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September 18, 2003, 3:30 p.m. |
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kangaroo court of liberal-leaning journalists and Democratic state treasurers charged and convicted former New York Stock Exchange CEO Dick Grasso with an unpardonable sin — success.This collection of class-envy warriors put such relentless pressure on the NYSE that Grasso was finally forced by his board to resign. Grasso, of course, was the man whose Herculean efforts were behind the reopening of the stock exchange only four business days after the terrorist bombing of downtown New York. But the so-called titans of finance who sit on the NYSE board were so mau-maued by the media and political onslaught that they actually sided against the man who inflicted the first major blow on Osama's terrorism.
There was no scandal here. Dick Grasso accepted a big pay package endorsed on two occasions by the NYSE board in return for 35 years of successful service. What is scandalous is that key Big Board officials — like Hank Paulson of Goldman Sachs, Philip Purcell of Morgan Stanley, and William Harrison of JP Morgan Chase — succumbed to the pressure of newspaper headlines and abandoned Grasso.
Not only did Grasso start America's economic recovery immediately after 9/11, he also saved the NYSE from a late-1990s assault by the Nasdaq. At the time, the technology stock market threatened to induce numerous Big Board companies to switch their listings, and at one point cautioned that it might even take over the NYSE. But it was the diminutive son of Italian immigrants who defended NYSE floor brokers and retail investors from a new era of impersonal electronic trading. Some thanks he got: Many of these same floor brokers helped push Grasso over the edge.
Let's be very clear about this: Grasso has done nothing wrong. Nothing, that is, except believe his own board when they offered him a large pay package for his long-term service.
Grasso did not fraudulently cook the books, steal from the corporate cookie jar, lie to federal prosecutors, or engage in insider trading. He is no Worldcom Bernie Ebbers, Enron Kenneth Lay, or Tyco Dennis Kozlowski. In fact, a Grasso-led decision to embark on full compensation disclosure as a way of hastening corporate-governance reform put him in this pickle in the first place.
The announcement of a one-time payment of $140 million probably did the former CEO in. A longer-term smoothing out of his pay plan would have avoided the media killing field. But it was seldom reported that the payment covered 35 years of service, including pension, savings, and other deferred incentives. Discounted properly, this sum comes to roughly $2 million a year over the entire three-decade period Grasso served — a modest amount by Wall Street standards.
The talented Grasso could have been lured away as CEO of another company. That's precisely why the NYSE board re-upped his pay package beginning in 1995 and extended his tenure through 2007. They were rewarding success and loyalty.
In recent years, techie CEOs like Lawrence Ellison of Oracle, John Chambers of Cisco, Scott McNealy of Sun Microsystems, and Irwin Jacobs of Qualcomm received billions of dollars in stock-option-based pay packages. Grasso could have signed on with any of these companies, but he chose to stay with his long-time employer. For that he was devoured by a wolfpack of anti-market journalists.
No one really knows what pay is proper for successful management skills. But the example of the Chicago Mercantile Exchange — where 1.5 billion in daily trading of interest-rate, currency, and stock market futures is directly comparable to the NYSE — shows that Grasso's pay was in the right ballpark.
The Merc recently went public, and today it has $900 million of enterprise value with a market cap of $3.1 billion. Merc CEO Jim McNulty receives annual pay and benefits totalling about $1.5 million. But for his longer-term service he owns a one-time grant of stock options now valued at $66 million, according to a Merc spokesperson.
In a piece of bitter irony, NYSE board members talked Dick Grasso out of a Big Board public offering in 1999. But Grasso was right — only full privatization will enable the NYSE to resolve all of its pay, disclosure, regulatory, and modernization issues.
Since Grasso resigned without cause, he will take all of his compensation chips off the table. Perhaps he will retire. Maybe he'll run another company. But the big lesson is this: Our free-market American system of entrepreneurial capitalism must never be Europeanized by punishing success or delinking effort from reward. We must never wage war against the smart investments or talented people that made our economy the most inventive and prosperous in all history.
Grasso was one of our successes. He earned his pay. For both his economic value and moral inspiration, he deserved a better fate.
— Mr. Kudlow is CEO of Kudlow & Co.