Are CEOs in for a pay cut? One little-discussed provision of the financial reform bill will make it mandatory for companies to submit executive pay packages to shareholders for approval. Already, some investors have their scissors out.

This spring, for the first time ever, three large U.S. companies failed to achieve majority shareholder support in say on pay votes approving their executive pay packages: Motorola, KeyCorp, and Occidental Petroleum. The votes were non-binding, so the companies technically weren t required to do anything. However, to maintain good relations and to protect board members in the next round of voting the companies would be well served by responding to investor input, says Amy Borrus, the deputy director of the Council of Institutional Investors.

The say on pay issue is increasingly important now because both the Senate and the House versions of financial reform legislation would make these non-binding votes mandatory for all companies meaning that as early as next year, thousands of U.S. companies could be scrambling to deal with this new mood of shareholder discontent.

Giving shareholders input on compensation is a relatively new phenomenon, says Michael Littenberg, a partner at the law firm Schulte, Roth & Zabel who focuses on corporate governance issues. Over the past few years, SEC rules have increased disclosure requirements around executive pay, and a small but growing number of companies have also asked for shareholder approval of pay policies. This year, about 120 public companies had these advisory votes, Littenberg says.

The message from the voters hasn t always been positive. American Express, for example, saw support for its pay policy fall from 71.9% in 2009 to 62% this year, and Wells Fargo majority support fell from 92.8% to 72%, Borrus says. A spokeswoman for Wells Fargo said the bank continues to review its pay policies, but hasn t made any changes following this vote. American Express declined to comment.

Companies that overcompensate their executives relative to peers can see a stock-price boost when say on pay proposals are announced, according to research by Jay Cai, an assistant professor at Drexel University s LeBow College of Business, and Ralph Walkling, another professor at Drexel. Yet, in the past, activist shareholders say on pay demands haven t targeted firms that truly overpay their top brass, Cai says. Labor unions in particular seem to simply target large companies, where CEOs are highly paid, but not necessarily overpaid relative to peers, Cai says.

At Occidental, the problem appeared to be that shareholders had protested pay for some time, but those concerns have not been fully addressed, says Borrus. The company s chief executive officer, Ray Irani, received $31.4 million in 2009, making him one of the highest-paid CEOs in the country. His compensation is 15% higher, for example, than Rex Tillerson at Exxon and more than double that of James Mulva at ConocoPhillips.

What s more, according to Borrus, there is a notable gap between Irani s pay and that of the executives just under him: Occidental s CFO made $13.5 million in 2009, while the other three executives whose pay is disclosed made between $2.8 and $3.6 million each. Big internal pay gaps are bad for morale, Borrus says, and can spur investor discontent. Dr. Irani s compensation reflects his outstanding leadership in managing Occidental, a spokesman for the company said. The spokesman adds that the compensation committee is working with investors and independent compensation consultants to come up with recommendations.

Shareholders reviewing executive compensation policies need to get beyond the sticker shock of big numbers, and also look at the how and why that companies disclose, about why they pay people what they do, says Littenberg of Schulte, Roth & Zabel. The three companies whose pay packages were rejected did tell shareholders that they aimed to tie executive pay to performance.

To see if that rhetoric matches reality, shareholders should look for companies to put a large portion of the CEO s pay at risk based on performance and then look for multiple, specific, not easily manipulated performance metrics that actually require the company to outperform peers before executives receive bonuses, Borrus says. At Motorola, for example, the financial performance has not been stellar, and yet CEO Sanjay Jha s compensation has risen, she says. A spokeswoman for Motorola said that Jha s base pay has been cut 25% from what was specified in his contract, and 95% of his compensation is in the form of equity awards.

The head of the KeyCorp board s compensation committee, Edward Campbell, told shareholders that the company takes the advisory vote very seriously and will promptly change the compensation program once it has exited the TARP program, which restricts its ability to link pay to performance.

Post-employment pay is another area for shareholders to watch, Borrus says. Guaranteeing severance to executives who are fired for poor performance, offering change-of-control payments so generous they incentivize selling the company, and guaranteeing continued benefits to retired executives are all bad signs, she says.

Investors shouldn t worry that executives whose pay is reduced or redesigned due to shareholder protest will leave the company, Borrus says. It does happen but not nearly as often as senior executives would like you to think, she says. A report from the TARP bailout pay czar found that 84% of executives affected by 2009 restrictions on pay remain in their positions.