Flaws Cited in Grasso Pay Process

NEW YORK —  An internal New York Stock Exchange report analyzing former Chairman Richard Grasso’s controversial $139.5-million pay package casts a harsh light on the exchange itself, portraying its board of directors as detached and unaware of how much he was making.

The report, drafted in late 2003 but not publicly released until Wednesday, said the directors approved the payout in August 2003 even though many of them didn’t understand the details. The 136-page report also cited “multiple flaws” in the exchange’s pay process, including granting Grasso bonuses that exceeded its own guidelines.

Grasso’s pay was “far beyond reasonable levels,” and he might have taken home $125 million more than he should have during his eight years as chairman, the report concluded. Grasso resigned in September 2003 amid a furor over his pay.

The report blackens eyes all around the NYSE, said Michael F. Perlis, a securities lawyer for Stroock & Stroock & Lavan in Century City.

“It certainly doesn’t enhance the reputation of the exchange or of its board of directors, all of whom are captains of industry who are supposed to understand compensation,” he said.

The report also placed significant blame on Grasso. For example, he effectively “hand-selected” friends to be on the compensation committee, the report said. Three people warned Grasso that they were busy and couldn’t attend every meeting, but were put on the committee anyway.

The report also criticized Grasso for paying his executive assistant $240,000 a year, saying $85,000 would have been fair. His two drivers should have been paid $65,000 each but took home twice that amount.

The report was written by attorney Dan K. Webb of law firm Winston & Strawn, which was hired by the NYSE to investigate the facts behind Grasso’s compensation.

The Big Board claimed that the report fell under attorney-client privilege and sought to keep it confidential. The exchange released the document after a state judge overseeing New York Atty. Gen. Eliot Spitzer’s lawsuit against Grasso last week granted the former chairman’s request to see the document.

Spitzer charged in a suit filed in May that Grasso used deception and intimidation to take at least $100 million more in pay than he should have. The suit says Grasso should return the pay because it is excessive under laws regulating not-for-profit corporations.

Michael York, an NYSE lawyer, said the exchange implemented governance reforms after the Grasso saga.

“I’m not going to quibble very much about all the shortcomings that some people might attribute to other board members and [to] the system,” he said. “Having said that, the real issue in the case is whether the compensation is reasonable.”

Grasso’s spokesman, Eric Starkman, said the report showed his client never pushed NYSE directors to hike his pay.

“Every dime of compensation was voted on unanimously by a compensation committee that ... decided that Dick Grasso was worth a great deal to the NYSE,” Starkman said in a statement.

The report also said the board failed to realize that Grasso was accruing tens of millions of dollars in retirement benefits.