Final Bell for Grasso Strikes a Nerve

When New York Stock Exchange Chairman Richard Grasso quit Wednesday in the face of massive criticism over his compensation, he may have handed corporate governance reformers their biggest victory yet in reining in executive pay.

Public anger about multimillion-dollar compensation levels has simmered for years. But until last week, no company chief had lost his job solely because he was earning “too much.”

Grasso was ousted by the stock market’s board after the exchange revealed details of his pay, which included $140 million in deferred compensation accumulated over decades, $12 million earned just last year, and a $5 million bonus for his leadership after the 2001 terrorist attacks.

Even for a nation that has become used to corporate leaders pulling down gigantic sums, Grasso’s compensation struck a nerve -- and may embolden activist investors who have been putting increasing pressure on executives and boards of directors to pare back pay levels, some say.

“I think executives are getting the message that the American public won’t put up with this anymore,” said Sarah Anderson, director of the Global Economy Project at the Institute for Policy Studies in Washington.

Archon Fung, an assistant professor of public policy at Harvard University, agreed: “The message is that it’s not just what the market will bear, but what the public will tolerate.”

Grasso’s departure was a victory for some of the nation’s biggest public pension funds, including the California Public Employees’ Retirement System. The funds long have been among the most vocal proponents of more frugal corporate governance, and several, including CalPERS, led a campaign last week demanding Grasso’s resignation.

The AFL-CIO also has crusaded against what it views as runaway corporate pay. Damon Silvers, associate general counsel, said the union federation hoped that the Grasso affair would “raise the discomfort level among board members when CEOs, their lawyers and their consultants come looking for excessive pay packages.”

Some statistics show that the pay of top corporate officers already has been on the decline, though there is much disagreement about how best to gauge executive compensation because it takes so many forms.

In any case, identifying what constitutes an “excessive” amount of compensation is a highly subjective issue. In America, where success is expected to be well-rewarded, the question of how much pay is too much isn’t easily answered by executives or their critics.

Phil Angelides, California state treasurer and a CalPERS trustee, said that judging whether pay is rational or irrational inevitably involves a gut-level call. “You know it when you see it,” he said.

Yet even Grasso has plenty of defenders for his accomplishments at the NYSE, where he worked for 36 years, the last eight as chairman.

For most chief executives, the pay debate isn’t one they’re willing to engage in publicly. But one prominent CEO, Franklin Raines of mortgage-finance giant Fannie Mae, addressed the subject last week at a governance conference sponsored by the Business Roundtable, a group of major U.S. companies.

“I think that the market for CEO pay is the same as any other market, and that compensation depends dramatically on what are your other alternatives,” said Raines, who in 2002 earned $11.5 million in salary, bonus and “long-term incentive payouts.”

Using a sports analogy, he said: “I don’t think you can find a circumstance where you have investors -- smart, knowledgeable investors -- who are going to say, ‘I’m going to choose to not pick the best player.’ If the best player costs a lot of money, I’m going to choose to do that.”

When concerns began to rise about soaring executive compensation in the late 1990s, many executives and corporate directors argued that pay was reflecting performance as profits boomed with the economy and stock prices rocketed to record highs, enriching all investors.

The decline in executive pay since 2000, as measured by some surveys, also shows that pay truly is tied to performance, corporate advocates say: As the economy and stocks sank, they say, so did managers’ pay.

BusinessWeek magazine’s executive compensation survey, tracking 365 companies, found that the average CEO’s pay package totaled $7.4 million last year, down from $11 million in 2001 and $13.1 million in 2000.

Those totals include salary, bonuses, incentive payouts and the value of any stock options that were exercised.

But pay averages can be skewed by compensation shifts among the very highest- and lowest-paid executives. A fairer measure, some experts say, is median pay. The median is the midrange figure, which means half of the executives earned more and half earned less.

In the BusinessWeek survey, median CEO pay rose 5.9% in 2002 to $3.7 million, even as most investors saw the value of their company shares tumble.

Among Southern California CEOs, a Times survey performed by Mercer Human Resource Consulting showed that median pay was $1.7 million in 2002, up 11.4% from 2001.

By contrast, median family income in the Southland last year was $50,005, up 1.1%.

By any measure, CEOs are pulling down far more than they did a decade ago when compared with the average worker.

The BusinessWeek average CEO pay figure for 2002 was 282 times the wages of the average U.S. production worker. In 1990 that multiple was 109 times.

To critics, those numbers are unequivocal evidence that compensation became grossly inflated in the late 1990s.

“If we were to return to what executive pay was before the boom, it would be a fraction of what it is today,” said Edward Lawler III, a USC business professor and compensation expert.

What’s more, executives have enjoyed growing baskets of perks, from extra life insurance to supplemental retirement plans, which often aren’t counted in pay surveys. And guaranteed returns are common: Grasso, for example, was assured of earning 8% a year on his deferred compensation at a time when bank savings accounts pay 1% or less.

Lawler and others put the blame for outsized compensation on company directors, who are supposed to represent shareholders’ best interests. Governance experts have long argued that directors have severe conflicts of interest because they often have close ties to their CEOs; typically the CEO also is the board chairman.

“All of this says to the board: You haven’t done the proper due diligence or exercised the control that you should have,” Lawler said.

But consultants who work with board compensation committees -- the directors who are specifically charged with setting CEO pay -- say the corporate scandals of the last two years, the heightened focus on pay levels and the threat of lawsuits have left those individuals fully aware of their responsibilities.

“I have never seen more diligence on the part of compensation committees,” said Pearl Meyer, head of Pearl Meyer & Partners, a New York-based consulting firm. “It’s a very different environment now.”

In another development last week that suggested a significant shift in board attitudes toward pay, General Electric Co., the second-largest U.S. company by stock market value (after Microsoft Corp.), said that CEO Jeffrey R. Immelt would no longer be granted stock options. Instead, GE’s board said Immelt would be eligible for outright awards of stock, but only if the company meets long-term performance benchmarks that would benefit all shareholders.

GE’s move follows Microsoft’s surprise announcement in July that it would eliminate stock option grants altogether.

Options have allowed executives to generate spectacular wealth over the last decade, but many experts have argued that options have amounted to a massive giveaway at shareholders’ expense.

The moves by GE and Microsoft show that boards are rethinking the formulas by which compensation is doled out, Meyer and others say. It isn’t realistic to expect boards to simply slash executive pay, consultants say, because big investors such as pension funds expect directors to establish and follow formal processes that can be monitored.

Yet the problem with those processes is that they often help sustain rising pay, critics say.

The reason: Consultants who compile surveys of what rival executives are paid frequently suggest that a board set its CEO’s pay at the high end of the industry range, to give the CEO more incentive to perform for shareholders.

When enough companies follow the same advice, overall pay levels are bound to keep moving higher, said Nell Minow, editor of the Corporate Library, a governance group in Portland, Maine.

“It’s the Lake Woebegon problem -- all the children are above average,” Minow said.

In addition, the company performance targets that must be triggered for CEOs to earn bonuses can be so accommodating that Minow has likened them to a pinball game, wherein “everything you hit rings a bell.”

Despite the public outrage over Grasso’s pay, some better-governance activists fear that the debacle, instead of humbling CEOs, will spur some to demand even more money.

“The greed bar has just been raised exponentially,” said Ann Yerger, deputy director of the Council of Institutional Investors in Washington. “This pay package is extraordinary, and there are always going to be people who say, ‘Why don’t I get that?’ ”

And though his directors turned on him, they were the ones who granted Grasso’s pay package to begin with -- which meant that Grasso broke no law, or NYSE regulation, by accepting the board’s generosity, said Paul Lapides, head of the corporate governance center at Kennesaw State University in Georgia.

“I worry that the message is, ‘You can take any amount, as long as it’s legal,’ ” Lapides said.

But others say Grasso’s dramatic ouster -- almost unthinkable as recently as two weeks ago -- makes a point that corporate chieftains and their directors cannot ignore.

“I think we’ve reached a watershed in corporate governance,” said Meyer. “I don’t know what it will do to the level of corporate pay, but I do know that it will improve the oversight.”