This excerpt taken from the IBM DEF 14A filed Mar 10, 2008.
Full Career Performance: Retention, Pension and Savings
Retention of our key leaders for a full career is an important element of our total compensation strategy. This is accomplished through a combination of retention payments and retirement plans.
Retention Stock-Based Grants & Cash Awards. Periodically, Chairman and CEO Palmisano reviews outstanding stock-based awards for the members of his senior leadership team and other key executives. Depending on individual performance and the competitive environment for senior executive leadership talent, he may recommend that the Compensation Committee approve individual Retention Awards, in the form of restricted stock units or cash, for certain executives. The restricted stock unit grants typically vest at the end of five years and the cash awards have a clawback (i.e., repayment clause) if an executive leaves IBM before a specified date. These awards make it more difficult for other companies to recruit IBMs top talent.
Closed Retention Plan. In 1995, IBM created a new plan to help retain, for their full careers, the caliber of senior leaders needed to turn the Company around, preserve its long-term viability, and position it for growth in the future. To discourage these leaders from joining competitors, benefits would be forfeited if leaders left IBM prior to the end of a full career, typically age 60. The approach worked, as evidenced by the Companys historic turnaround in the late 1990s, and its current position of market leadership. Thirteen of the Companys top 16 executives, including four of the named executive officers, were with IBM and eligible for the Retention Plan when it was introduced and remain with the Company today. Because its original purpose had been met, the plan was closed to new participants in 2004. Future accruals under the plan stopped on December 31, 2007, and the Retention Plan will not be replaced by any other plan.
Pension. Prior to 2008, IBMs senior executives and other IBM employees in the U.S. participated in pension plans. Future accruals under the pension plans stopped on December 31, 2007. The amount of the pension benefit under these plans is based on pay and service and determined by the same formulas for executives and non-executives.
Savings. The money that U.S. executives save through the Savings Plan, as for all U.S. employees, is eligible for a Company match that in 2007 equaled 50% of the first 6% of eligible pay that they save through the plan for those hired before January 1, 2005, and 100% of the first 6% saved for those hired after December 31, 2004. As announced in early 2006, effective January 1, 2008, the provisions of the Savings Plan were changed, and it was renamed the 401(k) Plus Plan, becoming the only retirement program available to IBMs U.S. employees for future accruals.
In the U.S., the Department of Labor and Internal Revenue Service also permit company executives to defer, on a nonqualified basis, receipt of compensation they earn. This also allows IBM to delay paying these obligations and, until they come due and are paid, IBM retains the cash for operating purposes. In simple terms, this deferred compensation is money earned in the past, but not yet paid out. Executives choose investment options for their accounts from the same investment options available to all employees through the 401(k) plan. IBM does not pay guaranteed, above-market or preferential earnings on deferred compensation. The value of these account balances, then, can go up or down depending on market performance. For executives with long and successful careers at a single company, the deferrals can accumulate to sizeable amounts over time.
As shown in the table below, the current value of Chairman and CEO Palmisanos account, made up of money he earned during the past 12 years that the program has been available, is now worth approximately $39 million. During that time, Mr. Palmisano could have chosen not to defer, taken these funds from IBM and put them in other investment vehicles. Had he done so, these numbers would not appear here. The table below shows the deferral elections and accumulated balances (including investment returns) that are owed to the Chairman and CEO from his prior years earned compensation. Before he was named Chairman and CEO in January 2003, Mr. Palmisano had invested approximately $8 million of his compensation in the account. When Mr. Palmisano retires, the value of his deferrals will be paid to him in five equal installments over five years.