Does Richard Grasso Deserve $139 Million?

Why the New York Stock Exchange chief may not be overpaid.

New York Stock Exchange Chairman Richard Grasso’s just-approved $139 million compensation package has inspired rage, derision, and disbelief. It’s post-crash, post-Sarbanes-Oxley, post-Enron, yet even the NYSE doesn’t seem to get it. The New York Times notes that the diminutive Grasso has done the impossible: “making Wall Street gasp in astonishment at someone else’s compensation.”

Several senior Wall Street executives—none of whom had the courage to go on the record—said the compensation was out of line. (The gilded pot, appalledby the gilded kettle.) Do the critics have a point? And should the public care?

Sure, that $139 million lump sum—which included accrued retirement benefits of $51.6 million, $47.9 million stemming from prior incentive awards, and $40 million from an executive savings plan—is a gargantuan sum of money. But while it’s shocking for voyeuristic reasons, Grasso’s compensation shouldn’t necessarily bother—or for that matter even concern—the public.

Over his career, Grasso has made a lot more than Federal Reserve Chairman Alan Greenspan and a lot less than former General Electric CEO Jack Welch. And that is probably as it should be, because the NYSE occupies a strange netherworld, neither a public-serving government agency nor a profit-seeking private corporation.

The NYSE is a hybrid. It’s a “self-regulating organization,” perhaps the most successful of its type in history. It’s a non-profit corporation that turns a profit. It’s a member-based organization in which membership grants a license to mint fat profits. It’s a service company that collects fees from customers (some 2,800 listed companies with a combined market capitalization of $15 trillion) in exchange for allowing their shares to be traded. It is the world’s grandest swap-meet; 85 million people invest, directly or indirectly, through the NYSE.  It is the ground zero of democratic capitalism, American-style. And over the 211-year lifespan of the exchange, this system, for all its foibles, has proven to be an immensely powerful engine for creating wealth equitably.

Grasso has earned his keep by preserving and enhancing that long-earned credibility. Grasso, who has spent all 35 years of his professional career at the NYSE, became president and chief operating officer in 1988 and has been chairman and CEO since 1995. In many ways, he made an unlikely mascot for the ‘90s bull market. Short and slim, and with a slightly high-pitched voice, he lacks a commanding presence. But he is a cheerleader and relentless pitchman. (He appears on CNBC with every new listing and did a cameo on a recent episode of Sex and the City.) Grasso is the unofficial mayor of downtown Manhattan.

Whether a NYSE chairman is an upstanding mensch or a lowdown crook can make an immense difference to the system at large. In the 1930s, when the need for reform was glaring, the exchange was run by a revanchist blue-blood named Richard Whitney. He resisted any regulation, claiming: “The Exchange is a perfect institution.” A few years later, Whitney pleaded guilty to embezzlement and spent several years in jail. His mendacity and poor leadership are among the many reasons that the market didn’t regain its 1929 peak until the 1950s. By contrast, Grasso, who erred by, for example, serving on corporate boards of member companies, has proven far more willing to embrace reform.

Under Grasso, the NYSE has grown enormously and borne a terrible downturn manfully. Even when listed companies ran into trouble for fraud, the NYSE kept its own reputation intact: Faith in the capital markets has barely wavered.

As businesses go, the NYSE isn’t very big, as the annual report shows. On revenues of about $1 billion—derived from listing fees, from trades, and from the sale of data products—it turned a net profit of $28 million. And on that basis, Grasso’s compensation would seem to be off the charts. But the NYSE doesn’t exist to make profits in its own right. It exists to enable people—companies that sell stock, specialists, member firms, brokers, investment banks, individual traders and investors—to make profits for themselves. And by that measure, Grasso’s reign has been remarkably successful, which is why his board of directors approved the pay package. The NYSE Fact Book documents the astonishing growth of the U.S. capital markets in the Grasso era. Check out the data on share volume, the price of a seat, and member firm employment and profits during Grasso’s 15 years as a top executive. Now does his long-term compensation package—paid for out of private funds—seem so beyond the pale?

Disclosure: In 2002, Daniel Gross wrote an article on the history of stock-market regulation for NYSE, a magazine produced by Time Inc.’s custom-publishing unit on behalf of NYSE.