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Final Bell for Grasso Strikes a Nerve

The stock market chief's ouster may embolden activist investors to increase pressure on company boards to pare compensation.

September 21, 2003|Tom Petruno and Kathy M. Kristof | Times Staff Writers

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.

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