The Rumble Over Executive Pay

Some companies are adopting more sophisticated formulas that peg CEO compensation to benchmarks other than the stock price in a bid to align pay more closely with performance. During each of the next three years, Hewlett-Packard CEO Carly Fiorina can accrue up to 150% of a nearly $2 million cash award if she meets certain criteria for operating cash flow. But she will collect the full amount only if at the end of the three years HP stock has outperformed at least half the companies in the S&P 500. IBM is now granting its top 300 senior executives stock options that are priced 10% above market value, an uncommon practice that makes it harder for execs to cash out. Compensation committees, partly to shield themselves from lawsuits, are also taking a tougher stance, hiring consultants to evaluate employment contracts.

The Grasso suit will probably name former directors who approved Grasso's pay, the most prominent of whom is Ken Langone, Grasso's longtime friend who chaired the compensation committee during the years that Grasso received his biggest compensation deals. Spitzer was in talks with Langone's lawyers late last week in one of those 10 cases the tireless New York attorney general was on.

Langone has steadfastly defended Grasso's pay, appalling though it might have been by the standards of a not-for-profit institution like the N.Y.S.E. In fact, the basis for Spitzer's suit is a New York not-for-profit law dictating that pay be reasonable for services rendered. From 1999 through 2002, Grasso was paid more than $76 million--more than a third of the exchange's net income in that period. Langone has argued that Grasso was worth every dime, in part for getting the markets running after the Sept. 11 terrorist attacks. Grasso's lawyer has said that the N.Y.S.E. board went through all the necessary legal steps in approving his compensation.

The N.Y.S.E., meanwhile, is reforming. The Big Board has split the positions of chairman and CEO, overhauled its board of directors and created the post of chief regulatory officer. In Washington the SEC is developing proposals that would tighten regulation of U.S. stock exchanges--the first order of business being that they must abide by the same disclosure rules they impose on publicly traded companies. But the changes afoot aren't enough for Spitzer. In a recent interview with the Harvard Business Review, he noted that "we have board compensation committees that are self-selected and interwoven. It's a rigged marketplace." Asked what it would take to right the playing field, he tells TIME, "I have no idea what the solution is. But I do believe that the first step--shedding light on these issues--is important." It looks as if the fight has just begun.

--With reporting by Barbara Kiviat, Julie Rawe/New York, Eric Roston/Washington and Sonja Steptoe/Los Angeles