High-flying CEOs risk losing touch with their companies

Are America's top CEOs living in a world apart from the rest of us? The average compensation package for a CEO of an S&P 500 company last year was $11.7 million — about 185 times greater than the average salary of a rank-and-file employee. Even in the wake of the recent corporate accounting scandals, boards are still happy to pay whatever it costs to bring in their CEOs of choice. It's hard to blame executives for taking what's offered. But there's a risk to the high life: Those who live too well, say experts at the W. P. Carey School of Business, can alienate their employees, lose touch with customers and, ultimately, put their companies at risk — simply because they no longer understand the world around them.

The scandals that rocked the business world early this decade have changed almost everything for America's top companies. New anti-corruption laws have been passed, making compliance an ongoing headache. Regulators and prosecutors are pursuing corporate wrongdoers with renewed vigor. And the general public has grown increasingly suspicious of the men and women running the world's largest companies.

But there's still one thing that hasn't changed: top executives are still very rich, very privileged — and very much removed from the experience of the average person. Whether it's the liberal use of the company jet, salaries that exceed the GNP of some small countries, or perks that cover everything from their lawn care to their tax bills, U.S. executives are living a life that most of us will never know.

And it's for that very reason, say three experts from the W. P. Carey School of Business, that some executives may fail to do the one thing they are paid to do: Run their companies well. "Do senior executives get out of touch with their customers? Yes, they do," said Angelo Kinicki, a W. P. Carey professor of management.

The more you're doing this kind of thing, the more you distance yourself from your customers.

— Angelo Kinicki, professor of management

"Extremely high compensation and perks tend to insulate executives from the everyday concerns that plague the general public — making the mortgage payment, juggling child care with work, and so on," adds Blake Ashforth, also a W. P. Carey professor of management. "And, like most people, they tend to socialize with others like themselves. Pretty soon, having multiple homes and millions in a stock portfolio comes to seem normal.

As that happens, it becomes increasingly difficult to empathize with and relate to others outside of their circle." It's certainly not a reach to say America's top CEOs are living in another world. According to one recent study, the average compensation package for a CEO of an S&P 500 company last year was a whopping $11.7 million — that's about 185 times greater than the average salary of a rank-and-file S&P 500 employee.

The Federal Reserve says executives in the U.S. also make far more than their counterparts overseas, as Japanese execs earn just 11 times the average worker's pay and British execs earn 22 times more. Clearly, the free market has deemed these salaries and perks necessary. Even in the wake of the business scandals, and despite increasing protests from business commentators and stockholders, boards are still happy to pay whatever it costs to bring in their CEOs of choice.

It's certainly hard to blame executives for taking what's offered. But there's a risk to the high life. Executives who live too well, W. P. Carey experts say, can alienate their employees, lose touch with the customers they are supposed to be serving and, ultimately, put their companies at risk, simply because they no longer understand the world around them.

Marianne Jennings, professor of legal and ethical studies at the W. P. Carey School, says she saw evidence of the damage wrought by isolated CEOs while researching her new book, "The Seven Signs of Ethical Collapse: Understanding What Causes Moral Meltdowns in Organizations." In the book, Jennings explored what caused some companies — think Enron and WorldCom — to lose their way, and their moral compass, in pursuit of financial success.

And one of the recurring "signs" of impending collapse that turned up in her research? The presence of a CEO so completely removed from the rest of the world — either because of the star treatment afforded them or the cash and perks they enjoyed — that they became numb to the feelings and needs of their customers and their own employees.

"The CEO just got almost rock-star-ish," Jennings says. "Nobody questioned them. They had, sort of, blinders on, in that their reality was very much detached, but nobody around them would tell them that, because they were afraid and often in awe of their rock-star leader.

The CEOs couldn't see their pedestal position themselves because they were running with a jet-set crowd, so isolated from ordinary folk. Real feedback was just not possible." But as any successful CEO knows, Jennings says, constant feedback is essential to strong leadership. These executives know they must always have their finger on the pulse of their company — and that doing so requires more than sitting at their mahogany desk and patching calls through their assistants.

Good executives, says Jennings, need to get down on the floor of their factories. They need to talk to their front-line salespeople. They need to understand their people and their customers — and that's not always possible while sitting in a private plane. "You want one of those executives who goes down on the factory floor, not one of the ones who are always out being interviewed," Jennings says.

"You want executives who are paying attention to the business, who are good at being hands-on … You need to talk to the salespeople. Or you need to talk to the customers. You need that real-life interaction." It makes sense. And some companies, and executives, clearly get it. Legends such as Sam Walton of Wal-Mart and Herb Kelleher of Southwest Airlines are famous for their efforts to keep their feet planted firmly on the ground — and their commitment to knowing their company from the ground up.

Natural gas company El Paso Corp. three years ago completely eliminated executive perks in response to shareholder complaints, and Coca-Cola Corp. says it will now solicit shareholder input when crafting future executive pay packages. Martha Stewart Living CEO Susan Lyne, meanwhile, made headlines when she chose to give up $200,000 of her 2005 bonus and put it back into the general employee bonus pool.

But many other companies have kept the perks coming, and many executives keep living the high life — especially in the form of free air travel. A recent study from the corporate research firm Equilar found that two-thirds of the 100 largest public U.S. companies now allow their executives to use the company jet, with the average CEO receiving more than $100,000 in free air travel per year.

Other reports have uncovered cases where executives have racked up more than $1 million in free travel over a period of several years. Ashforth is quick to point out that the company jet can be put to good use — since an executive's time is short, the jet can be a useful tool in getting them where they need to be.

But he adds: "It's also true that corporate jets are one more instance of a missed opportunity to see life as others must live it," Ashforth said. Imagine, for instance, an airline executive trying to make decisions about the experience of air travel, even though she only flies in her private plane. How could she possibly understand the miseries of air travel — and make decisions to improve that experience for her customers?

"It just can't help but get to you," adds Jennings. "Every time you take off in your private plane, you're in a whole different world from the rest of us schlubs — we experience the people waiting in line, waiting for security. When you miss that slice of life, you lose perspective." Maybe more importantly, Kinicki adds, these perks ultimately distance a CEO from their employees, creating resentment and, ultimately, reduced job performance.

"It's not only that they are insensitive to what their customers want," Kinicki said. "It's also the perception that their own employees will then have about their leadership, and how that in turn affects their performance. If I'm an employee and my executives are riding around in jets, and having perks that are so out of line with my reality, that will lead to feelings of inequity, lower motivation, lower levels of commitment."

Popular sentiment against these perks and pay packages seems to be rising. The SEC recently proposed regulations that would force companies to disclose the details of their executives' compensation packages, and some shareholder groups are also trying to take a stand: Shareholders of Home Depot Inc., for instance, recently railed against the hefty salary paid to CEO Bob Nardelli, who has received nearly $124 million in compensation since 2000 even though the company's stock has fallen.

Then again, it's unclear how much such protests matter. Though the Home Depot shareholders made headlines with their protests, they didn't make much progress, either. The proposal to give shareholders some control over CEO pay was flatly rejected. "Unfortunately, I'm not optimistic that these packages will actually be scaled back," Ashforth says. "At best, the media attention and shareholder revolts may cause the rising executive pay curve to flatten a bit. Hey, once you let kids roam free in a candy store, it's hard to convince them to come out."

Bottom line:

• Despite public protest, top executives continue to rake in huge salaries and extensive perks. The average salary of an S&P 500 CEO in 2005 topped $11 million
• High salaries and luxurious perks can be dangerous, however, because they can insulate executives from the daily experiences of their customers
• Executives who openly enjoy extensive perks may also risk alienating their employees, who can react with feelings of resentment and reduced commitment
• Stockholder groups are fighting back in hopes of having a voice in compensation packages, but it doesn't appear boards are shying away from paying whatever it takes for top executives.