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The lawsuit calling Richard Grasso’s compensation package “unreasonable” boils down to a seemingly simple question: unreasonable compared to what? But experts say the question has no obvious answer. Grasso, the former president and chairman of the New York Stock Exchange, has been sued by state Attorney General Eliot Spitzer over his eight-years’ total NYSE compensation of $188 million. Spitzer says that amount is unreasonable under New York laws governing nonprofits, of which the NYSE is one. The bulk of the money should be returned to the exchange, Spitzer says. Section 202(a)(12) of New York’s non-for-profit corporation law says that a nonprofit entity shall set the “reasonable compensation” of its directors “commensurate with services performed.” Section 515(b) adds that a nonprofit “may pay compensation in a reasonable amount” to its officers and directors. The state attorney general is empowered to enforce the nonprofit laws to uphold the integrity of charities in protecting the public interest. Grasso in turn has sued the exchange and its current chairman, John Reed, demanding $50 million in damages for breaching his employment contract and disparaging his reputation. The attorney general’s suit raises largely unexplored issues of what is reasonable compensation for the NYSE. As Grasso’s lawyers at Williams & Connolly have said in pleadings, the exchange is not a charity even though — unlike the publicly-traded Nasdaq exchange — it is a nonprofit organization, making its compensation subject to government review. Grasso’s pay far exceeds that of executives not only of charities but also other nonprofits, such as university foundations and hospitals. If Spitzer can persuade a court that Grasso can reasonably be compared with them, his case looks formidable. Grasso, however, intends to show that the relevant comparison is not with executives of traditional nonprofits but the top executives of Wall Street. In that company, his lawyers argue, his compensation does not appear out of sync. WHAT IS THE NYSE? Traditional charities and foundations in New York are classified as Type B nonprofit corporations. The NYSE is incorporated as Type A nonprofit, a sub-category used for trading boards and exchanges. This classification makes it difficult to compare it with traditional nonprofits, say nonprofit sector experts. NYSE is a membership type of organization, not a charity, noted Jon Small, head of the Nonprofit Coordinating Committee of New York. The NYSE has 1,336 members made up of brokers and floor traders who execute stock trades. “We would call [the NYSE] an outlier,” said James Abruzzo, head of the nonprofit group at the executive search firm, DHR International. The rules applicable to typical nonprofits may not apply, he said. Others agreed with this appraisal. The standards and guidelines established by industry watchdogs typically target foundations and charities, not the stock exchange, which is regulated by the Securities & Exchange Commission (SEC). Spitzer’s action is not the first to attack the pay of nonprofit executives. In the 1990s, his predecessor, Dennis Vacco, targeted the trustees and president of Adelphi University for approving an excessive compensation package for its president. The office also sued the president of United Way for misappropriating funds. The Adelphi group settled and United Way’s former chief, with a salary of $390,000 and a lavish expense account, eventually went to prison for defrauding the charity. States have played a prominent role in regulating nonprofits, said industry experts, with modest intervention from the federal government. But with the SEC in firm control of regulating national exchanges like the NYSE, states have remained largely invisible in overseeing America’s exchanges. COMPARABLES With little guidance available from nonprofit groups, the NYSE’s board had to use its common sense in determining Grasso’s salary, said Abruzzo. In many instances, he said, boards study market rates to determine the level of executive compensation — a process known as looking at “comparables.” The difficulty in this case, said observers, lies with selecting comparables. In May 2003, the NYSE’s chief rival, Nasdaq hired a new CEO with a pay package nearing $3 million annually. Stock options granted to Robert Greifeld to lure him to the Nasdaq post could be worth millions more depending on the company’s future value. His stock options totaled 37 percent of all the options granted last year within the company. The NYSE’s current CEO, John Thain, last year made more than $20 million and accumulated millions more in stock options during his tenure as the chief operating officer of Goldman Sachs. Several past presidents of the NYSE either originated or returned to high-profile positions with lucrative pay packages. The exchange’s current chairman, John Reed, once served as CEO of Citigroup, for instance. Top executives on Wall Street earn salaries commensurate with Thain’s. Goldman Sachs’ CEO and Chairman, Henry Paulson Jr., earned more than $20 million last year. His counterpart at JPMorgan-Chase was in a similar range. Most nonprofit executives earn far less. In 2003, only 52 nonprofit executives received more than $1 million in compensation, according to a study released last month by the industry publication, the Chronicle of Philanthropy. The highest pay went to the president of Harvard University’s endowment, Jack Meyer, who oversees the fund’s investments. Spitzer tackled this issue in his complaint now before Manhattan Supreme Court Justice Charles Ramos. The NYSE compensation committee, he said, looked at comparable pay packages in calculating Grasso’s salary. But the committee mistakenly ignored entities with similar “size, revenue or complexity” and instead looked at organizations that “might compete for executive talent,” Spitzer said. As head of the NYSE, Grasso was in charge of overseeing the regulation of its members as well as the companies listed with the exchange. As an organizational leader, he was also the public face of the exchange with frequent appearances on television. The companies selected among the comparables, Spitzer added, “were not bound by the restrictions on compensation” of New York not-for-profit corporation laws. Nonprofits can look to for-profit companies for guidance, according to federal guidelines, and should make comparisons with entities with similar revenues and number of employees. Grasso’s brief response to these allegations were that the NYSE intended to attract and retain talented executives and included an acceptable set of companies in determining his salary, according to court filings. William Bates II, a partner at King & Spalding’s New York office, said that the pay package “will be reviewed in large part by the nature of what the executive does and the talent level you need to entice a person to take the position.” The dueling lawsuits are in their beginning stages. The only thing clear at this point is that the NYSE is a unique and difficult institution to categorize, leaving no cut and dry solution to the question of reasonable compensation.

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