When to Say When on Pay

"Say on pay" has become a common concept in the investing realm in 2011; say-on-pay advisory votes are now mandatory at public companies. However, how often should shareholders be able to vote on this important issue? Here's no surprise: the opinions of managements and shareholders diverge on the appropriate frequency of this key shareholder right.

Three is not the magic number
GMI, the leading independent provider of global corporate governance and ESG ratings and research, has issued another report in its "Say on Pay" series, this time addressing the frequency of advisory votes. This past year, shareholders gained the right to vote on whether say-on-pay votes should occur every one, two, or three years.

After analyzing 2,176 Russell 3000 index companies' votes through the end of July, GMI revealed a stark yet unsurprising result. Although the majority of management teams supported annual voting, 42% of those companies recommended that say-on-pay votes take place every three years. In contrast, fully 72% of those companies' shareholders voted to have their say every single year, while only 13% of shareholders voted for the triennial option.

Many companies with managements that recommended triennial voting played the "long-term performance" card. GMI highlighted Broadcom (Nasdaq: BRCM  ) as an adherent. I also recall that last year one of my personal favorite companies, Costco (Nasdaq: COST  ) , was one of the companies that recommended triennial voting using the long-term logic; Johnson Controls (NYSE: JCI  ) , Monsanto (NYSE: MON  ) , and Jacobs Engineering also did. (The majority of shareholders voted for annual votes at all four of those companies.)

It's a legitimate point because the investing world tends to be woefully short-term, but there's a larger problem: executive compensation has managed to burgeon out of control at far too many companies. A heck of a lot of damage can be done to shareholder returns in three years (and a lot of padding of executives' bank accounts can transpire in that time frame, too). Triennial voting pretty much strips the teeth out of having a say on pay at all.

Think carefully, corporate managements
GMI gave examples of two companies that particularly insulted their own shareholders by acting against their stated wishes. Annaly Capital Management (NYSE: NLY  ) and American Reprographics (NYSE: ARC  ) both decided to stick with managements' preferred triennial say-on-pay votes rather than adopt the yearly options that shareholders had overwhelmingly supported.

On the more positive side of the issue, Allstate (NYSE: ALL  ) expressed its intention to adhere to shareholder wishes even before voting transpired. Although management recommended triennial say-on-pay voting, Allstate will adopt annual voting after 60% of its shareholders voted for the yearly option.

Granted, these are "advisory votes," which means they're non-binding. Companies like Annaly Capital Management and American Reprographics do have the right to overrule shareholders' desires on these issues.

However, completely ignoring what a majority of shareholders want should give current and potential investors a lot to think about in terms of whether these are worthy, shareholder-friendly companies to be invested in. The sense of this interpretation probably explains why 40% of companies still hadn't decided what policy to adopt as of GMI's report. Of the companies that had decided, only 10% went ahead and adopted the triennial option.

Does your ownership mean nothing?
American chief executives made 343 times the salary of the average worker in 2010. Speaking of what can transpire over the very long term, in 1980, chief executive officers only made 42 times the average worker's salary. I certainly don't believe CEOs are eight times more worthy now.

Although some rare management teams may be trustworthy enough to have triennial say-on-pay voting in place, suffice it to say there's plenty of reason to believe most aren't.

Long-term investors must remember they're part-owners of the companies they've invested in, and pay close attention to whether corporate management teams are willing to listen to and respond to their wishes. If they're not, beware: If ownership means nothing, shareowners could be left with nothing in the long run.

Check back at Fool.com every Wednesday and Friday for Alyce Lomax's columns on environmental, social, and governance issues.