Grasso Makes How Much?

Grasso Makes How Much?
September 22, 2003
by John Bloom

NEW YORK, September 22 (UPI) -- Whenever someone starts a new magazine, the first thing they do is hire a cold-call advertising salesman. These guys tend to be grumpy loners who could care less about you or your magazine, but have two questions: What are your sales goals? How much money do I get if I meet them?

Capitalism in its purest form. They're hired because they get results. They're scarce. They're hired guns. They have that extremely rare talent to take a product no one has ever heard of and sell it to a businessman who didn't even think he needed it until this guy showed up. For doing this, they sometimes get 50 percent commissions--an equal share with the magazine.

And then they get fired. They always get fired. They get fired as soon as the magazine becomes successful, even if they're continuing to pack in the ads, bring in the business, and enhance the prestige of the company. Somebody says, "Well, yes, he's doing a good job, but look at how much he's taking home. We can bring this in-house."

Pretty soon you have boring but efficient salespeople who have a modest salary and a modest commission. The guy in the checked jacket is gone. No one has to smell his cigars anymore.

But here's my point: in many cases, the magazine actually suffers from his firing. Even paying him 50 percent--or 40, or 30, since he will probably negotiate--is better than the alternative because of his sheer productivity and sales volume and personal relationships. If you add up the figures, and compare his output to everyone else's, he's still a bargain--at the moment he's let go.

So why is he fired?

They just can't stand to see one guy making that much money.

I think this is what happened to Richard A. Grasso.

When the chairman of the New York Stock Exchange stepped down last week, there was not a single person who came forward to say, "The man was incompetent." And usually, when anyone is ousted or fired, someone--a disgruntled ex-employee, a rival, an analyst--will step forward and say that it was a long time coming, that he deserved it, that the company will be better off without him.

But this may be the first time in history that a private firm, with an executive who is universally praised for doing his job, is fired for the crime of . . . making too much money. And he was fired by the same board that gave him the contract that allowed him to make that much money in the first place. He was essentially fired by the media.

Grasso is the guy who shepherded the stock exchange through 9/11, getting it reopened just four business days later. He's the guy who, despite the increased prestige of other stock exchanges in the nineties, maintained the NYSE as the number one financial market in the world. He's the guy who, faced with the spread of Internet trading, adapted to the new technology and held Wall Street intact. He's the guy who quickly installed new backup systems that will allow the exchange to function in the future no matter what power outages or terrorist attacks occur.

And now he's being ousted from the very symbol of western capitalism for, uh, being a capitalist.

When chief executives at Fortune 500 companies negotiate their pay, they're doing two things: making sure they're protected if they're fired (since this can happen at any time, and when you've been at the top, there's nowhere else to go), and making sure that their wealth increases (that they don't go backwards). In this sense, their goals are the same as the goals of any corporation. It's just done on an individual level.

But they're not stupid. They know that they have to give the company what it wants. They have to enhance value. So often the executive pay package is structured to reflect the goals of the company. Does the company want more earnings? Then the executive's bonuses are tied to earnings. Does the company want a stable stock price? Then the bonuses are tied to that. Does the company want to expand rapidly? Then that's reflected in the CEO's compensation.

In other words, the board is saying: Here's what we want in the next five years. If you do that, then you'll be rewarded.

Nobody ever says, "Hey, here's $140 million. That's what we think you're worth." What they're saying is, "If you can do all of this for the company, then the $140 million is inconsequential. We'll more than cover that in our stock price and our earnings and our growth."

In other words, it's not based on the individual. It's based on what the individual does. In this sense, it's less a salary than a sales incentive program. It just happens to be paid to a single person.

If you look at Grasso's 1999 contract, he had the same things that most chief executives have: an incentive compensation plan (money tied to performance), a long term incentive plan (money tied to long-term performance), a capital accumulation plan (in return for not taking salary, the company pays interest on it), a retirement plan, a savings plan, a "supplemental executive retirement plan" (a perk), and a "supplemental executive savings plan." He also received $5 million just for 9/11.

No arms were twisted when Grasso made this deal. The board couldn't have foreseen that it would amount to $140 million, but then they shouldn't care about that if he hit all the goals that made it end up at that level. It's sort of the attitude Congress takes when they write the corporate tax laws. They say to big companies, "If you'll do this socially desirable thing, then we won't tax you on it." So the companies load up their capital in those areas, and then Congress screams, "Look at these corporate vultures--they don't pay any taxes!"

In other words, you set up a system that has no set number on it--it's tied to actions you take in the future--and then you complain because somebody used your system to his advantage.

One argument made against Grasso was that he shouldn't be paid like a corporate executive since his job is essentially administrative. This is like saying Bruce Willis shouldn't get $20 million per movie because his job is easier than the cinematographer's job. The pay is partly based on the fact that the man receiving it is unique. His skills are unique, and they fit narrowly into a unique position. It's an economic principle of the film business that only about ten men in the world can guarantee a solid opening-weekend gross, regardless of the quality of the movie, and it's an economic principle of the New York Stock Exchange that it's such a unique institution that you need a person steeped in its idiosyncrasies to run it, even if he's more expensive than someone who has the same general qualifications.

When New York Times columnist Gretchen Morgenson sneered that Grasso is just a "casino greeter," she was both right and wrong--yes, much of his job is ceremonial and symbolic, but that's also why there are very few people who can do the job. Ten thousand other actors could equal the performance of Bruce Willis, but Bruce Willis is the face that mollifies the audience. Economic principles have nothing to do with who should be getting the money in a perfect world. If Grasso doesn't get the $140 million, that doesn't mean you and I are going to get it.

In addition to the $140 million--which, by the way, is almost exactly the same amount Michael Ovitz took when he left Disney--Grasso is entitled to another $54.2 million in severance pay. His contract says that if he doesn't break the law (and he didn't), and he doesn't fail to do his job (he did his job), then he's supposed to be paid his complete compensation to the end of the contract term, which would be December 2007. All the commentators are saying he shouldn't take this money.

And yet what are the two basic principles of Wall Street?

First, the sacredness of contracts.

Second, the accumulation of capital as a fundamental good.

Grasso is being ousted for being too good a businessman. On Wall Street, money itself is never supposed to be dirty.

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