CalSTRS recently released a paper, “Lessons Learned: The Inaugural Year of Say-on-Pay,” in which they detailed their reasons for voting against companies’ 2011 Say-on-Pay proposals.

Surprisingly, CalSTRS voted against 23% of the say-on-pay proposals on which they voted during the 2011 proxy season, citing a pay for performance disconnect as the primary reason. In looking at the pay for performance disconnect, CalSTRS found that most of the companies they voted against had negative 5-year performance numbers. Other pay for performance issues noted by CalSTRS were companies’ failure to prioritize or fully explain the “laundry list” of performance metrics listed in the proxy statement and problems in peer group selection, including: a failure to adequately disclose the rationale of the peer group selection, too large a peer group, mismatch of size of peers and inclusion of companies in an unrelated industry.

CalSTRS’s second reason for negative say-on-pay votes was the ratio of CEO to named executive officer pay.  CalSTRS said that, although it would not be the sole factor in determining their vote, a pay ratio over 3 times would cause them to question a company’s practices.

A CEO base pay of over $1 million was listed as the next reason for a negative vote.  CalSTRS also found it troubling when companies used peer benchmarking to pay above the median, “particularly when companies targeted the 75th and 90th percentile.”  CalSTRS noted that this type of pay benchmarking would be a “renewed focus” next year.

Finally, in an effort to make proxy disclosure more understandable for the average investor, CalSTRS lauded the use of plain English executive summaries and additional tables to describe actually realized executive pay.

In a sampling of the companies against which they voted, CalSTRS found that the industries receiving the most negative votes were consumer discretionary, energy and industrials.

CalSTRS’s “Lessons Learned” can be found here.