Grasso In The Stocks

By Daniel Kadlec

Love him or scorn him: Richard Grasso, chief of the New York Stock Exchange (N.Y.S.E.), is drawing strongly mixed signals of affection and rejection these days. At a civic function in New York City last week, Robert Nardelli, head of Home Depot, told Grasso that he would love to have him on his board--again--if he ever leaves the exchange. While Nardelli was wooing Grasso, seat holders at the exchange were doing their level best to make the N.Y.S.E. boss available, drumming up support for a special meeting that could lead to Grasso's resignation.

So it is for Grasso, the lifelong exchange employee with ticker tape in his veins and a trademark shaved head. Highly respected for his leadership and results, he has become tossed about in the battle over corporate governance because of a pay flap that won't go away. The tipping point came last week when the exchange, in a letter responding to inquiries from Securities and Exchange Commission (SEC) chairman William Donaldson, detailed a trove of Grasso enrichments--from the requisite car and driver, private-jet privileges and club memberships to a previously undisclosed $48 million in benefits due him by 2007. That's on top of the $140 million deferred-income payout announced two weeks earlier, which had been building up for three decades and finally was disclosed at the time of Grasso's contract extension.

Never mind that Grasso had agreed, even before it was made public, to forgo the additional $48 million. For many the gesture was too late. The episode had already become a painful reminder of the cronyism and greed that thrived during the Internet bubble. It may be worse in this case because the N.Y.S.E. is a quasi-regulatory body that should be setting the standard for responsible management. Sources at the SEC say Donaldson has long been concerned about excessive CEO pay, an area of abuse he is determined to clean up. A senior SEC official told TIME that, as a result, the agency is weighing public hearings on governance issues at the N.Y.S.E. and other exchanges. Key questions would be how directors are nominated, the composition of board committees and the role of independent directors--all areas in which Grasso largely calls the shots at the N.Y.S.E.

For now, Grasso has the support of his board and says he isn't leaving. "Dick's pay is fair and reasonable," says Kenneth Langone, Home Depot co-founder and a Grasso friend who served on the board as chairman of the compensation committee until this year. No one disputes that Grasso, 57, is an effective leader. On his watch, the exchange has won hundreds of listings, improved trading capacity and expertly navigated the Sept. 11 crisis. For Grasso's 9/11 efforts alone, the board awarded him a special bonus of $5 million.

But a divide has formed over the pay issue. Some on the board insist that all directors were aware of Grasso's pay and agreed to set it so high partly because the exchange is not publicly traded and cannot grant stock options to retain top managers. But exchange director H. Carl McCall, who remains a Grasso supporter, says he and others were unaware of how the numbers added up. He faults the Big Board's human-resources staff for not clarifying the amounts Grasso was accumulating through complicated bonus and pension formulas. "Not everyone on the board understood, in aggregate, the total package," he says. To which Nell Minow, editor of the Corporate Library, a watchdog group, says, "Who's running the store? This crisis has made it inevitable that very soon serious change will have to come about on the board."

Complicated pay formulas aren't all the board may have failed to grasp. Every year since Grasso took over at the exchange, it has trounced internal performance targets, which center on things like trading volume and market share. How the exchange measures up against its predetermined targets heavily influences annual bonuses. A typical company will reach its performance targets less than 75% of the time and only rarely blow through them by a wide margin, says Pearl Meyer, an executive compensation consultant. Yet since Grasso took over in 1995, the exchange has far exceeded its targets every year, documents show. That suggests the targets are a lay-up, Meyer says. Frank Ashen, executive vice president of human resources at the exchange, says that's not the case. The targets, he says, are designed to "make the organization stretch." One thing is sure: they stretched pay.

--With reporting by Sean Gregory and Jyoti Thottam/New York and Adam Zagorin/Washington

With reporting by Sean Gregory and Jyoti Thottam/New York and Adam Zagorin/Washington