WSJ/CNBC: Dick Grasso Offers Resignation, NYSE Accepts

The Wall Street Journal | September 17, 2003

[Timesink]

More TK...

[Batrachian]

"Name one"

Jack Welch of General Electric received $122 million in compensation in 2000 on a nominal salary of $4 million, mostly in the form of bonuses and stock options. The CEO of Sun Microsystems, Scott McNealy, got $48 million in bonuses in 1998. Leo Mullins of Delta Airlines got $32 million in 2002. I could go on and on.

I guess you'll just say "so what", right?

[STARWISE]

I'm not so sure .. I saw him falling all over Al Franken (the dirtbag) a couple of nights ago.

[Grampa Dave]

If you develop a data base or spreadsheet showing common relationships, please post it and ping us.

[Batrachian]

I don't know why you defend this practice. A lot of these companies are already in trouble. Do you really think it's good business to suck out the lifeblood of a company in this way? Capitalism doesn't mean "anything goes". If you're going to argue that talent costs money then can you explain why so many of these bonuses are paid going out the door?

[Sub-Driver]

Wow, I just saw him last week @ Union Staion (DC)...his limo pulled up, let off 2 people (who I assume were on the same Acela train I was on to NYC)......he left I figure to go the DCA...

[SierraWasp]

One Pingy Dingy...

[TopQuark]

Jack Welch of General Electric He was a CEO. YOu said that the members of the boards get salaries in the hundreds of millions.

received $122 million in compensation in 2000 on a nominal salary of $4 million, mostly in the form of bonuses and stock options.

He did not "receive" this much in options. He received these options not in 2000 but long before. Surely, that is how it is reported --- to make you angry.

Very briefly: suppose the price of GE stock today is $37 and you receive an option exercisable at $40. What you have actually received is $3. From this point on it is your INVESTMENT. If you wait for 10 years and exercise that option in the year 2013, when the stock price is $200, you will pocket $200-$40=$160. Your investment grew from $3 to $160.

Observe that anyone could've made that investment. All you received was $3. But the media will report in 2013 that you got $160. That is the origin of these numbers. That is why they are always reported falsely. But you should know the difference.

The CEO of Sun Microsystems, Scott McNealy, got $48 million in bonuses in 1998. Leo Mullins of Delta Airlines got $32 million in 2002. I could go on and on. That's CEOs again. They are hired labor; that's what it takes to get talent.

I guess you'll just say "so what", right? As you can see, I did not. You seem to be a thinking person who is short on some facts. Why would you expect me to be rude to you?

[TopQuark]

If you're going to argue that talent costs money then can you explain why so many of these bonuses are paid going out the door?

Yes, I can. As you rise in the management higherarchy, your job qualifications are less and less definable (the talent component vs. skill rises, and nobody knows what talent is). As a result you are less and less "interchangeable" with other candidates. As a consequence, you employment contract is negotiated. This in contrast to the entry positions, where the salary has a small range and hardly anything esle is negotiable.

Now, during negotiations, exit from the company is also discussed. This is because the CEO takes a big risk accepting the job: if he is fired, he is unlikely to work ever again: he has forgotten whatever entry skills he had, and other companies will not hire him as a CEO. So the contract provides him with insurance: if you are fired, etc., you will receive specified severance compensation to be abler to maintain their lives (this may happen when the person is in his 40s).

The question of compensation is a very difficult one, and we hardly know what constituted optimal compensation.

I don't know why you defend this practice. This "practice" is called labor market, and it is one of the core institutions we have in this country.

And the reason I am explaining this is to make you curious about how it functions and, if you follow the scientific method, refrain from judgement until you do, A lot of these companies are already in trouble.

That too is straight from a newspaper. They have made a few sound like most. That is the objective of the socialists --- to attack the institutions of capitalism. As you can see, they have succeded in phase I: it is possible to graduate from high school and even college without a clue about the main institutions of this society --- those that made this country great. In the absence of basic knowledge, the garbage from newspapers eventually sticks in our minds.

[lelio]

Very briefly: suppose the price of GE stock today is $37 and you receive an option exercisable at $40. What you have actually received is $3. From this point on it is your INVESTMENT. If you wait for 10 years and exercise that option in the year 2013, when the stock price is $200, you will pocket $200-$40=$160. Your investment grew from $3 to $160.

So if I'm the CEO and my stock's at $30 and I get 10M options at a price of $30 my "investment" is $0? The stock goes up to $31 and I make $10M on it. Where does that $10M come from?

[TopQuark]

I simplified it a little. An option has an additional value precisely because the price may rise further.

Suppose that the stock is at $30. If you look at the price of options --- they would typically be exercisable at $30, $35, $40, etc. --- you will find that the option exercisable at $40 costs only a few pennies. That's right: you may pick up that option for a nickel. Suppose you bought it, and the (pharma) company announces in December some super new drug. The price of the stock sktrockets to, say, $45. What's your profit? You exercise your option at $40 (buy the stock at $40) and immediately sell at $45. You het $5.00 from a nickel investment.

Had you bought the option with the strike price of $30, your profits would be even greater: now you buy at $30 and sell at $45, for a profit $45-30-15. That's a real killing, but you could not have bought it a nickel; it probably costs $2. So you turned $2 into $15.

There is a catch: if you boght the $40-option for a nickel and the price of the stock never reaches that level from today's $30, you lose ALL of your investment.

Back to manager's compensation. They typically receive out-of-the-money options; that is, if the stock is at $30, he'll be given the options at $40 which are worth.. a nickel. If he (or the rest of the company) performs poorly, the stock does not rise, and he loses all of his options.

The media reports only the success stories to cause envy and anger in us.

[Beck_isright]

"I don't know why you defend this practice. A lot of these companies are already in trouble. Do you really think it's good business to suck out the lifeblood of a company in this way? Capitalism doesn't mean "anything goes". If you're going to argue that talent costs money then can you explain why so many of these bonuses are paid going out the door?"

Sadly, I have to agree with Top whatever on one thing; compensation is not the issue. A company can and should have the right to pay anyone as much as they want. However self-regulating bodies (like the NYSE) who have a board made up of members, current and former, who in the past have been involved in illegal stock manipulation practices, are a different story. The large payola to Grasso cries out as hush money from the Citicorp and Merrill's of this world. With the mutual fund explosion soon to occur (or implosion possibly), it's time for the club known as the NYSE to open it's doors and let the public see how it actually operates and insure it operates in an ethical manner which protects the investing public.

We're not talking about much. You know, just a few little things. The future of capitalism. Trillions of dollars in our economy. The retirement of the baby boomers. Nothing big. Nothing to see here. Move along people.

[TopQuark]

....as an MBA/conservative.....
this seems to just be an extension of a shakedown he and the Board were "legally" able to complete.

So, which facts, combined with your knowledge of management, produced this conclusion?

[TopQuark]

He was operating a fraud pit -- the New York Stock Exchange

This "fraud" is one of the core institutions that built this country. On the other hand the one throwing ridiculous accusations without any support IS a fraud.

[lelio]

As I understand it if a normal person buys an option there's someone out there that's on the hook if the price of the stock skyrockets.

But in the case of an exec getting options, who pays if the price of the stock goes up? That money to pay him off just doesn't materialize out of thin air. Is the number of options that a company grants to employees counted in the number of shares outstanding? They're kind of in a stock market limbo: they only exist for that split second you exercise them. Most of the time they're dead and not "costing" anyone anything.

[TopQuark]

who pays if the price of the stock goes up?

The company tyically (i) has some shares held or (ii) is authorized to issue them. In 2013, when you exercise at $40, the company will sell you the shares and receive from you $40. You will sell them, say at $200, and pocket the difference.

[TopQuark]

Is the number of options that a company grants to employees counted in the number of shares outstanding?

There are two answers to that of which I know one. Until recently, the companies were not requried to report the options granted, and some changes have been introduced by FASB. I am not an accountant, and do not know the details.

From the standpoint of finance, however, you do view the options as potentially deluting: if exercised, they will at that point increase the number of shares outstanding. How to take it into account is not a trivial mathematical problem.

[BikerNYC]

...that's what it takes to get talent.

You mean if Mr. McNealy only got a bonus of $20 million instead of $48 million he would have walked? I would have liked to see the company call that bluff.

[goodnesswins]

"shakedown" is probably NOT the correct characterization....and I RETRACT IT, however, knowing a bit about Boards, I know how EASY it is for the relationships to take precedent over logic. And, having worked in high tech, I understand the concept of future stock benefits, however, in this case I think the Board had a fiduciary responsibility to it's "shareholders" which it is now being forced to acknowledge. AND, there are hundreds of other Boards who should also be doing the same....I think Grasso is a fall guy for LOTS of others...I guess we shall see. And, NO, I'm no expert.

[arete]

One more core American institution suffered from the class warfare and leftist attack.

Congratualtions to the cheerleaders of that attack.

Excuse me, but Grasso worked his way up throught the system having started at the NYSE as a clerk. He comes from a working class background and didn't even graduate from college. The board of directors who approved his pay package and now asked for his resignation represent the wealthy elite. If it had anything to do with class warfare, the board would be gone before Grasso.

Richard W.

[Beck_isright]

To say Mr. Grasso will be missed, is not something you will hear from me. I forgot about this story until someone reminded me of it tonight.

Grasso Meeting with Leaders Of FARC

For the blind deaf and dumb, FAR is the bad guys (yes, real by God Communists).