NYSE back in business soon after the terrorist attacks, his total pay package was $30.6 million.

Meanwhile, Grasso's retirement fund was growing at a tremendous rate because of several unusual provisions. Senior executives' pension payouts usually depend on their tenure with the company and the average salaries they receive in their highest-earning years. Grasso not only was credited with extra years of service, but he earned pension dollars based in part on his big cash bonuses. In contrast, the CEOs of large corporationssuch as the CEOs who made up his benchmark groupgenerally receive much of their compensation in the form of stock grants and options, which are not included in the computation of their pension benefits. As a result of beneficial provisions, during some years, Grasso could actually earn as much as $6.8 million in retirement benefits for every $1 million in bonuses!

In January 2003, Grasso announced that he wanted to take all the money out of his retirement accountnearly $140 millionin return for staying on as CEO through mid-2007. (Normally, of course, he would have been entitled to his retirement funds at the time he retired.) In August, the board agreed and issued a press release announcing that Grasso would stay on as CEO and disclosing the $140 million payout.

Greed or Merit?

Once the payout became public, there was a firestorm of outrage. The press was relentless, and there were many calls for Grasso's resignation. On September 17, 2003, the board, in a 13 to 7 vote, asked Grasso to resign, and he agreed. Then, in May 2004, New York State Attorney General Eliot Spitzer filed a civil suit against Grasso under New York State's Not-for-Profit Corporation Law, which requires the compensation practices in nonprofit corporations to be reasonable. Spitzer also named Langone in the lawsuit but concluded that the rest of the NYSE board had been deceived when they approved various aspects of Grasso's pay and benefits packages.

What can we conclude about the fairness of Grasso's compensation? On the one hand, there is no question that the NYSE prospered under Grasso's leadership. Listings had gone up and market share had increased, as had the value of a chair on the exchange. New computer technology that would have decreased profits had been rejected. And everyone admits that Grasso was heroic in getting the NYSE reopened after the September 11 attacks.

On the other hand, some information might lead us to believe that greed also played a role. There are indications that Grasso jealously guarded his benefits and perks. Although the board may not have known the full amount of Grasso's pension benefits, Grasso's executive assistant testified that Grasso received regular updates from human resources on the value of his pension. He once withdrew $6 million in retirement savings to buy a new house. Each year, he cashed out a week of unused vacation time, and he once charged a $759 pair of sunglasses to his expense account with the justification that the sunglasses were needed to limit glare during on-camera interviews.

Subsequent Revelations

After the scandal broke, the NYSE commissioned an investigation under the leadership of former federal prosecutor Dan Webb. At first, the NYSE refused to make Webb's findings public or even to turn it over to Grasso's defense team. They argued that the report was protected under attorney-client privilege. Protracted court battles on release of the report did not end until early 2005, when a New York court ruled that the report was not legal advice and thus was not protected under attorney-client privilege.

The Webb report, as it is now known, was not favorable to Grasso. It contended that the New York Stock Exchange had not used good governance practices, because Grasso had been involved in the process that calculated his pay and benefits. As evidence, the report noted that Grasso had personally selected which board members served on the compensation committee, and some directors he selected were those with whom he had friendships or personal relationships. The report was also willing to pass moral judgment on the size of the benefits package, concluding that Grasso's pension benefits were several times more than what a reasonable pension would have been. Overall, there is general agreement that the report found Grasso's pay excessive.

Potentially more serious allegations also arose. SEC lawyers asked Grasso if he had attempted to prop up the price of stock of the AIG Corporation as a gesture of friendship for Maurice R. Greenberg, then chairman and CEO of AIG. Specifically, Grasso was asked if he had put pressure on AIG specialists at Spear, Leeds, and Kellogg, a unit of Goldman Sachs, to support the price of AIG stock, in part by setting up a $17 million fund to buy AIG shares. The state was expected to argue that Grasso was motivated to do Greenberg favors because Greenberg was a member of the NYSE compensation committee from 1996 to 2002. Spitzer contended that Grasso was guilty of a conflict of interest because his position with the NYSE gave him regulatory authority over companies, like AIG, whose CEOs approved his pay.

Grasso's trial was originally scheduled to begin October 30, 2006, but it never happened. In June 2008 speculation began that the Grasso case was falling apart. Within a month the entire case was dismissed and Grasso was able to keep all of the money.

DISCUSSION QUESTIONS 1. Was Grasso justly paid for being a great manager and protecting the interests of the NYSE, or was his compensation excessive? Defend your answer. 2. Did the board of the NYSE act responsibly in this matter? Why or why not? Were the alleged conflicts of interest real or merely apparent? Explain. 3. Was Grasso simply a victim of certain character flaws? Of political forces that required more disclosure after the Enron and other corporate scandals in late 2001? Discuss your answer.