Grasso left the NYSE at a loss

The New York Stock Exchange was closed Monday for the first time since release of the “Report on the Investigation Relating to the Compensation of Richard A. Grasso.” If they have not done so already, the off day gave Wall Street time to digest the 137-page document, also called the Webb Report, and wonder at the dysfunction within one of capitalism’s iconic institutions.

Author Dan Webb, a former U.S. prosecutor, found that a wily Grasso had foxed exchange board members into overpaying him as much as $156.7 million for his services as chairman and chief executive officer. This, out of total compensation of around $193 million for the years 1995 to 2003.

Grasso resigned in September 2003, after the exchange issued a press release disclosing a lump-sum payment of $139.5 million. He subsequently offered to surrender $48 million of that, but he was forced out anyway. The board hired Webb in January 2004 to find out just how the exchange could have made so severe a mistake.

Last May, New York Attorney General Eliot Spitzer sued the exchange because, as a nonprofit under New York law, it can pay its leaders only what is “reasonable” and “commensurate with the services provided.”

Grasso, being Grasso, countersued. Politic and pugnacious, he worked his way up from clerk. He rallied Wall Street in the wake of the 9/11 attacks, and protected NYSE turf against inroads by more modern electronic exchanges.

If you’ve cheered as the street smart walked all over the school smart on “The Apprentice,” Grasso is your kind of guy.

But it was Grasso’s suite smarts that got him those fat paychecks. Webb found the exchange directors were beyond lax in reviewing his compensation. In fact, Grasso hand-picked the members and the chairman of the compensation committee that consented to his repeated demands for more pay, or for early payment of pension benefits.

During his final eight years at the exchange, Grasso received $97.8 million in cash compensation. The tab in 2001 alone was $30.6 million. Webb says a “generous annual compensation level” would have been $8 million to $9 million.

Grasso’s supplemental retirement benefits amounted to $126.4 million by August 2003. As much as $113.6 million of that was excessive, according to Webb. And, he noted, “Grasso not only accumulated excessive amounts of pension benefits, he was allowed to withdraw them repeatedly from his retirement accounts while still employed at the NYSE.”

Webb found the board used the wrong benchmarks calculating what would be appropriate compensation for Grasso, kept consultant analysis of the package to a minimum, and did not disclose the payments to other exchange members.

The board itself did not fully understand all it was doing for Grasso. The contract renewing his employment in 2003 was approved only in concept, although Webb says alarmed board members unsuccessfully tried to talk Grasso out of taking the $139.5 million lump sum. The compensation committee chairman, a former comptroller for the state of New York, did not read the entire 25-page document before signing it.

Webb attributed some of the board’s failures to high turnover and a consequent lack of continuity and perspective that frustrated proper oversight of Grasso. But just what kind of perspective do board members have?

Among the directors were two very sophisticated, savvy heads of top Wall Street investment banks; Morgan Stanley’s Phil Purcell and Goldman Sachs’ Henry Paulson Jr. Last year, Purcell pulled down $22 million in total compensation. Paulson received $29.8 million. That was a 46 percent increase for Purcell despite an 8.2 percent drop in the value of Morgan Stanley shares for a fiscal year that ended Nov. 30. The increase for Paulson was 39 percent. Goldman had a record year for profits.

Webb, as noted, faulted the exchange board for using inappropriate benchmarks to determine how much Grasso should be paid. If you make almost $30 million a year, you don’t know any better.

The biggest losers in all this may be those who own once coveted seats on the exchange. By one estimate, those 1,366 seats have lost a total $1 billion in value since Grasso resigned. How’s that for a benchmark?