Comparable Firms

U.S. executive compensation systems

Comment from Professor Bebchuk

More on the Spitzer Complaint

Was the salary outrageous?

The first step: Comparable Firms

How was Grasso able to capture such outrageous earnings as the CEO of a nonprofit organization? Can we show what he earned in previous years?

Grasso worked for the Exchange for years – in fact, his entire career. His annual income went up consistently over the years. In 1995, he was named CEO and Chairman. The compensation included various components of deferred-salary and pension funds. The compensation arrangements were approved by the Compensation Committee and referred to the full Board of the NYSE for approval in the February meeting following the compensation year (i.e. in 2000 for 1999 compensation). In some cases (the LTIP, for example), a plan was not intended to include the CEO. However, Grasso arranged through negotiations on his contracts to be included (32). See the list after Table 1.

(32) The incentive and deferred compensation plans are discussed in Appendix A.

Did anyone ever ask the legitimacy of combining all of these elements of compensation?

Probably not. The Board members were all busy men and women and were placed on the Board of the NYSE for reasons other than their expertise in financial and personnel matters.

Table 1 Grasso Salary, 1999 and 2000 (33)
(source: “The Mercer Report”)

1. Base salary, Grasso
$ 1.4 million
$ 1.4 million
2. ICP
$ 5,652,000
$ 12,519,000
$ 948,000
$ 1,081,000
4. Variable compensation
$ 6,600,000
$ 13,600,000
5. Total cash compensation
$ 8,000,000
$ 15,000,000
6. CAP
$ 3,330,000
$ 6,800,000
7. Total compensation*
$ 11,300,000
$ 21,800,000

* not including "Special Payments”
ICP = incentive compensation plan
LTIP = long-term incentive plan
CAP = capital accumulation plan
SERP = supplemental executive retirement plan

(33) The Mercer Report, NYSE FOIA Confidential SEC-07266, Exhibit 9. (“Chief Executive Officer”)


(The Webb Report, the internally-funded consultant report, notes that a worksheet provided to committee members and to the full board did not include CAP figures. The Mercer Report provided the figures as shown above, with the following note at the bottom of the data: “Mr. Grasso will also receive a capital accumulation award equal to 50% of the variable compensation.”)

Those Table 1 figures (1999 and 2000) came from the “Mercer Report.” We have more complete numbers in the Webb Report in Appendix A, but at the time the non-cash items weren’t subject to full-disclosure or transparency requirements. In other words, it was not common in 1999 and 2000 to disclose compensation beyond the “salary,” or cash, component. Several years later, the SEC began to discuss a requirement that public companies disclose, in addition, the estimated value of executives’ non-cash items. The U.S. Congress decided to discuss it, too.

Of course, when considering Grasso’s compensation process, we are reminded that it (the process) often includes a listing of “comparable firms” for the calculation. If the NYSE Compensation Committee was using comparables, as it was, then what firms were used?

The use of comparables for the NYSE compensation started in 1995 (for the year 1994). A new list was presented to the Compensation Committee and the NYSE Board every year by Hewitt, one of their compensation consultants. In the year 2003 (for 2002), the list included 16 firms, as shown below

Figure #2

List of Comparator Firms used in 2003 for the calculation of NYSE executive compensation (for the year 2002)

Citigroup Wells Fargo
Federal Home Loan Bank Aetna Inc.
Fleet Boston Financial GMAC
AIG American Express
Merrill Lynch GE Capital
CIGNA Freddie Mac
Mellon Financial Allstate Fannie Mae
Chubb Corp  

That’s a ridiculous list! They probably put in the quasi-governmental organizations (Federal Home Loan Bank, FNMA and Freddie Mac) as “the best we can do.” They could also have a footnote for “In Trouble with the SEC,” which would include Fannie Mae and AIG. Such a footnote might suggest which of these firms was represented on the NYSE board. The CEO of AIG, for example, was on the NYSE board.

Hewitt provided a list of “comparables” to the NYSE (the Compensation Committee and the Human Resources Division, which was working with the Committee.) The Appendix includes a list for every year, with an indication of which firms were being eliminated. However, there were no major changes from year to year.

Our friend and co-author, Robert A.G. Monks, suggests the following conclusion about the misleading comparator list: “The NYSE didn’t move fast enough from its roots as a Gentleman’s Club (involving the odd crook, to be sure – i.e. Richard Whitney) to the 'grotesque governance' of the 1990s. To be head of the NYSE was considered an honor for which one was paid a 'numeraire' by a board composed of people who reflected honor on the institution. The scarecrow from the past was badly out matched in the world of Langone, the corrupt consults, the languid board and the feral greed of Grasso."

Assignment: Check the NYSE annual report to see which of the “comparator firms” were represented by someone on the NYSE Board.

That’s the process on comparable firms. But, as we will be noting, the compensation committee didn’t use the comparables for much of their calculation (despite the fact that many members of the Board believed they were being used). Look at this table for 1995, as reproduced from the Spitzer complaint. This is Grasso’s first CEO salary, representing 1995 (and one-half year as CEO)

Table 2
Compensation for 1995

By then (1995), there were limits on the compensation paid to corporate executives in the U.S. That is, the U.S. Congress decided that any corporate salary over $1 million would not be tax deductible as an expense unless the additional amount represented performance. This was a limit for publicly listed firms, not the NYSE, but it could have influenced the amount designated as Grasso’s “salary.” Later contractual salaries for Grasso turned out always to be $1.4 million per year.