International Business Machines DEF 14A 2008
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SECURITIES AND EXCHANGE COMMISSION
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o Preliminary Proxy Statement
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IBM Notice of 2008 Annual Meeting and Proxy Statement
You are cordially invited to attend the Annual Meeting of Stockholders on Tuesday, April 29, 2008 at 10 a.m., in the Ballroom of the Charlotte Convention Center, Charlotte, North Carolina.
We are very pleased that Dr. William R. Brody, president of The Johns Hopkins University, is a new nominee for the Board this year.
Messrs. Juergen Dormann and Minoru Makihara are not nominees for election, and their terms on the Board will end in April. We are very grateful to them for their many valuable contributions and we will miss their participation.
Stockholders of record can vote their shares by using the Internet or the telephone. Instructions for using these convenient services are set forth on the enclosed proxy card. Of course, you also may vote your shares by marking your votes on the enclosed proxy card, signing and dating it, and mailing it in the enclosed envelope. If you will need special assistance at the meeting because of a disability, please contact the Office of the Secretary, Armonk, N.Y. 10504.
Your vote is important
Please vote by using the internet,
ARMONK, NEW YORK 10504
MARCH 10, 2008
Notice of Meeting
The Annual Meeting of Stockholders of International Business Machines Corporation will be held on Tuesday, April 29, 2008, at 10 a.m., in the Ballroom of the Charlotte Convention Center, 501 South College Street, Charlotte, North Carolina 28202. The items of business are:
1. Election of directors for a term of one year.
2. Ratification of the appointment of PricewaterhouseCoopers LLP as the Companys independent registered public accounting firm.
3. Such other matters, including five stockholder proposals, as may properly come before the meeting.
These items are more fully described in the following pages, which are a part of this Notice.
This Proxy Statement and the accompanying form of proxy card are being mailed beginning on or about March 10, 2008, to all stockholders entitled to vote. The IBM 2007 Annual Report, which includes consolidated financial statements, is being mailed with this Proxy Statement.
The Board proposes the election of the following directors of the Company for a term of one year. Below is information about each nominee, including biographical data for at least the last five years. If one or more of these nominees become unavailable to accept nomination or election as a director, the individuals named as proxies on the enclosed proxy card will vote the shares that they represent for the election of such other persons as the Board may recommend, unless the Board reduces the number of directors.
Cathleen Black, 63, is president of Hearst Magazines, a division of The Hearst Corporation, a diversified communications company. She is chair of IBMs Directors and Corporate Governance Committee and a member of IBMs Executive Committee. Prior to joining Hearst Magazines, she was president and chief executive officer of the Newspaper Association of America from 1991 to 1996, president, then publisher, of USA TODAY from 1983 to 1991, and also executive vice president/marketing for Gannett Company, Inc. (USA TODAY parent company) from 1985 to 1991. She is a director of The Hearst Corporation, The Coca-Cola Company, the Advertising Council, a member of the Council on Foreign Relations and a trustee of the University of Notre Dame. Ms. Black became an IBM director in 1995.
William R. Brody, 64, is president of The Johns Hopkins University. He is a member of IBMs Executive Compensation and Management Resources Committee. From 1987 to 1994, Dr. Brody was the Martin Donner Professor and director of the Department of Radiology, professor of electrical and computer engineering, and professor of biomedical engineering at Johns Hopkins and radiologist in-chief of The Johns Hopkins Hospital. He was the provost of the Academic Health Center at the University of Minnesota from 1994 until he assumed his current position in 1996. Dr. Brody became an IBM director in 2007.
Kenneth I. Chenault, 56, is chairman and chief executive officer of American Express Company, a financial services company. Mr. Chenault joined American Express in 1981 and was named president of the U.S. division of American Express Travel Related Services Company, Inc. in 1993, vice chairman of American Express Company in 1995, president and chief operating officer in 1997 and chairman and chief executive officer in 2001. Mr. Chenault became an IBM director in 1998.
Michael L. Eskew, 58, is retired chairman and chief executive officer of United Parcel Service, Inc., a provider of specialized transportation and logistics services. He is a member of IBMs Audit Committee. Mr. Eskew joined United Parcel Service in 1972. He was named corporate vice president for industrial engineering in 1994, group vice president for engineering in 1996, executive vice president in 1999, vice chairman in 2000, and he was chairman and chief executive officer from 2002 until his retirement at the end of last year. Mr. Eskew remains on the board of United Parcel Service, and he is also a director of Eli Lilly and Company, 3M Company and chairman of the Annie E. Casey Foundation. Mr. Eskew became an IBM director in 2005.
Shirley Ann Jackson, 61, is president of Rensselaer Polytechnic Institute. She is a member of IBMs Directors and Corporate Governance Committee. Dr. Jackson was a theoretical physicist at the former AT&T Bell Laboratories from 1976 to 1991, professor of theoretical physics at Rutgers University from 1991 to 1995 and chairman of the U.S. Nuclear Regulatory Commission from 1995 until she assumed her current position in 1999. Dr. Jackson is a director of FedEx Corporation, Marathon Oil Corp., Medtronic, Inc., Public Service Enterprise Group Incorporated and NYSE Euronext. She is a member of the National Academy of Engineering and a fellow of the American Academy of Arts and Sciences. Dr. Jackson is past president of the American Association for the Advancement of Science and a member of the Council on Foreign Relations and the American Philosophical Society. Dr. Jackson became an IBM director in 2005.
Lucio A. Noto, 69, is a managing partner of Midstream Partners LLC, an investment company specializing in energy and transportation projects. He is chair of IBMs Audit Committee and a member of IBMs Executive Committee. Mr. Noto was chairman and chief executive officer of Mobil Corporation from 1994 until its merger with Exxon in 1999 at which time he was named vice chairman of Exxon Mobil Corporation. He held this position until his retirement in 2001. Mr. Noto is a director of Altria Group, Inc., Penske Automotive Group, Inc., and a member of the International Advisory Council of Temasek (Singapore) Inc. Mr. Noto became an IBM director in 1995.
James W. Owens, 62, is chairman of the board and chief executive officer of Caterpillar Inc., a manufacturer of construction and mining equipment, diesel and natural gas engines and industrial gas turbines. He is a member of IBMs Audit Committee. Mr. Owens joined Caterpillar Inc. in 1972 as a corporate economist and subsequently held various management positions, including chief financial officer. He was named group president in 1995, vice chairman in 2003 and to his current position in 2004. He is a director of Alcoa Inc. Mr. Owens serves on the boards of the Peterson Institute for International Economics in Washington, D.C. and the Council on Foreign Relations. He is chairman of the International Trade and Investment Task Force of the Business Roundtable, vice chairman of The Business Council, a member of the Presidents Advisory Committee for Trade Policy and Negotiations and the Global Advisory Council to The Conference Board in New York. Mr. Owens became an IBM director in 2006.
Samuel J. Palmisano, 56, is chairman of the Board, president and chief executive officer of IBM and chair of IBMs Executive Committee. Mr. Palmisano joined IBM in 1973. He was elected senior vice president and group executive of the Personal Systems Group in 1997, senior vice president and group executive of IBM Global Services in 1998, senior vice president and group executive of Enterprise Systems in 1999, president and chief operating officer in 2000, chief executive officer in 2002 and chairman of the Board in 2003. Mr. Palmisano is a director of Exxon Mobil Corporation. Mr. Palmisano became an IBM director in 2000.
Joan E. Spero, 63, is president of the Doris Duke Charitable Foundation. She is a member of IBMs Audit Committee. Ms. Spero served as U.S. Ambassador to the United Nations for Economic and Social Affairs from 1980 to 1981. From 1981 to 1993 she held several positions with American Express Company, the last being executive vice president, corporate affairs and communications. From 1993 to 1996 Ms. Spero served as U.S. Undersecretary of State for Economic, Business and Agricultural Affairs, and she assumed her current position with the Doris Duke Charitable Foundation in 1997. She is a director of the Council on Foreign Relations, a member of the International Advisory Board of Toyota Motors and a trustee of Columbia University and the Wisconsin Alumni Research Foundation. Ms. Spero became an IBM director in 2004.
Sidney Taurel, 59, is chairman of the board and chief executive officer of Eli Lilly and Company, a pharmaceutical company. He is chair of IBMs Executive Compensation and Management Resources Committee and a member of IBMs Executive Committee. Mr. Taurel joined Eli Lilly in 1971 and has held management positions in the companys operations in South America and Europe. He was named president of Eli Lilly International Corporation in 1986, executive vice president of the Pharmaceutical Division in 1991, executive vice president of Eli Lilly and Company in 1993, president and chief operating officer in 1996, chief executive officer in 1998 and chairman of the board in 1999. Mr. Taurel is a director of The McGraw-Hill Companies, Inc., a member of the White House Advisory Committee on Trade Policy and Negotiations, the Board of Overseers of the Columbia Business School and a trustee of the Indianapolis Museum of Art. Mr. Taurel became an IBM director in 2001.
Lorenzo H. Zambrano, 63, is chairman and chief executive officer of CEMEX, S.A.B. de C.V., a producer and marketer of cement and ready-mix concrete products. He is a member of IBMs Directors and Corporate Governance Committee. Mr. Zambrano joined CEMEX in 1968. He was named chief executive officer in 1985 and has also served as chairman of the board since 1995. He is a director of Grupo Televisa and a member of the Citigroup International Advisory Board. He is also chairman of the board of the Tecnologico de Monterrey. Mr. Zambrano became an IBM director in 2003.
IBMs Board of Directors is responsible for supervision of the overall affairs of the Company. The Board held 10 meetings during 2007. To assist it in carrying out its duties, the Board has delegated certain authority to several committees. Overall attendance at Board and committee meetings was 92%. Attendance was at least 75% for each director except for Mr. Dormann. Directors are expected to attend the Annual Meeting of Stockholders, and all directors attended the 2007 Annual Meeting except Messrs. Dormann and Owens. Following the Annual Meeting in 2008, the Board will consist of 11 directors. In the interim between Annual Meetings, the Board has the authority under the by-laws to increase or decrease the size of the Board and to fill vacancies.
IBMs Board of Directors has long adhered to governance principles designed to assure the continued vitality of the Board and excellence in the execution of its duties. Since 1994, the Board has had in place a set of governance guidelines reflecting these principles, including the Boards policy of requiring a majority of independent directors, the importance of equity compensation to align the interests of directors and stockholders, and regularly scheduled executive sessions, including sessions of non-management directors without management. An executive session with independent directors is scheduled for at least once a year, and the non-management directors met in executive session three times in 2007. The chair of the Board committee responsible for the principal subject being discussed presides at executive sessions of the non-management directors. The IBM Board Corporate Governance Guidelines reflect the Companys principles on corporate governance matters, including the policy that any director who receives more withheld votes than for votes in an election shall tender his or her resignation. These guidelines are available at http://www.ibm.com/investor/corpgovernance/cggl.phtml and are available in print to any stockholder who requests them. At its Annual Meeting in 2009, the Company intends to seek stockholder approval to amend its certificate of incorporation to provide for majority voting for directors in uncontested elections. The Company will implement majority voting at an earlier date if there is a change in applicable law that would allow the Company to do so without stockholder approval.
Under the IBM Board Corporate Governance Guidelines, the Directors and Corporate Governance Committee and the full Board annually review the financial and other relationships between the non-management directors and IBM as part of the annual assessment of director independence. The Directors and Corporate Governance Committee makes recommendations to the Board about the independence of non-management directors, and the Board determines whether those directors are independent. The independence criteria established by the Board in accordance with New York Stock Exchange requirements and used by the Directors and Corporate Governance Committee and the Board in their assessment of the independence of directors is set forth in Appendix A to this Proxy Statement. Applying those standards for the non-management directors in 2007, including those standing for election, the Committee and the Board have determined that each of the following directors has met the independence standards: C. Black, W.R. Brody, J. Dormann, M.L. Eskew, S.A. Jackson, M. Makihara, L.A. Noto, J.W. Owens, J.E. Spero, S. Taurel, C.M. Vest and L.H. Zambrano. The Committee and the Board have determined that Mr. K.I. Chenault does not qualify as an independent director in view of the commercial relationships between IBM and American Express Company. As a result, Mr. Chenault does not participate on any committee of the Board or in executive sessions regarding compensation for the Companys CEO. Otherwise, Mr. Chenault continues to participate fully in the Boards activities and to provide valuable expertise and advice. Mr. Eskews son is employed by the Company in a non-executive officer position. He was hired over a year before Mr. Eskew joined the Companys Board, and his compensation is consistent with the Companys policies that apply to all employees. Based on the foregoing, the Board has determined that this relationship does not preclude a finding of independence for Mr. Eskew.
Stockholders and other interested parties who wish to communicate with the non-management directors of the Company should send their correspondence to: IBM Non-Management Directors, c/o Chair, IBM Directors and Corporate Governance Committee, International Business Machines Corporation, Mail Drop 390, New Orchard Road, Armonk, NY 10504, or firstname.lastname@example.org.
The Audit Committee, the Directors and Corporate Governance Committee, the Executive Compensation and Management Resources Committee and the Executive Committee are the standing committees of the Board of Directors.
* As noted above, Messrs. Dormann and Makihara are not nominees for election, and their terms on the Board will end in April.
As explained above, Mr. Chenault does not qualify as an independent director; therefore, he does not participate on any committee of the Board.
The Audit Committee is responsible for reviewing reports of the Companys financial results, audits, internal controls and adherence to IBMs Business Conduct Guidelines in compliance with applicable laws and regulations including federal procurement requirements. The Committee selects the independent registered public accounting firm and approves all related fees and compensation and reviews their selection with the Board. The Committee also reviews the procedures of the independent registered public accounting firm for ensuring its independence with respect to the services performed for the Company.
Members of the Committee are non-management directors who, in the opinion of the Board, satisfy the independence criteria established by the Board and the standards of the Securities and Exchange Commission (SEC). The Board has determined that Mr. Noto qualifies as an Audit Committee Financial Expert as defined by the rules of the SEC. The Committee held five meetings in 2007. The IBM Board of Directors has adopted a written charter for the Committee, which is available at http://www.ibm.com/investor/corpgovernance/cgbc.phtml/. The Business Conduct Guidelines (BCGs) are IBMs code of ethics for directors, executive officers and employees. Any amendment to or waiver of the BCGs that applies to our directors or executive officers may be made only by the IBM Board or a Board committee and will be disclosed on IBMs website. The BCGs are available at http://www.ibm.com/investor/corpgovernance/cgbcg.phtml/. The charter and the BCGs are also available in print to any stockholder who requests them.
Directors and Corporate Governance Committee
The Directors and Corporate Governance Committee is devoted primarily to the continuing review and articulation of the governance structure of the Board of Directors.
The Committee is responsible for recommending qualified candidates to the Board for election as directors of the Company, including the slate of directors that the Board proposes for election by stockholders at the Annual Meeting. The Committee recommends candidates based on their business or professional experience, the diversity of their background and their talents and perspectives. The Committee identifies candidates through a variety of means, including information the Committee requests from time to time from the Secretary of the Company, recommendations from members of the Committee and the Board and suggestions from Company management, including the Chairman and CEO. The Committee also considers candidates recommended by stockholders. Any formal invitation to a director candidate is authorized by the full Board. Dr. Brody is a new nominee this year. His nomination was recommended by the Committee and approved by the Board, after following this candidate identification process. Stockholders wishing to recommend director candidates for consideration by the Committee may do so by writing to the Secretary of the Company, giving the recommended candidates name, biographical data and qualifications.
The Committee also advises and makes recommendations to the Board on all matters concerning directorship practices, and on the function and duties of the committees of the Board. The Committee also makes recommendations to the Board on compensation for non-management directors. The Committee currently retains Towers Perrin to assess trends and developments in director compensation practices and to compare the Companys practices against them. The Committee uses the analysis prepared by the consultant as part of its periodic review of the Companys director compensation practices.
The Committee is responsible for reviewing and considering the Companys position and practices on significant issues of corporate public responsibility, such as workforce diversity, protection of the environment and philanthropic contributions, and it reviews and considers stockholder proposals dealing with issues of public and social interest. Members of the Committee are non-management directors who, in the opinion of the Board, satisfy the independence criteria established by the Board. The Committee held three meetings in 2007. The IBM Board of Directors has adopted a written charter for the Committee, which is available at http://www.ibm.com/investor/corpgovernance/cgbc.phtml/. The charter is also available in print to any stockholder who requests it.
Executive Compensation and Management Resources Committee
The Executive Compensation and Management Resources Committee has responsibility for defining and articulating the Companys overall executive compensation philosophy, and administering and approving all elements of compensation for elected corporate officers.
The Committee approves, by direct action or through delegation, participation in and all awards, grants and related actions under the Companys various equity plans, reviews changes in the Companys pension plans primarily affecting corporate officers, and manages the operation and administration of the IBM Excess 401(k) Plus Plan (Excess Plan), formerly known as the IBM Executive Deferred Compensation Plan (EDCP), and the IBM Supplemental Executive Retention Plan. The Committee has the direct responsibility to review and approve the corporate goals and objectives relevant to the Chairman and CEOs compensation, evaluate his performance in light of those goals and objectives and, together with the other independent directors, determine and approve the Chairman and CEOs compensation level based on this evaluation. The Committee also has responsibility for reviewing the Companys management resources programs and for recommending qualified candidates to the Board for election as officers. The Committee reviews the compensation structure for the Companys officers and provides oversight of managements decisions regarding performance and compensation of other employees. In addition, the Committee monitors compliance of stock ownership guidelines. All equity awards for employees other than senior management are approved by senior management, pursuant to a series of delegations that were approved by the Committee, and the grants made pursuant to these delegations are reviewed periodically with the Committee.
The IBM Senior Vice President of Human Resources (SVP HR) works directly with the chair of the Committee to provide a decision-making framework for use in making a recommendation for the Chairman and CEOs total compensation. In addition, IBMs Chairman and CEO and the SVP HR review the self-assessments of the Executive Vice President and Senior Vice Presidents and evaluate the information, along with comparisons to market compensation levels for cash compensation and total direct compensation, potential for future roles within IBM and total compensation levels
relative to internal peers before and after any recommendations. Following this in-depth review, and in consultation with the SVP HR, the Chairman and CEO makes compensation recommendations to the Committee based on his evaluation of each senior managers performance and expectations for the coming year.
The Committee has the sole authority to retain consultants and advisors as it may deem appropriate in its discretion, and the Committee has the sole authority to approve related fees and other retention terms. The Committee currently retains a Managing Director of Towers Perrin as its outside compensation consultant to advise the Committee on market practices and the specific policies and programs. This Managing Director does not perform any work for the Company. The consultants work for the Committee includes data analyses, market assessments and preparation of related reports. The work done by Towers Perrin for the Committee is documented in a formal scope of work and contract which is executed by the consultant and the Committee.
The Committee reports to stockholders as required by the SEC (see 2007 Report of the Executive Compensation and Management Resources Committee of the Board of Directors below). Members of the Committee are non-management directors who, in the opinion of the Board, satisfy the independence criteria established by the Board. Committee members are not eligible to participate in any of the plans or programs that the Committee administers. The Committee held five meetings in 2007. The IBM Board of Directors has adopted a written charter for the Committee, which is available at http://www.ibm.com/investor/corpgovernance/cgbc.phtml/. The charter is also available in print to any stockholder who requests it.
Compensation Committee Interlocks and Insider Participation
No member of the Executive Compensation and Management Resources Committee had a relationship that requires disclosure as a Compensation Committee interlock.
The Executive Committee is empowered to act for the full Board in intervals between Board meetings, with the exception of certain matters that by law may not be delegated. The Committee meets as necessary, and all actions by the Committee are reported at the next Board of Directors meeting. The Committee did not meet in 2007.
Under the Companys written related person transactions policy, information about transactions involving related persons is assessed by the independent directors on IBMs Board. Related persons include IBM directors and executive officers, as well as immediate family members of directors and officers, and beneficial owners of more than five percent of the Companys common stock. If the determination is made that a related person has a material interest in any Company transaction, then the Companys independent directors would review, approve or ratify it, and the transaction would be required to be disclosed in accordance with the SEC rules. If the related person at issue is a director of IBM, or a family member of a director, then that director would not participate in those discussions. In general, the Company is of the view that the following transactions with related persons are not significant to investors because they take place under the Companys standard policies and procedures: the sale or purchase of products or services in the ordinary course of business and on an arms length basis; the employment by the Company where the compensation and other terms of employment are determined on a basis consistent with the Companys human resources policies; and any grants or contributions made by the Company under one of its grant programs and in accordance with the Companys corporate contributions guidelines.
From time to time, the Company may have employees who are related to our executive officers or directors. As noted under the discussion above on General InformationBoard of Directors, Mr. Eskews son is employed by the Company. In addition, each of Messrs. M.E. Daniels (Senior Vice President, Global Technology Services), J.B. Harreld (Senior Vice President, Marketing and Strategy), M. Loughridge (Senior Vice President and Chief Financial Officer), and W.M. Zeitler (Senior Vice President and Group Executive, Systems and Technology Group) has an adult child who is employed by the Company in a non-executive position, and each of Messrs. N.M. Donofrio (Executive Vice President, Innovation and Technology) and T.S. Shaughnessy (Vice President and Controller) has a sibling who is employed by the Company in a non-executive position. Further, the wife of Mr. Shaughnessy, a brother-in-law of Mr. Loughridge and a sibling of Ms. L.S. Sanford (Senior Vice President, Enterprise On Demand Transformation) are executives of the Company.
The Company has renewed its directors and officers indemnification insurance coverage. This insurance covers directors and officers individually where exposures exist other than those for which the Company is able to provide direct or indirect indemnification. These policies run from June 30, 2007, through June 30, 2008, at a total cost of $9,580,056. The primary carrier is XL Specialty Insurance Company.
Annual Retainer and IBM Deferred Compensation and Equity Award Plan (the DCEAP): In 2007 non-management directors received an annual retainer of $200,000. Each committee chair received an additional annual retainer of $5,000. Under the DCEAP, 60% of the total annual retainer is required to be deferred and paid in Promised Fee Shares (PFS). Each PFS is equal in value to one share of the Companys common stock. When a cash dividend is paid on the Companys common stock, each directors PFS account is credited with additional PFS reflecting a dividend equivalent payment. With respect to the payment of the remaining 40% of the annual retainer, directors may elect one or any combination of the following: (a) deferral into PFS, (b) deferral into an interest-bearing cash account to be paid with interest at a rate equal to the rate on 26-week U.S. Treasury bills updated each January and July, and/or (c) receipt of cash payments on a quarterly basis during service as a Board member. The Company does not pay above-market or preferential earnings on compensation deferred by directors. IBM had a retirement plan for directors which was eliminated effective January 1996, and the Company credited the PFS accounts with retirement promised fee shares equal to the benefits accrued under that retirement plan. For 2007 all directors made elections under the DCEAP to defer 100% of their annual retainer in PFS. Under the IBM Board Corporate Governance Guidelines, within five years of initial election to the Board non-management directors are expected to have stock-based holdings in IBM equal in value to five times the annual retainer.
Payout under the DCEAP: Upon a directors retirement or other completion of service as a director, (a) all amounts deferred into PFS are payable in either cash and/or shares of the Companys common stock at the directors choice, (b) amounts deferred into the interest-bearing cash account are payable in cash and (c) amounts credited to the PFS account in connection with the elimination of the retirement plan are payable solely in cash. The payout of PFS is valued based on the average of the high and low sales prices of IBM stock on the New York Stock Exchange on the first day after the date on which the director ceases to be a member of the Board.
Termination of IBM Non-Employee Directors Stock Option Plan (the DSOP) effective January 1, 2007: Prior to January 1, 2007, non-management directors who had been elected or reelected as a member of the Board as of the adjournment of the Annual Meeting of Stockholders received on the first day of the month following such meeting an annual grant of options to purchase 4,000 shares of IBM common stock. The exercise price of the options was the average of the high and low sales prices of IBM stock on the New York Stock Exchange on the date of grant. Each option has a term of ten years and becomes exercisable in four equal installments commencing on the first anniversary of the date of grant and continuing for the three successive anniversaries thereafter. If a non-management director retires (as defined in the DSOP) or dies, all options granted to that director become immediately exercisable. Effective January 1, 2007, the DSOP was terminated. Therefore, the 2007 Director Compensation Table does not include any option awards. However, the table below entitled Aggregate Number of Option Awards Outstanding reflects the options outstanding under the DSOP as of year end.
IBMs Matching Grants Programs: Non-management directors are eligible to participate in the Companys two matching grants programs on the same basis as the Companys employees based in the U.S. Under one of the programs, the Company will provide specified matches in cash or equipment in connection with a directors eligible contributions to approved colleges, hospitals, cultural and environmental institutions. Under the second program directors can also make a contribution toward the donation of personal computer equipment to eligible primary and secondary schools of their choice. Under this second program, directors are required to donate 20% of the list price of a particular pre-packaged configuration, and the Company contributes the remaining 80%. Under each of these programs, directors gifts are limited to $5,000 per director, per institution, to a total of $10,000 in gifts per calendar year.
2007 Director Compensation Table
Fees Earned or Paid in Cash (column (b)): Amounts shown in this column reflect the annual retainer paid to each director as described above.
All Other Compensation (column (c)): Amounts in this column represent the following:
Aggregate Number of Option Awards Outstanding (Both Exercisable and Unexercisable) for Each Director at Fiscal Year-End
As described above, until the termination of the DSOP effective January 1, 2007, non-management directors received an annual grant of options to purchase 4,000 shares of IBM common stock. Because Dr. Brody joined the Board after the termination of the DSOP, he did not receive any options and therefore is not included in the table below.
The Company believes that all reports for the Companys executive officers and directors that were required to be filed under Section 16 of the Securities Exchange Act of 1934 were timely filed.
Common Stock and Stock-Based Holdings of Directors and Executive Officers
The following table sets forth the beneficial ownership of shares of the Companys common stock as of December 31, 2007 by IBMs current directors and nominees, the executive officers named in the Summary Compensation Table, and such directors and all of the Companys executive officers as of December 31, 2007 as a group. Also shown are shares over which the named person could have acquired voting power or investment power within 60 days. Voting power includes the power to direct the voting of shares held, and investment power includes the power to direct the disposition of shares held.
Set out below is the Compensation Discussion and Analysis, which is a discussion of the Companys executive compensation programs and policies written from the perspective of how we and management view and use such programs and policies. Given the Committees role in providing oversight to the design of those programs and policies, and in making specific compensation decisions for senior executives using those policies and programs, the Committee participated in the preparation of the Compensation Discussion and Analysis, reviewing successive drafts of the document and discussing those with management. The Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement. We join with management in welcoming readers to examine our pay practices and in affirming the commitment of these pay practices to the long-term interests of stockholders.
Sidney Taurel (chair)
William R. Brody
Trust and personal responsibility in all relationshipsrelationships with clients, partners, communities, fellow IBMers, and investorsis a core value at IBM. Investors should have as much trust in the integrity of a companys executive compensation process as clients do in the quality of its products. A breach of either constitutes an unacceptable risk. As a part of maintaining this trust, we well understand the need for our investors to know how compensation decisions are made. We have put tremendous effort and rigor into our own executive compensation processes over many years, continually updating them to meet new voluntary criteria as well as official requirements from the SEC.
As we did last year, we are publishing this guide to executive pay at IBM, which will, we hope, make the process accessible and comprehensible not only to professional fund managers and to institutional investor groups, but to millions of individual investors.
InvestorsIBMs ownerswant senior leaders to run the Company in a way that protects and grows their investment over the long term. This is no simple task at any company, and at a company as large and complex as IBM, it is a particularly exciting leadership challenge. IBM holds a unique identity, based on talent, brand, global operating footprint, the size and scope of our business overall and the size of each of our individual lines of business. Unlike those few other companies of comparable size and scale that tend to operate as holding companies of component businesses, we operate as an integrated entity across a number of significant business lines, most large enough to be among the Fortune 150 biggest companies if they were stand-alone businesses. Our unique, integrated model delivers great value to our investors and our clients, yet demands a senior leadership team of unusual depth, agility and experience.
With these goals in mind, IBM executives earn their compensation based on performance over three time frames:
Compensation Elements for Senior Leaders
On average, 86% of IBMs senior leaders annual compensation is at riskwhich means it varies year to year based on business results, with the remainder coming from salary. With this much pay at risk, the Company ensures that the interests of senior executives are aligned with stockholders.
Current Years Performance: Salary and Annual Incentives
Salary. Senior leaders at IBM receive a small percentage of their overall compensation in salary. In 2007, for example, Chairman and CEO Sam Palmisano earned 10% of his compensation in salary, and the rest of the senior team earned an average of 14%.
Annual Incentive. Senior leaders are incented through a program that sets performance targets based on their role and scope. Actual payments are driven by business performance against revenue growth, net income, and cash flow targets and individual performance, as reflected in the Personal Business Commitment review process described under How Compensation Decisions Are Made. Top performers earn the greatest payouts; median performers earn much smaller amounts; and the lowest performers earn no incentive payments at all. Over the past four years, these results-based
payouts for individual leaders have ranged from 0.7 times target to a high of 1.66 times target. In 2007, the annual incentive earned by the Chairman and CEO represented 33% of his total compensation; incentives achieved by the rest of the senior team averaged 20% of their total compensation. Additional information about the Annual Incentive Program is outlined in Section 2 of this CD&A, Setting Performance Targets for Incentive Compensation.
Team Incentive. When Mr. Palmisano became CEO in 2002, he asked the Board of Directors to take a portion of the incentive funding (approximately $3 million) to help create a pool for rewarding teamwork by his most senior leaders. This was done to reinforce IBMs strategy of integration across the Company, with awards based on how well the EVP and SVPs lead efforts to deliver integrated value to IBMs clients worldwide. Every year, an amount ranging from $0 to $250,000 is awarded and paid equally to each member of the senior team. The Chairman and CEO does not receive a team incentive. Since inception, payments to the senior team have ranged from $100,000 to $220,000; the maximum award has not yet been earned. In 2007, this team incentive represented an average of 5% of total compensation for the EVP and SVPs.
Other Compensation. At IBM, additional programs that are restricted to senior executive participation amount to less than 1% of total compensation on average. Programs are limited to services with a direct bearing on productivity.
Longer-Term Performance: Long Term Incentive Plan
Long-term incentive plans (LTIP) have been a focal point for much of the discussion over executive compensation in the past several years. Well-designed LTIPs ensure that senior leaders hold a competitive stake in their companys financial future. At the same time, the size of the awards reflects the value that the company and, ultimately, its investors place on the individual executive at the time. Any gain the executives realize in the long run from the program depends on what they and their colleagues do to drive the financial performance of the company. Under IBMs LTIP, senior leaders may receive certain grants of IBM equity, as explained below.
Performance Share Unit (PSU) Grants. This portion of the LTIP focuses senior leaders on delivering business performance over the next three years against two key financial metrics which drive long-term stockholder valueearnings per share and cash flow. Through this program, senior leaders are eligible to earn a target number of shares of IBM stock at the end of a three-year performance period. The award pays out at the end of the three years depending on how well the Company performed against targets set at the beginning of the three-year period. The payouts are made in shares of stock, so the value goes up or down based on stock price performance from the beginning of the grant. Additional information about PSUs is set forth in Section 2 of this CD&A, Setting Targets for Incentive Compensation.
Over the past seven years, program payouts have ranged from a low of 54% to a high of 147% of the target number of shares. In 2007, the potential value of performance share grants, assuming future performance at target, represented 40% of the Chairman and CEOs total compensation and 42% for the EVP and SVPs.
The IBM Integration & Values Team (I&VT) consists of approximately 300 executives charged with working beyond the scope of their regular job responsibilities to drive growth through integration and demonstrating IBMs values. The Chairman and CEO may grant members of this group additional performance shares for delivering extraordinary results. The Chairman and CEO, EVP and SVPs are not eligible for these I&VT awards.
Other Stock-Based Grants. Another portion of the LTIP provides for stock-based grants to focus senior leaders on delivering performance that increases the value of the Company through growth of IBMs stock price over the long term. Senior leaders may receive these grants in the form of stock options, restricted stock, restricted stock units or any combination. The grants vestbecome available for sale or exerciseover time, typically over either three or four years. Until vested, the grants have no value, except that dividend equivalents are paid on restricted stock units granted prior to January 1, 2008. For restricted stock units awarded after December 31, 2007, dividend equivalents will not be paid. Executives awarded these grants typically hold them for extended periods, and have up to 10 years to convert stock option awards to cash or shares. The planned value of the annual other stock-based awards granted in 2007 represented 17% of the Chairman and CEOs total compensation and, on average, 19% for the EVP and SVPs.
In 2007, market-priced stock options were awarded to executives, including some named executive officers, who chose to participate in an IBM stock investment program. Under this program, which has since been discontinued, executives could invest 5, 10 or 15% of their annual incentive plan payout in IBM stock equivalents and receive IBM stock options, under the terms of the IBM Long Term Performance Plan, valued at two times their investment.
The values of the awards granted in 2007 are shown in the Grants of Plan-Based Awards Table. The 2007 expense associated with all outstanding awards, including grants made in 2007 and prior years, is shown in the 2007 Summary Compensation Table.
Full Career Performance: Retention, Pension and Savings
Retention of our key leaders for a full career is an important element of our total compensation strategy. This is accomplished through a combination of retention payments and retirement plans.
Retention Stock-Based Grants & Cash Awards. Periodically, Chairman and CEO Palmisano reviews outstanding stock-based awards for the members of his senior leadership team and other key executives. Depending on individual performance and the competitive environment for senior executive leadership talent, he may recommend that the Compensation Committee approve individual Retention Awards, in the form of restricted stock units or cash, for certain executives. The restricted stock unit grants typically vest at the end of five years and the cash awards have a clawback (i.e., repayment clause) if an executive leaves IBM before a specified date. These awards make it more difficult for other companies to recruit IBMs top talent.
Closed Retention Plan. In 1995, IBM created a new plan to help retain, for their full careers, the caliber of senior leaders needed to turn the Company around, preserve its long-term viability, and position it for growth in the future. To discourage these leaders from joining competitors, benefits would be forfeited if leaders left IBM prior to the end of a full career, typically age 60. The approach worked, as evidenced by the Companys historic turnaround in the late 1990s, and its current position of market leadership. Thirteen of the Companys top 16 executives, including four of the named executive officers, were with IBM and eligible for the Retention Plan when it was introduced and remain with the Company today. Because its original purpose had been met, the plan was closed to new participants in 2004. Future accruals under the plan stopped on December 31, 2007, and the Retention Plan will not be replaced by any other plan.
Pension. Prior to 2008, IBMs senior executives and other IBM employees in the U.S. participated in pension plans. Future accruals under the pension plans stopped on December 31, 2007. The amount of the pension benefit under these plans is based on pay and service and determined by the same formulas for executives and non-executives.
Savings. The money that U.S. executives save through the Savings Plan, as for all U.S. employees, is eligible for a Company match that in 2007 equaled 50% of the first 6% of eligible pay that they save through the plan for those hired before January 1, 2005, and 100% of the first 6% saved for those hired after December 31, 2004. As announced in early 2006, effective January 1, 2008, the provisions of the Savings Plan were changed, and it was renamed the 401(k) Plus Plan, becoming the only retirement program available to IBMs U.S. employees for future accruals.
In the U.S., the Department of Labor and Internal Revenue Service also permit company executives to defer, on a nonqualified basis, receipt of compensation they earn. This also allows IBM to delay paying these obligations and, until they come due and are paid, IBM retains the cash for operating purposes. In simple terms, this deferred compensation is money earned in the past, but not yet paid out. Executives choose investment options for their accounts from the same investment options available to all employees through the 401(k) plan. IBM does not pay guaranteed, above-market or preferential earnings on deferred compensation. The value of these account balances, then, can go up or down depending on market performance. For executives with long and successful careers at a single company, the deferrals can accumulate to sizeable amounts over time.
As shown in the table below, the current value of Chairman and CEO Palmisanos account, made up of money he earned during the past 12 years that the program has been available, is now worth approximately $39 million. During that time, Mr. Palmisano could have chosen not to defer, taken these funds from IBM and put them in other investment vehicles. Had he done so, these numbers would not appear here. The table below shows the deferral elections and accumulated balances (including investment returns) that are owed to the Chairman and CEO from his prior years earned compensation. Before he was named Chairman and CEO in January 2003, Mr. Palmisano had invested approximately $8 million of his compensation in the account. When Mr. Palmisano retires, the value of his deferrals will be paid to him in five equal installments over five years.
Ten-Year History of Chairman and CEO Deferred Compensation (Nonqualified)
How Compensation Decisions Are Made
At any level, compensation reflects an employees value to the businessmarket value of skills, individual contribution and business results. To be sure we appropriately assess the value of senior leaders, IBM follows an evaluation process, described here in some detail:
1. Making Commitments
At the beginning of each year, all IBM employees, including Chairman and CEO Palmisano and the other senior leaders, make a Personal Business Commitment (PBC) of the goals, both qualitative and quantitative, they seek to achieve that year in support of the business. These commitments are reviewed and approved by each individuals manager. Chairman and CEO Palmisanos commitments are reviewed directly by the Board of Directors.
2. Determining Executive Vice President (EVP) and Senior Vice President (SVP) Compensation
Evaluation of Results by the Chairman and CEO
Throughout the year, employees assess their progress against their PBCs. At year end, employees at all levels, including executives, work with their managers to evaluate their own resultsnot only with regard to their stated goals, but in relation to how well their peers and the entire Company performed.
The self-assessments of the EVP and SVPs are reviewed by the Senior Vice President of Human Resources (SVP HR) and Chairman and CEO Palmisano, who evaluate the information, along with the following:
· Comparisons to market compensation levels for cash compensation and total direct compensation;
· Potential for future roles within IBM; and
· Total compensation levels relative to internal peers before and after any recommendations.
Following this in-depth review and in consultation with the SVP HR, Mr. Palmisano makes compensation recommendations to the Boards Compensation Committee based on his evaluation of each senior managers performance and expectations for the coming year.
Evaluation of Results by the Compensation Committee
The Compensation Committee decides whether to approve or adjust the Chairman and CEOs recommendations for the members of his team.
The Committee evaluates all of the factors considered by the Chairman and CEO and reviews compensation summaries for each senior leader that tally the dollar value of all compensation and related programs, including salary, annual incentive, long-term compensation, deferred compensation, retention payments and pension benefits.
3. Determining Chairman and CEO CompensationResearch, Recommendations and Review
IBMs SVP HR works directly with the chair of the Compensation Committee to provide a decision-making framework for use in making a recommendation for the Chairman and CEOs total compensation. This framework includes the Chairman and CEOs evaluation of how well he believes he performed against his commitments in the year, with an assessment of his performance against the Companys stated strategic objectives. In addition to the above, the Committee also reviews an analysis of IBMs total performance over the past year and a competitive benchmark analysis furnished by the Committees outside consultant (Towers Perrin).
The Compensation Committee also separately reviews relevant information and arrives at its recommendation for the Chairman and CEOs total compensation. In this work, they are assisted by the Compensation Committees outside consultant.
The final pay recommendation for the Chairman and CEO is presented to the independent directors on IBMs Board for further review, discussion and final approval. This process is followed every year.
4. Ensuring Competitive PayApproach to Benchmarking
IBM participates in several executive compensation benchmarking surveys that provide detail on levels of salary, target annual incentives and long-term incentives, the relative mix of short- and long-term incentives, and mix of cash and stock-based pay. We include in these surveys a broad range of key information technology companies, given the battle for talent that exists in our industry and to help us identify trends in the industry. We also include companies outside our industry, with stature, size and complexity that approximate our own, in recognition of the fact that competition for senior management talent is not limited to our industry. The companies used in the benchmarking surveys for 2007 and 2008 compensation decisions are listed below. The Committee reviews and approves this list annually. These surveys are supplemented by input from the Compensation Committees outside consultant on factors such as recent market trends.
The data from these surveys and related sources form the primary external view of the market, and the Companys philosophy is to generally target the median of the market for cash and total compensation for IBM job roles compared to jobs of similar size and complexity at comparable companies. For individual compensation decisions, the information is used together with an internal view of longer-term potential and individual performance relative to other executives. For the Companys senior level executives, the Compensation Committee also takes into account long-term retention objectives, recognizing that their skills and experience are highly sought after by other companies and, in particular, by the Companys competitors.
5. Compensation Committee Consultant
The Committee currently retains a Managing Director of Towers Perrin as its outside compensation consultant to advise the Committee on market practices and the specific IBM policies and programs. This Managing Director does not perform any work for the Company. The consultants work for the Committee includes data analyses, market assessments, and preparation of related reports. The work done by Towers Perrin for the Committee is documented in a formal scope of work and contract which is executed by the consultant and the Committee.
Chairman and CEO Compensation Decisions for 2007 and 2008
The Compensation Committee made decisions for the Chairman and CEOs 2007 and 2008 compensation following the process described above and using the pay components shown above. The Compensation Committee noted the following as key points regarding the Chairman and CEOs performance against his Personal Business Commitments for 2007:
· Achieved very strong financial performance including record revenue, profit, cash flow and earnings per share (EPS)
· Improved overall client satisfaction and quality of delivery
· Continued to drive IBM to be the leading globally integrated enterprise
· Invested and developed leaders in high growth countries, which combined, grew revenue more than 20% in 2007
· Returned significant capital to stockholders through $18.8 billion in share buyback and $2.1 billion in dividends
· Increased IBMs leading market position in served software and services
· Strengthened services business, generating the strongest services revenue performance since 2003, and posting double-digit growth in services pre-tax profit
· Drove strong financial performance through the acquisition strategy and excellence in integration execution
· Continued leadership in technology and innovation earning more U.S. patents than any other company for the 15th consecutive year
The Committee considered these results and recommended that Mr. Palmisano receive $5,800,000 in annual incentive for his 2007 performance.
The Committee worked with its outside consultant (Towers Perrin) to review Mr. Palmisanos base salary, annual incentive target and long-term incentive award value using a framework of competitive benchmark analysis, Company performance and Mr. Palmisanos personal performance. Based on this review, the Committee recommended that Mr. Palmisanos base salary and target annual incentive for 2008 remain at $1,800,000 and $5,000,000, respectively.
The Committee recommended a 2008 long-term incentive award comprised entirely of 2008-2010 Performance Share Units valued at $11,000,000. The 2007 award was valued at $10,000,000 and consisted of $7,000,000 in Performance Share Units and $3,000,000 in restricted stock units. The 2008 grant will be made on May 8, 2008. The Committee chose the long-term incentive value to improve Mr. Palmisanos position relative to competitive benchmarks and to signal the Committees desire for him to continue his focus on taking the steps necessary to position the Company for long-term success.
The Committees recommendations were approved by the independent directors on IBMs Board.
EVP and SVP Compensation Decisions for 2007 and 2008
The Compensation Committee also made decisions for each of the executive officers following the process described above and using a mix of the components shown above. The Compensation Committee noted the following as key points for each of the other named executive officers:
Mark Loughridge, Senior Vice President and Chief Financial Officer
· Returned substantial capital to stockholders by creating a more efficient balance sheet, preserving U.S. cash levels and positioning future non-U.S. cash flows to service debt
· Exceeded Net Income and EPS objectives
· Exceeded Cash Flow objectives, while avoiding losses due to sub-prime mortgages
· Developed long-term EPS roadmap to 2010 to enhance investor understanding of financial model
· Managed IBMs portfolio, including the Printer Systems divestiture and execution of 12 strategic acquisitions
Following IBMs practice, the recommendations for Mr. Loughridges compensation were ratified by the independent directors on IBMs Board.
Steve Mills, Senior Vice President and Group Executive, Software Group
· Achieved financial performance in line with market
· Grew middleware brands faster than market
· Integrated acquisitions effectively, exceeding profit objectives and retaining key talent
· Introduced new development practices for greater global integration and efficiency
· Continued to strengthen IBMs brand with respect to market-leading software products and services
Mike Daniels, Senior Vice President, Global Technology Services
· Significantly increased revenue, net income and profit of GTS business
· Focused on building a culture of services excellence resulting in improved client satisfaction
· Completed strategic transformation of the GTS business model including global standardization of products/services
· Accelerated growth rate vs. prior years
· Expanded use of channels to increase sales
Doug Elix, Senior Vice President and Group Executive, Sales and Distribution
· Achieved performance objectives in high growth markets
· Held market share
· Increased client satisfaction
· Improved growth in key mature markets Japan and Germany
· Provided leadership to improve overall sales management process and focus on client value
· Identified organizational structure and key leaders to drive performance in new growth markets
Based on these results and following the process outlined above, the Compensation Committee approved the following 2007 annual incentive payments for these named executive officers:
The team incentive payment reflected Chairman and CEO Palmisanos assessment of the performance of his entire senior leadership team and their success in working together to integrate across business units to deliver strong 2007 business results.
The Committee also approved these 2008 base salary, target annual incentive and stock-based grants under the Long-Term Performance Plan:
(1) Restricted stock units (RSUs) and performance share units (PSUs) will be granted on May 8, 2008. The actual number of RSUs and PSUs granted on this date will be determined by dividing the value shown above by a predetermined, formulaic planning price for the second quarter 2008. The PSUs will vest in 2011 and the RSUs will vest 1/3 in 2009, 1/3 in 2010, and 1/3 in 2011.
Senior LeadersPersonal Stake in IBMs Future
Investors want the leaders of their companies to act like owners. That alignment, we have found, works best when senior leaders have meaningful portions of their personal holdings invested in the stock of their company. This is why IBM sets significant stock ownership requirements for the Companys top 60 senior leaders, including the Chairman and CEO.
Of this group, the Chairman and CEO, EVP and SVPs are all required to own IBM stock or equivalents worth three times their individual target cash compensation (their base salary plus the incentive payment they would earn if they hit their performance targets) within five years of hire or promotion. As a group, the Chairman and CEO, EVP and 14 SVPs own 1.45 million shares or equivalents valued at approximately $156 million as of December 31, 2007. Approximately 40 other senior leaders are required to hold shares worth one time their target cash compensation within five years of hire or promotion.
All of these approximately 60 leaders who have been in place for at least five years have met or exceeded their personal IBM ownership requirements. In fact, this group currently holds, on average, nearly four times more IBM stock or equivalents than the Company requires.
IBM Meeting Market Standards for Executive Compensation
We recognize that the issue of executive pay is critical to stockholders and to members of the public whose hopes for the future rest substantially on trust in the conduct of those who run our corporations. Simply put, those who profit disproportionately to the value they create for stockholders and society, or the value they provide to clients, are breaking faith with all who would do business with them, and all who would risk their hard-earned savings in the future of an enterprise.
We have provided the information in these pages precisely because IBM works to keep that faith. We know that striking a balance between stockholders concept of fairness and the incentives needed to attract and retain a stellar executive team will always require sound judgment and careful thought. Business, markets, and people are too dynamic for mere formulaic solutions. The numbers can be best understood when the process behind them is transparent.
IBMs business has always been to help our clients succeed through innovative solutions. Our stockholders deserve no less. We welcome this discussion.
ELEMENTS OF COMPENSATION PROGRAMS AND LINKAGE TO OBJECTIVES
To supplement the discussion in Section 1 and as required by the SEC, the following is a description of the Companys compensation elements and the objectives they are designed to support. As noted in Section 1: Executive Compensation Summary, IBMs compensation practices are designed to meet five key objectives.
In total, these elements support the objective to balance rewards between short-term results and the long-term strategic decisions needed to ensure sustained business performance over time.
* IBMs planning price is computed each quarter using a consistent statistical forecasting procedure based on historical IBM stock price data. IBM uses the quarterly planning price to aid in establishing the overall size of the equity plan and to give more consistency across equity grants made at different points in the quarter.
* IBMs planning price is computed each quarter using a consistent statistical forecasting procedure based on historical IBM stock price data. IBM uses the quarterly planning price to aid in establishing the overall size of the equity plan and to give more consistency across equity grants made at different points in the quarter.
Setting Performance Targets for Incentive Compensation
The compensation of our senior executive team is highly linked with Company performance against four key metrics, consistent with our overall financial model:
1. Revenue Growth
2. Net Income
4. Cash Flow
Targets are set for both the annual and long-term plans at aggressive levels each year to motivate high business performance and support attainment of longer term financial objectives. These targets, individually or together, are designed to be challenging to attain. Targets are set within the parameters of our long-term financial model with profit expansion and growth objectives aligned with our roadmap to 2010 communicated to investors in May 2007.
IBM is not disclosing specific targets under the annual and long-term plans because it would signal IBMs strategic focus areas and impair IBMs ability to leverage these areas for competitive advantage. For example, disclosure of our cash flow targets would provide insight into timing of large capital investments or acquisitions. Knowledge of the targets could also be used by competitors to take advantage of insight into specific areas to target the recruitment of key skills from IBM. Disclosing the specific targets and metrics used in the qualitative assessment made by the Chairman and CEO would give our competitors our insight to key market dynamics and areas that could be used against IBM competitively by industry consultants or competitors targeting existing customers.
Our financial model is well communicated to investors and our performance targets are based on this model. We also describe the performance relative to the pre-set objectives in our discussion of named executive officer compensation decisions. Finally, outlined below is a description of the specific metrics and weightings for the Annual Incentive and the Performance Share Unit Programs.
Annual Incentive Program
The Company sets business objectives at the beginning of each year that are reviewed by the Board of Directors. These objectives translate to targets for the Company and for each business unit for purposes of determining the target funding of the Annual Incentive Program. Actual funding levels can vary from 0% to 200% of target, depending on performance against objectives.
At the end of the year, management assesses the financial performance for the Company based on performance against financial metrics, as set out below.
Overall funding for the Annual Incentive Plan is based on the performance results against these targets and is typically not adjusted except for extraordinary events if deemed appropriate by the Chairman and CEO and Compensation Committee. This adjustment can be either up or down. For example, adjustments are usually made for large divestitures and acquisitions. In addition, an adjustment can be recommended by the Chairman and CEO based on factors such as individual and unit performance, client satisfaction, market share growth and workforce development, among others. The Compensation Committee reviews the financial scoring and qualitative adjustments and approves the Annual Incentive Plan funding level. Once the funding level has been approved, a lower-performing executive will receive as little as zero payout and the most exceptional performers are capped at three times target (payouts at that level are rare and only possible when IBMs performance has also been exceptional).
In 2007, the borrowing associated with the accelerated stock repurchase reduced net income and cash flow performance relative to the target by a marginal amount.
Performance Share Unit Program
EPS and cash flow targets for the Performance Share Unit program are set at the beginning of each three-year performance period, taking into account the Companys financial model shared with investors, including the impact our ongoing share buyback program has on EPS. At the end of the three years, the score is calculated based on results against the predetermined targets, with the following weights:
Adjustments can be made for extraordinary events if deemed appropriate by the Chairman and Compensation Committee for example, large divestitures.
The accelerated stock repurchase and associated borrowing improved actual EPS results for 2007. Given that the Performance Share Unit Program is based on results for the period 2005-2007, the resulting effect on the program score was marginal.
The final score, which is approved by the Compensation Committee, adjusts the planned value of the actual Performance Share Unit award from 0% to 150%. There is no discretionary adjustment to the Performance Share program score.
Equity Awards Practices
Under IBMs long-standing practices and policies, all equity awards are approved before or on the date of grant. The exercise price of at-the-money stock options is the average of the high and low market price on the date of grant or, in the case of premium-priced stock options, 10% above that average.
The approval process specifies the individual receiving the grant, the number of units or the value of the award, the exercise price or formula for determining the exercise price and the date of grant. All equity awards for senior management are approved by the Compensation Committee. All equity awards for employees other than senior management are approved by senior management pursuant to a series of delegations that were approved by the Compensation Committee, and the grants made pursuant to these delegations are reviewed periodically with the Committee.
Equity awards granted as part of annual total compensation for senior management and other employees are made on specific cycle dates scheduled in advance. IBMs policy for new hires and promotions requires approval of any awards before the grant date, which is typically the date of the promotion or hire.
Every executive is held accountable to comply with IBMs high ethical standards: IBMs Values, including Trust and Personal Responsibility in all Relationships, and IBMs Business Conduct Guidelines. This responsibility is reflected in each executives Personal Business Commitments, and is reinforced through each executives annual certification to the IBM Business Conduct Guidelines. An executives compensation is tied to compliance with these standards; compliance is also a condition of IBM employment for each executive.
The Companys equity plans and agreements provide that awards will be cancelled and that certain gains must be repaid if an executive engages in activity that is detrimental to the Company, such as violating the Companys Business Conduct Guidelines, disclosing confidential information, or performing services for a competitor. Annual cash incentive payments are also conditioned on compliance with these Guidelines.
In addition, approximately 400 of our key executives (including each of the named executive officers) have agreed to a non-competition, non-solicitation agreement that prevents them from working for certain competitors within 12 months of leaving IBM or soliciting employees within two years of leaving IBM.
The Committee has also implemented a policy for the clawback of cash incentive payments in the event an officers conduct leads to a restatement of the Companys financial results, as follows:
To the extent permitted by governing law, the Company will seek to recoup any bonus or incentive paid to any executive officer if (i) the amount of such payment was based on the achievement of certain financial results that were subsequently the subject of a restatement, (ii) the Board determines that such officer engaged in misconduct that resulted in the obligation to restate, and (iii) a lower payment would have been made to the officer based upon the restated financial results.
The Company does not allow any member of the I&VT, including any named executive officer, to enter into any derivative transaction on IBM stock, including any short-sale, forward, market option, collar, etc.
Section 162(m) of the U.S. Internal Revenue Code of 1986, as amended, limits deductibility of compensation in excess of $1 million paid to the Companys CEO and to each of the other three highest paid executive officers (not including the companys chief financial officer) unless this compensation qualifies as performance-based. Based on the applicable tax regulations, taxable compensation derived from certain stock appreciation rights and from the exercise of stock options by senior executives under the Companys Long-Term Performance Plans should qualify as performance-based. The Executive Deferred Compensation Plan permits an executive officer who is subject to section 162(m) and whose salary is above $1 million to defer payment of a sufficient amount of the salary to bring it below the section 162(m) limit. The Companys stockholders have previously approved terms under which the Companys annual and long-term performance incentive awards should qualify as performance-based, and did so again in 2004, as required by the Internal Revenue Service. These terms do not preclude the Committee from making any payments or granting any awards, whether or not such payments or awards qualify for tax deductibility under section 162(m), which may be appropriate to retain and motivate key executives.
Salary (Column (c))
Amounts shown in the salary column reflect the salary amount paid to each named executive officer during 2007.
· IBM reviews salaries for each named executive officer annually during a common review cycle. In 2007, salary increases for named executive officers took effect on June 1.
· See Section 1 of the 2007 Compensation Discussion and Analysis above for an explanation of the amount of salary, bonus and other compensation elements in proportion to total compensation.
Bonus (Column (d))
Amounts shown in the Bonus column represent payouts of the Team Incentive. Amounts in this column do not include payments under the IBM Annual Incentive Plan, which are included under column (g) (Non-Equity Incentive Plan Compensation).
· Only the EVP and SVPs participate in this program; each participant receives the same payout.
· The Chairman and CEO determines how well the participants have performed as a team over the course of the year and sets the payout amount which is approved by the Compensation Committee.
· See 2007 Compensation Discussion and Analysis for an explanation of the Team Incentive.
Performance Period and Payout Range
· This is an annual program with a performance period from January 1 to December 31. Payout generally occurs in March of the year following the performance period.
· Minimum annual payout of $0. Maximum annual payout of $250,000. There is no target.
Stock Awards Total (Column (e))
Amounts shown in the Stock Awards Total column are comprised of three different types of awards (Performance Share Units, Restricted Stock Units and Retention Restricted Stock Units), presented separately to enhance understanding. The amounts shown in the columns for Performance Share Units, Restricted Stock Units and Retention Restricted Stock Units are the dollar amounts recognized for financial statement reporting purposes in 2007 in accordance with FAS 123R for equity award expense (excluding any risk of forfeiture, per SEC regulations). Equity expense calculations for financial statement purposes spread the grant date cost of those awards over the vesting period. Therefore, amounts in this column include the expense for awards granted in 2007 and previous years. All of these awards were granted to the named executive officers under IBMs 1999 Long-Term Performance Plan (LTPP).
PERFORMANCE SHARE UNITS (PSUs)
The following describes the material terms and conditions of PSUs as reported in the column titled Performance Share Units (column (e)) in the 2007 Summary Compensation Table and in the columns under the heading Estimated Future Payouts Under Equity Incentive Plan Awards (columns (f), (g) and (h)) in the 2007 Grants of Plan-Based Awards Table.
· One PSU is equivalent in value to one share of IBM common stock.
· Executive officers are awarded a number of PSUs each year at the beginning of the three-year performance period.
· Performance targets for cumulative three-year attainment in earnings per share and cash flow are set at the beginning of the three-year period. These targets are approved by the Compensation Committee.
· At the end of the three-year performance period, the Compensation Committee approves the determination of actual performance relative to pre-established targets.
· At the end of the performance period, that number of PSUs is adjusted up or down based on the approved actual performance relative to the pre-established targets.
· The performance period for the awards made in 2007 is January 1, 2007 through December 31, 2009.
· PSUs are paid out in IBM common stock after the three-year performance period.
· There are no dividends or dividend equivalents paid on PSUs.
Vesting and Payout Calculations
· PSU awards granted in 2007 will be adjusted for performance (as described below) and will be paid in IBM common stock on February 1, 2010 if the executive has been continuously employed by IBM as of that date.
· Payout of PSUs is determined by separately assessing performance against each of the pre-established targets.
· Payout will not be made for performance below the Threshold level, described below.
· For PSUs that are paid out on or before February 1, 2008, the executive could have elected, at least 6 months prior to vesting, to defer payment of these shares into the IBM Excess 401(k) Plus Plan (formerly the IBM Executive Deferred Compensation Plan). For PSUs that pay out after February 1, 2008, deferrals are not permitted.
· See Section 2 of the Compensation Discussion and Analysis for information on setting performance targets for the PSU program.
· The Threshold number of PSUs (listed in column (f) of the 2007 Grants of Plan-Based Awards Table) is 25% of the Target number.
· The Threshold number of PSUs will be earned for achievement of 70% of both business objectives (earnings per share and cash flow).
· If only the cumulative earnings-per-share target is met at the Threshold level (and the cash flow target is not met), the number of PSUs earned would be 80% of the Threshold number.
· If only the cumulative cash flow target is met at the Threshold level (and the earnings-per-share target is not met), the number of PSUs earned would be 20% of the Threshold number.
The Target number of PSUs (listed in column (g) of the 2007 Grants of Plan-Based Awards Table) will be earned if 100% of the objectives are achieved.
· The Maximum number of PSUs (listed in column (h) of the 2007 Grants of Plan-Based Awards Table) is 150% of the Target number.
· The Maximum number of PSUs will be earned for achieving 120% of both business objectives.
RESTRICTED STOCK UNITS (RSUs)
The following describes the material terms and conditions of RSUs as reported in the column titled Restricted Stock Units (column (e)) in the 2007 Summary Compensation Table and in the column titled All Other Stock Awards: Number of Shares of Stock or Units (column (i)) in the 2007 Grants of Plan-Based Awards Table.
· One RSU is equivalent in value to one share of IBM common stock. RSUs are generally paid out in IBM common stock at vesting.
· RSUs granted before January 1, 2008 earn dividend equivalents at the same rate and at the same time as the dividends paid to IBM stockholders.
Vesting and Payout
· RSUs generally vest in three equal increments on the first three anniversaries of the grant date.
· Payout at each anniversary is contingent on the recipient remaining employed by IBM through each anniversary date.
· From time to time, special performance-based RSUs may be granted with performance contingent vesting.
RETENTION RESTRICTED STOCK UNITS (RRSUs)
The following describes the material terms and conditions of RRSUs as reported in the column titled Retention Restricted Stock Units (column (e)) in the 2007 Summary Compensation Table and in the column titled All Other Stock Awards: Number of Shares of Stock or Units (column (i)) in the 2007 Grants of Plan-Based Awards Table.
Terms, Vesting and Payout
· RRSUs have the same general terms as RSUs. These awards are typically given to select senior executives for the purpose of providing additional value to retain the executive through the vesting date.
· Vesting periods for RRSUs typically range from two to five years and can be as long as ten years.
· Payout is contingent on the recipient remaining employed by IBM until the end of each vesting period.
· For RRSUs granted on or before December 31, 2007, the executive could have elected to defer payment of those shares into the IBM Excess 401(k) Plus Plan (formerly the IBM Executive Deferred Compensation Plan). For RRSUs granted on or after January 1, 2008, deferrals are not permitted.
Option Awards (Column (f))
Amounts shown in the Options Awards Total column are comprised of two different types of awards (Premium Priced Options and Market Priced Options), presented separately to enhance understanding. The amounts shown in the columns for Premium Priced Options and Market Priced Options are the dollar amounts recognized for financial statement reporting purposes in 2007 in accordance with FAS 123R for equity award expense (excluding any risk of forfeiture, per SEC regulations). Equity expense calculations for financial statement purposes spread the grant date cost of those awards over the vesting period. Therefore, amounts in this column include the expense for awards granted in 2007 and previous years. All of these options were granted to the named executive officers under IBMs 1999 LTPP.
· All option awards made in 2007 expire on the tenth anniversary of the date of grant.
· In accordance with IBMs LTPP, the exercise price of stock options is not less than the average of the high and low prices of IBM stock on the New York Stock Exchange (NYSE) on the date of grant.
· Option recipient must remain employed by IBM through each vesting date in order to receive any potential payout value.
Premium priced options:
· The exercise price is equal to 110% of the average of the high and low prices of IBM stock on the NYSE on the date of grant.
· These options vest in four equal increments on the first four anniversaries of the grant date, except if otherwise noted.
Market priced options:
· The exercise price is equal to the average of the high and low prices of IBM stock on the NYSE on the date of grant.
· These options generally vest 100% on the third anniversary of the date of grant.
· In 2007, market priced options were awarded to named executive officers who participated in the IBM stock investment program (the Buy-First Program) by agreeing to invest 5, 10 or 15% of their annual incentive plan payouts in the IBM Stock Fund under the EDCP.
Non-Equity Incentive Plan Compensation (Column (g))
Amounts in this column represent payments under IBMs Annual Incentive Plan (AIP).
· All executive officers, including the Chairman and CEO, participate in this plan. The performance period is the fiscal year (January 1 through December 31, 2007).
· Performance goals are set annually in the beginning of the year and generally encompass corporate-wide goals and business unit goals.
· See Section 2 of the Compensation Discussion and Analysis for information on setting performance targets for the AIP program.
· The Chairman and CEO had a target of $5,000,000.
· Each named executive officer other than the Chairman and CEO had a target of approximately 135% of salary rate for 2007.
· Threshold payout for each named executive officer is $0 (see column (c) of the 2007 Grants of Plan-Based Awards Table).
· Maximum payout for each named executive officer is three times the target (see column (e) of the 2007 Grants of Plan-Based Awards Table).
Vesting and Payout
· In addition to performance against corporate-wide and business unit goals, individual performance against goals set at beginning of year determine payout amount.
· An executive generally must be employed by IBM at the end of the performance period in order to be eligible to receive an AIP payout.
· AIP payouts earned between January 1, 2007 and December 31, 2007 will be paid on or before March 15, 2008.
Change in Retention Plan Value (Column (h))
· Amounts in the column titled Change in Retention Plan Value represent the annual change in retention plan value from December 31, 2006 to December 31, 2007 for each named executive officer.
· See the 2007 Retention Plan Narrative for a description of the Retention Plan.
Change in Pension Value (Column (h))
· Amounts in the column titled Change in Pension Value represent the annual change in pension value from December 31, 2006 to December 31, 2007 for each named executive officer.
· See the 2007 Pension Benefits Narrative for a description of the IBM Pension Plans.
Nonqualified Deferred Compensation Earnings (Column (h))
· IBM does not pay above-market or preferential earnings on nonqualified deferred compensation.
· See the 2007 Nonqualified Deferred Compensation Narrative for a description of the nonqualified deferred compensation plans in which the named executive officers may participate.
All Other Compensation (Column (i))
Amounts in this column represent the following as applicable:
· Amounts represent payments IBM has made to the named executive officers to cover taxes incurred by them for certain business-related taxable expenses.
· These expenses are: family travel to and attendance at Company-related events; and for the Chairman and CEO, commutation in Company-leased cars (see Personal Use of Company Autos below).
Company Contributions to Defined Contribution Plans
· Amounts represent Company matching contributions to the individual accounts for each named executive officer.
· Under IBMs 401(k) plan and the EDCP, the Company matched 50% of the first 6% of eligible compensation contributed by executives hired before January 1, 2005, and 100% of the first 6% contributed by executives hired on or after January 1, 2005.
· See the 2007 Nonqualified Deferred Compensation Narrative for additional details on the nonqualified deferred compensation plans in which the named executive officers may participate.
Life Insurance Premiums
· Amounts represent life insurance premiums paid by IBM on behalf of the named executive officers.
· These executive officers are covered by life insurance policies under the same terms as other U.S. full-time regular employees.
· Life insurance for employees and executives hired before January 1, 2004 is two times salary plus annual incentive plan payout, with a maximum coverage amount of $2,000,000.
· In addition, IBM provides Travel Accident Insurance for most employees in connection with business travel. Travel Accident Insurance for employees and executives is five times salary plus incentive with a maximum coverage amount of $15,000,000.
· Amounts represent dividend equivalents paid in cash to the named executive officers in 2007 on their RSUs that have not yet vested and on any shares of IBM stock for which the officers deferred receipt under the EDCP (Deferred IBM Shares).
· Dividend equivalents are paid on unvested RSUs granted prior to 2008 and Deferred IBM Shares at the same rate and at the same time as the dividends paid to IBM stockholders.
· IBM does not pay dividend equivalents on PSUs or stock options.
· See the 2007 Nonqualified Deferred Compensation Narrative for a description of the EDCP, including Deferred IBM Shares.
The following describes perquisites (and their aggregate incremental cost calculations) provided to the named executive officers in 2007.
Personal Financial Planning
In 2007, IBM offered financial planning services with coverage up to $14,000 annually for each named executive officer.
Personal Travel on Company Aircraft
· Amounts represent the aggregate incremental cost to IBM for travel not directly related to IBM business.
· IBMs security practices provide that all air travel by the Chairman and CEO, including personal travel, be on Company aircraft; the aggregate incremental cost for his personal travel is included in this column. These amounts also include the aggregate incremental cost, if any, of travel by his family or other non-IBM employees on both business and non-business occasions.
· Additionally, personal travel on IBM aircraft by named executive officers other than the Chairman and CEO, and the aggregate incremental cost, if any, of travel by the officers family or other non-IBM employees when accompanying the officer on business occasions is also included.
· Also, from time to time, named executive officers who are members of the boards of directors of other companies and non-profit organizations travel on IBM aircraft to those outside board meetings. These amounts include travel related to participation on these outside boards.
· Travel by named executive officers for an annual physical under the corporate wellness program is included in these amounts.
Aggregate Incremental Cost Calculation
· The aggregate incremental cost for the use of Company aircraft for personal travel is calculated by multiplying the hourly variable cost rate for the aircraft used by the hours used.
· The hourly variable cost rate includes fuel, oil, parking/landing fees, crew expenses, aircraft maintenance (based on the hourly operation of the aircraft) and catering.
· The rate for each aircraft is periodically reviewed by IBMs flight operations team and adjusted as necessary to reflect changes in costs.
· The aggregate incremental cost includes deadhead flights (i.e., empty flights to and from IBM hangar or other location).
· The aggregate incremental cost for charter flights is the full cost to IBM of the charter.
Personal Use of Company Autos
· IBMs security practices provide that the Chairman and CEO be driven to and from work by IBM personnel in a car leased by IBM.
· In addition, under IBMs security practices, the Chairman and CEO may use a Company-leased car with an IBM driver for non-business occasions, and his family may use a Company-leased car on non-business occasions or when accompanying him on business occasions.
· Family members and other non-IBM employees may accompany named executive officers other than the Chairman and CEO in a Company-leased car on business occasions.
· Amounts reflect the aggregate incremental cost, if any, for the above referenced items.
Aggregate Incremental Cost Calculation
· The incremental cost for the car and driver for commutation and non-business events is calculated by multiplying variable rate by the number of trips.
· The variable rate includes drivers salary and overtime payments, fuel, maintenance, tolls, parking, and drivers meals.
· Under IBMs security practices, IBM provides security personnel for the Chairman and CEO on certain non-business occasions and for his family on certain non-business occasions or when accompanying him on business occasions.
· Amounts include the aggregate incremental cost, if any, of security personnel for those occasions.
· In addition, amounts also include the cost of home security systems and monitoring for the Chairman and CEO and the specified named executive officers.
Aggregate Incremental Cost Calculation
· The aggregate incremental cost for security personnel is the cost of any commercial airfare to and from the destination, hotels, meals, car services, and salary and travel expenses of any additional subcontracted personnel if needed.
· The aggregate incremental cost for installation, maintenance and monitoring services for home security systems reflects the costs of these items.
Annual Executive Physical
· IBM covers the cost of an annual executive physical for the named executive officers under the Companys corporate wellness program.
· Amounts represent payments by IBM for the specified named executive officer under this program.
Family Travel and Attendance at Company-Related Events
· Company-related events may include meetings, dinners and receptions with IBMs clients, executive management or Board of Directors attended by the named executive officer and his family.
· Amounts represent the aggregate incremental cost, if any, of commercial travel and/or meals and entertainment for the family members of the named executive officers to attend Company-related events.
Other Personal Expenses
· Amounts represent the cost of meals and lodging for executives who traveled for their annual executive physical under the Companys corporate wellness program.
· Amounts also include expenses associated with participation on outside boards other than those disclosed as Personal Travel on Company Aircraft.
· Amounts also include ground transportation expenses and administrative charges incurred by executives.
2007 Summary Compensation Table
(1) The expense for the Performance Share Units, Restricted Stock Units and Retention Restricted Stock Units above was computed in accordance with FAS 123R (excluding risk of forfeiture) by multiplying the number of units granted by the average high and low stock prices of IBM stock on the NYSE on the date of grant.
(2) The amounts in this column reflect the total of the previous three columns (Performance Share Units, Restricted Stock Units and Retention Restricted Stock Units).
(3) For assumptions used in determining the fair value of stock option awards granted, see Note T (Stock-Based Compensation) to the Companys 2007 Consolidated Financial Statements for the assumptions used in 2005, 2006 and 2007. In addition, see Note U (Stock-Based Compensation) to the Companys 2005 Consolidated Financial Statements for assumptions used in 2003 and 2004.
(4) The amounts in this column reflect the total of the previous two columns (Premium Priced Options and Market Priced Options).
(5) Assumptions used to calculate this amount can be found immediately after the 2007 Retention Plan Table.
(6) Assumptions used to calculate this amount can be found immediately after the 2007 Pension Benefits Table.
(7) IBM does not provide above-market or preferential earnings on deferred compensation.
(8) Amounts in this column include the following: for Mr. Palmisano: tax reimbursements of $11,378, Company contributions to defined contribution plans of $152,460 and dividend equivalents of $364,162; for Mr. Loughridge: Company contributions to defined contribution plans of $54,175 and dividend equivalents of $111,544; for Mr. Mills: Company contributions to defined contribution plans of $51,675 and dividend equivalents of $73,395; for Mr. Daniels: dividend equivalents of $78,184; and for Mr. Elix: tax reimbursements of $11,705, Company contributions to defined contribution plans of $55,898 and dividend equivalents of $36,539. Amounts in this column also include the following perquisites: for Mr. Palmisano: personal financial planning, personal travel on Company aircraft of $406,235, personal use of Company autos, personal security, family attendance at Company-related events and other personal expenses; for Mr. Loughridge: personal travel on Company aircraft, annual executive physical, family attendance at Company-related events and other personal expenses; for Mr. Mills: personal financial planning and family attendance at Company-related events; for Mr. Daniels: personal financial planning, personal travel on Company aircraft, family attendance at Company-related events and other personal expenses; and for Mr. Elix: personal travel on Company aircraft, family attendance at Company-related events and other personal expenses. See the 2007 Summary Compensation Table Narrative for a description of these items and information about aggregate incremental cost calculations for perquisites.
(9) The amounts in this column reflect the total of the following columns: Salary, Bonus, Stock Awards Total, Option Awards Total, Non-Equity Incentive Plan Compensation, Change in Retention Plan Value, Change in Pension Value, Nonqualified Deferred Compensation Earnings and All Other Compensation.
(10) Mr. Daniels was not a named executive officer in the Companys most recent Proxy Statement. Therefore, in accordance with SEC rules, the table above does not provide 2006 data for him.