Grasso pay package a case of bad corporate governance; study finds CEOs get paid for performance ‘after-the-fact’

In 1980, the average CEO was paid around 40 times as much as the average worker, but the multiple is now above 400 for the largest U.S. companies. With such increases in top executive pay, including New York Stock Exchange Chairman Richard Grasso’s $139.5 million retirement-pay package, an expert on executive compensation says that corporate governance practices should come under even greater scrutiny. Todd Milbourn, Ph.D., a professor of finance at the Olin School of Business at Washington University in St. Louis, has recently documented other troubling evidence with regard to the efficacy of corporate governance and CEO pay.

Todd Milbourn, Ph.D., has discovered troubling new evidence on corporate governance and CEO pay.
Todd Milbourn, Ph.D., has discovered troubling new evidence on corporate governance and CEO pay.

The Grasso pay fiasco, in which his substantial compensation package was apparently hidden from the market since 1999, is most troubling given the NYSE’s recent listing requirements calling for better corporate governance in America’s corporations, Milbourn said.

“Apparently, the NYSE’s board was structured such that Grasso served as both chief executive and chairman of the board, had a strong hand in selecting his own directors, and had been criticized for having a heavy hand in determining the members of both the nominating and compensation committees,” he said. “This is in total contradiction of the NYSE’s own censure of bad corporate governance.”

Milbourn is the co-author of numerous studies on executive pay and compensation, including “CEO Reputation and Stock-Based Compensation” (Journal of Financial Economics, May 2003), “Asymmetric Benchmarking in Compensation: Executives are Paid for (Good) Luck But Not Punished for Bad,” and “Incentive Compensation When Executives Can Hedge the Market,” published in the August issue of The Journal of Finance, co-authored with Gerald Garvey of Claremont University.

Todd Milbourn
Todd Milbourn

“It is commonly agreed upon that today’s CEOs have a much greater proportion of their total pay package in the form of performance-based pay,” Milbourn said. “In our most recent research, we have uncovered evidence that a great proportion of CEO compensation appears to be set after the performance of the firm has been observed. While CEO payouts are allowed to increase commensurately as stock performance increases — a consequence of any bonus-type scheme — these same incentive-based pay schemes seem to be amended after the fact when [stock] performance is down.

“Such a result stems from poor corporate governance,” Milbourn said.

Milbourn is a referee of the Review of Financial Studies, Journal of Financial Intermediation, and the Review of Economic Studies.

He is available to comment.