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US Executive Pay Issue Stirs Controversy Following NYSE Chairman's Resignation - 2003-09-26

September 17, the head of the New York Stock Exchange, Richard Grasso, was forced to resign following revelations that his pay package totaled nearly $190 million a year, an amount considered excessive even by Wall Street standards.

The 211 year old New York Stock Exchange is the world's biggest and most influential equities market. Richard Grasso, 57, had won acclaim for his leadership in getting the exchange operating within only days of the devastating attack on the nearby World Trade Center two years ago. He was well rewarded for this accomplishment. It was revealed this month that Mr. Grasso received a bonus of $5 million dollars for his performance following the September 11 disaster. But for Mr. Grasso at least, that wasn't all that much money, considering that his total compensation was close to $190 million.

Mike Donnally, an analyst at Global Insights, an economics consulting firm in Philadelphia, says there was a damaging conflict of interest at the stock exchange. Mr. Grasso's pay, he says, was determined by a committee comprised of executives of companies the exchange was regulating.

"You've got [for example] Dick Grasso on the board of Home Depot," he said. "And then Home Depot's CEO is on the board of the New York Stock Exchange. And so they both are in effect setting each other's pay."

The new interim chief of the stock exchange, former Citicorp chairman, John Reed, says he will reduce the size of the exchange's board of directors from the current 27 to 10 or 12. Other reforms would separate the exchange's regulatory and administrative functions.

Mr. Donnally of Global Insights says Mr. Grasso's pay package reflects the growing gap between CEO pay of those of regular employees.

"Thirty years ago the average CEO [chief executive officer] pay was something like 40 times the median worker or the lowest worker's pay," said Mr. Donnally. "It has gone past 400 times now and it continues to go up. So you get this stratification of pay in the United States where you've got growing inequality."

There is also the question of ethics. Not only was the magnitude of Mr. Grasso's pay not known publicly but he apparently felt such high compensation was appropriate. Rick Malone, a money manager and broker [for Ferris Baker Watts] in suburban Washington, says the fiasco over Mr. Grasso's pay shows that boards of directors are not doing their job properly.

It was an old boys network where people get together and drink and slap each other on the back. They got together four times a year to do that and they were well compensated. You're going to see a lot less of that in the future. But then it will revert back, probably, in ten years after this scandal blows over.

Mr. Grasso's ouster has even intruded into the U.S. presidential campaign. Democratic candidate Joseph Lieberman says that instead of setting an example of ethical leadership for the market he oversees, Mr. Grasso's behavior has shaken the faith of investors and the foundation of the stock exchange.