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International Business Machines DEF 14A 2017

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934  (Amendment No.        )

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Filed by a Party other than the Registrant  o

Check the appropriate box:

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x  Definitive Proxy Statement

o  Definitive Additional Materials

o  Soliciting Material Pursuant to §240.14a-12

 

International Business Machines Corporation

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

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(3)  Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

 

 

 

 

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(5)  Total fee paid:

 

 

 

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Fee paid previously with preliminary materials.

o

 

Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

 

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Persons who are to respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB control number.

 



 

IBM Notice of 2017 Annual Meeting and Proxy Statement

International Business Machines Corporation

 

 

Armonk, New York 10504

March 13, 2017

 

DEAR STOCKHOLDERS:

 

You are cordially invited to attend the Annual Meeting of Stockholders on Tuesday, April 25, 2017 at 10 a.m., at the Tampa Marriott Waterside Hotel & Marina, Tampa, Florida.

 

We are pleased to present to you our nominees for the Board of Directors. Ms. Joan E. Spero is not a nominee for election, and her term on the Board will end in April. We are very grateful to her for her many valuable contributions and will miss her participation.

 

At this year’s Annual Meeting, you will once again be asked to provide an advisory vote on executive compensation, as well as on the frequency of the advisory vote on executive compensation, which is required to be voted on every six years. The Board’s recommendations on these items are set forth in the proposal, and your support is important.

 

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 proxy card or the notice of Internet availability of proxy materials. If you received your materials by mail, 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, International Business Machines Corporation, 1 New Orchard Road, Armonk, NY 10504.

 

Very truly yours,

 

 

Virginia M. Rometty

Chairman of the Board

 

YOUR VOTE IS IMPORTANT.

Please vote by using the Internet, the telephone,

or by signing, dating, and returning a proxy card.

 

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NOTICE OF MEETING

 

The Annual Meeting of Stockholders of International Business Machines Corporation will be held on Tuesday, April 25, 2017 at 10 a.m., at the Tampa Marriott Waterside Hotel & Marina, 700 South Florida Avenue, Tampa, Florida 33602. The items of business are:

 

1.         Election of directors proposed by IBM’s Board of Directors for a term of one year, as set forth in this Proxy Statement.

 

2.         Ratification of the appointment of PricewaterhouseCoopers LLP as IBM’s independent registered public accounting firm.

 

3.         Advisory Vote on Executive Compensation.

 

4.         Advisory Vote regarding Frequency of Advisory Vote on Executive Compensation.

 

5.         Three stockholder proposals if properly presented at the meeting.

 

These items are more fully described in the following pages, which are a part of this Notice.

 

 

Christina M. Montgomery

Vice President and Secretary

 

This Proxy Statement, the proxy card, or the notice of Internet availability of proxy materials, as applicable, are being distributed beginning on or about March 13, 2017 to all stockholders entitled to vote. The IBM 2016 Annual Report, which includes consolidated financial statements, is being provided with this Proxy Statement.

 

Important Notice Regarding the Availability of Proxy Materials for the Stockholder Meeting to be held on April 25, 2017: The Proxy Statement and the Annual Report to Stockholders are available at www.ibm.com/investor/material/.

 

Websites throughout this Proxy Statement are provided for reference only. Websites referred to herein are not incorporated by reference into this Proxy Statement.

 

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IBM Notice of 2017 Annual Meeting and Proxy Statement

International Business Machines Corporation

 

TABLE OF CONTENTS

 

 

 

General Information:

 

·   IBM Board of Directors

 

 

 

1. Election of Directors for a Term of One Year

 

 

 

·   Corporate Governance

 

·   Committees of the Board

 

·   Certain Transactions and Relationships

 

·   Certain Information about Insurance and Indemnification

 

·   2016 Director Compensation

 

·   Section 16(a) Beneficial Ownership Reporting Compliance

 

·   Ownership of Securities

 

 

 

Executive Compensation:

 

2016 Report of the Executive Compensation and Management Resources Committee of the Board of Directors

 

2016 Compensation Discussion and Analysis

 

2016 Summary Compensation

 

2016 Grants of Plan-Based Awards

 

2016 Outstanding Equity Awards at Fiscal Year-End

 

2016 Option Exercises and Stock Vested

 

2016 Retention Plan

 

2016 Pension Benefits

 

2016 Nonqualified Deferred Compensation

 

2016 Potential Payments Upon Termination

 

 

 

Report of the Audit Committee of the Board of Directors

 

 

 

Audit and Non-Audit Fees

 

 

 

2. Ratification of Appointment of Independent Registered Public Accounting Firm

 

 

 

3. Advisory Vote on Executive Compensation

 

 

 

4. Frequency of Advisory Vote on Executive Compensation

 

 

 

5. Stockholder Proposal on Lobbying Disclosure

 

 

 

6. Stockholder Proposal on Special Shareowner Meetings

 

 

 

7. Stockholder Proposal to Adopt a Proxy Access By-law

 

 

 

Frequently Asked Questions

 

 

 

APPENDIX A — Non-GAAP Financial Information and Reconciliation

 

 

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GENERAL INFORMATION

 

IBM BOARD OF DIRECTORS

 

IBM’s Board of Directors is responsible for supervision of the overall affairs of IBM. To assist it in carrying out its duties, the Board has delegated certain authority to several committees. Following the Annual Meeting in 2017, the Board will consist of 13 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. The Board held nine meetings during 2016. The Board and the Directors and Corporate Governance Committee recognize the importance of director attendance at Board and committee meetings. In 2016, overall attendance at Board and committee meetings was over 96%. Attendance was at least 75% for each director. Information about Board attendance at IBM’s 2016 Annual Meeting of Stockholders and IBM’s policy with regard to Board members’ attendance at annual meetings of stockholders is available at http://www.ibm.com/investor/governance/director-attendance-at-annual-meeting.html?subtabs=open.

 

IBM’s 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 Board’s policy of requiring a majority of the Board to be comprised 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 members of management. An executive session with independent directors is held at least once a year, and the non-management directors met in executive session eight times in 2016. The IBM Board Corporate Governance Guidelines reflect IBM’s principles on corporate governance matters. These guidelines are available at
http://www.ibm.com/investor/governance/corporate-governance-guidelines.html?subtabs=open.

 

The Directors and Corporate Governance Committee is responsible for leading the search for qualified individuals for election as directors to ensure the Board has the right mix of skills, expertise and background. The Board believes that the following attributes are key to ensuring the continued vitality of the Board and excellence in the execution of its duties: experience as a leader of a business, firm or institution; mature and practical judgment; the ability to comprehend and analyze complex matters; effective interpersonal and communication skills; and strong character and integrity. Each of IBM’s directors has these attributes. In identifying potential director candidates, the Committee and the Board also focus on ensuring that the Board reflects a diversity of experiences, backgrounds and individuals.

 

The IBM Board is composed of a diverse group of members, all leaders in their respective fields. Many of the current directors have leadership experience at major domestic and international companies with operations inside and outside the United States, as well as experience on other companies’ boards, which provides an understanding of different business processes, challenges and strategies. Other directors have experience as presidents of significant academic, research and philanthropic institutions, which brings unique perspectives to the Board. Further, IBM’s directors also have other experience that makes them valuable members, such as prior public policy or regulatory experience that provides insight into issues faced by companies.

 

The Directors and Corporate Governance Committee and the Board believe that the above-mentioned attributes, along with the leadership skills and other experiences of its Board members described below, provide IBM with the perspectives and judgment necessary to guide IBM’s strategies and monitor their execution.

 

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1.         ELECTION OF DIRECTORS FOR A TERM OF ONE YEAR

 

The Board proposes the election of the following directors of IBM for a term of one year. Below is information about each nominee, including biographical data for at least the past 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 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.

 

 

Director since: 1998

 

KENNETH I. CHENAULT

 

Chairman and Chief Executive Officer, American Express Company, a financial services company

 

Qualifications:

 

·        Global business, technology and information management experience as chairman and chief executive officer of American Express Company

·        U.S. Government service (member of the President’s Council on Jobs and Competitiveness)

·        Affiliation with leading business and public policy association (member of the executive committee of the Business Roundtable)

·        Experience as a university trustee

·        Outside board experience as a director of The Procter & Gamble Company

 

Mr. Chenault, 65, 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. He is a director of The Procter & Gamble Company.

 

 

Director since: 2005

IBM Presiding Director

 

MICHAEL L. ESKEW

 

Retired Chairman and Chief Executive Officer, United Parcel Service, Inc., a provider of specialized transportation and logistics services

 

Committees: Chair, Audit; Executive

 

Qualifications:

 

·        Global business experience as former chairman and chief executive officer of United Parcel Service, Inc.

·        Outside board experience as a director of Allstate Corporation, Eli Lilly and Company and 3M Company

·        Chairman of a charitable organization

 

Mr. Eskew, 67, is IBM’s Presiding Director. 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 2007. Mr. Eskew remained on the board of United Parcel Service until the end of 2014. He is a director of Allstate Corporation, Eli Lilly and Company and 3M Company. In addition, he is chairman of the Annie E. Casey Foundation.

 

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Director since: 2012

 

DAVID N. FARR

 

Chairman and Chief Executive Officer, Emerson Electric Co., a diversified manufacturing and technology company

 

Committees: Audit

 

Qualifications:

 

·        Global business experience as chairman and chief executive officer of Emerson Electric Co.

·        Affiliation with leading business and public policy association (director of the US-China Business Council)

·        Outside board experience as former director of Delphi Corporation

 

Mr. Farr, 62, joined Emerson in 1981 and subsequently held various executive positions. He was named senior executive vice president and chief operating officer in 1999, chief executive officer in 2000 and chairman and chief executive officer in 2004. Mr. Farr was named chairman, president and chief executive officer in 2005 and chairman and chief executive officer in 2010. He is chairman of the National Association of Manufacturers and a director of the US-China Business Council.

 

 

Director since: 2016

 

MARK FIELDS

 

President and Chief Executive Officer, Ford Motor Company, a global automotive and mobility company

 

Committees: Directors and Corporate Governance

 

Qualifications:

 

·        Global business experience as president and chief executive officer of Ford Motor Company

·        Affiliation with leading business and public policy association (chairman of the US-China Business Council)

·        Technology and innovation experience pursuing emerging opportunities through Ford’s business model expansion into mobility

 

Mr. Fields, 56, joined Ford in 1989 and subsequently held various executive positions in the company. He was named vice president, president and chief executive officer, Mazda Motor Corporation in 1999, group vice president, chairman and chief executive officer, Premier Automotive Group in 2002 and executive vice president and chief executive, Premier Automotive Group and Ford of Europe in 2004. Mr. Fields was named executive vice president and president, The Americas in 2005, chief operating officer in 2012 and president and chief executive officer in 2014. He is also a director of Ford and chairman of the US-China Business Council.

 

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Director since: 2014

 

ALEX GORSKY

 

Chairman and Chief Executive Officer, Johnson & Johnson, a global healthcare products company

 

Committees: Executive Compensation and Management Resources

 

Qualifications:

 

·        Global business experience as chairman and chief executive officer of Johnson & Johnson

·        Affiliation with leading business and public policy associations (member of the Business Roundtable and The Business Council)

 

 

Mr. Gorsky, 56, joined Johnson & Johnson in 1988. In 2001, he was appointed president of Janssen Pharmaceutical Inc., and in 2003 he was named company group chairman of the Johnson & Johnson pharmaceutical business in Europe, the Middle East and Africa. Mr. Gorsky left Johnson & Johnson in 2004 to join the Novartis Pharmaceuticals Corporation, where he served as head of the company’s pharmaceutical business in North America. Mr. Gorsky returned to Johnson & Johnson in 2008 as company group chairman for Ethicon. In early 2009, he was appointed worldwide chairman of the Surgical Care Group and member of the executive committee. In September 2009, he was appointed worldwide chairman of the Medical Devices and Diagnostics Group. Mr. Gorsky became vice chairman of the executive committee in January 2011. He was named chief executive officer and joined the board of directors in April 2012, and was named chairman in December 2012. Mr. Gorsky also serves on the boards of the Travis Manion Foundation, Congressional Medal of Honor Foundation, the National Academy Foundation and the Wharton Board of Overseers.

 

 

Director since: 2005

 

 

SHIRLEY ANN JACKSON

 

President, Rensselaer Polytechnic Institute, a leading science and technology university that brings technological innovation to the marketplace

 

Committees: Chair, Directors and Corporate Governance; Executive

 

Qualifications:

 

·        Leadership position as president of Rensselaer Polytechnic Institute

·        Industry and research experience as a theoretical physicist at the former AT&T Bell Laboratories

·        U.S. Government service (former chairman of the U.S. Nuclear Regulatory Commission and co-chair of the President’s Intelligence Advisory Board, former member of the International Security Advisory Board to the United States Secretary of State, and the President’s Council of Advisors on Science and Technology)

·        Regulatory experience (former member of the board of governors of the Financial Industry Regulatory Authority (FINRA))

·        Affiliation with leading business and public policy associations (member of the Council on Foreign Relations and former university vice chair of the Council on Competitiveness)

·        Outside board experience as a director of FedEx Corporation, Medtronic, Inc. and Public Service Enterprise Group Incorporated

·        Leadership and teaching positions at a research university

 

Dr. Jackson, 70, 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 of president of Rensselaer Polytechnic Institute in 1999. Dr. Jackson is a director of FedEx Corporation, Medtronic, Inc. and Public Service Enterprise Group Incorporated. She has been co-chair of the President’s Intelligence Advisory Board and a member of the International Security Advisory Board to the United States Secretary of State. Dr. Jackson is a fellow of the Royal Academy of Engineering (U.K.), the American Academy of Arts and Sciences, an honorary trustee of the Brookings Institution and a past president of the American Association for the Advancement of Science. She is a board member of the Council on Foreign Relations, and a member of the National Academy of Engineering, the American Philosophical Society and the Board of Regents of the Smithsonian Institution. Additionally, during the past five years, she served as a director of Marathon Oil Corporation.

 

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Director since: 2010

 

ANDREW N. LIVERIS

 

Chairman and Chief Executive Officer, The Dow Chemical Company, a materials, polymer, chemicals and biological sciences enterprise

 

Committees: Executive Compensation and Management Resources

 

Qualifications:

 

·        Global business experience as chairman, president and chief executive officer of The Dow Chemical Company

·        U.S. and international government service (chairman of the President’s American Manufacturing Committee, member of the Australian government’s Industry Growth Centres Advisory Committee, and Thailand’s Board of Investment, former service on the President’s Export Council and as co-chair of the President’s Advanced Manufacturing Partnership)

·        Affiliation with leading business and public policy associations (vice chairman of the executive committee of the Business Roundtable and executive committee member and former chairman of The Business Council)

·        Experience as a university trustee

 

Mr. Liveris, 62, joined Dow in 1976 and subsequently held various executive positions, including vice president of specialty chemicals from 1998 to 2000, business group president for performance chemicals from 2000 to 2003, and president and chief operating officer from 2003 to 2004. Mr. Liveris was named president and chief executive officer of Dow in 2004 and chairman in 2006. In 2016 he transitioned the president role and continues as chairman and chief executive officer. Mr. Liveris serves as chairman of the President’s American Manufacturing Committee, vice chairman of the Executive Committee of the Business Roundtable, and an Executive Committee member and former chairman of The Business Council. He formerly served as co-chair of the President’s Advanced Manufacturing Partnership and a member of the President’s Export Council. Mr. Liveris is also a trustee of the Herbert H. & Grace A. Dow Foundation, the California Institute of Technology and the United States Council for International Business (USCIB).

 

 

Director since: 2009

 

W. JAMES MCNERNEY, JR.

 

Retired Chairman and Chief Executive Officer, The Boeing Company, an aerospace company and manufacturer of commercial airplanes and defense, space and security systems

 

Committees: Executive Compensation and Management Resources

 

Qualifications:

 

·        Global business experience as former chairman and chief executive officer of The Boeing Company

·        Manufacturing and technology experience as former chairman and chief executive officer of 3M Company and senior executive of General Electric Company

·        U.S. Government service (former chairman of the President’s Export Council)

·        Affiliation with leading business and public policy association (member and former chairman of the executive committee of the Business Roundtable)

·        Outside board experience as a director of The Procter & Gamble Company

·        Experience as a university trustee

 

Mr. McNerney, 67, joined Boeing as chairman and chief executive officer in 2005. In 2015 he stepped down as chief executive officer and remained chairman until his retirement in 2016. Mr. McNerney also served as president of Boeing from 2005 through 2013. Beginning in 1982, he served in management positions at General Electric Company, including as president and chief executive officer of GE Aircraft Engines from 1997 to 2000. From 2001 to 2005, he served as chairman and chief executive officer of 3M Company. Mr. McNerney is a former chairman of the President’s Export Council. He is also a director of The Procter & Gamble Company.

 

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Director since: 2016

 

HUTHAM S. OLAYAN

 

President and Chief Executive Officer, Olayan America, and Principal, Director and Senior Executive, The Olayan Group, a private family-owned multinational enterprise that is a diversified global investor and an operator of industrial and commercial businesses in the Middle East

 

Committees: Directors and Corporate Governance

 

Qualifications:

 

·        Global business experience as president and chief executive officer, Olayan America

·        Affiliation with leading business and public policy associations (member of the Council on Foreign Relations, the Peterson Institute for International Economics and the Carnegie Middle East Center)

·        Outside board experience as a director of Morgan Stanley

·        Experience as a university trustee

 

Ms. Olayan, 63, has been a principal director and officer since 1981 of Olayan Investments Company Establishment, the parent company of The Olayan Group. Ms. Olayan is a director of Morgan Stanley. She has previously served as a director of Thermo Electron Corporation. She is also a member of the Executive Advisory Board of General Atlantic. She serves on the boards of the American University of Beirut, the MasterCard Foundation, the Memorial Sloan-Kettering Cancer Center and the Peterson Institute for International Economics. Ms. Olayan is also a member of the Council on Foreign Relations and international advisory bodies affiliated with the Belfer Center for Science and International Affairs of Harvard University and the Carnegie Middle East Center.

 

 

Director since: 2006

 

JAMES W. OWENS

 

Retired Chairman and Chief Executive Officer, Caterpillar Inc., a manufacturer of construction and mining equipment, diesel and natural gas engines and industrial gas turbines

 

Committees: Audit

 

Qualifications:

 

·        Global business experience as former chairman and chief executive officer of Caterpillar Inc.

·        Experience as a former senior advisor at KKR & Co. L.P., a global asset management company

·        U.S. Government service (former member of the President’s Economic Recovery Advisory Board)

·        Affiliation with leading business and public policy associations (chairman of the executive committee of the Peterson Institute for International Economics, former director of the Council on Foreign Relations and former chairman of The Business Council)

·        Outside board experience as a director of Alcoa Inc. and Morgan Stanley

·        Experience as a university trustee

 

Mr. Owens, 71, joined Caterpillar in 1972 as a corporate economist and subsequently held various management positions, including chief financial officer. He was named group president in 1995 and vice chairman in 2003. Mr. Owens served as chairman and chief executive officer of Caterpillar from 2004 until his retirement in 2010. He is a director of Alcoa Inc. and Morgan Stanley. Mr. Owens is chairman of the executive committee of the Peterson Institute for International Economics, chairman of the board of trustees at North Carolina State University and was a member of the President’s Economic Recovery Advisory Board.

 

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Director since: 2012

 

VIRGINIA M. ROMETTY

 

Chairman, President and Chief Executive Officer, IBM

 

Committees: Chair, Executive

 

Qualifications:

 

·        Global business experience as chairman, president and chief executive officer of IBM

·        Affiliation with leading business and public policy associations (member of the Business Roundtable, the Council on Foreign Relations and the Peterson Institute for International Economics)

·        U.S. Government service (member of the President’s Export Council)

·        Experience as a university trustee

 

Mrs. Rometty, 59, joined IBM in 1981. She was elected senior vice president of Global Business Services in 2005, senior vice president of Sales and Distribution in 2009, senior vice president and group executive of Sales, Marketing and Strategy in 2010, president and chief executive officer of IBM in early 2012 and chairman in late 2012. She is a member of the Business Roundtable, the Council on Foreign Relations, the President’s Export Council, the Board of Trustees of Northwestern University and the Board of Overseers and Managers of Memorial Sloan-Kettering Cancer Center.

 

 

Director since: 2001

 

SIDNEY TAUREL

 

Chairman, Pearson plc, a provider of digital education products and services

 

Committees: Chair, Executive Compensation and Management Resources; Executive

 

Qualifications:

 

·        Global business experience as chairman of Pearson plc and former chairman and chief executive officer of Eli Lilly and Company

·        Private equity management and investment banking experience as former senior advisor of Capital Royalty L.P. and senior advisor of Moelis & Company

·        U.S. Government service (former member of the Homeland Security Advisory Council, the President’s Export Council and the Advisory Committee for Trade Policy and Negotiations)

·        Affiliation with leading business association (graduate member of The Business Council)

·        Outside board experience as a director of McGraw Hill Financial, Inc.

·        Member of a university oversight board

 

Mr. Taurel, 68, joined Eli Lilly in 1971 and held management positions in the company’s 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, and president and chief operating officer in 1996. He was named chief executive officer of Eli Lilly and Company in 1998 and chairman in 1999. Mr. Taurel retired as chief executive officer in early 2008 and as chairman in late 2008. He is chairman of Pearson plc. He is also a member of the Board of Overseers of the Columbia Business School, a graduate member of The Business Council and a trustee of the Indianapolis Museum of Art. Additionally, during the past five years, he was a director of McGraw Hill Financial, Inc.

 

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Director since: 2015

 

PETER R. VOSER

 

Chairman, ABB Ltd., a global group of power and automation companies

 

Committees: Audit

 

Qualifications:

 

·        Global business experience as chairman of ABB Ltd. and former chief executive officer of Royal Dutch Shell plc

·        Affiliation with leading business and public policy associations (former member of the European Round Table of Industrialists and a former member of The Business Council)

·        Outside board experience as a director of Roche Holding Limited and Temasek

 

Mr. Voser, 58, joined Shell in 1982 and held a variety of finance and business roles including chief financial officer of Oil Products. In 2002, he joined the Asea Brown Boveri (ABB) Group of Companies as chief financial officer and a member of the ABB Group executive committee. Mr. Voser returned to Shell in 2004 becoming a managing director of The Shell Transport and Trading Company, p.l.c. and chief financial officer of the Royal Dutch/Shell Group. He was appointed chief executive officer of Royal Dutch Shell plc in 2009 and held that position until his retirement in late 2013. Mr. Voser was named chairman of ABB Ltd. in 2015. He is chairman of Catalyst and a director of Roche Holding Limited and Temasek. Mr. Voser is also active in a number of international and bilateral organizations.

 

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CORPORATE GOVERNANCE

 

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 (NYSE) requirements and used by the Directors and Corporate Governance Committee and the Board in their assessment of the independence of directors is available at http://www.ibm.com/investor/governance/director-independence-standards.html. Applying those standards for the non-management directors in 2016, including those not standing for election, the Committee and the Board have determined that each of the following directors has met the independence standards: A.J.P. Belda, W.R. Brody, K.I. Chenault, M.L. Eskew, D.N. Farr, M. Fields, A. Gorsky, S.A. Jackson, A.N. Liveris, W.J. McNerney, Jr., H.S. Olayan, J.W. Owens, J.E. Spero, S. Taurel and P.R. Voser. Mr. Eskew’s son is employed by IBM and is not an executive officer. He was hired over a year before Mr. Eskew joined IBM’s Board, and his compensation and other terms of employment are determined on a basis consistent with IBM’s human resources policies. Based on the foregoing, the Board has determined that this relationship does not preclude a finding of independence for Mr. Eskew.

 

As noted below, the Directors and Corporate Governance Committee is responsible for the continuing review of the governance structure of the Board, and for recommending to the Board those structures and practices best suited to IBM and its stockholders. The Committee and the Board recognize that different structures may be appropriate under different circumstances. Mrs. Rometty serves as IBM’s Chairman and CEO and Mr. Eskew serves as Presiding Director, a structure which the Directors and Corporate Governance Committee and the Board believe is in the best interests of IBM and its stockholders. The Presiding Director has the following responsibilities:

 

·        preside at all meetings of the Board at which the Chairman is not present, including executive sessions of the independent directors;

·        serve as liaison between the Chairman and the independent directors;

·        approve information sent to the Board;

·        approve meeting agendas for the Board;

·        approve meeting schedules to assure that there is sufficient time for discussion of all agenda items;

·        have authority to call meetings of the independent directors; and

·        if requested by major stockholders, ensure that he or she is available, as necessary after discussions with the Chairman and Chief Executive Officer, for consultation and direct communication.

 

Additionally, on occasion, the Presiding Director attends other committee meetings in addition to the committee he chairs.

 

The Directors and Corporate Governance Committee and the Board as a whole believe that this leadership structure provides IBM with the benefits of combining the leadership role of Chairman and CEO, while also recognizing the unique strengths and capabilities of IBM’s Board members. An independent Presiding Director with these clearly defined duties and responsibilities further enhances the contributions of IBM’s independent directors, which have been and continue to be substantial. Mr. Eskew, the Presiding Director, has significant global business, leadership and oversight experience as the former chairman and chief executive officer of United Parcel Service, Inc., the current chairman of the Annie E. Casey Foundation, and a board member of Allstate Corporation, Eli Lilly and Company and 3M Company.

 

In recent years, much attention has been given to the subject of risk and how companies assess and manage risks across the enterprise. At IBM, we believe that innovation and leadership are impossible without taking risks. We also recognize that imprudent acceptance of risk or the failure to appropriately identify and mitigate risks could be destructive of stockholder value. Senior management is responsible for assessing and managing IBM’s various exposures to risk on a day-to-day basis, including the creation of appropriate risk management programs and policies. IBM has developed a consistent, systemic and integrated approach to risk management to help determine how best to identify, manage and mitigate significant risks throughout IBM. The Board is responsible for overseeing management in the execution of its responsibilities and for assessing IBM’s approach to risk management. The Board exercises these responsibilities periodically as part of its meetings and also through the Board’s three committees, each of which examines various components of enterprise risk as part of their responsibilities. The Audit Committee periodically reviews IBM’s enterprise management framework, including IBM’s enterprise risk management processes. In addition, an overall review of risk is inherent in the Board’s consideration of IBM’s long-term strategies and in the transactions and other matters presented to the Board, including capital expenditures, acquisitions and divestitures, and financial matters. The Board’s role in risk oversight of IBM is consistent with IBM’s leadership structure, with the CEO and other members of senior management having responsibility for assessing and managing IBM’s risk exposure, and the Board and its committees providing oversight in connection with those efforts.

 

The process by which stockholders and other interested parties may communicate with the Board or non-management directors of IBM is available at http://www.ibm.com/investor/governance/contact-the-board.html?subtabs=open.

 

13



 

COMMITTEES OF THE BOARD

 

 

 

 

 

 

 

Executive

 

 

 

 

 

 

Directors and

 

Compensation

 

 

 

 

 

 

Corporate

 

and Management

 

 

Name

 

Audit

 

Governance

 

Resources

 

Executive

M.L. Eskew

 

Chair

 

 

 

 

 

X

D.N. Farr

 

X

 

 

 

 

 

 

M. Fields

 

 

 

X

 

 

 

 

A. Gorsky

 

 

 

 

 

X

 

 

S.A. Jackson

 

 

 

Chair

 

 

 

X

A.N. Liveris

 

 

 

 

 

X

 

 

W.J. McNerney, Jr.

 

 

 

 

 

X

 

 

H.S. Olayan

 

 

 

X

 

 

 

 

J.W. Owens

 

X

 

 

 

 

 

 

V.M. Rometty

 

 

 

 

 

 

 

Chair

J.E. Spero*

 

X

 

 

 

 

 

 

S. Taurel

 

 

 

 

 

Chair

 

X

P.R. Voser

 

X

 

 

 

 

 

 

 


* As noted above, Ms. Spero is not a nominee for election, and her term on the Board will end in April.

 

Audit Committee

 

The Audit Committee is responsible for reviewing reports of IBM’s financial results, audits, internal controls and adherence to IBM’s Business Conduct Guidelines in compliance with applicable laws and regulations, including federal procurement requirements. The Committee selects the independent registered public accounting firm and reviews its selection with the Board. At the beginning of each year, the Audit Committee approves the proposed services to be provided by the accounting firm during the year. In addition, the Audit Committee chair pursuant to authority delegated by the Audit Committee may approve engagements that are outside the scope of the services and fees approved by the Committee which are later presented to the Committee. The Committee also reviews the procedures of the independent registered public accounting firm for ensuring its independence with respect to the services performed for IBM.

 

Members of the Committee are non-management directors who, in the opinion of the Board, satisfy the independence criteria established by the Board, the standards of the Securities and Exchange Commission (SEC) and the NYSE. The Board has determined that Mr. Eskew qualifies as an Audit Committee Financial Expert as defined by the rules of the SEC. The Committee held six meetings in 2016. The IBM Board of Directors has adopted a written charter for the Committee, which is available at http://www.ibm.com/investor/governance/audit-committee-charter.html. The Business Conduct Guidelines (BCGs) are IBM’s 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 would be disclosed on IBM’s website. The BCGs are available at http://www.ibm.com/investor/governance/business-conduct-guidelines.html?subtabs=open.

 

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. As discussed above, the Committee is responsible for recommending qualified candidates to the Board for election as directors of IBM, 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 IBM, recommendations from members of the Committee and the Board, suggestions from IBM management, including the CEO and, from time to time, a third-party search firm. Any formal invitation to a director candidate is authorized by the full Board. The Committee also considers candidates recommended by stockholders. Stockholders wishing to recommend director candidates for consideration by the Committee may do so by writing to the Secretary of IBM, giving the recommended candidate’s 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. In addition, the Committee makes recommendations to the Board on compensation for non-management directors. The Committee currently retains Frederic W. Cook & Co., Inc. (FW Cook) to assess trends and developments in director compensation practices and to compare IBM’s practices against them. The Committee uses the analysis prepared by the consultant as part of its periodic review of IBM’s director compensation practices. Other than services provided to IBM’s Directors and Corporate Governance Committee and IBM’s Executive Compensation and Management Resources Committee, FW Cook does not perform any other work for IBM. The Committee determined that FW Cook is free of conflicts of interest. The Committee is responsible for reviewing and considering IBM’s 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, including those 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 2016. The IBM Board of Directors has adopted a written charter for the Committee, which is available at http://www.ibm.com/investor/governance/director-and-corporate-governance.html.

 

Executive Compensation and Management Resources Committee

 

The Executive Compensation and Management Resources Committee has responsibility for defining and articulating IBM’s overall executive compensation philosophy, and administering

 

14



 

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 IBM’s various equity plans, reviews changes in IBM’s pension plans primarily affecting corporate officers, and manages the operation and administration of 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 CEO’s compensation, evaluate her performance in light of those goals and objectives and, together with the other independent directors, determine and approve the Chairman and CEO’s compensation level based on this evaluation. The Committee also has responsibility for reviewing IBM’s management resources programs and for recommending qualified candidates to the Board for election as officers. The Committee reviews the compensation structure for IBM’s officers and provides oversight of management’s 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 under these delegations are reviewed periodically with the Committee.

 

The chair of the Committee works directly with the Committee’s compensation consultant to provide a decision-making framework for use in making a recommendation for the Chairman and CEO’s total compensation. In addition, IBM’s Chairman and CEO and the IBM Senior Vice President of Human Resources (SVP HR) review the self-assessments of the 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 her evaluation of each senior executive’s 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 retains Frederic W. Cook & Co., Inc. (FW Cook) as its compensation consultant to advise the Committee on market practices and specific IBM policies and programs. FW Cook reports directly to the Compensation Committee Chairman and takes direction from the Committee. The consultant’s work for the Committee includes data analyses, market assessments, and preparation of related reports. Other than services provided to IBM’s Executive Compensation and Management Resources Committee and IBM’s Directors and Corporate Governance Committee, FW Cook does not perform any other work for IBM, and the work done by them for the Committee is documented in a formal agreement executed by FW Cook and the Committee. See Section 1 of the 2016 Compensation Discussion and Analysis for additional information about the Committee’s consultant.

 

The Committee reports to stockholders as required by the SEC (see 2016 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 applicable regulations and by the Board. Committee members are not eligible to participate in any of the plans or programs that the Committee administers. The Committee held six meetings in 2016. The IBM Board of Directors has adopted a written charter for the Committee, which is available at http://www.ibm.com/investor/governance/executive-compensation-and-management-resources.html.

 

Compensation Committee Interlocks and Insider Participation

 

Messrs. Gorsky, Liveris, McNerney and Taurel served as members of the Executive Compensation and Management Resources Committee in 2016. All members of the Committee were independent directors, and no member was an employee or former employee of IBM. During 2016, none of our executive officers served on the compensation committee or board of directors of another entity whose executive officer served on our Executive Compensation and Management Resources Committee or Board. Therefore, there is no relationship that requires disclosure as a Compensation Committee interlock.

 

Executive Committee

 

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 2016.

 

CERTAIN TRANSACTIONS AND RELATIONSHIPS

 

Under IBM’s written related person transactions policy, information about transactions involving related persons is assessed by the independent directors on IBM’s 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 IBM’s common stock. If the determination is made that a related person has a material interest in any IBM transaction, then IBM’s 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, IBM is of the view that the following transactions with related persons are not significant to investors because they take place under IBM’s standard policies and procedures: the sale or purchase of products or services in the ordinary course of business and on an arm’s-length basis; the employment by IBM where the compensation and other terms of employment are determined on a basis consistent with IBM’s human resources policies; and any grants or contributions made by IBM under one of its grant programs and in accordance with IBM’s corporate contributions guidelines.

 

15



 

From time to time, IBM may have employees who are related to our executive officers or directors. As noted in the discussion above on “General Information — Board of Directors,” Mr. Eskew’s son is employed by IBM. He is an executive of IBM (not an executive officer). In addition, a brother-in-law of Mrs. V.M. Rometty (Chairman and CEO), the wife of Mr. M. Jetter (Senior Vice President, IBM Global Technology Services), and the wife of Mr. R.F. Del Bene (Vice President and Controller) are employed as executives of IBM. The wife of Mr. R.J. Picciano (Senior Vice President, IBM Cognitive Systems), a daughter of Mr. Del Bene, and a brother of Dr. J.E. Kelly III (Senior Vice President, IBM Cognitive Solutions and IBM Research) are also employed by IBM in non-executive positions. None of the above-referenced family member employees are executive officers of IBM. Each employee mentioned above received compensation in 2016 between $120,000 and $850,000. Additionally, in 2016, the above-referenced family members of Mrs. Rometty and Messrs. Eskew and Jetter, as well as the wife of Mr. Del Bene, each received equity grants. The compensation, equity grants and other terms of employment of each of the family member employees noted above are determined on a basis consistent with IBM’s human resources policies.

 

CERTAIN INFORMATION ABOUT INSURANCE AND INDEMNIFICATION

 

IBM has renewed its directors and officers indemnification insurance coverage. This insurance covers directors and officers individually where exposures exist other than those for which IBM is able to provide indemnification. This coverage runs from June 30, 2016 through June 30, 2017, at a total cost of approximately $5.4 million. The primary carrier is XL Specialty Insurance Company.

 

2016 DIRECTOR COMPENSATION NARRATIVE

 

Annual Retainer: In 2016, non-management directors received an annual retainer of $300,000. Chairs of the Directors and Corporate Governance Committee and the Executive Compensation and Management Resources Committee received an additional annual retainer of $20,000 and the chair of the Audit Committee received an additional annual retainer of $25,000. The retainer for the Presiding Director position is a total of $50,000, inclusive of any committee chair retainer received. For 2016, Mr. Eskew, the Presiding Director and the chair of the Audit Committee, received $25,000 for the Presiding Director role and $25,000 for the Audit Committee chair role.

 

Under the IBM Deferred Compensation and Equity Award Plan (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 IBM’s common stock. When a cash dividend is paid on IBM’s common stock, each director’s 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, and/or (c) receipt of cash payments on a quarterly basis during service as a Board member. IBM does not pay above-market or preferential earnings on compensation deferred by directors. 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 initially payable to such director. Stock-based holdings mean (i) IBM shares owned personally or by members of the immediate family sharing the same household, and (ii) DCEAP PFS.

 

Payout under the DCEAP: Upon a director’s retirement or other completion of service as a director (a) all amounts deferred as PFS are payable, at the director’s choice, in either cash and/or shares of IBM’s common stock, and (b) amounts deferred into the interest-bearing cash account are payable in cash. Payouts may be made in either (a) a lump sum payment as soon as practicable after the date on which the director ceases to be a member of the Board, (b) a lump sum payment paid in February of the calendar year immediately following the calendar year in which the director ceases to be a member of the Board, or (c) between two and ten annual installments, each paid beginning in February following the calendar year in which the director ceases to be a member of the Board. If a director elects to receive PFS in cash, the payout of PFS is valued using the closing price of IBM common stock on the NYSE as follows: for payouts made in an immediate lump sum, IBM stock will be valued on the date on which the director ceases to be a member of the Board and for lump sum payments made in February of the calendar year immediately following the calendar year of separation or for installment payouts, IBM common stock will be valued on the last business day of the January preceding such February payment.

 

IBM’s Matching Grants Program: Non-management directors are eligible to participate in IBM’s Matching Grants Program on the same basis as IBM’s employees based in the United States. Under this program, IBM will provide specified matches in cash or equipment in connection with a director’s eligible contributions to approved educational institutions, medical facilities and cultural or environmental institutions. IBM matches eligible contributions in cash on a 1-to-1 basis and in equipment on a 2-to-1 basis. Each director is eligible for a Company match on total gifts up to $10,000 per calendar year. Amounts shown in the 2016 Director Compensation Table for matching grants may be in excess of $10,000 because such amounts include Company contributions on gifts that were made by directors in previous years.

 

2016 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. A director receives a pro-rated amount of the annual retainer for service on the Board and, if applicable, as Presiding Director or a committee chair, based on the portion of the year the director served.

 

All Other Compensation (column (c)): Amounts shown in this column represent:

 

·        Dividend equivalent payments on PFS accounts under the DCEAP as described above.

·        Group Life Insurance premiums paid by IBM on behalf of the directors.

·        Value of the contributions made by IBM under IBM’s Matching Grants Program as described above.

 

16



 

 

 

 

 

All Other

 

 

 

 

 

Fees Earned or

 

Compensation

 

 

 

Name

 

Paid in Cash ($)

 

($)(1)

 

Total ($)

 

(a)

 

(b)

 

(c)

 

(d)

 

A.J.P. Belda(2)

 

$

96,667

 

$

2,090,250

 

$

2,186,917

 

W.R. Brody(3)

 

96,667

 

1,785,498

 

1,882,165

 

K.I. Chenault

 

300,000

 

145,961

 

445,961

 

M.L. Eskew

 

350,000

 

123,580

 

473,580

 

D.N. Farr

 

300,000

 

33,369

 

333,369

 

M. Fields(4)

 

250,000

 

2,849

 

252,849

 

A. Gorsky

 

300,000

 

18,397

 

318,397

 

S.A. Jackson

 

320,000

 

115,716

 

435,716

 

A.N. Liveris

 

300,000

 

67,667

 

367,667

 

W.J. McNerney, Jr.

 

300,000

 

66,719

 

366,719

 

H.S. Olayan

 

300,000

 

4,268

 

304,268

 

J.W. Owens

 

300,000

 

86,831

 

386,831

 

J.E. Spero

 

300,000

 

140,837

 

440,837

 

S. Taurel

 

320,000

 

145,805

 

465,805

 

P. Voser

 

300,000

 

15,515

 

315,515

 

 


(1)    Amounts in this column include the following: for Mr. Belda: $2,090,210 of earned compensation and dividend reinvestments which had been previously deferred under the DCEAP since his election to the Board in 2008 and paid to him after his term on Board ended in 2016, which amount includes $37,882 of dividend equivalent payments earned in 2016 on PFS, and does not include the retainer earned in 2016; for Dr. Brody: $1,785,458 of earned compensation and dividend reinvestments which had been previously deferred under the DCEAP since his election to the Board in 2007 and paid to him after his term on Board ended in 2016, which amount includes $43,417 of dividend equivalent payments earned in 2016 on PFS, and does not include the retainer earned in 2016; for Mr. Chenault: $145,842 of dividend equivalent payments on PFS; for Mr. Eskew: $123,462 of dividend equivalent payments on PFS; for Mr. Farr: $23,250 of dividend equivalent payments on PFS and $10,000 contributed by IBM under the Matching Grants Program; for Mr. Gorsky: $18,279 of dividend equivalent payments on PFS; for Dr. Jackson: $110,598 of dividend equivalent payments on PFS; for Mr. Liveris: $57,548 of dividend equivalent payments on PFS and $10,000 contributed by IBM under the Matching Grants Program; for Mr. McNerney: $61,600 of dividend equivalent payments on PFS; for Mr. Owens: $86,712 of dividend equivalent payments on PFS; for Ms. Spero: $120,718 of dividend equivalent payments on PFS and $20,000 contributed by IBM under the Matching Grants Program; for Mr. Taurel: $143,186 of dividend equivalent payments on PFS; for Mr. Voser: $15,396 of dividend equivalent payments on PFS.

(2)    After Mr. Belda’s term on the Board ended in April 2016, Mr. Belda was paid the amount shown in column (b) plus the amount shown for him as earned compensation and dividend reinvestments in footnote (1) above.

(3)    After Dr. Brody’s term on the Board ended in April 2016, Dr. Brody was paid the amount shown in column (b) plus the amount shown for him as earned compensation and dividend reinvestments in footnote (1) above. The amount in column (b) does not include the value of 4,209 shares, for which Dr. Brody previously elected to defer payment.

(4)    Mr. Fields joined the Board in March 2016.

 

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

 

IBM believes that all reports for IBM’s executive officers and directors that were required to be filed under Section 16 of the Securities Exchange Act of 1934 were timely filed.

 

Ownership of Securities

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

 

The following sets forth information as to any person known to IBM to be the beneficial owner of more than five percent of IBM’s common stock as of December 31, 2016.

 

 

 

Number of

 

 

 

 

 

Shares

 

 

 

 

 

Beneficially

 

Percent

 

Name and Address

 

Owned

 

of Class

 

Warren E. Buffett(1)

 

81,241,303

 

8.5

%

Berkshire Hathaway Inc.(1)

 

 

 

 

 

3555 Farnam Street

 

 

 

 

 

Omaha, NE 68131

 

 

 

 

 

 

 

 

 

 

 

National Indemnity Company(1)

 

 

 

 

 

1314 Douglas Street

 

 

 

 

 

Omaha, NE 68102

 

 

 

 

 

 

 

 

 

 

 

The Vanguard Group(2)

 

57,862,237

 

6.08

%

100 Vanguard Boulevard

 

 

 

 

 

Malvern, PA 19355

 

 

 

 

 

 

 

 

 

 

 

BlackRock, Inc.(3)

 

52,221,600

 

5.5

%

55 East 52nd Street

 

 

 

 

 

New York, NY 10022

 

 

 

 

 

 

 

 

 

 

 

State Street Corporation(4)

 

51,025,648

 

5.37

%

State Street Financial Center

 

 

 

 

 

One Lincoln Street

 

 

 

 

 

Boston, MA 02111

 

 

 

 

 

 


(1)

Based on the Schedule 13G/A filed with the Securities and Exchange Commission on February 15, 2017 by Warren E. Buffett, Berkshire Hathaway Inc., National Indemnity Company, together with relevant subsidiaries and members of the filing group. Warren E. Buffett reported that he had sole voting and dispositive power over 9,000 shares beneficially owned and shared voting power over 81,232,303 shares beneficially owned. Each of the other members of the filing group reported that it had shared voting and dispositive power over the shares it beneficially owned. The Schedule 13G does not identify any shares with respect to which there is a right to acquire beneficial ownership. The Schedule 13G states that the shares were acquired and are held in the ordinary course of business and were not acquired and are not held for the purpose of or with the effect of changing or influencing the control of IBM.

(2)

Based on the Schedule 13G filed with the Securities and Exchange Commission on February 13, 2017 by The Vanguard Group and certain subsidiaries (Vanguard). Vanguard reported that it had sole voting power over 1,375,277 shares, shared voting power over 175,870 shares and sole and shared dispositive power over all shares beneficially owned. The Schedule 13G does not identify any shares with respect to which there is a right to acquire beneficial ownership. The Schedule 13G states that the shares were acquired and are held in the ordinary course of business and were not acquired and are not held for the purpose of or with the effect of changing or influencing the control of IBM.

(3)

Based on the Schedule 13G filed with the Securities and Exchange Commission on January 25, 2017 by BlackRock, Inc. and certain subsidiaries (BlackRock). BlackRock reported that it had sole voting power over 44,062,404 shares and sole dispositive power over all shares beneficially owned. The Schedule 13G does not identify any shares with respect to which there is a right to acquire beneficial ownership. The Schedule 13G states that the shares were acquired and are held in the ordinary course of business and were not acquired and are not held for the purpose of or with the effect of changing or influencing the control of IBM.

(4)

Based on the Schedule 13G filed with the Securities and Exchange Commission on February 7, 2017 by State Street Corporation and certain subsidiaries (State Street). State Street reported that it had shared voting and dispositive power over all shares beneficially owned. The Schedule 13G does not identify any shares with respect to which there is a right to acquire beneficial ownership. The Schedule 13G states that the shares were acquired and are held in the ordinary course of business and were not acquired and are not held for the purpose of or with the effect of changing or influencing the control of IBM.

 

17



 

COMMON STOCK AND STOCK-BASED HOLDINGS OF DIRECTORS AND EXECUTIVE OFFICERS

 

The following table sets forth the beneficial ownership of shares of IBM’s common stock as of December 31, 2016 by IBM’s current directors and nominees, the executive officers named in the 2016 Summary Compensation Table, and such directors and all of IBM’s executive officers as of December 31, 2016 as a group. Also shown are shares over which the named person could have acquired voting power or investment power within 60 days after December 31, 2016. 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.

 

 

 

 

 

 

 

Acquirable within 60 days

 

 

 

 

 

 

 

 

 

Directors’

 

 

 

Common

 

Stock-based

 

Options

 

DCEAP

 

Name

 

Stock(1)

 

Holdings(2)

 

and RSUs(3)

 

Shares(4)

 

K.I. Chenault

 

8,268

(5)

8,268

 

0

 

28,264

 

E. Clementi

 

19,547

 

75,415

 

12,579

 

N/A

 

M.L. Eskew

 

0

 

0

 

0

 

24,301

 

D.N. Farr

 

4,908

 

4,908

 

0

 

5,020

 

M. Fields

 

400

 

400

 

0

 

1,600

 

A. Gorsky

 

0

 

0

 

0

 

4,564

 

S.A. Jackson

 

0

 

0

 

0

 

21,794

 

M. Jetter

 

1,007

(6)

63,371

 

12,579

 

N/A

 

J.E. Kelly III

 

61,518

(7)

144,161

 

0

 

N/A

 

A.N. Liveris

 

0

 

0

 

0

 

11,860

 

W.J. McNerney, Jr.

 

0

 

0

 

0

 

12,613

 

H.S. Olayan

 

0

 

0

 

0

 

1,939

 

J.W. Owens

 

3,282

(8)

3,282

 

0

 

16,811

 

V.M. Rometty

 

189,747

 

266,104

 

0

 

N/A

 

M.J. Schroeter

 

21,188

 

99,656

 

25,835

 

N/A

 

J.E. Spero

 

1,000

 

1,000

 

0

 

26,596

 

S. Taurel

 

19,487

 

19,487

 

0

 

27,849

 

P.R. Voser

 

0

 

0

 

0

 

4,029

 

Directors and executive officers as a group

 

582,008

(9)

1,613,510

 

196,269

(9)

184,240

(9)

 


(1)    This column is comprised of shares of IBM common stock beneficially owned by the named person. Unless otherwise noted, voting power and investment power in the shares are exercisable solely by the named person, and none of the shares are pledged as security by the named person. Standard brokerage accounts may include nonnegotiable provisions regarding set-offs or similar rights. This column includes 78,328 shares in which voting and investment power are shared. The directors and officers included in the table disclaim beneficial ownership of shares beneficially owned by family members who reside in their households. The shares are reported in such cases on the presumption that the individual may share voting and/or investment power because of the family relationship. The shares reported in this column do not include 167,980 shares held by the IBM Personal Pension Plan Trust Fund, over which the members of the IBM Retirement Plans Committee, a management committee presently consisting of certain executive officers of IBM, have voting power, as well as the right to acquire investment power by withdrawing authority now delegated to various investment managers.

(2)    For executive officers, this column is comprised of the shares shown in the “Common Stock” column and, as applicable, all restricted stock units including retention restricted stock units, officer contributions into the IBM Stock Fund under the IBM Excess 401(k) Plus Plan, and Company contributions into the IBM Stock Fund under the Excess 401(k) Plus Plan. Some of these restricted stock units may have been deferred under the Excess 401(k) Plus Plan in accordance with elections made prior to January 1, 2008, and they will be distributed to the executive officers after termination of employment as described in the 2016 Nonqualified Deferred Compensation Narrative.

(3)    For executive officers, this column is comprised of (i) shares that can be purchased under an IBM stock option plan within 60 days after December 31, 2016, and (ii) RSU awards that vest within 60 days after December 31, 2016.

(4)    Promised Fee Shares earned and accrued under the IBM Deferred Compensation and Equity Award Plan (DCEAP) as of December 31, 2016, including dividend equivalents credited with respect to such shares. Upon a director’s retirement, these shares are payable in cash or stock at the director’s choice (see 2016 Director Compensation Narrative for additional information).

(5)    Includes 1,619 shares in which voting and investment power are shared.

(6)    Includes 692 shares in which voting and investment power are shared.

(7)    Includes 24,702 shares in which voting and investment power are shared.

(8)    Voting and investment power are shared.

(9)    The total of these three columns represents less than 1% of IBM’s outstanding shares, and no individual’s beneficial holdings totaled more than 1/10 of 1% of IBM’s outstanding shares.

 

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EXECUTIVE COMPENSATION

 

2016 REPORT OF THE EXECUTIVE COMPENSATION AND MANAGEMENT RESOURCES COMMITTEE OF THE BOARD OF DIRECTORS

 

Set out below is the Compensation Discussion and Analysis, which is a discussion of IBM’s executive compensation programs and policies written from the perspective of how we and management view and use such programs and policies. Given the Committee’s 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.

 

Alex Gorsky

Andrew N. Liveris

W. James McNerney, Jr.

Sidney Taurel (chair)

 

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2016 Compensation Discussion and Analysis

 

EXECUTIVE SUMMARY

 

In 2016, IBM emerged as the recognized cognitive solutions and cloud platform company — the result of a multi-year transformation of the business portfolio. IBM reinvented its core hardware, software, and services franchises, while investing to create new ones such as IBM Cloud, IBM Analytics, IBM Security, and the Watson businesses. A strong foundation is now in place.

 

Specific highlights of performance include:

 

·        Generated revenue of $79.9 billion and GAAP net income from continuing operations of $11.9 billion (operating non-GAAP net income of $13.0 billion).

·        Delivered GAAP gross margin of 48%, reflecting the investments made in acquisitions and our as-a-Service business.

·        Achieved GAAP diluted earnings per share from continuing operations of $12.39 and (operating non-GAAP diluted earnings per share of $13.59).

·        Generated $17.0 billion in cash from operations and $11.6 billion in free cash flow, with a strong realization rate of 97% of GAAP net income, while continuing our investment in research & development and capital expenditures.

·        Executed 15 acquisitions with total spend of nearly $6 billion to strengthen our cognitive, cloud and industry capabilities.

·        Maintained IBM’s industry-leading position in cloud with revenue of $13.7 billion, up 35% year over year. We exited the year with a cloud as-a-Service run rate of $8.6 billion, up 61%.

·        Scaled Strategic Imperatives — cloud, analytics, mobile, security and social — up 13% year over year and contributing 41% of IBM’s revenue. Revenue from analytics increased 9% and mobile, security and social collectively increased 19%.

·        Continued momentum in our high-value businesses providing world-class innovation to our clients. Software Solutions grew 5%, Technology Services and Cloud Platforms grew 1% and our total Software revenue was flat at actual rates, returning to growth at constant currency.

 

Our compensation strategy supports IBM’s emergence as the cognitive solutions and cloud platform company. It is designed to ensure that executives balance short-term objectives against long-term priorities, to align executive and stockholder interests, and to attract and retain the leadership needed to deliver strong results. Pay decisions were made in the context of our financial performance relative to our goals, while taking into account the transformation made in the Company’s portfolio and the steps taken to strengthen IBM’s position for the future.

 

For 2016, at target, 69% of Mrs. Rometty’s pay was at risk and subject to attainment of specific performance goals, excluding the one-time premium-priced option award described below:

 

 

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For 2016 performance, the Board approved an annual incentive payment of $4.95 million for Mrs. Rometty, which represented 99% of target. The payout level considered significant progress in the implementation of IBM’s strategy, with continued growth in Strategic Imperatives, momentum in cognitive, and the creation of new businesses in health care, Internet of Things, and financial regulatory compliance, including several sizeable acquisitions. In addition, the Committee noted significant continued increases in employee engagement, and major steps taken to realign workforce skills and strengthen senior management. Taking into consideration the actual salary, annual incentive payout and long-term incentive award for the period 2014–2016, Mrs. Rometty earned 54% of her annual total target compensation in 2016.

 

For 2017, the independent members of the Board made no change to Mrs. Rometty’s base salary, target annual incentive or annual long-term incentive award value, relative to 2016.

 

As disclosed last year in the 2016 Proxy Statement, the Board granted Mrs. Rometty a one-time award of 1.5 million nonqualified stock options that vest three years from the date of grant, are exercisable in four equal tranches at premium prices of 105%, 110%, 115% and 125% of the fair market value of IBM common stock on the date of grant, and expire 10 years from the date of grant.

 

This premium-priced stock option award demonstrates the Board’s strong confidence in Mrs. Rometty’s leadership of IBM and the momentum of its strategic direction as well as the Board’s desire to ensure her continued service through a critical period in IBM’s multi-year transformation, align her compensation closely with increases in shareholder value over the long-term, and, when combined with her ongoing compensation, deliver a market-competitive performance-based total compensation opportunity.

 

While one-time stock grants are prevalent in our industry for leaders navigating companies through extraordinary periods of transformation, this grant is unique in several ways. First, it is an option grant with value being derived only when incremental value is created for shareholders. Second, its premium-priced mechanism serves to increase even further the incremental value shareholders must receive relative to a typical option grant in which the exercise price is set at fair market value on the date of grant. This performance-sensitive design ensures that Mrs. Rometty is only compensated if there has been significant appreciation in shareholder value after the time of vesting. Each of the four tranches will expire valueless if the IBM stock price fails to appreciate to the levels described above, thereby ensuring that realized compensation, if any, is tied to the successful business transformation being led by Mrs. Rometty. The Board believes that the transformation is a defining moment not only for IBM, but also for the industry, and this grant reflects that significance and delivers value if, and only if, successful.

 

Note: In an effort to provide additional and useful information regarding IBM’s financial results and other financial information as determined by generally accepted accounting principles (GAAP), this Compensation Discussion and Analysis and Proxy Statement contains certain non-GAAP financial measures on a continuing operations basis, including software revenue at constant currency, operating earnings per share, free cash flow and operating (non-GAAP) earnings. For reconciliation and rationale for management’s use of this non-GAAP information refer to Appendix A — “Non-GAAP Financial Information and Reconciliations”.

 

Stockholder Engagement

 

IBM continually reviews its corporate governance and executive compensation structure. As part of this review, it is IBM’s longstanding practice for our executives to meet with a significant number of our largest investors to solicit their feedback on a variety of topics. In 2016, IBM once again engaged with over 100 institutional investors.

 

IBM considered the results of the management Say on Pay proposal presented to the stockholders for approval in 2016. In light of the support the proposal received, IBM’s compensation policies and decisions, explained in detail in this Compensation Discussion and Analysis, continue to be focused on long-term financial performance to drive stockholder value. IBM provides an advisory vote on executive compensation (Say on Pay) on an annual basis. The table below highlights practices that IBM embraces in support of our pay-for-performance philosophy:

 

What We Do

 

What We Don’t Do

 

 

 

    Tie a significant portion of pay to company performance

 

    Mitigate risk taking by emphasizing long-term equity incentives, placing caps on potential payments, and maintaining robust clawback provisions

 

    Require significant share ownership by the Chairman and CEO and Senior Vice Presidents

 

    Utilize noncompetition and nonsolicitation agreements

 

No individual severance or change-in-control agreements for executive officers

 

No excise tax gross-ups

 

No dividend equivalents on unearned RSUs/PSUs

 

No hedging/pledging of IBM stock

 

No stock option repricing, exchanges or options granted below market value

 

No guaranteed incentive payouts

 

No accelerated vesting of equity awards for executive officers

 

No above-market returns on deferred compensation plans

 

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SECTION 1: EXECUTIVE COMPENSATION PROGRAM DESIGN

 

Trust and personal responsibility in all relationships — relationships with clients, partners, communities, fellow IBMers, and investors — is a core value at IBM. As a part of maintaining this trust, we well understand the need for our investors — not only professional fund managers and institutional investor groups, but also millions of individual investors — to know how and why compensation decisions are made.

 

To that end, IBM’s executive compensation practices are designed specifically to meet five key objectives:

 

·        Ensure that the interests of IBM’s leaders are closely aligned with those of our investors by varying compensation based on both long-term and annual business results and delivering a large portion of the total pay opportunity in IBM stock;

·        Balance rewards for both short-term results and the long-term strategic decisions needed to ensure sustained business performance over time;

·        Attract and retain the highly qualified senior leaders needed to drive a global enterprise to succeed in today’s highly competitive marketplace;

·        Motivate our leaders to deliver a high degree of business performance without encouraging excessive risk taking; and

·        Differentiate rewards to reflect individual and team performance.

 

The specific elements of IBM’s U.S. executive compensation programs are:

 

Type

 

Component

 

Key Characteristics

Current Year Performance

 

 

Salary

 

Salary is a market-competitive, fixed level of compensation.

 

 

 

 

 

 

 

Annual Incentive

 

At target, annual incentive provides a market-competitive total cash opportunity. Actual annual incentive payments are driven by business performance against financial metrics and individual performance, with top performers typically earning the greatest payouts and the lowest performers earning no incentive payouts.

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term Incentive Plan

 

 

Performance Share Units (PSUs)

 

Equity awards are typically made annually and may be made in PSUs, RSUs or a combination thereof. Equity grants are based on the level of the executive and individual performance. Lower performers do not receive equity grants. For PSUs, the number of units granted is adjusted at the end of the three-year performance period based on IBM’s performance against predetermined targets for operating earnings per share and free cash flow. RSUs vest over time, typically over one to four years.

 

 

 

 

 

 

 

 

Restricted Stock Units (RSUs)

 

 

 

 

 

 

 

 

 

 

 

 

 

Retention

 

 

Stock-Based Grants & Cash Awards

 

Periodically, the Compensation Committee and/or the Chairman and CEO reviews outstanding stock-based awards for key executives. Depending on individual performance and the competitive environment for senior executive leadership talent, awards may be made in the form of restricted stock units, premium-priced stock options or cash for certain executives. Retention Restricted Stock Unit (RRSU) vesting periods typically range from two to five years. Cash awards have a clawback if an executive leaves IBM before a specified date. Premium-priced stock options may have varying exercise prices.

 

 

 

 

 

 

 

 

 

Supplemental Executive Retention Plan (closed)

 

In 1995, IBM created a plan in the U.S. to help retain, for their full careers, the caliber of senior leaders needed to turn IBM around, preserve its long-term viability, and position it for growth in the future. To discourage these leaders from joining competitors, their benefits under this retention plan would be forfeited if they left IBM prior to age 60. The plan was closed to new participants in 2004 and future accruals under the plan stopped on December 31, 2007.

 

 

 

 

 

 

 

 

 

 

 

 

Pension & Savings Plans

 

 

Pension Plans (closed)

 

In the U.S. 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 as of such date and is determined by the same formulas for executives and non-executives.

 

 

 

 

 

 

 

 

 

Savings Plan

 

The money that U.S. executives save through the IBM 401(k) Plus Plan, as for all U.S. employees, is eligible for IBM match and automatic contributions. The 401(k) Plus Plan is the only tax-qualified retirement program available to IBM’s U.S. employees for future deferrals and employer contributions.

 

 

 

 

 

 

 

 

 

Deferred Savings Plan

 

IBM has a nonqualified deferred compensation plan established in accordance with U.S. Department of Labor and Internal Revenue Service guidelines to enable employees to defer compensation in excess of limits applicable to 401(k) plans. Employees are eligible for IBM match and automatic contributions similar to the 401(k) Plus Plan.

 

 

 

 

 

 

 

 

 

 

 

 

Other Compensation

 

 

Perquisites and Other Benefits

 

Perquisites are intended to ensure safety and productivity of executives. Perquisites include such things as annual physicals, transportation, financial planning, and personal security.

 

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Senior Leadership Team — Personal Stake in IBM’s Future through Stock Ownership Requirements

 

Investors want the leaders of their companies to act like owners. That alignment, we believe, 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 IBM’s Chairman and CEO and Senior Vice Presidents. The following table illustrates which equity holdings count towards stock ownership requirements:

 

What Counts

 

What Does Not Count

 IBM shares owned personally or by members of the immediate family sharing the same household

 

 Unvested equity awards, including PSUs, RSUs and RRSUs

 

 

Holdings in the IBM Stock Fund of the 401(k) Plus Plan and the Excess 401(k) Plus Plan

 

Unexercised stock options

 

 

Shares of IBM stock deferred under the Excess 401(k) Plus Plan

 

 

 

 

 

The Chairman and CEO and Senior Vice Presidents are all required to own IBM shares or equivalents worth three times their individual total target cash compensation within five years of hire or promotion. Unlike the majority of the Fortune 100 companies who establish ownership guidelines using a multiple of only base salary, IBM uses a multiple of base salary plus target annual incentive. This ensures that meaningful ownership levels are accumulated based on each executive’s annual cash compensation opportunity. As of December 31, 2016, as a group, the Chairman and CEO and Senior Vice Presidents owned shares or equivalents valued at over $129 million; in fact, as of that date, this group held, on average, 140% of the amount of IBM shares or equivalents that IBM requires.

 

Setting Performance Targets for Incentive Compensation

 

Compensation of our senior leaders is linked with IBM’s performance against core business metrics. These metrics and their weightings are aligned with IBM’s financial and strategic objectives and are designed to appropriately balance short- and long-term goals. Targets are set for both the annual and long-term incentive programs at aggressive levels each year. These targets, individually and together, are designed to be challenging to attain and are consistent with our financial model shared with investors each year. As part of IBM’s ongoing management system, targets are evaluated to ensure they do not encourage an inappropriate amount of risk taking.

 

For 2016, IBM continued to measure five key financial metrics:

 

 


*Net Cash from Operating Activities, excluding Global Financing receivables

 

Strategic Imperatives revenue supports IBM’s portfolio shift into a cognitive solutions and cloud platform company that will deliver the highest-value opportunities for our clients and shareholders. Operating net income and operating EPS best measure our operational success as a high-value company. Both free cash flow and operating cash flow are important measures of IBM’s ability to reinvest and return value to our shareholders. We believe that these metrics best align the interests of management with shareholders.

 

IBM shares its financial model each year with investors in the context of its long-term strategy. As such, the financial model is clearly communicated to investors, and our performance targets are based on this model. IBM competes for client business, talent and investment opportunities in a highly dynamic and competitive marketplace. Therefore, we do not disclose specific targets within the annual and long-term plans because such disclosure could disadvantage IBM competitively and impair the Company’s ability to execute our strategic plans. For example, disclosure of our free cash flow targets would provide insight into timing of large capital investments. In addition, IBM has a specific acquisition and divestiture strategy that could be negatively impacted if the specific targets were disclosed.

 

While we do not disclose specific targets for competitive reasons, the difficulty and rigor of these targets is apparent in our payouts. Since becoming CEO, Mrs. Rometty’s annual incentive payout has ranged from 0% to 108% and Performance Share Unit payouts have ranged from 32% to 113% during that same period. We also describe annual performance 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

 

IBM sets business objectives at the beginning of each year which are approved by the Board of Directors. These objectives translate to targets for IBM and for each business unit for purposes of determining the target funding of the Annual Incentive Program. Performance against business objectives determines the actual total funding pool for the year which can vary from 0% to 200% of total target incentives for all executives. Each year the Compensation Committee and the Board of Directors review IBM’s annual business objectives and set the metrics and weightings for the annual program reflecting current business priorities. The metrics and weightings for 2016 and 2017 are listed below.

 

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2016 and 2017 Weighting

 

Financial Metric

 

in Overall Score

 

Operating Net Income

 

40

%

Strategic Imperatives Revenue

 

20

%

Operating Cash Flow

 

40

%

 

At the end of the year, performance for IBM is assessed against these predetermined financial targets. The performance results against these targets may be adjusted 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, the Chairman and CEO can recommend an adjustment, up or down, based on factors beyond IBM’s financial performance, for example, client experience, market share growth and workforce development. Taking such matters into account for 2016, no such adjustment was made. The Compensation Committee reviews the financial scoring and qualitative adjustments and approves the Annual Incentive Program funding level. Once the total pool 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 their individual target incentive (payouts at this level are rare and only possible when IBM’s performance has also been exceptional).

 

For 2016, IBM’s Annual Incentive Program’s financial performance score was slightly below par. Strategic Imperatives revenue, operating net income, and operating cash flow attainment fell slightly below target.

 

Performance Share Unit Program

 

For Performance Share Units, the two metrics are operating EPS and free cash flow. The targets for the Performance Share Unit program are set at the beginning of each three-year performance period, taking into account IBM’s financial model shared with investors and the annual budget as approved by the Board, including the impact our share buyback program has on operating EPS. In addition, for Performance Share Unit awards starting in 2016 and beyond, the Committee has determined that actual operating EPS results will be adjusted to remove the impact of any difference between the actual share count and the budgeted share count. This method formalizes the Committee’s longstanding intention of not having unplanned share repurchase practices affect executive compensation. Additionally, the scoring for the Performance Share Unit Program takes into account extraordinary events. For example, in 2014 and 2015, operating EPS reflected the impact of the Microelectronics divestiture. At the end of the three years, the score is calculated based on results against the predetermined targets, with the following weights:

 

 

 

2016 and 2017 Weighting

 

Financial Metric

 

in Overall Score

 

Operating Earnings Per Share

 

70

%

Free Cash Flow

 

30

%

 

The Compensation Committee approves the determination of actual performance relative to pre-established targets, and the number of Performance Share Units is adjusted up or down based on the approved actual performance from 0% to 150%. There is no discretionary adjustment to the Performance Share Unit program score.

 

For the Performance Share Units granted in 2014, the final performance score was well below par. Both operating EPS and free cash flow for the three-year period (2014–2016) were below target.

 

SECTION 2: HOW AND WHY COMPENSATION DECISIONS ARE MADE

 

At any level, compensation reflects an employee’s value to the business — market value of skills, individual contribution and business results. To be sure we appropriately assess the value of senior executives, IBM follows an evaluation process, described here in some detail:

 

1. Making Commitments

 

All IBM employees, including the Chairman and CEO and Senior Vice Presidents, develop goals, both qualitative and quantitative, they seek to achieve in a particular year in support of the business. Beginning in 2016, IBM adopted a more nimble and real-time approach to managing employee performance. Employee’s performance goals are discussed with each individual’s manager regularly and updated as necessary throughout the year. The Chairman and CEO’s performance goals are reviewed directly by the Board of Directors. As part of this process, many factors are considered, including an understanding of the business risks associated with the performance goals.

 

2. Determining Compensation for the Chairman and CEO — Research, Recommendations and Review

 

The chair of the Compensation Committee works directly with the Committee’s compensation consultant, Frederic W. Cook & Co., Inc. (FW Cook), to provide a decision-making framework for use by the Committee in determining incentive plan payouts and setting target compensation opportunities for the Chairman and CEO. This framework considers the Chairman and CEO’s self-assessment of performance against commitments in the year, both qualitative and quantitative, and also considers progress against strategic objectives, an analysis of IBM’s total performance over a multi-year period, a competitive benchmark analysis, and other relevant information. The Committee considers all of this information in developing its recommendations, which are then presented to the independent members of the IBM Board of Directors for further review, discussion and final approval.

 

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3. Determining Compensation for Senior Vice Presidents

 

Evaluation of Results by the Chairman and CEO

 

Employees at all levels, including executives, work with their managers throughout the year to evaluate their own results against their stated goals.

 

The self-assessments of the Senior Vice Presidents are reviewed by the Senior Vice President of Human Resources (SVP HR) and the Chairman and CEO, 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, the Chairman and CEO makes compensation recommendations to the Compensation Committee based on an evaluation of each Senior Vice President’s 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 CEO’s recommendations for the Senior Vice Presidents.

 

The Committee evaluates all of the factors considered by the Chairman and CEO and reviews compensation summaries 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. These summaries provide the Committee with an understanding of how their decisions affect other compensation elements and the impact that separation of employment or retirement will have.

 

4. Ensuring Competitive Pay — Approach to Benchmarking

 

IBM participates in several executive compensation surveys that provide general trend information and details 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. Given the battle for talent that exists in our industry, the benchmark companies that are used by the Compensation Committee to guide its decision making have included a broad range of key information technology companies, 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 surveys and benchmark data are supplemented by input from the Compensation Committee’s outside consultant on factors such as recent market trends. The Committee reviews and approves this list annually.

 

The Compensation Committee re-examined the benchmark group for 2016 and determined that companies which meet the following criteria should be included in the 2016 benchmark group:

 

·        Companies in the technology industry with revenue that exceeds $15 billion, plus

·        Additional companies (up to two per industry if available) in industries other than technology, with revenue that exceeds $40 billion and that have a global complexity similar to IBM.

 

2016 Benchmark Group:

 

Accenture

 

EMC

 

Oracle

Amazon.com

 

ExxonMobil

 

PepsiCo

Apple

 

Ford

 

Pfizer

AT&T

 

General Electric

 

United

Boeing

 

Google

 

Technologies

Caterpillar

 

Hewlett-Packard

 

UPS

Chevron

 

Intel

 

Verizon

Cisco Systems

 

Johnson & Johnson

 

Xerox

Dow Chemical

 

Microsoft

 

 

 

For 2017 compensation decisions, the Committee approved the following benchmark group using the criteria above and reflecting changes in the corporate structure of certain competitors.

 

2017 Benchmark Group:

 

Accenture

 

Dow Chemical

 

Microsoft

Alphabet

 

ExxonMobil

 

Oracle

Amazon.com

 

Ford

 

PepsiCo

Apple

 

General Electric

 

Pfizer

AT&T

 

Hewlett-

 

United

Boeing

 

Packard Enterprises

 

Technologies

Caterpillar

 

HP Inc.

 

UPS

Chevron

 

Intel

 

Verizon

Cisco Systems

 

Johnson & Johnson

 

Xerox

 

The data from compensation surveys and related sources form the primary external view of the market. In consideration of size and complexity, IBM’s philosophy is to generally target the 50th percentile of the market for cash and total compensation. Owing to the size and scope of our business overall, some roles are compared to a size-adjusted market rate.

 

For individual compensation decisions, the benchmark information is used together with an internal view of longer-term potential, individual performance relative to other executives and recognizing that the skills and experience of our senior executives are highly sought after by other companies and, in particular, by IBM’s competitors. Because factors such as performance and retention, as well as size and complexity of the job role, are considered when compensation decisions are made, the cash and total compensation for an individual named executive officer may be higher or lower than the target reference point of the relevant benchmark group.

 

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5. Compensation Committee Consultant

 

The Committee enters into a consulting agreement with its outside compensation consultant on an annual basis. The Committee has retained FW Cook as its compensation consultant to advise the Committee on market practices and specific IBM policies and programs. FW Cook reports directly to the Compensation Committee Chairman and takes direction from the Committee. The consultant’s work for the Committee includes data analyses, market assessments and preparation of related reports. From time to time, the Committee seeks the views of the consultant on items such as incentive program design and market practices. The work done by FW Cook for the Committee is documented in a formal agreement which is executed by the consultant and the Committee. FW Cook does not perform any other work for IBM, other than services provided to IBM’s Directors and Corporate Governance Committee. The Committee determined that there is no conflict of interest with regard to FW Cook.

 

The Compensation Committee made recommendations for Mrs. Rometty’s 2016 and 2017 compensation following the process and using the pay components described above.

 

2016 ANNUAL INCENTIVE DECISION FOR THE CHAIRMAN AND CEO

 

In addition to the overall IBM performance detailed in the Executive Summary, the Compensation Committee noted the following personal leadership achievements for Mrs. Rometty, all of which are clear sign posts of the successful business portfolio shift:

 

·        Directed investments to Strategic Imperatives — cloud, analytics, mobile, social and security — growing revenue to $33 billion. The Strategic Imperatives contributed 41% of IBM’s total revenue.

·        Established Watson as the premier artificial intelligence platform for business. Extended the reach of Watson on the IBM Cloud, open to millions of clients, developers, partners and users.

·        Expanded IBM’s cloud capabilities and broadened the ecosystem with over 50 cloud datacenters.

·        Launched the Watson Financial Services unit and entered the global regulatory compliance market, enabled by the acquisition of Promontory Financial Group. The newly launched unit brings clients an industry-specific combination of Watson, IBM Cloud, IBM Systems, blockchain, deep domain expertise and ecosystems of partners and developers.

·        Accelerated the creation of cognitive-driven value based solutions by acquiring Truven Health Analytics. IBM Watson Health is the world’s leading commercial healthcare technology platform, with solutions available to more than 200 million patients worldwide.

·        Established IBM as the global leader in applying blockchain technology to business, with more than 300 client projects underway.

·        Ranked #1 in patents for the 24th consecutive year, continuing our leadership in technology and innovation. IBM was the first company to exceed 8,000 patents in a year.

·        Drove significant productivity savings through work redesign and the deployment of cognitive solutions across IBM’s internal operations, and positioned IBM for future growth by realigning workforce skills with the new portfolio and strengthening all levels of management, including senior management.

·        Continued to build on employee engagement momentum, with increases across virtually all markets and business units.

 

For 2016 performance, the Board approved an annual incentive payment of $4.95 million for Mrs. Rometty, which represented 99% of her target opportunity. This payout considered her outstanding personal leadership through a landmark transformation and the significant growth in new business areas, balanced against underperformance in some other areas, such as Global Business Services. Taking into consideration the actual salary, actual annual incentive payout and actual long-term incentive award for the period 2014–2016, Mrs. Rometty earned 54% of her annual total target compensation in 2016.

 

 

26



 

2017 COMPENSATION DECISIONS FOR THE CHAIRMAN AND CEO

 

For 2017, the independent members of the Board made no change to Mrs. Rometty’s base salary or target annual incentive. She was granted an annual long-term incentive award valued at $13.3 million, flat compared to the prior year. This grant is comprised 65% of 2017–2019 Performance Share Units and 35% of Restricted Stock Units. For 2017, 69% of Mrs. Rometty’s annual total target compensation is tied to performance-based incentives.

 

2016 ANNUAL INCENTIVE DECISIONS FOR MR. SCHROETER, MR. JETTER, DR. KELLY AND MR. CLEMENTI

 

The Compensation Committee also made decisions for the following named executive officers, noting overall corporate performance as described in the Executive Summary and the following key points:

 

Martin J. Schroeter,

 

Senior Vice President and Chief Financial Officer

 

·        Shifted IBM’s spending profile to focus on Strategic Imperatives. Invested $15 billion across research & development, capital spending and 15 acquisitions, adding to our capabilities in the high-growth areas of cognitive and cloud with industry focus.

·        Returned $8.8 billion, or approximately 75% of free cash flow, to shareholders through $3.5 billion in gross share repurchases and $5.3 billion of dividends, with an increase in the quarterly dividend of 7.7%.

·        Implemented new segment reporting structure that aligns to IBM’s emergence as a cloud platform and cognitive solutions company.

 

Martin Jetter,

 

Senior Vice President, IBM Global Technology Services

 

·        Delivered revenue growth in Global Technology Services and grew revenue backlog.

·        Grew Technology Services & Cloud Platforms Strategic Imperatives revenue 39%, with Cloud revenue up 49% and an as-a-Service annual exit run rate of $5.8 billion.

·        Shifted the business from systems integration to services integration, assisting our clients as they move to enterprise-grade cloud solutions that are secure, agile, and that leverage the data and investments in their core systems.

 

John E. Kelly III,

 

Senior Vice President, IBM Cognitive Solutions & IBM Research

 

·        Led Solutions Software which had revenue growth of 5% and drove an as-a-Service annual exit run rate of $1.8 billion.

·        Embedded cognitive capabilities in Commerce, Analytics, Security, Watson Health, Internet of Things, and financial services solutions; and drove the integration of the Watson and IBM Cloud platforms.

·        Completed five Cognitive Solutions acquisitions, including assets of The Weather Company, whose high-volume data platform serves as the foundation for IBM’s Watson Internet of Things Cloud platform.

·        Achieved #1 patent position for the 24th consecutive year, with over 8,000 patents in areas from bioinformatics to nanotechnology. Launched the first ever commercial program for universal quantum computing.

 

Erich Clementi,

 

Senior Vice President, IBM Global Markets

 

·        Re-organized IBM’s go-to-market resources and established a management system across IBM business units to deliver the breadth of the IBM portfolio tailored to 12 global industries.

·        Enabled IBM to deliver $33 billion of Strategic Imperatives revenue, up 13%, with strong contributions from IBM’s two biggest geographic markets.

·        Deployed a new operating model, which increased the productivity of IBM’s sales force, fostering speed in addressing new markets and making investments in emerging opportunities.

 

Following the process outlined above and based on business and individual performance, the Compensation Committee approved the 2016 annual incentive payouts below for these named executive officers:

 

 

 

2016 Annual

 

Name

 

Incentive Payouts

 

M.J. Schroeter

 

$

1,046,430

 

M. Jetter

 

901,890

 

J.E. Kelly III

 

927,350

 

E. Clementi

 

889,200

 

 

Taking into consideration the actual salary, annual incentive payout and long-term incentive award for the period 2014–2016, these named executive officers earned from 50%-67% of their annual total target compensation in 2016.

 

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2017 COMPENSATION DECISIONS FOR MR. SCHROETER, MR. JETTER, DR. KELLY, AND MR. CLEMENTI

 

The Committee also approved the following compensation elements for 2017: base salary, annual incentive target, Performance Share Unit (PSU) and Restricted Stock Unit (RSU) grants under the Long-Term Performance Plan. As previously disclosed in the 2016 Proxy Statement, for Long-Term Incentive Plan grants beginning in 2016, the mix of vehicles is now set at 65% PSUs and 35% RSUs, to align better with market practice. This mix provides competitive pay, while at the same time ensuring a strong link between pay and performance, and creates a better balance relative to peers with which we compete for talent. For 2017, based on the compensation decisions detailed below at target, 63% of the NEOs’ (excluding the Chairman and CEO) pay is at risk.

 

 

 

 

 

 

 

 

2017 Long-Term

 

 

 

2017 Cash(1)

 

Incentive Awards(2)

 

 

 

 

 

Annual

 

 

 

 

 

 

 

 

 

Incentive

 

Performance

 

Restricted

 

Name

 

Salary Rate

 

Target

 

Share Units

 

Stock Units

 

M.J. Schroeter

 

$

874,000

 

$

1,181,000

 

$

3,575,000

 

$

1,925,000

 

M. Jetter

 

723,000

 

977,000

 

3,250,000

 

1,750,000

 

J.E. Kelly III

 

852,000

 

1,148,000

 

3,575,000

 

1,925,000

 

E. Clementi

 

777,000

 

1,048,000

 

3,575,000

 

1,925,000

 

 


(1) The 2017 salary rates for Mr. Schroeter, Mr. Jetter, Dr. Kelly and Mr. Clementi will be effective July 1, 2017 and the 2017 annual incentive targets were effective January 1, 2017.

(2) PSUs and RSUs will be granted on June 8, 2017 to the named executive officers, including the Chairman and CEO. The actual number of units granted on this date will be determined by dividing the value shown above by a predetermined, formulaic planning price for the second quarter 2017. The performance period for the PSUs ends December 31, 2019, and the award will pay out in February 2020. The Restricted Stock Units will vest 25% per year on each anniversary of the date of grant.

 

SECTION 3: ADDITIONAL INFORMATION

 

COMPENSATION PROGRAM AS IT RELATES TO RISK

 

IBM management, the Compensation Committee and the Committee’s outside consultant review IBM’s compensation policies and practices, with a focus on incentive programs, to ensure that they do not encourage excessive risk taking. This review includes the cash incentive programs and the long-term incentive plans that cover all executives and employees. Based on this comprehensive review, we concluded that our compensation program does not encourage excessive risk taking for the following reasons:

 

·        Our programs appropriately balance short- and long-term incentives, with approximately 71% of 2017 annual total target compensation for the Chairman and CEO and Senior Vice Presidents as a group provided in equity.

·        Our executive compensation program pays for performance against financial targets that are set to be challenging to motivate a high degree of business performance, with an emphasis on longer-term financial success and prudent risk management.

·        Our incentive plans include a profit metric as a significant component of performance to promote disciplined progress toward financial goals. None of IBM’s incentive plans are based solely on signings or revenue targets, which mitigates the risk of employees focusing exclusively on the short term.

·        Qualitative factors beyond the quantitative financial metrics are a key consideration in the determination of individual executive compensation payments. How our executives achieve their financial results, integrate across lines of business and demonstrate leadership consistent with IBM values are key to individual compensation decisions.

·        As explained in the 2016 Potential Payments Upon Termination Narrative, we further strengthened our retirement policies on equity grants for our senior leaders beginning in 2009 to ensure that the long-term interests of IBM continue to be the focus even as these executives approach retirement.

·        Our stock ownership guidelines require that the Chairman and CEO and each Senior Vice President hold a significant amount of IBM equity to further align their interests with stockholders over the long term.

·        IBM has a policy that requires a clawback of cash incentive payments in the event that an executive officer’s conduct leads to a restatement of IBM’s financial results. Likewise, IBM’s equity plan has a clawback provision which states that awards may be cancelled and certain gains repaid if an employee engages in detrimental activity. To further reinforce our commitment to ethical conduct, the IBM Excess 401(k) Plus Plan allows the clawback of certain IBM contributions if a participant engages in detrimental activity.

 

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We are confident that our compensation program is aligned with the interests of our stockholders, rewards for performance and represents strong executive compensation governance practices.

 

EQUITY AWARD PRACTICES

 

Under IBM’s 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, for example, 10% above that average, or as specified by the Compensation Committee.

 

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. In the case of planned grant value, the number of shares granted are determined by dividing the planned value by the predetermined, formulaic planning price in effect for the quarter. IBM’s 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.

 

As with all compensation decisions, the independent members of the Board approve all equity awards for the Chairman and CEO and ratify all equity awards for the Chief Financial Officer. In addition, all equity awards for Senior Vice Presidents are approved by the Compensation Committee. All equity awards for employees other than the Chairman and CEO and Senior Vice Presidents are approved by the Chairman and CEO and Senior Vice Presidents 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 leaders and other employees are made on specific cycle dates scheduled in advance. IBM’s policy for new hires and promotions requires approval of any awards before or on the grant date, which is typically the date of the promotion or hire.

 

IBM does not have any plans, programs or agreements that would provide any payments to any of the named executive officers upon a change in control of IBM, a change in the named executive officer’s responsibilities or a constructive termination of the named executive officer.

 

ETHICAL CONDUCT

 

Every executive is held accountable to comply with IBM’s high ethical standards: IBM’s Values, including “Trust and Personal Responsibility in all Relationships,” and IBM’s Business Conduct Guidelines. This responsibility is reflected in each executive’s performance goals, and is reinforced through each executive’s annual certification to the IBM Business Conduct Guidelines. An executive’s compensation, including annual cash incentive payments, is tied to compliance with these standards; compliance is also a condition of IBM employment for each executive.

 

IBM’s equity plans and agreements have a clawback provision — awards may be cancelled and certain gains repaid if an employee engages in activity that is detrimental to IBM, such as violating IBM’s Business Conduct Guidelines, disclosing confidential information or performing services for a competitor. To further reinforce our commitment to ethical conduct, the Excess 401(k) Plus Plan allows the clawback of certain IBM contributions if a participant engages in activity that is detrimental to IBM.

 

In addition, approximately 2,000 of our key executives (including each of the named executive officers) have agreed to a noncompetition, nonsolicitation 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 the following policy for the clawback of cash incentive payments in the event an executive officer’s conduct leads to a restatement of IBM’s financial results:

 

To the extent permitted by governing law, IBM 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.

 

HEDGING AND PLEDGING PRACTICES

 

IBM has two senior leadership teams: the Performance Team and the Growth and Transformation Team (G&TT). The Performance Team consists of approximately 70 of our senior leaders who run IBM business units and geographies and includes the Chairman and CEO and each Senior Vice President. The team is accountable for business performance and the development of cross-unit strategies. The G&TT, which includes all members of the Performance Team, consists of a select group of approximately 350 executives. This team is charged with supporting IBM’s continued transformation through their leadership initiatives to engage their teams and promote innovation, speed and simplicity in service of our clients.

 

IBM does not allow any member of the G&TT, including any named executive officer, to hedge the economic risk of their ownership of IBM securities, which includes entering into any derivative transaction on IBM stock (e.g., any short-sale, forward, option, collar). Further, IBM does not allow any member of the G&TT to pledge IBM securities at any time, which includes having IBM stock in a margin account or using IBM stock as collateral for a loan.

 

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TAX CONSIDERATIONS

 

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 IBM’s CEO and to each of the other three highest-paid executive officers (not including IBM’s 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 Vice Presidents under IBM’s Long-Term Performance Plans should qualify as performance-based. The IBM Excess 401(k) Plus 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. In 1999, IBM’s stockholders approved the terms under which IBM’s annual and long-term performance incentive awards should qualify as performance-based. In 2014, as required by the Internal Revenue Code, the stockholders approved the material terms of the performance criteria under which long-term performance incentive awards should qualify as performance-based. 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.

 

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2016 SUMMARY COMPENSATION TABLE NARRATIVE

 

Salary (Column (c))

 

Amounts shown in the salary column reflect the salary amount paid to each named executive officer during 2016.

 

·        IBM reviews salaries for each named executive officer annually during a common review cycle. Mrs. Rometty’s salary rate was effective July 1, 2015. This was her first salary increase since her appointment as CEO in January 2012. The salary rates for the other named executive officers took effect on July 1, 2016.

 

Bonus (Column (d))

 

No bonuses were awarded to the named executive officers in the years shown in the 2016 Summary Compensation Table. Payments under the IBM Annual Incentive Program are included under column (g) (Non-Equity Incentive Plan Compensation).

 

Stock Awards (Column (e))

 

The amounts shown are the aggregate grant date fair values of Performance Share Units (PSUs), Restricted Stock Units (RSUs) and Retention Restricted Stock Units (RRSUs) granted in each fiscal year shown, computed in accordance with accounting guidance (excluding any risk of forfeiture as per SEC regulations). The values shown for the PSUs are calculated at the Target number, as described below. The values shown for the PSUs, RSUs and RRSUs reflect an adjustment for the exclusion of dividend equivalents.

 

Performance Share Units (PSUs)

 

The following describes the material terms and conditions of PSUs as reported in the column titled Stock Awards (column (e)) in the 2016 Summary Compensation Table and in the 2016 Grants of Plan-Based Awards Table under the heading Estimated Future Payouts Under Equity Incentive Plan Awards (columns (f), (g) and (h)).

 

General Terms

 

·        One PSU is equivalent in value to one share of IBM common stock.

·        Executive officers are awarded a number of PSUs during the first year of the three-year performance period. PSUs are generally paid out in IBM common stock after the three-year performance period.

·        Performance targets for cumulative three-year attainment in operating earnings per share and free cash flow are set at the beginning of the three-year performance 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, and the number of PSUs is adjusted up or down based on the approved actual performance.

·        PSUs granted to U.S. executives vest on December 31 of the end of the performance period. Payout for all PSUs is in the February following the end of the performance period.

·        There are no dividends or dividend equivalents paid on PSUs.

 

Vesting and Payout Calculations

 

·        The performance period for the awards granted in 2016 is January 1, 2016 through December 31, 2018, and the awards will pay out in February 2019. PSU awards granted in 2016 will be adjusted for performance, as described below.

·        Outstanding PSUs are typically cancelled if the executive’s employment is terminated. See the 2016 Potential Payments Upon Termination Narrative for information on payout of unvested PSUs upon certain terminations.

·        Payout will not be made for performance below the thresholds, as described below.

·        See Section 1 of the 2016 Compensation Discussion and Analysis for information on performance targets for the PSU program.

 

Threshold Number:

 

·        The Threshold number of PSUs (listed in column (f) of the 2016 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 (operating earnings per share and free cash flow).

·        If only the cumulative operating earnings per share target is met at the Threshold level (and the free cash flow target is not met), the number of PSUs earned would be 70% of the Threshold number.

·        If only the cumulative free cash flow target is met at the Threshold level (and the operating earnings per share target is not met), the number of PSUs earned would be 30% of the Threshold number.

 

Target Number:

 

·        The Target number of PSUs (listed in column (g) of the 2016 Grants of Plan-Based Awards Table) will be earned if 100% of the objectives are achieved.

 

Maximum Number:

 

·        The Maximum number of PSUs (listed in column (h) of the 2016 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)

 

RSUs may include RRSUs. In 2016, RSUs, but not RRSUs, were granted to all named executive officers. RRSUs granted in previous years to any named executive officer and outstanding at the end of 2016 are included in the 2016 Outstanding Equity Awards at Fiscal Year-End Table.

 

General Terms

 

·        One RSU or RRSU is equivalent in value to one share of IBM common stock. RSUs and RRSUs are generally paid out in IBM common stock at vesting.

·        Dividend equivalents are not paid on RSUs or RRSUs granted on or after January 1, 2008.

 

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Vesting and Payout

 

·        RSUs typically fully vest in four years, with 25% vesting each year.

·        RRSUs typically fully vest in a two to five year period. These awards are typically given to select senior executives for the purpose of providing additional value to retain the executive through the vesting date.

·        Payout of RSUs and RRSUs at each vesting date is typically contingent on the recipient remaining employed by IBM through that vesting date. See the 2016 Potential Payments Upon Termination Narrative for information on payout of unvested RSUs upon certain terminations.

·        All deferred shares, comprised of shares that were deferred by the participant (Deferred IBM Shares), in the 2016 Nonqualified Deferred Compensation Table may include certain previously-granted RRSUs. Executives have not been allowed to defer payment of RSUs.

·        From time to time, special performance-based RSUs may be granted with performance contingent vesting.

 

Option Awards (Column (f))

 

·        There were no option awards granted to the named executive officers in the years shown in the 2016 Summary Compensation Table, except for Mrs. Rometty. On January 26, 2016, Mrs. Rometty was granted a one-time award of 1.5 million nonqualified stock options that vest three years from the date of grant, is exercisable in four equal tranches at premium prices of 105%, 110%, 115% and 125% of the average of the high and low prices of IBM common stock on the date of grant, and expires 10 years from the date of grant. Market-priced and premium-priced options granted in previous years to the named executive officers and outstanding at the end of 2016 are included in the 2016 Outstanding Equity Awards at Fiscal Year-End Table.

 

Non-Equity Incentive Plan Compensation (Column (g))

 

Amounts in this column represent payments under IBM’s Annual Incentive Program (AIP).

 

General Terms

 

·        All named executive officers participate in this program. The performance period is the fiscal year (January 1 through December 31).

·        See Section 1 of the 2016 Compensation Discussion and Analysis for information on performance targets for AIP.

 

Payout Range

 

·        Mrs. Rometty had a target of $5 million for 2016. The other named executive officers had targets of 135% of their salary rate for 2016. See column (d) of the 2016 Grants of Plan-Based Awards Table for the target payout.

·        Threshold payout for each named executive officer is $0 (see column (c) of the 2016 Grants of Plan-Based Awards Table).

·        Maximum payout for each named executive officer is three times the target (see column (e) of the 2016 Grants of Plan-Based Awards Table).

 

Vesting and Payout

 

·        In addition to performance against corporate-wide and business unit goals, which determine the funding pool for the year, individual performance against commitments set at the beginning of the year determine payout amounts.

·        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. At the discretion of appropriate senior management, the Compensation Committee, or the Board, an executive may receive a prorated payout of AIP upon retirement.

·        AIP payouts earned during the performance period are paid on or before March 15 of the year following the end of such period.

 

Change in Retention Plan Value (Column (h))

 

·        For Mrs. Rometty and Dr. Kelly, amounts in the column titled Change in Retention Plan Value represent the annual change in Retention Plan Value from December 31, 2015 to December 31, 2016. Messrs. Schroeter, Jetter and Clementi do not have a benefit under the Retention Plan.

·        See the 2016 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, 2015 to December 31, 2016 for each named executive officer.

·        See the 2016 Pension Benefits Narrative for a description of the applicable defined benefit pension plan. Mr. Clementi does not have a benefit under any IBM defined benefit pension plan.

 

Nonqualified Deferred Compensation Earnings (Column (h))

 

·        IBM does not pay above-market or preferential earnings on nonqualified deferred compensation.

·        See the 2016 Nonqualified Deferred Compensation Narrative for a description of the nonqualified deferred compensation plans in which the named executive officers participate.

 

All Other Compensation (Column (i))

 

Amounts in this column represent the following as applicable:

 

Tax Reimbursements

 

·        Amounts represent payments that IBM has made to the named executive officers to cover taxes incurred by them for certain business-related taxable expenses.

·        These expenses for a named executive officer may include: tax equalization payments related to international assignments, cost of family travel to and attendance at business-related events, business-related local lodging and incidental expenses, and business-related ground transportation expenses (see Ground Transportation below).

 

IBM Contributions to Defined Contribution Plans

 

·        Amounts represent IBM matching and automatic contributions to the individual accounts for each named executive officer.

 

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·        Under IBM’s 401(k) Plus Plan, participants hired or rehired by IBM U.S. before January 1, 2005, including Mrs. Rometty and Dr. Kelly, are eligible to receive matching contributions up to 6% of eligible compensation. Participants hired or rehired by IBM U.S. on or after January 1, 2005, including Messrs. Schroeter, Jetter and Clementi, who complete the plan’s service requirement, are generally eligible for up to 5% matching contributions. A participant’s hire/rehire date is measured by a participant’s most recent U.S. hire date. Mr. Schroeter rejoined IBM U.S. in 2011 after working for IBM Australia from April 1, 2005 to June 30, 2011. Mr. Jetter joined IBM U.S. in 2015 after working for IBM Germany since 1986. Mr. Clementi joined IBM U.S. in 2009 after working for IBM Italy since 1984. In addition, for all eligible participants, IBM makes automatic contributions equal to a certain percentage of eligible compensation, which generally depends on the participant’s pension plan eligibility on December 31, 2007. In 2016, the automatic contribution percentage was 4% for Mrs. Rometty; 2% for Dr. Kelly; and 1% for Messrs. Schroeter, Jetter and Clementi.

·        Under IBM’s Excess 401(k) Plus Plan, IBM makes matching contributions equal to a percentage of the sum of (i) the amount the participant elects to defer under the Excess 401(k) Plus Plan, and (ii) the participant’s eligible compensation after reaching the Internal Revenue Code compensation limits. Participants hired or rehired by IBM U.S. before January 1, 2005, including Mrs. Rometty and Dr. Kelly, are eligible to receive matching contributions up to 6% of eligible compensation. Participants hired or rehired by IBM U.S. on or after January 1, 2005, including Messrs. Schroeter, Jetter and Clementi who complete the plan’s service requirement, are eligible for up to 5% matching contributions. In addition, for all eligible participants, IBM makes automatic contributions equal to a percentage of the sum of (i) the amount the participant elects to defer under the Excess 401(k) Plus Plan, and (ii) the participant’s eligible compensation after reaching the Internal Revenue Code compensation limits. The automatic contribution percentage generally depends on the participant’s pension plan eligibility on December 31, 2007, and in 2016, the automatic contribution percentage was 4% for Mrs. Rometty; 2% for Dr. Kelly; and 1% for Messrs. Schroeter, Jetter and Clementi.

·        For purposes of calculating the matching contribution and the automatic contribution under the 401(k) Plus Plan, the participant’s eligible compensation excludes the amount the participant elects to defer under the Excess 401(k) Plus Plan.

·        See the 2016 Nonqualified Deferred Compensation Narrative for additional details on the nonqualified deferred compensation plans.

 

Life and Travel Accident Insurance Premiums

 

·        Amounts represent 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 executives hired or rehired by IBM U.S. before January 1, 2004, including Mrs. Rometty and Dr. Kelly, is two times salary plus annual incentive program target, with a maximum coverage amount of $2,000,000. Life insurance for executives hired or rehired by IBM U.S. on or after January 1, 2004, including Messrs. Schroeter, Jetter and Clementi, is one times salary plus annual incentive program target, with a maximum coverage of $1,000,000.

·        In addition, IBM provides Travel Accident Insurance for most employees in connection with business travel. Travel Accident Insurance for all eligible employees and executives is up to five times salary plus annual incentive target with a maximum coverage amount of $15,000,000.

 

Perquisites

 

The following describes perquisites (and their aggregate incremental cost calculations) provided to the named executive officers in 2016.

 

Personal Financial Planning

 

In 2016, IBM offered financial planning services with coverage generally up to $15,000 annually for senior U.S. executives, including each named executive officer.

 

Personal Travel on Company Aircraft

 

General Information

 

·        Amounts represent the aggregate incremental cost to IBM for travel not directly related to IBM business.

·        IBM’s security practices provide that all air travel by the Chairman and CEO, including personal travel, be on Company aircraft. The aggregate incremental cost for Mrs. Rometty’s personal travel is included in column (i) of the 2016 Summary Compensation Table. These amounts also include the aggregate incremental cost, if any, of travel by her family members or other guests on both business and non-business occasions.

·        Additionally, personal travel or commutation in 2016 on Company aircraft by named executive officers other than Mrs. Rometty, and the aggregate incremental cost, if any, of travel by the officer’s family or other guests when accompanying the officer on both business and non-business occasions is also included.

·        Also, from time to time, named executive officers who are members of the boards of directors of certain other companies and non-profit organizations travel on Company aircraft to those outside board meetings. These amounts may include travel related to participation on these outside boards.

·        Any aircraft 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, including travel to outside boards, is calculated by multiplying the hourly variable cost rate for the specific aircraft by the number of flight hours used.

 

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·        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 IBM’s 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 the IBM hangar or any other location).

·        The aggregate incremental cost for any charter flights is the full cost to IBM of the charter.

 

Ground Transportation

 

General Information

 

·        IBM’s security practices provide that the Chairman and CEO be driven to and from work by IBM personnel in a car leased by IBM or by an authorized car service.

·        In addition, under IBM’s security practices, the Chairman and CEO may use a Company-leased car with an IBM driver or an authorized car service for non-business occasions. Further, the family of the Chairman and CEO may use a Company-leased car with an IBM driver or an authorized car service on non-business occasions or when accompanying the Chairman and CEO on business occasions.

·        Other named executive officers may use a Company-leased car with an IBM driver or an authorized car service for business-related transportation, travel to outside board meetings, and an annual executive physical under IBM’s corporate wellness program. Family members and other guests may accompany named executive officers other than the Chairman and CEO in a Company-leased car with an IBM driver or an authorized car service on these occasions.

·        Amounts reflect the aggregate incremental cost, if any, for the above-referenced items.

 

Aggregate Incremental Cost Calculation

 

·        The incremental cost for the Company-leased car with an IBM driver or an authorized car service for commutation and non-business events is calculated by multiplying the variable rate by the applicable driving time. The variable rate includes a driver’s salary and overtime payments, plus a cost per mile calculation based on fuel and maintenance expense.

·        The incremental cost for an authorized car service is the full cost to IBM for such service.

 

Personal Security

 

General Information

 

·        Under IBM’s security practices, IBM provides security personnel for the Chairman and CEO on certain non-business occasions and for the family of the Chairman and CEO on certain non-business occasions or when accompanying her 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 any other named executive officers, if applicable.

 

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 full cost to IBM for these items.

 

Annual Executive Physical

 

·        IBM covers the cost of an annual executive physical for the named executive officers under IBM’s corporate wellness program.

·        Amounts represent any payments by IBM for the named executive officers under this program, if applicable.

 

Family Travel and Attendance at Business-Related Events

 

·        Business-related events attended by the named executive officers and their family members may include meetings, dinners and receptions with IBM’s clients, executive management or board members.

·        Amounts represent the aggregate incremental cost, if any, of travel and/or meals and entertainment for the family members of the named executive officers to attend business-related events.

 

International Assignments

 

·        IBM sends employees on international assignments. These assignments provide valuable opportunities to transfer knowledge across borders and develop future leadership.

·        Amounts represent any payments that IBM has made to, or on behalf of, a named executive officer related to an international assignment and may include relocation expenses, such as cost of living adjustments, housing payments, tax preparation services, and/or moving expenses.

 

Other Personal Expenses

 

·        Amounts represent the cost of meals and lodging for the named executive officers who traveled for their annual executive physical under IBM’s corporate wellness program.

·        Amounts also include expenses associated with participation on outside boards other than those disclosed as Personal Travel on Company Aircraft and Ground Transportation.

·        Amounts also include home office equipment, items relating to business events and administrative charges incurred by executives.

 

34



 

2016 Summary Compensation Table

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonqualified

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non- Equity

 

Change in

 

Change in

 

Deferred

 

 

 

 

 

Name and Principal Position

 

 

 

 

 

Stock

 

Option

 

Incentive Plan

 

Retention

 

Pension

 

Compensation

 

All Other

 

 

 

(a)

 

Salary

 

Bonus

 

Awards(1)

 

Awards(2)

 

Compensation

 

Plan Value(3)

 

Value(4)

 

Earnings(5)

 

Compensation(6)(7)

 

Total(8)

 

Year

 

($)

 

($)

 

($)

 

($)

 

($)

 

($)

 

($)

 

($)

 

($)

 

($)

 

(b)

 

(c)

 

(d)

 

(e)

 

(f)

 

(g)

 

(h)

 

(h)

 

(h)

 

(i)

 

(j)

 

V.M. Rometty Chairman, President and CEO

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

$

1,600,000

 

$

0

 

$

12,822,238

 

$

12,094,414

 

$

4,950,000

 

$

87,660

 

$

300,605

 

$

0

 

$

840,782

 

$

32,695,699

 

2015

 

1,550,000

 

0

 

12,905,329

 

0

 

4,500,000

 

0

 

0

 

0

 

866,621

 

19,821,950

 

2014

 

1,500,000

 

0

 

12,460,409

 

0

 

3,600,000

 

295,985

 

1,106,740

 

0

 

381,991

 

19,345,125

 

M.J. Schroeter Senior VP and CFO

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

754,000

 

0

 

4,820,379

 

0

 

1,046,430

 

N/A

 

6,227

 

0

 

173,159

 

6,800,195

 

2015

 

692,500

 

0

 

11,425,266

 

0

 

881,100

 

N/A

 

1,295

 

0

 

112,191

 

13,112,352

 

2014

 

660,000

 

0

 

3,616,006

 

0

 

747,600

 

N/A

 

8,481

 

0

 

80,812

 

5,112,899

 

M. Jetter(9) Senior VP, Global Technology Services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

650,000

 

0

 

4,338,523

 

0

 

901,890

 

N/A

 

520,799

 

0

 

2,100,391

 

8,511,603

 

J.E. Kelly III Senior VP, IBM Cognitive Solutions & IBM Research

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

754,500

 

0

 

5,302,514

 

0

 

927,350

 

0

 

66,423

 

0

 

240,583

 

7,291,370

 

2015

 

675,500

 

0

 

11,887,195

 

0

 

850,500

 

0

 

42,393

 

0

 

184,207

 

13,639,795

 

2014

 

638,000

 

0

 

3,909,248

 

0

 

791,100

 

1,043,296

 

92,989

 

0

 

96,193

 

6,570,826

 

E. Clementi(9) Senior VP, IBM Global Markets