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Don’t like high CEO pay? Sell shares and move on

For all the complaining that we do about executive pay, it might come as a surprise that investors recently rejected two out of the three “say on pay” proposals at pharmaceutical companies’ annual meetings. Shareholders at both Johnson & Johnson and Abbott Labs rejected the idea, and Pfizer’s investors just barely passed the resolution.

Investors may have figured that the proposals, which give shareholders only an advisory role, don’t have enough teeth. There are other ways to get shareholder opinions. Amgen and Prudential Financial have been gathering opinions online, for example, while other companies, such as Home Depot, have met with shareholders individually or in groups.

Of course, investors have always had a voice: their sell button. Don’t like the pay that the board is bestowing on the CEO? Just sell and move on. Or vote out the board members. Remember, shareholders own the company, and the board is supposed to act on their behalf.

“Say on pay” sounds good, but an advisory role really isn’t worth very much. It would be a good start for investors to be able to trust managements to increase shareholder value, and for boards to pay executives appropriately. If that’s not occurring, however, it’s sometimes best to move on.

(Home Depot and Pfizer are Motley Fool Inside Value recommendations and Johnson & Johnson is an Income Investor pick.)

Ask the Fool

Q: How should I examine the financials of a company in which I’m thinking of investing? – R.D., Dover, N.H.

A: There are many numbers to look at and a bunch you can crunch. The more you learn, the more confidence you’ll have in your decision to buy or not buy.

On the balance sheet, if inventory levels or accounts receivable are growing faster than sales, that’s a worrisome sign. So is a rising debt level with high interest rates. Examine the statement of cash flows to see how cash is being generated. Generally, you want to see most cash coming from ongoing operations – products or services sold – and not from the issuance of debt or stock or the sale of property.

Look at a company’s profit margins (gross, operating and net). Higher margins suggest that a firm has a proprietary brand or technology it can charge more for. They often indicate a higher-quality company.

You could also examine return on equity and return on assets, comparing a company with its competitors. See which firm is generating more earnings for each dollar invested in the business. Check previous years’ numbers, too, to see whether the trends are positive.

Q: What should someone who knows nothing about stocks read to learn to invest? – S.T., Davenport, Iowa

A: First, don’t invest anything until you’re comfortable with what you’re doing. Investing books by Peter Lynch are great for beginners, as are the www.betterinvesting.org and www.fool.com Web sites. When you’re ready to open a brokerage account, visit www.broker.fool.com for more info.

My dumbest investment

The dumbest mistake I ever made was in the late 1960s, when I was 40ish. I deposited money each month into an annuity for my retirement. Later I decided that I could do better elsewhere – but I didn’t consult the microscopic fine print. Withdrawing early, I got back about $9,000 of my invested $21,000 and almost had to retire right then due to shock or death on the spot. I learned my lesson: Read now or pay later. – Mel Vickery, Sierra Vista, Ariz.

The Fool responds: That’s a good lesson. It’s also smart to steer clear of variable annuities, as they have many disadvantages. For example, they typically sport high fees, can tie up your money for a long time, carry steep early withdrawal penalties, and your withdrawals will be taxed as ordinary income and won’t enjoy the usually lower capital gains rate. A better option for some people is the fixed, or income, annuity. With that, you pay a set sum and receive guaranteed payments for the rest of your life.

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