Governance Issues at the New York Stock Exchange

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The Role of Specialists Contd...

In the early 2000s, when businesses were reeling under pressure due to a slowdown, specialist firms at NYSE posted pre-tax profit margins of 35-37% against the 9.7% margin of corporate America as a whole. This raised questions about the working methods of specialists. Many felt that specialists took unfair advantage of their exclusive knowledge of investor orders. Analysts were also critical about execution of orders at NYSE. Investors could not execute their buy/sell orders immediately as they were required to go through specialists or floor brokers paying high commissions.

The Final Assault- CEO Compensation Finally, NYSE also faced increased criticism because it did not reveal its executive compensation figures. Under increasing pressure from the media and SEC, the NYSE announced its executive compensation figures in August 2003. These figures indicated that Grasso had been paid a lumpsum amount of $140 million for his services and that his employment contract had been extended upto the year 2007. The exchange revealed that Grasso would be receiving around $1.4 million as salary per year and a bonus of $1 million per year in the period 2003 to 2007. In addition, Grasso was entitled to receive around $48 million in the future as benefits. Grasso's pay package attracted criticism from all quarters. Under pressure, Grasso announced that he would not take the $48 million. Grasso's pay package was publicly criticized by Donaldson.

Donaldson issued a statement saying that Grasso's pay package raised doubts about the NYSE administration and asked NYSE to submit the minutes of the meetings in which Grasso's compensation had been finalized. Meanwhile, the Washington Post²⁹ reported that members of the executive compensation committee were appointed by Grasso himself.

The composition of the compensation committee was thus under public scrutiny too. It was apparent that the compensation committee comprised of executives from companies which were regulated by the NYSE. Further as Fortune reported, one of the NYSE directors had claimed in an email that board members who were not in the compensation committee, did not know about the break-up of Grasso's pay package.³⁰

Refuting the allegations that the compensation package was not properly drawn up, NYSE said that it acted on the advice of HR consultants. It said that it had taken advice from Hewitt Associates³¹ regarding Grasso's compensation and that it had hired an independent consultant - Vedder Price³² to assess the CEO's compensation.

Independent analysts however felt that Grasso's pay package should have been more in line with the salary drawn by the chief of SEC who earned around $142,500 per annum. But some felt that there was nothing wrong in the NYSE chief being compensated on par with top financial services industry executives. However, analysts considered Grasso's pay package high even when compared to industry salaries.

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29] Leading US news paper.
30] Tully, Shawn, See Dick Squirm, Fortune, September 15, 2003.
31] Established in 1940, Hewitt Associates is a global outsourcing and consulting firm delivering a wide range of human capital management services.
32] Founded in 1952, Vedder, Price, Kaufman & Kammholz is a law firm. The firm advises organizations on corporate responsibility and other related matters.