Who Decides How Much Is Too Much?

Holman W. Jenkins, Jr

Physician's Money Digest, October31 2003, Volume 10, Issue 20

In all the folderol about Dick Grasso's paycheck [last week], 1 question worth pondering is how did it come to be everybody's business what he was paid? The money isn't yours or mine but comes out of the revenues of the New York Stock Exchange (NYSE), owned by its 1366 seatholders. They're the ones who get socked with the costs of the exchange (including the onerous new "technology" fee that keeps the exchange's head above water these days).

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Nonetheless, Mr. Grasso's head is now being carried around on a pike by various tribunes of corporate reform, a victory in their campaign to dictate how much companies can spend on their bosses. One columnist denounced Mr. Grasso for "unrelenting greed," clearly putting the NYSE chief on the wrong side of 1 of the 7 deadly sins, though his only evidence for the charge was the size of Mr. Grasso's paycheck.

Whatever you think of the exchange's defenestrated impresario and its goofy board of directors, the spectacle put on by Mr. Grasso's critics was hardly more attractive, full of self-righteousness and the kind of chicken-bleep hostility that isn't even brave enough to find its own target but simply looks around for a socially approved punching bag. The mob's behavior, rather than Mr. Grasso's, may end up supplying the odor that lingers.

Perhaps it's time to remember that fat pay—even misguidedly fat pay—is not an offense against anybody's rights. Luck was the biggest factor in tipping over the old salary scale at the exchange. Mr. Grasso's tenure happened to coincide with a universal panic that the NYSE franchise, funnel for $9 trillion a year in trading volume, was in danger of slipping away.

Knight Trading, an emerging competitor to the stock exchange, went public in 1998 and soon rocketed above $70 a share. Its CEO and founder, Kenneth Pasternak, was worth half a billion on paper. A dozen other rivals, with names such as Instinet, Archipelago, Island, and OptiMark, were following the same carrot, setting up electronic exchanges that could perform stock transactions at a cost measured in thousandths of a penny.

These newcomers quickly captured 35% of the trading on Nasdaq. All the big investment banks, to cover their own rumps, began buying up stakes in the new electronic trading firms. Even a NYSE floor specialist, Spear, Leeds & Kellogg, hedged its bets by launching an electronic trading network, REDIbook.

In the middle of it all, Goldman Sachs Chief Executive Henry Paulson (a board member of the NYSE no less) gave a splashy speech calling for the creation of a single electronic exchange. Then-SEC Chairman Arthur Levitt told this paper in November 1999: "There's a very real chance that within a short period of time he (Mr. Grasso) could lose a substantial share of his market and never be able to regain it."

And wherever in the world you looked, exchanges were rethinking their expensive trading floors and turning themselves into publicly traded companies and paying their bosses CEO-style salaries. One such was the Chicago Mercantile Exchange, whose CEO just retired with $67 million in stock option profits and nary a whisper of recrimination.

Readers can decide for themselves whether, in this environment, the NYSE board was crazy to fear that Mr. Grasso might be lured to an electronic competitor with the promise of a huge option payday for helping to overthrow the traditional exchanges. But who cares? It's no skin off anybody else's back if his employer paid him too much, and looking over the past 20 years, one might readily conclude that we all benefit from the willingness of companies to wave big money carrots in front of their servants.

Stock options, leveraged buyouts, and other lucrative enticements have proved powerful incentives to take risks and push the boundaries, for both good and ill, but the most conspicuous evidence is that the formula has lots of positive spillover for society. So unfake was the prosperity of the 1980s and 1990s that it wiped out the budget deficit and came close to eliminating the national debt. (Remember, all those CEO and employee stock option packages were taxed at ordinary income rates, allowing all levels of government to collect about 50 cents on the dollar.)

To put it in terms that even liberals might appreciate, the high-risk, high-reward economy in the end financed the greatest profusion of public spending the world has ever seen, including the vast (if unplanned) expansion of Medicare and the simultaneous takedown of the Soviet Union.

Little hissyfits of envy, like the one we witnessed in the Grasso case, might seem an expensive luxury when measured against the benefits of a fertile, lively economy, even one that occasionally offends us by delivering dramatic paydays to a few conspicuous public figures. David Altig, an economist at the Cleveland Fed who has studied income inequality, once put the anti-envy case this way: "I would gladly see you gain a zillion dollars of real income if doing so would obtain a billion for me, even if the distribution of our incomes becomes more unequal in the process."

Mr. Grasso may or may not deserve credit, but the electronic interlopers have now found their place without tossing the Big By Holman W. Jenkins, Jr By Joseph Epstein Board on history's ash heap. One of the exchange's traditional floor specialists, LaBranche & Co, even saw its share price nearly quadruple when the smoke cleared in late 2000. The gain was worth $345 million to 4 LaBranche executives at the time, judging by insider-holding disclosures.

The point being, lots of money was at stake in how Mr. Grasso did his job. Whether he deserved what he got is a question to endlessly entertain professors, thinktankers, and journalists—that is, kibitzers without a stake in the game. But after last week, we are closer than is healthy to the kibitzers being in charge of deciding how much companies can pay their leaders.

Reprinted with permission of the Wall Street Journal © 2003 Dow Jones & Company, Inc. All rights reserved.