DEF 14A 1 a07-6250_1def14a.htm DEF 14A

 

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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International Business Machines Corporation

(Name of Registrant as Specified In Its Charter)

 

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IBM NOTICE OF 2007 ANNUAL MEETING AND PROXY STATEMENT

Dear Stockholders,

You are cordially invited to attend the Annual Meeting of Stockholders on Tuesday, April 24, 2007 at 10 a.m., in the Grand Ballroom of the Knoxville Convention Center, Knoxville, Tennessee.

Dr. Charles M. Vest is not a nominee for election, and his term on the Board will end in April. We are very grateful to him for his many valuable contributions and we will miss his participation.

At this year’s Annual Meeting, you will be asked to approve, among other items, amendments to IBM’s Certificate of Incorporation that will eliminate statutory supermajority voting requirements for certain extraordinary actions. Your affirmative vote on these matters is important, and we appreciate your continued support.

Stockholders of record can vote their shares by using the Internet or the telephone. Instructions for using these convenient services are set forth on the enclosed proxy card. Of course, you also may vote your shares by marking your votes on the enclosed proxy card, signing and dating it, and mailing it in the enclosed envelope. If you will need special assistance at the meeting because of a disability, please contact the Office of the Secretary, Armonk, N.Y. 10504.

Very truly yours,

 

Samuel J. Palmisano

Chairman of the Board

 

Your Vote is Important

PLEASE vOTE BY USING ThE INTERNET,
ThE TELEPhONE, OR BY SIGNING, DATING, AND RETURNING
ThE ENCLOSED PROXY CARD

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ARMONk, NEw YORk 10504
MARCh 12, 2007

NOTICE OF MEETING

The Annual Meeting of Stockholders of International Business Machines Corporation will be held on Tuesday, April 24, 2007, at 10 a.m., in the Grand Ballroom of the Knoxville Convention Center, 701 Henley Street, Knoxville, Tennessee 37902. The items of business are:

1.               Election of directors for a term of one year.

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

(3-6)  Amendments to the Company’s Certificate of Incorporation adding a new Article Twelve to eliminate Statutory Supermajority Voting Requirements for the following extraordinary actions:

3.               Merger or Consolidation.

4.               Disposition of All or Substantially All of the Assets of the Corporation Outside the Ordinary Course of Business.

5.               Plan for the Exchange of Shares of the Corporation.

6.               Authorization of Dissolution of the Corporation.

7.               Such other matters, including five stockholder proposals, as may properly come before the meeting.

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

 

 

Daniel E. O’Donnell

Vice President and Secretary

 

This Proxy Statement and the accompanying form of proxy card are being mailed beginning on or about March 12, 2007, to all stockholders entitled to vote. The IBM 2006 Annual Report, which includes consolidated financial statements, is being mailed with this Proxy Statement.

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TABLE OF CONTENTS

frequently asked questions regarding attendance and voting at the meeting:

 

1. Election of Directors for a Term of One Year

 

 

 

GENERAL INFORMATION:

 

· Board of Directors

 

· Committees of the Board

 

· Certain Transactions and Relationships

 

· Certain Information about Insurance and Indemnification

 

· 2006 Director Compensation

 

· Section 16(a) Beneficial Ownership Reporting Compliance

 

· Ownership of Securities — Management

 

 

 

EXECUTIvE COMPENSATION:

 

2006 Report of the Executive Compensation and Management Resources Committee of the Board of Directors

 

2006 Compensation Discussion and Analysis:

 

· Section 1: An Inside Look at Executive Compensation

 

· Section 2: Additional Information

 

2006 Summary Compensation

 

2006 Grants of Plan-Based Awards

 

2006 Outstanding Equity Awards at Fiscal Year-End

 

2006 Option Exercises and Stock Vested

 

2006 Retention Plan

 

2006 Pension Benefits

 

2006 Nonqualified Deferred Compensation

 

2006 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

 

(3-6) Amendments to the Company’s Certificate of Incorporation Adding a New Article Twelve to Eliminate Statutory Supermajority Voting Requirements for the Following Extraordinary Actions:

 

3.  Merger or Consolidation

 

4.  Disposition of All or Substantially All of the Assets of the Corporation

 

5.  Plan for the Exchange of Shares of the Corporation

 

6.  Authorization of Dissolution of the Corporation

 

7.  Stockholder Proposal on Cumulative Voting

 

8.  Stockholder Proposal on Pension and Retirement Medical

 

9.  Stockholder Proposal on Executive Compensation

 

10. Stockholder Proposal on Offshoring

 

11. Stockholder Proposal on Majority Voting for Directors

 

 

 

FREqUENTLY ASkED qUESTIONS REGARDING OThER MATTERS

 

APPENDIX A. DIRECTOR INDEPENDENCE STANDARDS

 

APPENDIX B. PROPOSED ARTICLE TwELvE TO ThE COMPANY’S CERTIFICATE OF INCORPORATION

 

 

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FREqUENTLY ASkED qUESTIONS REGARDING ATTENDANCE AND vOTING AT ThE MEETING

Q. What is a “stockholder of record”?

A. A stockholder of record or registered stockholder (“record owner”) is a stockholder whose ownership of IBM stock is reflected directly on the books and records of our transfer agent, Computershare Trust Company, N.A. If you hold IBM stock through a bank, broker or other intermediary, you are not a stockholder of record. Instead, you hold our stock in “street name,” and the “record owner” of your shares is your bank, broker or other intermediary. If you are not a registered stockholder, please understand that the Company does not know that you are a stockholder, or how many shares you own.

Q. I want to attend the Annual Meeting.

What procedures must I follow?

A. Admission to the Annual Meeting will be on a first-come, first-served basis, and an admission ticket and picture identification will be required to enter the meeting. Any individual arriving without an admission ticket will not be admitted to the meeting unless it can be verified that the individual is an IBM stockholder as of the record date for the meeting.

For stockholders of record: An admission ticket is attached to the proxy card sent with this Proxy Statement.

For holders in street name: Stockholders holding IBM stock in bank or brokerage accounts can obtain an admission ticket in advance by sending a written request, along with proof of stock ownership (such as a brokerage statement) to our transfer agent, Computershare Trust Company, N.A., P.O. Box 43072, Providence, R.I. 02940. If you hold your shares in street name and you wish to vote those shares at the meeting, you must also request a “legal proxy” directly from your bank or broker well in advance of the meeting and bring it to the meeting. Contact your bank or broker for specific information on how to obtain a legal proxy in order to attend and vote your shares at the meeting.

Q. What is the “record date” for the Annual Meeting?

A. February 23, 2007.

Q. Are there specific restrictions on attending the Annual Meeting, and what I can bring with me into the meeting?

A. This is a meeting for stockholders, and security at the meeting is very important. You will be asked to walk through an electronic screening device before entering the meeting hall. In addition, cameras, cell phones, recording equipment and other electronic devices will not be permitted to be brought into the meeting.

Q. Which IBM shares will be entitled to vote at the Annual Meeting?

A. IBM’s common stock ($.20 par value capital stock) is the only class of security entitled to vote at the Annual Meeting. Each stockholder of record and each stockholder who holds stock in street name at the close of business as of the record date is entitled to one vote for each share held at the meeting, or any adjournment or postponement.

q. which IBM shares are included in the proxy card I received?

A. For stockholders of record: The proxy card you received covers the number of shares to be voted in your account as of the record date, including any shares held for participants in the IBM Investor Services Program and Employees Stock Purchase Plans.

For stockholders who are participants in the IBM Stock Fund investment alternative under the IBM Savings Plan: The card serves as a voting instruction to the Trustee of the plan for IBM shares held in the IBM Stock Fund as of the record date.

For holders in street name: You will receive a voting instruction form directly from your bank or broker containing instructions on how you can direct your record holder to vote your shares. Contact your bank or broker if you have any questions regarding your IBM stockholdings as of the record date.

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q. May I vote my shares in person at the Annual Meeting?

A. For stockholders of record: Yes. However, we encourage you to vote by proxy card, the Internet or by telephone even if you plan to attend the meeting. If you wish to give a proxy to someone other than the individuals named as proxies on the enclosed proxy card, you may cross out the names appearing on the enclosed proxy card, insert the name of some other person, sign the card, and give the proxy card to that person for use at the meeting.

For holders in street name: Yes, but in order to do so you will first have to ask your broker or bank to furnish you with a legal proxy. You will need to bring the legal proxy with you to the meeting, and hand it in with a signed ballot that you can request at the meeting. You will not be able to vote your shares at the meeting without a legal proxy and a signed ballot.

q. Can I vote my shares without attending the Annual Meeting?

A. Yes. Whether or not you attend the meeting, we encourage you to vote your shares promptly.

For stockholders of record: Your shares cannot be voted unless a signed proxy card is returned, shares are voted using the Internet or the telephone, or other specific arrangements are made to have your shares represented at the meeting. You are encouraged to specify your choices by marking the appropriate boxes on the enclosed proxy card. Shares will be voted following your written instructions. However, it is not necessary to mark any boxes if you wish to vote in accordance with the Board of Directors’ recommendations; in that case, merely sign, date, and return the proxy card in the enclosed envelope.

Instead of returning a signed proxy card, you can also vote your shares over the Internet, or by calling a designated telephone number. These Internet and telephone voting procedures are designed to authenticate your identity in order to allow you to provide your voting instructions, and to confirm that your instructions have been recorded properly. The procedures which have been put in place are consistent with the requirements of applicable law. Specific instructions for stockholders of record who wish to use the Internet or telephone voting procedures are set forth on the enclosed proxy card.

For participants in the IBM Stock Fund Investment alternative under the IBM Savings Plan: In order to have the Trustee vote your shares as you direct, you must timely furnish your voting instructions over the Internet or by telephone by April 18, 2007, or otherwise ensure that your card is signed, returned, and received by April 18, 2007. If instructions are not received over the Internet or by telephone by April 18, 2007, or if the signed card is not returned and received by such date, the IBM shares in the IBM Stock Fund under the Savings Plan will be voted by the Trustee in proportion to the shares for which the Trustee timely receives voting instructions, provided the Trustee determines such vote is consistent with its fiduciary duties under the Employee Retirement Income Security Act of 1974, as amended.

For holders in street name: You must timely deliver your voting instructions to your respective bank or broker, following the specific instructions that have been provided to you by your bank or broker.

q. May I change or revoke my proxy?

A. For stockholders of record: Yes. A proxy may be revoked at any time prior to the voting at the meeting by submitting a later dated proxy (including a proxy via the Internet or by telephone) or by giving timely written notice of revocation to the Secretary of the Company.

For holders in street name: Yes. You must follow the specific voting directions provided to you by your bank or broker to change or revoke any instructions you have already provided to your bank or broker.

q. how can I contact IBM’s transfer agent?

A. You may write or call Computershare Trust Company, N.A., P.O. Box 43072, Providence, RI 02940 Telephone: 781-575-2727.

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1. ELECTION OF DIRECTORS FOR A TERM OF ONE YEAR

The Board proposes the election of the following directors of the Company for a term of one year. Below is information about each nominee, including biographical data for at least the last five years. If one or more of these nominees become unavailable to accept nomination or election as a director, the individuals named as proxies on the enclosed proxy card will vote the shares that they represent for the election of such other persons as the Board may recommend, unless the Board reduces the number of directors.

Cathleen Black, 62, is president of Hearst Magazines, a division of The Hearst Corporation, a diversified communications company. She is chair of IBM’s Directors and Corporate Governance Committee and a member of IBM’s Executive Committee. Prior to joining Hearst Magazines, she was president and chief executive officer of the Newspaper Association of America from 1991 to 1996, president, then publisher, of USA TODAY from 1983 to 1991, and also executive vice president/marketing for Gannett Company, Inc. (USA TODAY parent company) from 1985 to 1991. She is a director of The Hearst Corporation, The Coca-Cola Company, the Advertising Council, a member of the Council on Foreign Relations and a trustee of the University of Notre Dame. Ms. Black became an IBM director in 1995.

Kenneth I. Chenault, 55, is chairman and chief executive officer of American Express Company, a financial services company. Mr. Chenault joined American Express in 1981 and was named president of the U.S. division of American Express Travel Related Services Company, Inc., in 1993, vice chairman of American Express Company in 1995, president and chief operating officer in 1997 and chairman and chief executive officer in 2001. Mr. Chenault became an IBM director in 1998.

Juergen Dormann, 67, is chairman of the board of ABB Ltd, a manufacturer of power and automation technologies. He is a member of IBM’s Executive Compensation and Management Resources Committee. Mr. Dormann joined Hoechst AG in 1963 and was chairman of the management board from 1994 until 1999. In 1999 Mr. Dormann was elected chairman of the board of management of Aventis S.A. He was elected chairman of the board of ABB Ltd in 2001 and was president and chief executive officer of ABB from 2002 through 2004. Mr. Dormann is vice chairman of the board of Sanofi-Aventis, vice chairman of the board of Adecco S.A. and a director of BG Group. Mr. Dormann was an IBM director from 1996 to 2003, and he became an IBM director again in 2005.

Michael L. Eskew, 57, is chairman and chief executive officer of United Parcel Service, Inc., a provider of specialized transportation and logistics services. He is a member of IBM’s Audit Committee. Mr. Eskew joined United Parcel Service in 1972. He was named corporate vice president for industrial engineering in 1994 and group vice president for engineering in 1996. Mr. Eskew was named executive vice president in 1999, vice chairman in 2000 and to his current position in 2002. Mr. Eskew is a director of 3M Company. Mr. Eskew became an IBM director in 2005.

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Shirley Ann Jackson, 60, is president of Rensselaer Polytechnic Institute. She is a member of IBM’s Directors and Corporate Governance Committee. Dr. Jackson was a theoretical physicist at the former AT&T Bell Laboratories from 1976 to 1991, professor of theoretical physics at Rutgers University from 1991 to 1995 and chairman of the U.S. Nuclear Regulatory Commission from 1995 until she assumed her current position in 1999. Dr. Jackson is a director of Federal Express Corporation, Marathon Oil Corp., Medtronic, Inc., Public Service Enterprise Group Incorporated and the NYSE Group, Inc. She is a member of the National Academy of Engineering and a fellow of the American Academy of Arts and Sciences. Dr. Jackson is past president of the American Association for the Advancement of Science and a member of the Council on Foreign Relations. Dr. Jackson became an IBM director in 2005.

Minoru Makihara, 77, is senior corporate advisor and former chairman of Mitsubishi Corporation. He is a member of IBM’s Directors and Corporate Governance Committee. Mr. Makihara joined Mitsubishi in 1956 and was elected president of Mitsubishi International Corporation in 1987, chairman of Mitsubishi International Corporation in 1990, president of Mitsubishi Corporation in 1992 and chairman in 1998. Mr. Makihara retired as chairman of Mitsubishi Corporation and became senior corporate advisor in 2004. Mr. Makihara is a director of Shinsei Bank, Limited, and Millea Holdings, Inc. He is also a member of the international advisory board of The Coca-Cola Company and the international council of J.P. Morgan Chase & Co., Inc. Mr. Makihara was an IBM director from 1997 to 2003, and he became an IBM director again in late 2004.

Lucio A. Noto, 68, is a managing partner of Midstream Partners LLC, an investment company specializing in energy and transportation projects. He is chairman of IBM’s Audit Committee and a member of IBM’s Executive Committee. Mr. Noto was chairman and chief executive officer of Mobil Corporation from 1994 until its merger with Exxon in 1999 at which time he was named vice chairman of Exxon Mobil Corporation. He held this position until his retirement in 2001. Mr. Noto is a director of Altria Group, Inc., United Auto Group, Inc., Stem Cell Innovations and Shinsei Bank, Limited. He is also a member of the International Advisory Council of Temasek (Singapore) Inc. Mr. Noto became an IBM director in 1995.

James W. Owens, 61, is chairman of the board and chief executive officer of Caterpillar Inc., a manufacturer of construction and mining equipment, diesel and natural gas engines and industrial gas turbines. He is a member of IBM’s Audit Committee. Mr. Owens joined Caterpillar Inc. in 1972 as a corporate economist and subsequently held various management positions, including chief financial officer. He was named group president in 1995, vice chairman in 2003 and to his current position in 2004. He is a director of Alcoa Inc. Mr. Owens serves on the boards of the Institute of International Economics in Washington, D.C. and the Council on Foreign Relations, and he is also a member of the Business Roundtable. Mr. Owens became an IBM director in 2006.

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Samuel J. Palmisano, 55, is chairman of the Board, president and chief executive officer of IBM and chairman of IBM’s Executive Committee. Mr. Palmisano joined IBM in 1973. He was elected senior vice president and group executive of the Personal Systems Group in 1997, senior vice president and group executive of IBM Global Services in 1998, senior vice president and group executive of Enterprise Systems in 1999, president and chief operating officer in 2000, chief executive officer in 2002 and chairman of the Board in 2003. Mr. Palmisano is a director of Exxon Mobil Corporation. Mr. Palmisano became an IBM director in 2000.

Joan E. Spero, 62, is president of the Doris Duke Charitable Foundation. She is a member of IBM’s Executive Compensation and Management Resources Committee. Ms. Spero served as U.S. Ambassador to the United Nations for Economic and Social Affairs from 1980 to 1981. From 1981 to 1993 she held several positions with American Express Company, the last being executive vice president, corporate affairs and communications. From 1993 to 1996 Ms. Spero served as U.S. Undersecretary of State for Economic, Business and Agricultural Affairs, and she assumed her current position with the Doris Duke Charitable Foundation in 1997. She is a director of First Data Corporation and the Council on Foreign Relations and a trustee of Columbia University and the Wisconsin Alumni Research Foundation. Ms. Spero became an IBM director in 2004.

Sidney Taurel, 58, is chairman of the board and chief executive officer of Eli Lilly and Company, a pharmaceutical company. He is chairman of IBM’s Executive Compensation and Management Resources Committee and a member of IBM’s Executive Committee. Mr. Taurel joined Eli Lilly in 1971 and has 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, president and chief operating officer in 1996, chief executive officer in 1998, and chairman of the board in 1999. Mr. Taurel is a director of The McGraw-Hill Companies, Inc., a member of the President’s Export Council and the Board of Overseers of the Columbia Business School and a trustee of the Indianapolis Museum of Art. Mr. Taurel became an IBM director in 2001.

Lorenzo H. Zambrano, 62, is chairman and chief executive officer of CEMEX, S.A.B. de C.V., a producer and marketer of cement and ready-mix concrete products. He is a member of IBM’s Directors and Corporate Governance Committee. Mr. Zambrano joined CEMEX in 1968. He was named chief executive officer in 1985 and has also served as chairman of the board since 1995. He is director of Vitro, S.A. de C.V., a member of the Citigroup International Advisory Board and the International Advisory Board of the Allianz Companies. He is also chairman of the board of the Tecnologico de Monterrey. Mr. Zambrano became an IBM director in 2003.

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GENERAL INFORMATION

Board of Directors

IBM’s Board of Directors is responsible for supervision of the overall affairs of the Company. The Board held 10 meetings during 2006. To assist it in carrying out its duties, the Board has delegated certain authority to several committees. Overall attendance at Board and committee meetings was 91%. Attendance was at least 75% for each director. Directors are expected to attend the Annual Meeting of Stockholders, and all directors attended the 2006 Annual Meeting except Mr. Dormann. Following the Annual Meeting in 2007, the Board will consist of 12 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.

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 independent directors, the importance of equity compensation to align the interests of directors and stockholders, and regularly scheduled executive sessions, including sessions of non-management directors without management. An executive session with independent directors is scheduled for at least once a year, and the non-management directors met in executive session three times in 2006. The Chair of the Board committee responsible for the principal subject being discussed presides at executive sessions of the non-management directors.

Stockholders and other interested parties who wish to communicate with the non-management directors of the Company should send their correspondence to: IBM Non-Management Directors, c/o Chair, IBM Directors and Corporate Governance Committee, International Business Machines Corporation, Mail Drop 390, New Orchard Road, Armonk, NY 10504, or nonmanagementdirectors@us.ibm.com.

Our Corporate Governance Guidelines reflect the Company’s principles on corporate governance matters, including our policy that any director who receives more “withheld” votes than “for” votes in an election shall tender his or her resignation. These guidelines are available at http:// www.ibm.com/investor/corpgovernance/cggl.phtml and are available in print to any stockholder who requests them.

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 and used by the Directors and Corporate Governance Committee and the Board in their assessment of the independence of directors is set forth in Appendix A to this Proxy Statement. Applying those standards, the Committee and the Board have determined that each of the following non-management directors is independent: C. Black, J. Dormann, M.L. Eskew, S.A. Jackson, M. Makihara, L.A. Noto, J.W. Owens, J.E. Spero, S. Taurel, C.M. Vest and L.H. Zambrano. The Committee and the Board have determined that Mr. K.I. Chenault does not qualify as an independent director in view of the commercial relationships between IBM and American Express Company. As a result, Mr. Chenault does not participate on any committee of the Board or in executive sessions regarding compensation for the Company’s CEO. Otherwise, Mr. Chenault continues to participate fully in the Board’s activities and to provide valuable expertise and advice. Mr. Eskew’s son is employed by the Company in a non-executive officer position. He was hired over a year before Mr. Eskew joined the Company’s Board, and his compensation is consistent with the Company’s policies that apply to all employees. Based on the foregoing, the Board has determined that this relationship does not preclude a finding of independence for Mr. Eskew.

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Committees of the Board

The Audit Committee, the Directors and Corporate Governance Committee, the Executive Compensation and Management Resources Committee and the Executive Committee are the standing committees of the Board of Directors.

 

 

 

 

 

 

EXECUTIVE

 

 

 

 

 

 

 

DIRECTORS AND

 

COMPENSATION

 

 

 

 

 

 

 

CORPORATE

 

AND MANAGEMENT

 

 

 

NAME

 

AUDIT

 

GOVERNANCE

 

RESOURCES

 

EXECUTIVE

 

Cathleen Black

 

 

 

Chair

 

 

 

X

 

Juergen Dormann

 

 

 

 

 

X

 

 

 

Michael L. Eskew

 

X

 

 

 

 

 

 

 

Shirley Ann Jackson

 

 

 

X

 

 

 

 

 

Minoru Makihara

 

 

 

X

 

 

 

 

 

Lucio A. Noto

 

Chair

 

 

 

 

 

X

 

James W. Owens

 

X

 

 

 

 

 

 

 

Samuel J. Palmisano

 

 

 

 

 

 

 

Chair

 

Joan E. Spero

 

 

 

 

 

X

 

 

 

Sidney Taurel

 

 

 

 

 

Chair

 

X

 

Charles M. Vest*

 

X

 

 

 

 

 

 

 

Lorenzo H. Zambrano

 

 

 

X

 

 

 

 

 

 


* As noted above, Dr. Vest is not a nominee for election, and his term on the Board will end in April.

As explained above, Mr. Chenault does not qualify as an independent director; therefore, he does not participate on any committee of the Board.

Audit Committee

The Audit Committee is responsible for reviewing reports of the Company’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 approves all related fees and compensation and reviews their selection with the Board. The Committee also reviews the procedures of the independent registered public accounting firm for ensuring its independence with respect to the services performed for the Company.

Members of the Committee are non-management directors who, in the opinion of the Board, satisfy the independence criteria established by the Board and the standards of the Securities and Exchange Commission (SEC). The Board has determined that Mr. Noto qualifies as an Audit Committee Financial Expert as defined by the rules of the SEC. The Committee held five meetings in 2006. The IBM Board of Directors has adopted a written charter for the Committee, which is available at http://www.ibm.com/investor/corpgovernance/cgbc.phtml/. The Business Conduct Guidelines (BCGs) are IBM’s code of ethics for directors, executive officers and employees. Any amendment to the BCGs that applies to our directors or executive officers may be made only by the IBM Board or a Board committee and will be disclosed on IBM’s website. The BCGs are available at http://www.ibm.com/investor/corpgovernance/cgbcg.phtml/. The charter and the BCGs are also available in print to any stockholder who requests them.

Directors and Corporate Governance Committee

The Directors and Corporate Governance Committee is devoted primarily to the continuing review and articulation of the governance structure of the Board of Directors.

The Committee is responsible for recommending qualified candidates to the Board for election as directors of the Company, including the slate of directors that the Board proposes for election by stockholders at the Annual Meeting. The Committee recommends candidates based on their business or professional experience, the diversity of their background, and their talents and perspectives. The Committee identifies candidates through a variety of means, including

10




information the Committee requests from time to time from the Secretary of the Company, recommendations from members of the Committee and the Board, and suggestions from Company management, including the Chairman and CEO. The Committee also considers candidates recommended by third parties. Any formal invitation to a director candidate is authorized by the full Board. Stockholders wishing to recommend director candidates for consideration by the Committee may do so by writing to the Secretary of the Company, giving the recommended 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. The Committee also makes recommendations to the Board on compensation for non-management directors. The Committee currently retains Towers Perrin, a global consultancy specializing in compensation, benefits and other human resources issues, to assess trends and developments in director compensation practices and to compare the Company’s practices against them. The Committee uses the analysis prepared by the consultant as part of its periodic review of the Company’s director compensation practices.

The Committee is responsible for reviewing and considering the Company’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 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 2006. The IBM Board of Directors has adopted a written charter for the Committee, which is available at http://www.ibm.com/investor/corpgovernance/cgbc.phtml/. The charter is also available in print to any stockholder who requests it.

Executive Compensation and Management Resources Committee

The Executive Compensation and Management Resources Committee has responsibility for defining and articulating the Company’s overall executive compensation philosophy, and administering and approving all elements of compensation for elected corporate officers.

The Committee approves, by direct action or through delegation, participation in and all awards, grants, and related actions under the Company’s various equity plans, reviews changes in the Company’s pension plans primarily affecting corporate officers, and manages the operation and administration of the IBM Executive Deferred Compensation Plan (EDCP) and the IBM Supplemental Executive Retention Plan. The Committee has the direct responsibility to review and approve the corporate goals and objectives relevant to the Chairman and CEO’s compensation, evaluate his 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 the Company’s management resources programs and for recommending qualified candidates to the Board for election as officers. The Committee reviews the compensation structure for the Company’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 pursuant to these delegations are reviewed periodically with the Committee.

The IBM Senior Vice President of Human Resources (SVP HR) works directly with the chair of the Committee to provide a decision-making framework for use in making a recommendation for the Chairman and CEO’s total compensation. In addition, IBM’s Chairman and CEO and the SVP HR review the self-assessments of the Executive Vice President and Senior Vice Presidents and evaluate the information, along with benchmark compensation information for each leadership role. Following this in-depth review and in consultation with the SVP HR, the Chairman and CEO makes compensation recommendations to the Committee based on his evaluation of each senior manager’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 currently retains Towers Perrin, a global consultancy specializing in compensation, benefits and other human resources issues, as

11




its compensation consultant, approving all fees and scope of work; a single senior Managing Director of Towers Perrin has the responsibility for working with the Committee and does not perform any work for management.

The Committee reports to stockholders as required by the SEC (see 2006 Report of the Executive Compensation and Management Resources Committee of the Board of Directors below). Members of the Committee are non-management directors who, in the opinion of the Board, satisfy the independence criteria established by the Board. Committee members are not eligible to participate in any of the plans or programs that the Committee administers. The Committee held five meetings in 2006. The IBM Board of Directors has adopted a written charter for the Committee, which is available at http://www.ibm.com/investor/corpgovernance/cgbc.phtml/. The charter is also available in print to any stockholder who requests it.

Compensation Committee Interlocks and Insider Participation

No member of the Executive Compensation and Management Resources Committee had a relationship that requires disclosure as a Compensation Committee interlock.

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 2006.

Certain Transactions and Relationships

Under the Company’s related person transaction 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. If the determination is made that a related person has a material interest in any Company transaction, then the Company’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, the Company is of the view that the following transactions with related persons are not significant to investors because they take place under the Company’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 the Company where the compensation and other terms of employment are determined on a basis consistent with the Company’s human resources policies; and any grants or contributions made by the Company under one of its grant programs and in accordance with the Company’s corporate contributions guidelines.

From time to time, the Company may have employees who are related to our executive officers or directors. As noted under the discussion above on “General Information—Board of Directors,” Mr. Eskew’s son is employed by the Company. In addition, each of Messrs. Daniels (Senior Vice President, Global Technology Services), Loughridge (Senior Vice President and Chief Financial Officer), and Zeitler (Senior Vice President and Group Executive, Systems & Technology Group) has an adult child who is employed by the Company in a non-executive position, and each of Messrs. Donofrio (Executive Vice President, Innovation and Technology) and Shaughnessy (Vice President and Controller) has a sibling who is employed by the Company in a non-executive position. Further, the wife of Mr. Shaughnessy, the brother-in-law of Mr. Loughridge and a sibling of Ms. Sanford (Senior Vice President, Enterprise On Demand Transformation) are executives of the Company.

Certain Information about Insurance and Indemnification

The Company has renewed its directors and officers indemnification insurance coverage. This insurance covers directors and officers individually where exposures exist other than those for which the Company is able to provide direct or indirect indemnification. These policies run from June 30, 2006, through June 30, 2007, at a total cost of $11,282,373. The primary carrier is XL Specialty Insurance Company.

12




2006 Director Compensation Narrative

Annual Retainer and IBM Deferred Compensation and Equity Award Plan (the DCEAP): In 2006 non-employee directors received an annual retainer of $100,000. Each committee chair received an additional annual retainer of $5,000. Under the DCEAP, 60% of the total annual retainer is required to be deferred and paid in Promised Fee Shares (PFS). Each PFS is equal in value to one share of the Company’s common stock. When a cash dividend is paid on the Company’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 to be paid with interest at a rate equal to the rate on 26-week U.S. Treasury bills updated each January and July; and/or (c) receipt of cash payments on a quarterly basis during service as a Board member. The Company does not pay above-market or preferential earnings on compensation deferred by directors. IBM had a retirement plan for directors which was eliminated effective January 1996, and the Company credited the PFS accounts with the benefits accrued under that retirement plan. Upon a director’s retirement or other completion of service as a director, (i) all amounts deferred into PFS are payable in either cash and/or shares of the Company’s common stock, (ii) amounts deferred into the interest-bearing cash account are payable in cash and (iii) amounts credited to the PFS account in connection with the elimination of the retirement plan are payable solely in cash. Upon completion of service as a director, the payment of PFS is valued based on the average of the high and low sales prices of IBM stock on the New York Stock Exchange on the first day after the date on which the director ceases to be a member of the Board.

IBM Non-Employee Directors Stock Option Plan (the DSOP): Under the DSOP, in 2006 non-employee directors who had been elected or reelected as a member of the Board as of the adjournment of the Annual Meeting of Stockholders received on the first day of the month following such meeting an annual grant of options to purchase 4,000 shares of IBM common stock. The exercise price of the options was the average of the high and low sales prices of IBM stock on the New York Stock Exchange on the date of grant. Each option has a term of ten years and becomes exercisable in four equal installments commencing on the first anniversary of the date of grant and continuing for the three successive anniversaries thereafter. If a non-employee director retires (as defined in the DSOP) or dies, all options granted to that director become immediately exercisable.

Changes to Director Compensation effective January 2007: At the recommendation of the Directors and Corporate Governance Committee, the Board of Directors approved two changes to its director compensation practices effective January 1, 2007. These changes terminated the DSOP under which directors received an annual grant of options. In connection with the termination of the DSOP, the annual retainer paid to non-employee directors was increased from $100,000 to $200,000, with each committee chair continuing to receive an additional annual retainer of $5,000. Directors continue to defer their annual retainer under the DCEAP as described above. For 2006 all directors made elections under the DCEAP to defer 100% of their annual retainer in PFS. Under the IBM Board Corporate Governance Guidelines, within five years of initial election to the Board non-employee directors are expected to have stock-based holdings in IBM equal in value to five times the annual retainer.

13




2006 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.

Option Awards (column (c)): Amounts shown in this column reflect the dollar amount recognized for financial statement reporting purposes in 2006 in accordance with FAS 123R for equity award expense (excluding any risk of forfeiture, per SEC regulations).

All Other Compensation (column (d)): Amounts in this column represent the following:

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

·                  Group Life Insurance premiums paid by the Company on behalf of the director.

·                  For directors who retired from the Board in 2006, this column also includes additional amounts as explained in footnote (2) below.

 

 

FEES EARNED OR

 

OPTION

 

ALL OTHER

 

 

 

NAME

 

PAID IN CASH ($)

 

AWARDS ($)(1)

 

COMPENSATION ($)(2)

 

TOTAL ($)

 

(a)

 

(b)

 

(c)

 

(d)

 

(e)

 

C. Black

 

$

105,000

 

$

99,360

 

$

16,177

 

$

220,537

 

K.I. Chenault

 

100,000

 

99,360

 

8,146

 

207,506

 

J. Dormann

 

100,000

 

99,360

 

2,109

 

201,469

 

M.L. Eskew

 

100,000

 

99,360

 

2,320

 

201,680

 

S.A. Jackson

 

100,000

 

99,360

 

1,143

 

200,503

 

C.F. Knight

 

32,779

(3)

0

(4)

1,589,619

 

1,622,398

 

M. Makihara

 

100,000

 

99,360

 

2,564

 

201,924

 

L.A. Noto

 

105,000

 

99,360

 

17,813

 

222,173

 

J.W. Owens

 

83,334

(5)

99,360

 

497

 

183,191

 

J.E. Spero

 

100,000

 

99,360

 

3,333

 

202,693

 

S. Taurel

 

104,167

(6)

99,360

 

6,574

 

210,101

 

C.M. Vest

 

100,000

 

99,360

 

13,382

 

212,742

 

L.H. Zambrano

 

100,000

 

99,360

 

3,865

 

203,225

 

 


(1)          See Note U (Stock-Based Compensation) in the registrant’s Annual Report for assumptions used in determining the fair value of stock option awards granted. The grant date fair value of each option award is the same amount set forth in column (c) because directors’ stock options fully vest when they leave the Board. As a result, the company is required to recognize the full expense of these stock option awards in the year of the grant.

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Aggregate Number of Option Awards Outstanding (Both Exercisable and Unexercisable) for Each Director at Fiscal Year-End

C. Black

 

40,000

 

K.I. Chenault

 

32,000

 

J. Dormann

 

32,000

 

M.L. Eskew

 

8,000

 

S.A. Jackson

 

4,000

 

C.F. Knight

 

28,000

 

M. Makihara

 

28,000

 

L.A. Noto

 

37,000

 

J.W. Owens

 

4,000

 

J.E. Spero

 

12,000

 

S. Taurel

 

24,000

 

C.M. Vest

 

40,000

 

L.H. Zambrano

 

12,000

 

 

(2)          Amounts in this column include the following: for Ms. Black: $16,083 of dividend equivalent payments on PFS; for Mr. Knight: $1,589,582 consisting of earned compensation and dividend reinvestments which had been deferred under the DCEAP since his election to the Board and paid to him after his term on the Board ended on April 25, 2006; for Mr. Noto: $17,719 of dividend equivalent payments on PFS; for Dr. Vest: $13,288 of dividend equivalent payments on PFS.

(3)          Mr. Knight served as a committee chair from January 1, 2006 to March 1, 2006. When his term on the Board ended in April 2006, he was paid the amount in column (b) as well as the amount in footnote (2) above.

(4)          Mr. Knight did not receive a stock option award in 2006 because he was not a member of the Board as of the adjournment of the 2006 Annual Meeting of Stockholders (see description of DSOP above).

(5)          Mr. Owens was elected to the Board effective March 1, 2006.

(6)          Mr. Taurel became chair of the Executive Compensation and Management Resources Committee effective March 1, 2006 at which time he began to receive the additional annual retainer paid to committee chairs (see description of annual retainer above).

Section 16(a) Beneficial Ownership Reporting Compliance

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

15




OWNERSHIP OF SECURITIES

Common Stock and Total Stock-Based Holdings of Management

The following table sets forth the beneficial ownership of shares of the Company’s common stock as of December 31, 2006 by IBM’s current directors and nominees, the executive officers named in the Summary Compensation Table, and such directors and all of the Company’s executive officers as of December 31, 2006 as a group. Also shown are shares over which the named person could have acquired voting power or investment power within 60 days. Voting power includes the power to direct the voting of the shares held, and investment power includes the power to direct the disposition of the shares held.

 

 

AMOUNT AND NATURE

 

 

 

TOTAL STOCK-BASED

 

ACQUIRABLE

 

NAME

 

OF BENEFICIAL OWNERSHIP(1)

 

STOCK/UNITS(2)

 

HOLDINGS(3)

 

WITHIN 60 DAYS(4)

 

C. Black

 

4,324

(5)

17,252

 

17,627

 

30,000

 

K.I. Chenault

 

1,000

(6)

7,992

 

7,992

 

22,000

 

N.M. Donofrio

 

151,702

(7)

178,463

 

188,627

 

423,153

 

J. Dormann

 

5,422

 

7,695

 

7,695

 

25,000

 

D.T. Elix

 

99,284

 

129,027

 

134,427

 

407,410

 

M.L. Eskew

 

0

 

2,438

 

2,438

 

1,000

 

S.A. Jackson

 

0

 

1,518

 

1,518

 

0

 

M. Loughridge

 

6,265

 

83,038

 

88,936

 

170,288

 

M. Makihara

 

1,000

 

3,629

 

3,629

 

21,000

 

S.A. Mills

 

96,381

(8)

150,595

 

176,795

 

310,496

 

L.A. Noto

 

17,692

(9)

31,743

 

32,273

 

27,000

 

J.W. Owens

 

1,000

(6)

1,989

 

1,989

 

0

 

S.J. Palmisano

 

125,975

(10)

352,089

 

404,669

 

1,341,500

 

J.E. Spero

 

1,000

 

4,229

 

4,229

 

3,000

 

S. Taurel

 

5,265

 

11,061

 

11,061

 

14,000

 

C.M. Vest

 

400

 

10,617

 

11,484

 

30,000

 

L.H. Zambrano

 

4,000

 

7,645

 

7,645

 

3,000

 

Directors and executive officers as a group

 

797,943

(11)

1,816,613

*

1,998,925

 

5,653,317

*

 


(1)          This column shows 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.

(2)          For executive officers, this column includes the shares shown in the “Amount and Nature of Beneficial Ownership” column, as well as restricted stock units. For non-employee directors, this column includes the shares shown in the “Amount and Nature of Beneficial Ownership” column, as well as shares earned and accrued under the Directors Deferred Compensation and Equity Award Plan.

16




(3)          For executive officers, this column includes the shares shown in the “Stock/Units” column, as well as other IBM stock-based interests, including, as applicable, employee contributions into the IBM Stock Fund under the IBM Executive Deferred Compensation Plan (EDCP) and all Company matching contributions under the EDCP. For non-employee directors, this column includes the shares shown in the “Stock/Units” column, as well as other IBM stock-based interests, including, as applicable, the Promised Fee Shares payable in cash that were credited to the non-employee directors in 1996 in connection with the elimination of the retirement plan for such directors (see 2006 Director Compensation Narrative above for additional information).

(4)          Shares that can be purchased under an IBM stock option plan.

(5)          Includes 324 shares in which voting and investment power are shared.

(6)          Shared voting and investment power for all shares.

(7)          Includes 151,432 shares in which voting and investment power are shared.

(8)          Includes 90,151 shares in which voting and investment power are shared.

(9)          Includes 1,271 shares in which voting and investment power are shared.

(10)    Includes 94,189 shares in which voting and investment power are shared.

(11) Includes 405,966 shares in which voting and investment power are shared.

*                 The total of these two columns represents less than 1% of the outstanding shares. No individual’s beneficial holdings totaled more than 1/5 of 1% of the outstanding shares. These holdings do not include 1,633,774 shares held by the IBM Personal Pension Plan Trust Fund, over which the members of the Retirement Plans Committee, a management committee presently consisting of certain executive officers of the Company, have shared voting power, as well as the right to acquire shared investment power by withdrawing authority now delegated to various investment managers. 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.

17




EXECUTIVE COMPENSATION

2006 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 the Company’s executive compensation programs and policies written from the perspective of how we and management view and use such policies and programs. 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.

Sidney Taurel (chair)
Juergen Dormann
Joan E. Spero

2006 COMPENSATION DISCUSSION AND ANALYSIS

Section 1: An Inside Look at Executive Compensation

As successive waves of governance reform have swept the corporate world in recent years, few issues have held shareholders’ attention more than that of executive compensation. With the size and structure of executive pay receiving so much attention, shareholders of all companies are naturally left wondering if they are getting their money’s worth.

This concern has resonated with organizations like the Business Roundtable, which has responded with guidelines for industry, and the U.S. Securities and Exchange Commission (SEC), which has created new reporting requirements.

“Executive compensation should directly link the interests of senior management, both individually and as a team, to the long-term interests of shareholders. It should include significant performance-based criteria related to long-term shareholder value and should reflect upside potential and downside risk. The compensation committee should consider whether the benefits and perquisites provided to senior management are proportional to the contributions made by management.”

 

From Business Roundtable
“Principles of Corporate Governance”
November 2005

 

Ultimately, however, guidelines and requirements only take us so far. The real test lies not only in how companies translate the nuts and bolts of compliance into practice but in how far they go to make the process transparent. Investors should have as much trust in the integrity of a company’s executive compensation process as clients do in the quality of its products. A breach of either constitutes an unacceptable risk.

At IBM, we well understand the need for our investors to know how compensation decisions are made. We have put tremendous effort and rigor into our own executive compensation processes over many years, continually updating them to meet new voluntary criteria, such as the Business Roundtable recommendations, as well as official requirements from the SEC.

Now, we are going a step further by publishing this guide to executive pay at IBM, which will, we hope, make the process accessible and comprehensible not only to professional fund managers and to institutional investor groups, but to millions of individual investors.

The independent directors who comprise the Compensation Committee of the Board of Directors (officially known at IBM as the Executive Compensation and Management Resources Committee, or ECMRC) join with management in welcoming readers to examine our pay practices and in affirming their commitment to the long-term interests of shareholders.

The Point of Our Program

Investors—IBM’s owners—want senior leaders to run the Company in a way that protects and grows their investment over the long term. This is no simple task at any company, and at a company as large and complex as IBM, it is a particularly exciting leadership challenge. IBM holds a unique identity, based on talent, brand, global operating footprint, the size and scope of our business overall and the size of each of our individual lines of business.

Unlike those few other companies of comparable size and scale that tend to operate as holding companies of component businesses, we operate as an integrated entity across a number of significant business lines, most large enough to be among the Fortune 150 biggest companies if they were stand-alone businesses. Our unique, integrated model delivers great value to our investors and our clients, yet demands a senior leadership team of unusual depth, agility and experience.

18




To that end, IBM’s executive compensation practices are designed specifically to:

·                  Ensure that the interests of IBM’s leaders are closely aligned with those of our investors and owners;

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

·                  Motivate our leaders to deliver high business performance;

·                  Differentiate compensation so that it varies based on individual and team performance; and

·                  Balance rewards for these demanding roles between short-term results and the long-term strategic decisions needed to ensure sustained business performance over time.

With these goals in mind, IBM executives earn their compensation based on results over three time frames:

1.               Current—Salary and annual incentive that reflect actions and results over 12 months;

2.               Long-term—A long-term incentive plan that reflects results over a minimum of three years, helping to ensure that current results remain sustainable; and

3.               After Working Career—Deferrals, retention and retirement accumulations help ensure today’s leaders stay with IBM until their working careers end.

Current Year’s
Payout:
Salary and Annual
Incentive

 

 

+

 

 

Long-term Payout:
Long-term
Incentive Plan

 

 

+

 

 

After Career:
Full Career
Retention, Pension
and Savings

 

 

How Decisions Get 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 leaders, IBM follows an evaluation process, described here in some detail:

1. Making Commitments

At the beginning of each year, all IBM employees, including Chairman and CEO Sam Palmisano and the other senior leaders, make a Personal Business Commitment (PBC) of the goals, both qualitative and quantitative, they seek to achieve that year in support of the business. These commitments are reviewed and approved by each individual’s manager. Chairman and CEO Palmisano’s commitments are reviewed directly by the Board of Directors.

2. Determining Executive Vice President (EVP) and Senior Vice President (SVP) Compensation

Evaluation of Results by the Chairman and CEO

Throughout the year, employees assess their progress. At year end, employees at all levels, including executives, work with their managers to evaluate their own results—not only with regard to their stated goals, but in relation to how well their peers and the entire Company performed.

The self-assessments of the EVP and SVPs are reviewed by the Senior Vice President of Human Resources (SVP HR) and Chairman and CEO Palmisano, who evaluate the information, along with benchmark compensation information for each leadership role. Following this in-depth review and in consultation with the SVP HR, Mr. Palmisano makes compensation recommendations to the Board’s Compensation Committee based on his evaluation of each senior manager’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 members of his team.

In addition to the Chairman and CEO’s assessment of each individual’s contributions and results, the Committee considers the following:

·                  Comparisons to market compensation levels for cash compensation and total direct compensation;

·                  Potential for future roles within IBM;

·                  Retention risk;

·                  Total compensation levels before and after any recommendations; and

·                  Compensation summaries for each senior leader that tally the dollar value of all compensation and related programs, including salary, annual incentive, long-term compensation, deferred compensation, retention payments and pension benefits.

19




3. Determining Chairman and CEO Compensation—Research, Recommendations and Review

IBM’s SVP HR works directly with the chair of the Compensation Committee to provide a decision-making framework for use in making a recommendation for the Chairman and CEO’s total compensation. This framework includes the Chairman and CEO’s evaluation of how well he believes he performed against his commitments in the year, with an assessment of his performance against the Company’s stated strategic objectives. The Committee also reviews an analysis of IBM’s total performance over the past year and a competitive benchmark analysis furnished by the Committee’s outside consultant (Towers Perrin).

The Compensation Committee also separately reviews relevant information and arrives at its recommendation for the Chairman and CEO’s total compensation. In this work, they are assisted by the Compensation Committee’s outside consultant from Towers Perrin, a global consultancy specializing in compensation, benefits and other human resources issues.

The final pay recommendation for the Chairman and CEO is presented to the independent directors on IBM’s Board for further review, discussion and final approval.

This process is followed every year.

Determining Appropriate Pay Levels

To assess the competitive range of pay for a particular job role, IBM examines pay for executives in jobs of comparable size and complexity at other companies. IBM examines pay data from a group of cross-industry companies. This list of companies is reviewed and approved by the Compensation Committee each year.

For 2006, the list of comparison companies were:

AIG

Ford

Pfizer

Altria Group

General Electric

Proctor & Gamble

Apple

General Motors

SBC Communications

Bank of America

Hewlett Packard

Sprint

Boeing

Honeywell

Sun Microsystems

Chevron

Intel

Texas Instruments

Cisco Systems

Johnson & Johnson

United Technologies

Citigroup

Lenovo

Verizon

Dell

Lockheed Martin

Walt Disney

Dow

Microsoft

Wells Fargo

DuPont

Motorola

Xerox

EDS

PepsiCo

 

 

Compensation Elements for Senior Leaders

On average, IBM’s senior leaders, the Chairman and CEO and his senior team, earn about 87% of their annual compensation from sources that vary year to year based on business results, with the remainder from salary.

The 2006 mix of compensation elements looks like this:

 

20




Current Compensation

Salary. Senior leaders at IBM receive the smallest percentage of their overall compensation in salary. In 2006, for example, Chairman and CEO Sam Palmisano earned 10% of his compensation in salary and the rest of the senior team earned an average of 14%.

Annual Incentive. Senior leaders are incented through a program that sets performance targets based on their role and scope. Actual payments are driven solely by business and individual performance, as reflected in the Personal Business Commitment review process described above under “How Decisions Get Made.” Top performers earn the greatest payouts; median performers earn much smaller amounts; and the lowest performers earn no incentive payments at all. Over the past three years, these results-based payouts for individual leaders have ranged from 0.7 times target to a high of 1.66 times target. In 2006, the annual incentive earned by the Chairman and CEO represented 28% of his total compensation; incentives achieved by the rest of the senior team averaged about 17% of their total compensation.

Team Incentive. When Mr. Palmisano became CEO in 2002, he asked the Board of Directors to take a portion of the incentive funding (approximately $3 million) to help create a pool for rewarding teamwork by his most senior leaders. This was done to reinforce IBM’s strategy of integration across the Company, with awards based on how well the EVP and SVPs led efforts to deliver integrated value to IBM’s clients worldwide. Every year, an amount ranging from $0 to $250,000 is awarded and paid equally to each member of the senior team. The Chairman and CEO does not receive a team incentive. Since inception, payments to the senior team have ranged from $100,000 to $200,000; the maximum award has not yet been earned. In 2006, this team incentive represented an average of 5% of total compensation for the EVP and SVPs.

Other Performance Compensation:

Taking the Long View

Long-term incentive plans (LTIP) have been a focal point for much of the discussion over executive compensation in the past several years. Well-designed LTIPs ensure that senior leaders hold a competitive stake in their company’s financial future. At the same time, the size of the awards reflects the value that the company and, ultimately, its investors place on the individual executive at the time. What gain the executives realize in the long run from the program depends on what they and their colleagues do to drive the financial performance of the company.

Under IBM’s LTIP, senior leaders may receive certain grants of IBM equity, as explained below.

Performance Share Grants. This program focuses senior leaders on delivering business performance over the next three years against two key financial metrics which drive long-term shareholder value—earnings per share and cash flow. Through this program, senior leaders are eligible to earn a target number of shares of IBM stock at the end of a three-year performance period. The award pays out at the end of the three years depending on how well the Company performed against targets set at the beginning of the three-year period. The payouts are made in shares of stock, so the value goes up or down based on stock price performance from the beginning of the grant. Over the past six years, payouts have ranged from a low of 54% to a high of 130% of the target number of shares. In 2006, the potential value of performance share grants, assuming future performance at target, represented 42% of the Chairman and CEO’s total compensation and 30% for the EVP and SVPs.

The IBM Integration & Values Team consists of approximately 300 executives charged with working outside the scope of their job responsibilities to drive growth through integration and demonstrating IBM’s values. The Chairman and CEO may grant members of this group additional performance shares for delivering extraordinary results. The Chairman and CEO, EVP and SVPs are not eligible for this award.

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Other Stock-Based Grants. Stock-based grants are made to focus senior leaders on delivering performance that increases the value of the Company through growth of IBM’s stock price over the long term. Senior leaders may receive stock options, restricted stock, or a combination of the two. The grants vest—become available for sale or exercise—over time, typically over either three or four years. Until vested, the grants have no value, except that dividend equivalents are paid on restricted stock grants. Executives awarded these grants typically hold them for extended periods, and have up to 10 years to convert stock option awards to cash or shares. The planned value of the annual other stock-based awards granted in 2006 represented 20% of the Chairman and CEO’s total compensation and, on average, 34% for the EVP and SVPs.

In 2006, market-priced stock options were awarded to executives, including some named executive officers, who chose to participate in an IBM stock investment program. Under this program, which has since been closed, executives could invest 5, 10 or 15% of their annual incentive plan payout in IBM stock equivalents and receive IBM stock options, under the terms of the IBM Long Term Performance Plan, valued at two times their investment.

The value of the awards granted in 2006 are shown in the Grants of Plan-Based Awards table below. The 2006 expense associated with all outstanding awards, including grants made in 2006 and prior years, is shown in the 2006 Summary Compensation Table.

While stock remains a significant component of total compensation for IBM’s senior leaders, IBM took significant steps more than three years ago to reduce the emphasis on stock awards, leading external market trends away from an over-emphasis on stock-based compensation for executives. While cash compensation has increased during the same period, overall total target compensation levels at IBM have declined for most executives as a result of this shift.

Retention Stock-Based Grants. 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, often in the form of restricted stock units, for certain executives. These grants typically vest at the end of five years and make it more difficult for other companies to recruit IBM’s top talent.

Chairman and CEO Compensation Decisions for 2006 and 2007

The Compensation Committee made decisions for the Chairman and CEO’s 2006 and 2007 compensation following the process described above and using the pay components shown above. The Compensation Committee noted the following as key points regarding the Chairman and CEO’s performance against his Personal Business Commitments for 2006:

·                  Solid achievement against financial metrics, including record earnings per share (EPS);

·                  Sustained growth in EPS and cash flow over multiple years;

·                  Maintained IBM’s leading market position in systems, middleware and services;

·                  Grew presence in emerging markets;

·                  Realized successful global integration and productivity initiatives, enabling investment for growth;

·                  Operationalized new leadership model;

·                  Achieved improvements in global employee satisfaction; and

·                  Continued strong leadership in innovation.

The Committee considered these results and recommended that Mr. Palmisano receive $5,000,000 in annual incentive for his 2006 performance.

The Committee worked with its outside consultant (Towers Perrin) to review Mr. Palmisano’s base salary, annual incentive target and long-term incentive award value using a framework of competitive benchmark analysis, Company performance and Mr. Palmisano’s personal performance. Based on this review, the Committee recommended that Mr. Palmisano’s base salary and target annual incentive for 2007 remain at $1,800,000 and $5,000,000 respectively.

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The Committee recommended a long-term incentive comprised of a 2007-2009 Performance Share grant valued at $7,000,000 and Restricted Stock Units valued at $3,000,000, which will vest one-third each year until 2010. These grants will be made on May 8, 2007. The combined value of this grant represents a 5.8% increase over the 2006 long-term incentive award planned value of $9,447,500, excluding the matching option grant under the IBM stock investment program described below. The Committee chose the long-term incentive value to improve Mr. Palmisano’s position relative to competitive benchmarks and to signal the Committee’s desire for him to continue his focus on taking the steps necessary to position the Company for long-term success. The combination of long-term incentive vehicles is consistent with the treatment of the senior leadership team.

In addition, Mr. Palmisano chose to invest $750,000 of his 2006 incentive into the IBM stock investment program described under “Other Stock-Based Grants” above. By participating in that program, he will receive an option grant under the Long-Term Performance Plan valued at two times his investment, or $1,500,000. This grant will also be made on May 8, 2007 and will vest in 2010.

The Committee’s recommendations were approved by the independent directors on IBM’s Board.

EVP and SVP Compensation Decisions for 2006 and 2007

The Compensation Committee also made decisions for each of the executive officers following the process described above and using a mix of the components shown above. The Compensation Committee noted the following as key points for each of the other named executive officers:

Mark Loughridge, Senior Vice President and Chief Financial Officer

·                  Drove record earnings per share and cash flow results;

·                  Continued strong focus and success in delivering IBM’s business model to investors;

·                  Managed IBM’s portfolio, improving or divesting businesses that sub-optimize value; and

·                  Leveraged IBM’s global capabilities by identifying innovative ways of doing business and streamlining support models.

Following IBM’s practice, the recommendations for Mr. Loughridge’s compensation were ratified by the independent directors on IBM’s Board.

Nick Donofrio, Executive Vice President, Innovation & Technology

·                  Drove highly successful process transformation and standards efforts in IBM across all units;

·                  Closed 14th consecutive year of patent leadership;

·                  Drove advances in high-performance computing to enable new science and drive marketplace for new applications;

·                  Engaged leaders to build a values-based culture within IBM; Employee survey shows strong improvement on key values-related questions; and

·                  Continued strong leadership in driving innovation and technical advances.

Doug Elix, Senior Vice President and Group Executive, Sales and Distribution

·                  Grew revenue and profit through sales and distribution across IBM business units;

·                  Improved worldwide customer satisfaction ratings;

·                  Realigned sales force, resources and processes to enhance sales performance and drive growth; and

·                  Increased revenue growth in key industries, offerings and emerging markets.

Steve Mills, Senior Vice President and Group Executive, Software Group

·                  Grew revenue faster than or with the market in each Software unit and improved profit;

·                  Completed significant strategic acquisitions; and

·                  Drove initiatives to better integrate Software and Services business units, focusing on services-oriented assets and created major new focus on industry vertical standards.

Based on these results and following the process outlined above, the Compensation Committee approved the following 2006 annual incentive payments for these named executive officers:

 

 

2006 INCENTIVE

 

 

 

ANNUAL

 

TEAM

 

 

 

INCENTIVE

 

INCENTIVE

 

M. Loughridge

 

$

920,000

 

$

200,000

 

N.M. Donofrio

 

1,023,350

 

200,000

 

D.T. Elix

 

888,250

 

200,000

 

S.A. Mills

 

865,000

 

200,000

 

 

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The team incentive payment reflected Chairman and CEO Palmisano’s assessment of the performance of his entire senior leadership team and their success in working together to integrate across business units to enhance IBM’s performance.

The Committee also approved these 2007 base salary, target incentive and stock-based grants:

 

 

2007 CASH

 

2007 LONG-TERM INCENTIVE AWARDS

 

 

 

SALARY RATE

 

ANNUAL

 

 

 

RESTRICTED

 

PERFOR-

 

 

 

(EFFECTIVE

 

INCENTIVE

 

STOCK

 

STOCK

 

MANCE

 

NAME

 

JUNE 1, 2007)

 

TARGET

 

OPTIONS(1)

 

UNITS(2)

 

SHARE UNITS(2)

 

M. Loughridge

 

$

690,000

 

$

935,000

 

$

224,000

 

$

1,020,000

 

$

2,380,000

 

N.M. Donofrio

 

800,000

 

1,080,000

 

367,005

 

450,000

 

1,050,000

 

D.T. Elix

 

775,000

 

1,045,000

 

217,655

 

900,000

 

2,100,000

 

S.A. Mills

 

670,000

 

905,000

 

319,500

 

900,000

 

2,100,000

 

 


(1)          Stock options will be granted on May 8, 2007 under the LTPP as part of the IBM stock investment program described under “Other Stock-Based Grants” above. The actual number of options granted on this date will be determined by dividing the value shown above by a predetermined, formulaic planning price for the second quarter 2007 and the respective Black-Scholes option valuation factor. The exercise price of these options will be the average high/low market price on the New York Stock Exchange (NYSE) of the Company’s stock on the date of grant.

(2)          Restricted stock units and performance share units will be granted on May 8, 2007. The number of units granted on this date will be determined by dividing the value shown above by the predetermined, formulaic planning price for second quarter 2007. The PSUs will vest in 2010 and the RSUs will vest 50% in 2009 and 50% in 2011.

Senior Leaders—Personal Stake in IBM’s Future

Investors want the leaders of their companies to act like owners. That alignment, we have found, works best when senior leaders have significant portions of their personal holdings invested in the stock of their company. This is why IBM sets significant stock ownership requirements for the Company’s top 60 senior leaders, including the Chairman and CEO.

Of this group, the Chairman and CEO, EVP and SVPs are all required to own IBM stock or equivalents worth three times their individual target cash compensation (their base salary plus the incentive payment they would earn if they hit their performance targets) within five years of hire or promotion. As a group, the Chairman and CEO, EVP and 14 SVPs own 1.6 million shares or equivalents valued at approximately $144 million as of December 31, 2006. Approximately 40 other senior leaders are required to hold shares worth one time their target cash compensation within five years of hire or promotion.

All of these approximately 60 leaders who have been in place for at least five years have met or exceeded their personal IBM ownership requirements. In fact, this group currently holds, on average, nearly four times more IBM stock or equivalents than the Company requires.

Retaining Leaders for Full Working Career:

Closed Retention Plan

During the mid-1990s, an additional form of retention compensation was created for certain Company leaders. The Retention Plan began in 1995 during a particularly trying time in IBM’s history when the Company faced challenges that many thought put its very existence at risk. Some key leaders were recruited away from IBM during this time.

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In this environment, IBM created this 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 even after a full IBM career, they would forfeit any benefits under the plan if this happened. The approach worked, as evidenced by the Company’s historic turnaround in the late 1990s, and its current position of market leadership. Fourteen of the Company’s top 16 executives, including four of the top five officers with the highest 2006 compensation, 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 will stop on December 31, 2007 and it will not be replaced by any other plan.

For individuals who were eligible for this executive retention plan since its inception, like Chairman and CEO Palmisano, payments accrue based on age and service and are typically payable only after age 60, as a way to encourage senior leaders to continue working for the Company past the age when many others at our Company choose to retire. (The average age of retirement for U.S. IBMers is currently age 58.) If Mr. Palmisano retires at age 60, he is projected to receive approximately $1.5 million a year from this retention plan.

Deferred Compensation — Earned in the Past, Paid in the Future

In the U.S., the Department of Labor and Internal Revenue Service 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. There is no guarantee of payout. As with the 401(k) plan, salary and incentive payments saved under the deferred compensation plan are eligible for a Company match that currently equals 50% of the first 6% of eligible pay saved through the plan for those hired before 2005. Those hired after 2005 are eligible for a Company match that currently equals 100% of the first 6% of eligible pay saved.

For executives with long and successful careers at a single company, the deferrals can accumulate to sizeable amounts over time. As shown in Table 1 below, the current value of Chairman and CEO Palmisano’s account, made up of money he earned during the past 11 years that the program has been available, is now worth approximately $35 million. During that time, Mr. Palmisano could have chosen not to defer, taken these funds out of IBM and put them in other investment vehicles. Had he done so, these numbers would not appear here.

Table 1 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 CEO, Mr. Palmisano had invested approximately $7 million of his compensation in the account. When Mr. Palmisano retires, the value of his deferrals will be paid back to him in five equal installments over five years.

Table 1: History of Chairman and CEO Deferred Compensation (Nonqualified)

 

 

 

 

IBM

 

YEAR END

 

YEAR

 

DEFERRALS

 

MATCH

 

BALANCE

 

1998

 

$

207,525

 

$

29,587

 

$

948,401

 

1999

 

299,500

 

41,250

 

1,512,020

 

2000

 

1,280,125

 

45,088

 

2,525,162

 

2001

 

1,311,185

 

68,400

 

4,782,542

 

2002

 

5,021,815

 

130,600

 

8,796,332

 

2003

 

2,272,900

 

178,700

 

12,979,815

 

2004

 

6,020,881

 

208,600

 

20,935,482

 

2005

 

5,000,050

 

202,050

 

23,993,254

 

2006

 

5,729,377

 

205,350

 

34,942,721

 

 

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Pension and Savings Plans

IBM’s senior executives are eligible to participate in the same pension and savings plans available to other IBM employees in the U.S. on the same terms.

The amount of the pension benefit is based on pay and service and determined by the same formulas for executives and non-executives. Based on his earnings and 33 years of service, Mr. Palmisano’s pension is projected to be approximately $2.9 million a year if he retires at age 60.

The money that U.S. executives save through the 401(k) plan, as for all U.S. employees, is eligible for a Company match that currently equals 50% of the first 6% of eligible pay that they save through the plan for those hired before 2005, and 100% of the first 6% saved for those hired after 2004.

Other Compensation

Additional benefits for top management are also the occasional subject of headlines. At IBM, “perks” for executives are relatively few and quite basic. The value of these programs makes up less than 1% of any IBM leader’s total compensation.

Programs are limited to services with a direct bearing on productivity for these senior leaders. Each leader, for example, is eligible for a Company-paid annual medical exam to avoid medically-induced disruptions of their service to the Company. They are eligible for reimbursement up to $8,000 to pay for financial counseling, designed to guide them in decisions regarding their significant IBM stock investments and related financial issues. IBM does not provide its senior leaders with perquisites such as personal club memberships, vacation houses or apartments, entertainment accounts, or similar perks.

Another item reflects the realities and risks inherent in running a contemporary global enterprise where success demands heavy travel on the part of its senior business leaders. Under the Company’s security practices, the Chairman and CEO does not fly on commercial airlines, even for personal travel. He must use Company aircraft at all times. The Chairman and CEO is also provided with personal security when he travels. Although we consider these personal travel and security items to be basic business-related matters, the SEC requires that the incremental cost of these activities be disclosed as perquisites and included in compensation.

IBM — Meeting Market Standards for Executive Compensation

We recognize that the issue of executive pay is critical to shareholders and to members of the wider public whose hopes for the future rest substantially on trust in the conduct of those who run our corporations. Simply put, those who profit disproportionately to the value they create for shareholders and society, or the value they provide to clients, are breaking faith with all who would do business with them, and all who would risk their hard-earned savings in the future of an enterprise.

We have provided the information in these pages precisely because IBM works to keep that faith. We know that striking a balance between shareholders’ concept of fairness and the incentives needed to attract and retain a stellar executive team will always require sound judgment and careful thought. Business, markets, and people are too dynamic for mere formulaic solutions. The numbers can be best understood when the process behind them is transparent.

IBM’s business has always been to help our clients succeed through innovative solutions. Our shareholders deserve no less. We welcome this discussion.

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Section 2: Additional Information Required by SEC Disclosure Regulations

ELEMENTS OF COMPENSATION PROGRAMS AND LINKAGE TO OBJECTIVES

To supplement the discussion in Section 1 and as required by the SEC, the following is a description of the Company’s compensation programs and the objectives they are designed to support. As noted in Section 1: An Inside Look at Executive Compensation, IBM’s compensation practices are designed to meet five key objectives:

·                  Ensure that the interests of IBM’s leaders are closely aligned with those of our investors and owners;

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

·                  Motivate our leaders to deliver high business performance;

·                  Differentiate compensation so that it varies based on individual and team performance; and

·                  Balance rewards for these demanding roles between short-term results and the long-term strategic decisions needed to ensure sustained business performance over time.

In total, these elements support the objective to balance rewards between short-term results and the long-term strategic decisions needed to ensure sustained business performance over time.

 

 

 

 

 

 

LINKAGE TO

COMPENSATION

 

 

 

 

 

COMPENSATION

ELEMENT

 

DESCRIPTION

 

ELIGIBILITY

 

OBJECTIVES

Current Year Performance

 

 

 

 

 

 

Salary

 

Market-competitive, fixed level of compensation

 

All executives including those executives listed in the proxy statement tables (Named Executive Officers or NEOs)

 

Attract and retain highly qualified leaders

Motivate high business performance

Annual Incentive

 

Combined with salary, the target level of annual incentive provides a market-competitive total cash opportunity.

 

Actual annual incentive payout depends on individual and Company performance. Lowest performers receive no incentive payment.

 

All executives, including NEOs

 

Attract and retain highly qualified leaders

 

Motivate high business performance

 

Vary compensation based on individual and team performance

 

27




 

 

 

 

 

 

 

LINKAGE TO

COMPENSATION

 

 

 

 

 

COMPENSATION

ELEMENT

 

DESCRIPTION

 

ELIGIBILITY

 

OBJECTIVES

Current Year Performance (continued)

 

 

 

 

 

 

Team Incentive

 

Additional cash compensation opportunity shared equally by the team members

 

Encourages teaming, collaboration and integration across business units, by Chairman and CEO’s senior team

 

Executive Vice President and Senior Vice Presidents, including NEOs

 

Motivate high business performance

 

Vary compensation based on team performance

Long-Term Incentive Plan

 

 

 

 

 

 

Performance Share Units (PSUs)

 

Equity grant value based on individual performance and retention objectives for each executive.

 

Grant value is converted to the number of shares granted by dividing the planned value by the predetermined, formulaic planning price* in effect for the quarter.

 

Number of shares granted is adjusted up or down at the end of the three-year performance period based on Company performance against earnings per share and cash flow targets.

 

Encourages sustained, long-term growth by linking portion of compensation to the long-term Company performance.

 

Paid in IBM shares upon completion of three-year performance period, linking the compensation value further to the long-term performance of IBM.

 

Approximately 400 executives, based on job scope including NEOs

 

Align executive and shareholder interests

 

Attract and retain highly qualified leaders

 

Motivate high business performance

 


*                 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 equity plan and to give more consistency across equity grants made at different points in the quarter.

28




 

 

 

 

 

 

LINKAGE TO

COMPENSATION

 

 

 

 

 

COMPENSATION

ELEMENT

 

DESCRIPTION

 

ELIGIBILITY

 

OBJECTIVES

Long-Term Incentive Plan (continued)

 

 

 

 

 

 

Chairman’s Performance Uplift

 

Equity award decided annually by the Chairman and delivered to selected individuals in PSUs.

 

Selective recognition of those members of the Integration & Values Team (I&VT) who have demonstrated extraordinary results in driving growth through integration and demonstrating the IBM values.

 

Receiving an uplift award one year does not guarantee awards in following years.

 

Select members of the I &VT (excluding Chairman and CEO, EVP and SVPs)

 

Motivate high business performance

 

Vary compensation based on individual and team performance

Annual Stock-Based Grant

 

Annual equity grants are made in the form of restricted stock units (RSUs) or options, or some combination.

 

The amount of an annual grant is dependent on the level of the executive and individual performance with lowest performers receiving no grant.

 

Planned grant value is converted to the number of shares granted by dividing the planned value by the predetermined, formulaic planning price* in effect for the quarter and, for option grants, the respective Black-Scholes valuation factor.

 

Awards generally vest over a 1-4 year period.

 

All executives, including NEOs

 

Align executive and shareholder interests

 

Attract and retain highly qualified leaders

 

Motivate high business performance

 

Vary compensation based on individual and team performance

Retention Stock-Based Grant

 

Periodically, management reviews the retention strategy for high-performing executives and may make retention equity grants to selected executives.

 

Select executives determined each year, including some NEOs

 

Align executive and shareholder interests

 

Retain highly qualified leaders

 


*                 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 equity plan and to give more consistency across equity grants made at different points in the quarter.

29




 

 

 

 

 

 

 

LINKAGE TO

COMPENSATION

 

 

 

 

 

COMPENSATION

ELEMENT

 

DESCRIPTION

 

ELIGIBILITY

 

OBJECTIVES

After Working Career

 

 

 

 

Pension and Savings Plans

 

Like all IBM employees, executives participate in the local pension plans and savings plans sponsored by IBM in their country under the same terms and conditions as all employees.

 

All executives, including NEOs

 

Attract and retain highly qualified leaders

Other Executive Retention Programs

 

Separate plans established more than 10 years ago in some countries (including the U.S.) to encourage full-career retention of key executives.

 

Important during a time of significant business transformation for IBM; the programs are now closed.

 

No additional amounts will be earned in the U.S. under this program after 2007.

 

Selected executives, including NEOs and some other executive officers

 

Attract and retain highly qualified leaders

Executive Deferred Compensation Plan

 

Established in accordance with U.S. Department of Labor and Internal Revenue Service guidelines to provide executives with the ability to save for use after their career by deferring compensation in excess of limits applicable to 401(k) plans.

 

Cash and equity may be deferred under the plan.

 

All U.S. executives, including NEOs

 

Align executive and shareholder interests

 

Attract and retain highly qualified leaders

 

30




Determining Appropriate Pay Levels

Overall pay levels and the level for each element of pay are determined based on the competitive environment and expected market trends.

To set the range of pay for a particular job role, IBM positions executive pay compared to jobs of similar size and complexity at comparable companies. IBM participates in several executive compensation benchmarking surveys that provide detail on levels of salary, target annual incentives and long-term incentives, the relative mix of short- and long-term incentives, and mix of cash and stock-based pay. These surveys are supplemented by input from the Compensation Committee’s outside consultant on factors such as recent market trends. We include in these surveys a broad range of key information technology companies, given the battle for talent that exists in our industry and to help us identify trends in the industry. We also include companies outside our industry, whose stature, size and complexity approximates our own, in recognition of the fact that competition for senior management talent is not limited to our industry. The Committee currently retains Towers Perrin as its outside compensation consultant, approving all fees and scope of work; a single senior Managing Director of Towers Perrin has the responsibility for working with the Committee and does not perform any work for management.

The Committee approves the benchmark list and uses trend data to assess pay levels against pay for similar jobs. See discussion in Section 1: An Inside look at Executive Compensation (Determining Appropriate Pay Levels).

Setting Performance Targets for Incentive Compensation

ANNUAL INCENTIVE PROGRAM

The Company sets business objectives at the beginning of each year that are reviewed by the Board of Directors. These objectives translate to targets for the Company and for each Business Unit for purposes of determining the target funding of the Annual Incentive Program. Actual funding levels can vary from 0% to 200% of target, depending on performance against objectives.

At the end of the year, management assesses the financial and productivity performance for the Company based on performance against financial metrics, as set out below.

 

 

WEIGHTING IN

 

FINANCIAL METRIC

 

OVERALL SCORE

 

Net Income

 

60

%

Revenue Growth

 

20

%

Cash Flow

 

10

%

Productivity

 

10

%

 

Overall funding for the Annual Incentive Plan is based on the performance results against these targets and a discretionary assessment made by the Chairman and CEO based on factors such as individual and unit performance, client satisfaction, market share growth and workforce development, among others. This assessment can be either up or down. The Compensation Committee reviews the financial scoring and qualitative adjustments and approves the Annual Incentive Plan funding level. Once the funding level has been approved, a lower-performing executive will receive as little as zero payout and the most exceptional performers are capped at three times target (payouts at that level are rare and only possible when IBM’s performance has also been exceptional).

Because disclosure of the specific targets under the Annual Incentive Program would signal where IBM is shifting strategic focus, give competitors insight to areas where IBM is changing investments or divestments and impair IBM’s ability to leverage these actions for competitive advantage, IBM is not disclosing these specific targets. The targets are set at aggressive levels each year to motivate high business performance and support attainment of longer-term financial objectives. These targets, individually or together, are designed to be challenging to attain. Knowledge of the targets could also be used by competitors to take advantage of insight into specific areas to target the recruitment of key skills from IBM. In addition, disclosing the details of our

31




productivity metric provides confidential information we currently do not publicly disclose which would put at risk our ability to leverage for pricing competitiveness. Disclosing the specific targets and metrics used in the qualitative discretionary assessment made by the Chairman and CEO would give our competitors our insight to key market dynamics and areas that could be used against IBM competitively by industry consultants or competitors targeting existing customers. Also, the Company’s financial model, as explained to investors, is a long-term model, with objectives and drivers for top line growth and EPS. The Company does not manage its financial model on a short-term or annual basis. Disclosing short-term compensation objectives would run counter to the Company’s core financial model and could result in confusion for investors.

Performance Share Unit Program

EPS and cash flow targets for the Performance Share Unit program are set at the beginning of each three-year performance period, taking into account the Company’s financial model, including the impact our ongoing share buyback program has on EPS. At the end of the three years, the score is calculated based on results against the predetermined targets, with 80% weighting on EPS and 20% on cash flow. The resulting score, which is approved by the Compensation Committee, adjusts the planned value of the actual Performance Share Unit award from 0% to 150%. There is no discretionary adjustment to the Performance Share program score.

Disclosure of each of the three-year performance period targets would show our view of future cash flow targets which could put us at a competitive disadvantage for M&A negotiations. The disclosure also would signal to our competitors the timing of large capital investments or acquisitions based on our view of the market.

As in the annual incentive program, the targets for each of the financial metrics in the Performance Share Unit program are set at aggressive levels to motivate high business performance and support attainment of IBM’s longer-term financial objectives Achievement of these targets, individually or together, is designed to be challenging. Each year, the targets for the new three-year period are set based on the prior period’s attainment.

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 and the grant price of all full-value awards is the average of the high and low market price on the date of grant or, in the case of premium-priced stock options, 10% above that average.

The approval process specifies the individual receiving the grant, the number of units or the value of the award, the exercise price or formula for determining the exercise price and the date of grant. All equity awards for senior management are approved by the Compensation Committee. All equity awards for employees other than senior management are approved by senior management pursuant to a series of delegations that were approved by the Compensation Committee, and the grants made pursuant to these delegations are reviewed periodically with the Committee.

Equity awards granted as part of annual total compensation for senior management and other employees are made on specific cycle dates scheduled in advance. IBM’s policy for new hires and promotions requires approval of any awards before the grant date, which is typically the date of the promotion or hire.

32




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 Personal Business Commitments, and is reinforced through each executive’s annual certification to the IBM Business Conduct Guidelines. An executive’s compensation is tied to compliance with these standards; compliance is also a condition of IBM employment for each executive.

The Company’s equity plans and agreements provide that awards will be cancelled and that certain gains must be repaid if an executive engages in activity that is detrimental to the Company, such as performing services for a competitor, disclosing confidential information or violating the Company’s Business Conduct Guidelines. Annual cash incentive payments are also conditioned on compliance with these Guidelines.

In addition, approximately 400 of our key executives (including each of the named executive officers) have agreed to a non-competition, non-solicitation agreement that prevents them from working for certain competitors within 12 months of leaving IBM or soliciting employees within two years of leaving IBM.

The Committee has also implemented a policy for the “clawback” of cash incentive payments in the event an officer’s conduct leads to a restatement of the Company’s financial results, as follows:

To the extent permitted by governing law, the Company will seek to recoup any bonus or incentive paid to any executive officer if (i) the amount of such payment was based on the achievement of certain financial results that were subsequently the subject of a restatement, (ii) the Board determines that such officer engaged in misconduct that resulted in the obligation to restate, and (iii) a lower payment would have been made to the officer based upon the restated financial results.

Hedging Practices

The Company does not allow any member of the I&VT, including all named executive officers, to enter into any derivative transaction on IBM stock (e.g., any short-sale, forward, market option, collar, etc.).

Tax Considerations

Section 162(m) of the U.S. Internal Revenue Code of 1986 limits deductibility of compensation in excess of $1 million paid to the Company’s CEO and to each of the other four highest-paid executive officers unless this compensation qualifies as “performance-based.” Based on the applicable tax regulations, any taxable compensation derived from the exercise of stock options by senior executives under the Company’s Long-Term Performance Plans should qualify as performance-based. The Executive Deferred Compensation Plan permits an executive officer who is subject to section 162(m) and whose salary is above $1 million to defer payment of a sufficient amount of the salary to bring it below the section 162(m) limit. The Company’s stockholders have previously approved terms under which the Company’s annual and long-term performance incentive awards should qualify as performance-based, and did so again in 2004, as required by the Internal Revenue Service. These terms do not preclude the Committee from making any payments or granting any awards, whether or not such payments or awards qualify for tax deductibility under section 162(m), which may be appropriate to retain and motivate key executives.

33




2006 SUMMARY COMPENSATION TABLE NARRATIVE

Salary (Column (c))

Amounts shown in the salary column reflect the salary amount paid to each named executive officer during 2006.

·                  IBM reviews salaries for each named executive officer annually during a common review cycle.

·                  In 2006, salary increases for named executive officers took effect on June 1.

·                  See Section 1 of the 2006 Compensation Discussion and Analysis above for an explanation of the amount of salary, bonus and other compensation elements in proportion to total compensation.

Bonus (Column (d))

Amounts shown in the Bonus column represent payouts of the Team Incentive. Amounts in this column do not include payments under the IBM Annual Incentive Plan, which are included under column (g) (Non-Equity Incentive Plan Compensation).

TEAM INCENTIVE

General Terms

·                  Only the EVP and SVPs participate in this program.

·                  Each participant receives the same payout.

·                  The Chairman and CEO determines how well the participants have performed as a team over the course of the year and sets the payout amount which is approved by the Compensation Committee.

·                  See 2006 Compensation Discussion and Analysis above for an explanation of the Team Incentive.

Performance Period and Payout

·                  This is an annual program with a performance period from January 1 to December 31.

·                  Payout occurs generally in March of the year following the performance period.

Payout Range

·                  Minimum annual payout of $0.

·                  Maximum annual payout of $250,000.

·                  There is no target.

Stock Awards Total (Column (e))

Amounts shown in the Stock Awards Total column are comprised of three different types of awards (Performance Share Units, Restricted Stock Units and Retention Restricted Stock Units), presented separately to enhance understanding. The amount shown in the columns for Performance Share Units, Restricted Stock Units and Retention Restricted Stock Units is the dollar amount recognized for financial statement reporting purposes in 2006 in accordance with FAS 123R for equity award expense (excluding any risk of forfeiture, per SEC regulations). Equity expense calculations for financial statement purposes spread the grant date cost of those awards over the vesting period. Therefore, amounts in this column include the expense for awards granted in 2006 and previous years. All of these awards were granted to the named executive officers under IBM’s 1999 Long-Term Performance Plan (LTPP).

PERFORMANCE SHARE UNITS (PSUs)

The following describes the material terms and conditions of PSUs as reported in the column titled Performance Share Units (column (e)) in the 2006 Summary Compensation Table and in the columns under the heading Estimated Future Payouts Under Equity Incentive Plan Awards (columns (f), (g) and (h)) in the 2006 Grants of Plan-Based Awards Table.

General Terms

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

·                  Executive officers are awarded a number of PSUs each year at the beginning of the three-year performance period.

·                  Performance targets for cumulative three-year attainment in earnings per share and cash flow are set at the beginning of the three-year period. These targets are approved by the Compensation Committee.

34




·                  At the end of the three-year performance period, the Compensation Committee approves the determination of actual performance relative to pre-established targets.

·                  At the end of the performance period, that number of PSUs is adjusted up or down based on the approved actual performance relative to the pre-established targets.

·                  The performance period for the awards made in 2006 is January 1, 2006 through December 31, 2008.

·                  PSUs are paid out in IBM common stock after the three-year performance period.

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

Vesting and Payout

·                  PSU awards granted in 2006 will be adjusted for performance (as described below) and will be paid in IBM common stock on February 1, 2009 if the executive has been continuously employed by IBM as of that date.

·                  If the executive chooses, upon payout, the released shares may be deferred into the IBM Executive Deferred Compensation Plan (EDCP). See 2006 Nonqualified Deferred Compensation Narrative below.

Performance Targets

·                  Performance targets for the PSUs are set by the Compensation Committee based on two business objectives:

·                  Cumulative earnings per share (weighted 80%)

·                  Cumulative cash flow (weighted 20%)

·                  See Section 2 of the Compensation Discussion and Analysis for information on setting performance targets for the PSU program.

Payout Calculations

·                  Payout of PSUs is determined by separately assessing performance against each of the pre-established targets.

·                  Payout will not be made for performance below the Threshold level, described below.

Target Number

The Target number of PSUs (listed in column (g) of the 2006 Grants of Plan-Based Awards Table) will be earned if 100% of the objectives are achieved.

Threshold Number

·                  The Threshold number of PSUs (listed in column (f) of the 2006 Grants of Plan-Based Awards Table) is 25% of the Target number.

·                  The Threshold number of PSUs will be earned for achievement of 70% of both business objectives (earnings per share and cash flow).

·                  If only the cumulative earnings-per-share target is met at the Threshold level (and the cash flow target is not met), the number of PSUs earned would be 80% of the Threshold number.

·                  If only the cumulative cash flow target is met at the Threshold level (and the earnings-per-share target is not met), the number of PSUs earned would be 20% of the Threshold number.

Maximum Number

·                  The Maximum number of PSUs (listed in column (h) of the 2006 Grants of Plan-Based Awards Table) is 150% of the Target number.

·                  The Maximum number of PSUs will be earned for achieving 120% of both business objectives.

RESTRICTED STOCK UNITS (RSUs)

The following describes the material terms and conditions of RSUs as reported in the columns titled Restricted Stock Units and Retention Restricted Stock Units (column (e)) in the 2006 Summary Compensation Table and in the column titled All Other Stock Awards: Number of Shares of Stock or Units (column (i)) in the 2006 Grants of Plan-Based Awards Table.

35




General Terms

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

·                  RSUs are generally paid out in IBM common stock at vesting.

·                  RSUs earn dividend equivalents at the same rate and at the same time as the dividends paid to IBM stockholders.

Vesting and Payout

·                  RSUs generally vest in three equal increments on the first three anniversaries of the grant date.

·                  Payout at each anniversary is contingent on the recipient remaining employed by IBM through each anniversary date.

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

RETENTION RESTRICTED STOCK UNITS (RRSUs)

General Terms

·                  RRSUs have the same general terms as RSUs.

·                  These awards are typically given to select senior executives for the purpose of providing additional value to retain the executive through the vesting date.

Vesting and Payout

·                  Vesting periods for RRSUs typically range from two to five years and can be as long as ten years.

·                  Payout is contingent on the recipient remaining employed by IBM until the end of each vesting period.

Option Awards (Column (f))

Amounts shown in the Options Awards Total column are comprised of two different types of awards (Premium Priced Options and Market Priced Options), presented separately to enhance understanding. The amount shown in the columns for Premium Priced Options and Market Priced Options is the dollar amount recognized for financial statement reporting purposes in 2006 in accordance with FAS 123R for equity award expense (excluding any risk of forfeiture, per SEC regulations). Equity expense calculations for financial statement purposes spread the grant date cost of those awards over the vesting period. Therefore, amounts in this column include the expense for awards granted in 2006 and previous years. All of these options were granted to the named executive officers under IBM’s 1999 LTPP.

General Terms

·                  All option awards made in 2006 expire on the tenth anniversary of the date of grant.

·                  In accordance with IBM’s LTPP, the exercise price of stock options is not less than the average of the high and low prices of IBM stock on the New York Stock Exchange (NYSE) on the date of grant.

·                  Option recipient must remain employed by IBM through each vesting date in order to receive any potential payout value.

Premium priced options

·                  The exercise price is equal to 110% of the average of the high and low prices of IBM stock on the NYSE on the date of grant.

·                  These options vest in four equal increments on the first four anniversaries of the grant date, except if otherwise noted.

·                  For example, 1,000 options granted on May 8, 2006 would vest as follows:

·                  250 shares on May 8, 2007;

·                  250 shares on May 8, 2008;

·                  250 shares on May 8, 2009 and

·                  250 shares on May 8, 2010.

36




Market priced options

·                  The exercise price is equal to the average of the high and low prices of IBM stock on the NYSE on the date of grant.

·                  These options generally vest 100% on the third anniversary of the date of grant.

·                  In 2006, market priced options were awarded to named executive officers who participated in the IBM stock investment program (the Buy-First program) by agreeing to invest 5, 10 or 15% of their annual incentive plan payout in the IBM Stock Fund under the EDCP.

·                  That investment value was matched on a two-for-one basis with market priced options.

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

Amounts in this column represent payments under IBM’s Annual Incentive Plan (AIP). Under the previous SEC rules, AIP payments were disclosed in the Bonus column of the Summary Compensation Table.

General Terms

·                  All executive officers, including the Chairman and CEO, participate in this plan.

·                  The performance period is the fiscal year (January 1 through December 31, 2006).

·                  Performance goals are set annually in the beginning of the year and generally encompass the following components:

·                  Corporate-wide goals

·                  Business unit goals

·                  See Section 2 of the Compensation Discussion and Analysis for information on setting performance targets for the AIP program.

Payout Range

·                  The Chairman and CEO has a flat dollar target of $5,000,000.

·                  Each named executive officer other than the Chairman and CEO has a target of 135% of base salary.

·                  Threshold payout for each named executive officer is $0 (see column (c) of the 2006 Grants of Plan-Based Awards Table).

·                  Maximum payout for each named executive officer is three times the target (see column (e) of the 2006 Grants of Plan-Based Awards Table).

Vesting and Payout

·                  In addition to performance against Corporate-wide and Business Unit goals, individual performance against goals set at beginning of year determine payout amount.

·                  An executive generally must be employed by IBM at the end of the performance period in order to be eligible to receive an AIP payout.

·                  AIP payouts earned between January 1, 2006 and December 31, 2006 will be paid on or before March 15, 2007.

Change in Retention Plan Value (Column (h))

·                  Amounts in the column titled Change in Retention Plan Value represent the annual change in retention plan value from December 31, 2005 to December 31, 2006 for each named executive officer.

·                  See the 2006 Retention Plan Narrative section 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, 2005 to December 31, 2006 for each named executive officer.

·                  See the 2006 Pension Benefits Narrative for a description of the IBM Pension Plans.

37




Nonqualified Deferred Compensation Earnings (Column (h))

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

·                  See the 2006 Nonqualified Deferred Compensation Narrative for a description of the nonqualified deferred compensation plans in which the named executive officers may participate.

All Other Compensation (Column (i))

Amounts in this column represent the following as applicable:

Tax Reimbursements

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

·                  These expenses are:

·                  Family travel to and attendance at Company-related events; and

·                  For the Chairman and CEO, commutation in Company-leased cars (see Personal Use of Company Autos below).

Company Contributions to Defined Contribution Plans

·                  Amounts represent Company matching contributions to the individual accounts for each named executive officer.

·                  Under IBM’s 401(k) plan and the EDCP, the Company matched 50% of the first 6% of eligible compensation contributed by executives hired before 2005, and 100% of the first 6% contributed by executives hired after 2004.

·                  See the 2006 Nonqualified Deferred Compensation Narrative for additional details on the nonqualified deferred compensation plans in which the named executive officers may participate.

Life Insurance Premiums

·                  Amounts represent life insurance premiums paid by IBM on behalf of the named executive officers.

·                  These executive officers are covered by life insurance policies under the same terms as other U.S. full-time regular employees.

·                  IBM provides basic term life insurance for most employees.

·                  Life insurance for employees and executives hired before January 1, 2006 is:

·                  Two times salary plus annual incentive plan payout.

·                  Maximum coverage amount of $2,000,000.

·                  In addition, IBM provides Travel Accident Insurance for most employees in connection with business travel.

·                  Travel Accident Insurance for employees and executives is:

·                  Five times salary plus incentive.

·                  Maximum coverage amount of $15,000,000.

Dividend Equivalents

·                  Amounts represent dividend equivalents paid in cash to the named executive officers in 2006 on their RSUs that have not yet vested and on any shares of IBM stock for which the officers deferred receipt under the EDCP (Deferred IBM Shares).

·                  Dividend equivalents are paid on unvested RSUs and Deferred IBM Shares at the same rate and at the same time as the dividends paid to IBM shareholders.

·                  IBM does not pay dividend equivalents on PSUs or stock options.

·                  See the 2006 Nonqualified Deferred Compensation Narrative for a description of the EDCP, including Deferred IBM Shares.

38




The following describes perquisites (and their aggregate incremental cost calculations) provided to the named executive officers in 2006.

Personal Financial Planning

IBM covers up to $8,000 annually for financial planning services for the named executive officers.

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 his personal travel is included in this column. These amounts also include the aggregate incremental cost, if any, of travel by his family or other non-IBM employees on both business and non-business occasions.

·                  Additionally, personal travel on IBM aircraft by named executive officers other than the Chairman and CEO, and the aggregate incremental cost, if any, of travel by the officer’s family or other non-IBM employees when accompanying the officer on business occasions is also included.

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

Aggregate Incremental Cost Calculation

·                  The aggregate incremental cost for the use of Company aircraft for personal travel, including travel to outside boards, is calculated as follows: multiply hourly variable cost rate for the aircraft used by the hours used.

·                  The hourly variable cost rate includes the following:

·                  Fuel

·                  Oil

·                  Parking/Landing fees

·                  Crew expenses

·                  Aircraft maintenance (based on the hourly operation of the aircraft)

·                  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 for charter flights is the full cost to IBM of the charter.

Personal Use of Company Autos

General Information

·                  IBM security practices provide that the Chairman and CEO be driven to and from work by IBM personnel in a car leased by IBM.

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

·                  Family members and other non-IBM employees may accompany named executive officers other than the Chairman and CEO in a Company-leased car on business occasions.

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

39




Aggregate Incremental Cost Calculation

·                  The incremental cost for the car and driver for commutation and non-business events is calculated by multiplying:

·                  Variable rate by

·                  The number of trips.

·                  The variable rate includes the following:

·                  Drivers’ salary and overtime payments

·                  Fuel

·                  Maintenance

·                  Tolls

·                  Parking

·                  Drivers’ meals

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 his family on certain non-business occasions or when accompanying him on business occasions.

·                  Amounts include the aggregate incremental cost, if any, of security personnel for those occasions.

·                  In addition, amounts also include the cost of home security systems and monitoring for the Chairman and CEO and the specified named executive officers.

Aggregate Incremental Cost Calculation

·                  The aggregate incremental cost for security personnel is the cost of the following items:

·                  Commercial airfare to and from the destination, if needed

·                  Hotels

·                  Meals

·                  Car services

·                  Salary and travel expenses of any additional subcontracted personnel, if needed.

·                  The aggregate incremental cost for installation, maintenance and monitoring services for home security systems reflects the costs of these items.

Annual Executive Physical

·                  IBM covers the cost of an annual executive physical for the named executive officers.

·                  Amounts represent payments by IBM for the specified named executive officer under this program.

Family Travel and Attendance at Company-Related Events

·                  Company-related events may include meetings, dinners and receptions with IBM’s clients, executive management or Board of Directors attended by the named executive officer and his family.

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

Other Personal Expenses

·                  Amounts represent the cost of meals and lodging for executives who traveled for their annual executive physical.

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

40




2006 SUMMARY COMPENSATION TABLE

 

Year

 

Salary
($)

 

Bonus
($)

 

Perform-
ance
Share
Units
(1) ($)

 

Restricted
Stock
Units
(1) ($)

 

Retention
Restricted
Stock
Units
(1) ($)

 

Stock
Awards
Total
(2) ($)

 

Premium
Priced
Options
(3) ($)

 

Market
Priced
Options
(3) ($)

 

Option
Awards
Total
(4) ($)

 

Non-
Equity
Incentive
Plan
Compen-
sation
($)

 

Change
in
Retention
Plan
Value
(5) ($)

 

Change
in
Pension
Value
(6) ($)

 

Non-
qualified
Deferred
Compen-
sation
Earnings
(7) ($)

 

All
Other
Compen-
sation
(8) ($)

 

Total
(9) ($)

 

Name and Principal Position (a)

 

(b)

 

(c)

 

(d)

 

(e)

 

(e)

 

(e)

 

(e)

 

(f)

 

(f)

 

(f)

 

(g)

 

(h)

 

(h)

 

(h)

 

(i)

 

(j)

 

S.J. Palmisano

 

2006

 

$ 1,750,000

 

$             0

 

$ 5,342,100

 

$  495,283

 

$  624,650

 

$ 6,462,033

 

$ 3,934,012

 

$ 2,449,936

 

$ 6,383,948

 

$ 5,000,000

 

$ 1,615,832

 

$ 2,329,445

 

$             0

 

$  922,530

 

$ 24,463,788

 

Chairman, President

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and CEO

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

M. Loughridge

 

2006

 

659,167

 

200,000

 

979,974

 

232,763

 

574,522

 

1,787,259

 

780,616

 

310,670

 

1,091,286

 

920,000

 

465,512

 

698,630

 

0

 

132,447

 

5,954,301

 

Senior VP and CFO

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

N.M. Donofrio

 

2006

 

771,667

 

200,000

 

909,512

 

225,004

 

657,794

 

1,792,310

 

592,636

 

575,426

 

1,168,062

 

1,023,350

 

226,666

 

975,154

 

0

 

135,217

 

6,292,426

 

Executive VP, Innovation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and Technology

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

D.T. Elix

 

2006

 

768,751

 

200,000

 

1,280,009

 

225,004

 

288,492

 

1,793,505

 

1,078,472

 

601,094

 

1,679,566

 

888,250

 

473,653

 

136,307

 

0

 

120,117

 

6,060,149

 

Senior VP and Group

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Executive

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

S.A. Mills

 

2006

 

621,251

 

200,000

 

1,142,409

 

217,245

 

584,206

 

1,943,860

 

935,918

 

521,027

 

1,456,945

 

865,000

 

322,046

 

491,700

 

0

 

109,427

 

6,010,229

 

Senior VP and Group

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Executive

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(1)    The expense for the Performance Share Units, Restricted Stock Units and Retention Restricted Stock Units above was computed in accordance with FAS 123R (excluding risk of forfeiture) by multiplying the number of units granted by the average high and low stock prices of IBM stock on the NYSE on the date of grant.

(2)    The amounts in this column reflect the total of the previous three columns (Performance Share Units, Restricted Stock Units and Retention Restricted Stock Units).

(3)    For assumptions used in determining the fair value of stock option awards granted, see Note U (Stock-Based Compensation) to the Company’s 2005 and 2006 Consolidated Financial Statements and Note V (Stock-Based Compensation) to the Company’s 2003 and 2004 Consolidated Financial Statements.

(4)    The amounts in this column reflect the total of the previous two columns (Premium Priced Options and Market Priced Options).

(5)    Assumptions used to calculate this amount can be found immediately after the 2006 Retention Plan Table.

(6)    Assumptions used to calculate this amount can be found immediately after the 2006 Pension Benefits Table.

(7)    IBM does not provide guaranteed, above-market or preferential earnings on deferred compensation.

(8)    Amounts in this column include the following: for Mr. Palmisano: tax reimbursements of $11,143, Company contributions to defined contribution plans of $207,750, and dividend equivalents of $248,725; for Mr. Loughridge: Company contributions to defined contribution plans of $50,525, and dividend equivalents of $78,671; for Mr. Donofrio: Company contributions to defined contribution plans of $59,450, and dividend equivalents of $27,262; for Mr. Elix: Company contributions to defined contribution plans of $56,963, and dividend equivalents of $35,140; and for Mr. Mills: Company contributions to defined contribution plans of $47,438, and dividend equivalents of $47,403. Amounts in this column also include the following perquisites: for Mr. Palmisano: personal financial planning, personal travel on Company aircraft of $373,187, personal use of Company autos, personal security of $53,409 and spousal attendance at Company-related events; for Mr. Donofrio: personal financial planning, personal travel on Company aircraft of $27,696, personal security, annual executive physical, family attendance at Company-related events and other personal expense; for Mr. Elix: personal travel on Company aircraft, spousal attendance at Company-related events and other personal expense; and for Mr. Mills: personal financial planning, personal travel on Company aircraft, personal security and spousal attendance at Company-related events. See the 2006 Summary Compensation Table Narrative for a description of these items and information about aggregate incremental cost calculations.

(9)    The amounts in this column reflect the total of the following columns: Salary, Bonus, Stock Awards Total, Option Awards Total, Non-Equity Incentive Plan Compensation, Change in Retention Plan Value, Change in Pension Value, Nonqualified Deferred Compensation Earnings and All Other Compensation.

41




2006 GRANTS OF PLAN-BASED AWARDS TABLE

This table reflects the following plan-based awards: Annual Incentive Plan; Performance Share Units; Restricted Stock Units and Stock Option Grants. Each of these types of awards is discussed in the 2006 Summary Compensation Table Narrative and in the Compensation Discussion and Analysis above.

 

 

 

 

 

 

 

 

Estimated Future Payouts
Under Non-Equity Incentive
Plan Awards(2)

 

Estimated Future Payouts
Under Equity Incentive
Plan Awards(3)

 

 

 

 

 

 

 

 

 

 

 

Name (a)

 

Type of
Award(1)

 

Grant
Date
(b)

 

Compen-
sation
Committee
Approval
Date

 

Threshold
($) (c)

 

Target
($) (d)

 

Maximum
($) (e)

 

Threshold
(#) (f)

 

Target
(#) (g)

 

Maximum
(#) (h)

 

All Other
Stock
Awards:
Number of
Shares of
Stock or
Units(4)(5)
(#) (i)

 

All Other
Option
Awards:
Number of
Securities
Underl-ying
Options(6)
(#) (j)

 

Exercise or
Base Price
of Option
Awards(7)
($/Sh) (k)

 

Closing
Price on
the NYSE
on the
Date of
Grant
($/Sh)

 

Grant Date
Fair Value
of Stock
and Option
Awards(8)
($) (l)

 

S. J.

 

AIP

 

N/A

 

2/28/2006

 

$               0

 

$ 5,000,000

 

$ 15,000,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Palmisano

 

PSU

 

5/8/2006

 

2/28/2006

 

 

 

 

 

 

 

23,619

 

94,475

 

141,713

 

 

 

 

 

 

 

 

 

$ 7,818,751

 

 

 

SO

 

5/8/2006

 

2/28/2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

88,130

 

$       91.04

 

$       82.89

 

1,787,276

 

 

 

SO

 

5/8/2006

 

2/28/2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

63,628

 

82.76

 

82.89

 

1,495,894

 

M.

 

AIP

 

N/A

 

2/28/2006

 

0

 

920,000

 

2,760,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loughridge

 

PSU

 

5/8/2006

 

2/28/2006

 

 

 

 

 

 

 

4,688

 

18,750

 

28,125

 

 

 

 

 

 

 

 

 

1,551,750

 

 

 

RSU

 

5/8/2006

 

2/28/2006

 

 

 

 

 

 

 

 

 

 

 

 

 

11,250

 

 

 

 

 

 

 

931,050

 

 

 

RRSU

 

3/7/2006

 

2/28/2006

 

 

 

 

 

 

 

 

 

 

 

 

 

17,648

 

 

 

 

 

 

 

1,417,311

 

 

 

SO

 

5/8/2006

 

2/28/2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27,986

 

91.04

 

82.89

 

567,556

 

 

 

SO

 

5/8/2006

 

2/28/2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,402

 

82.76

 

82.89

 

197,531

 

N. M.

 

AIP

 

N/A

 

2/28/2006

 

0

 

1,055,000

 

3,165,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Donofrio

 

PSU

 

5/8/2006

 

2/28/2006

 

 

 

 

 

 

 

4,531

 

18,125

 

27,188

 

 

 

 

 

 

 

 

 

1,500,025

 

 

 

RSU

 

5/8/2006

 

2/28/2006

 

 

 

 

 

 

 

 

 

 

 

 

 

10,875

 

 

 

 

 

 

 

900,015

 

 

 

SO

 

5/8/2006

 

2/28/2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27,053

 

91.04

 

82.89

 

548,635

 

 

 

SO

 

5/8/2006

 

2/28/2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14,878

 

82.76

 

82.89

 

349,782

 

D. T. Elix

 

AIP

 

N/A

 

2/28/2006

 

0

 

1,045,000

 

3,135,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PSU

 

5/8/2006

 

2/28/2006

 

 

 

 

 

 

 

4,531

 

18,125

 

27,188

 

 

 

 

 

 

 

 

 

1,500,025

 

 

 

RSU

 

5/8/2006

 

2/28/2006

 

 

 

 

 

 

 

 

 

 

 

 

 

10,875

 

 

 

 

 

 

 

900,015

 

 

 

SO

 

5/8/2006

 

2/28/2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27,053

 

91.04

 

82.89

 

548,635

 

 

 

SO

 

5/8/2006

 

2/28/2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9,263

 

82.76

 

82.89

 

217,773

 

S.A. Mills

 

AIP

 

N/A

 

2/28/2006

 

0

 

865,000

 

2,595,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PSU

 

5/8/2006

 

2/28/2006

 

 

 

 

 

 

 

4,375

 

17,500

 

26,250

 

 

 

 

 

 

 

 

 

1,448,300

 

 

 

RSU

 

5/8/2006

 

2/28/2006

 

 

 

 

 

 

 

 

 

 

 

 

 

10,500

 

 

 

 

 

 

 

868,980

 

 

 

RRSU

 

12/22/2006

 

12/20/2006

 

 

 

 

 

 

 

 

 

 

 

 

 

12,346

 

 

 

 

 

 

 

1,180,278

 

 

 

SO

 

5/8/2006

 

2/28/2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26,120

 

91.04

 

82.89

 

529,714

 

 

 

SO

 

5/8/2006

 

2/28/2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11,804

 

82.76

 

82.89

 

277,512

 


(1)        Type of Award:
AIP = Annual Incentive Plan
PSU = Performance Share Unit
RSU = Restricted Stock Unit
RRSU = Retention Restricted Stock Unit
SO = Nonqualified Stock Option

(2)                These amounts will be adjusted based on performance and paid on or before March 15, 2007.

(3)                Amounts shown are numbers of PSUs. These awards will be adjusted for performance and be payable on February 1, 2009.

(4)                RSUs will vest in three equal annual installments on the first three anniversaries of the grant date.

(5)                The RRSU awarded to Mr. Loughridge on March 7, 2006 will vest one third on March 7, 2009, and the remaining two thirds will vest on March 7, 2011. The RRSU awarded to Mr.
Mills on December 22, 2006 will vest 100% on December 22, 2011.

(6)                Options with an exercise price of $91.04 will vest in four equal annual installments on the first four anniversaries of the grant date. Options with an exercise price of $82.76 will vest 100% on the third anniversary of the grant date.

(7)                Premium priced SOs have an exercise price equal to 110% of the average of the high and low prices of IBM stock on the NYSE on the date of grant. All other SOs have an exercise
price equal to the average of the high and low prices of IBM stock on the NYSE on the date of grant.

(8)                Amounts in this column represent the market value of the full 2006 awards indicated, calculated in accordance with FAS 123R. For option awards, that number is calculated by multiplying the Black-Scholes value by the number of options awarded. For PSUs, RSUs and RRSUs, that number is calculated by multiplying the average high and low prices of IBM stock on the NYSE on the date of grant by the number of units awarded.

 

42




 

2006 OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END NARRATIVE

Option Awards (Columns (b)-(f))

·                  The Grant Date for each of the outstanding option awards has been included to facilitate understanding of the vesting schedules.

 

·                  Additionally, a Total line has been included for each named executive officer to provide the reader with a better understanding of the total number of options outstanding in each category (exercisable and unexercisable).

 

·                  IBM has not granted any option awards that are Equity Incentive Plan Awards; therefore no amounts are reported in column (d) of the 2006 Outstanding Equity Awards at Fiscal Year-End Table.

 

·                  See the 2006 Summary Compensation Table Narrative above for more details on the option awards.

Stock Awards (Columns (g)-(j))

General Information

The Grant Date for each of the outstanding RSU awards (column (g)) and PSU and performance-based RSU awards (column (i)) has been included to facilitate understanding of the vesting schedules.

Number of Shares or Units of Stock That Have Not Vested (Column (g))

The amounts in this column are the number of RSUs that are not performance-based that were outstanding as of December 31, 2006.

Market Value of Shares or Units of Stock That Have Not Vested (Column (h))

The amounts in this column are the value of RSUs disclosed in column (g), calculated by multiplying the number of units by the closing price of IBM stock on the last business day of the fiscal year.

Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (Column (i))

The amounts in this column are the number of PSUs and performance-based RSUs that were outstanding as of December 31, 2006.

Performance Share Units

·                  Amounts in column (i) of the 2006 Outstanding Equity Awards at Fiscal Year-End Table reflect the maximum number possible for each PSU award.

 

·                  The maximum payout level is 150% of target and the program has not paid out at the maximum level since the 1995-1997 performance period (which paid out in February 1998).

 

·                  The performance criteria for IBM’s PSU program is based on cumulative three-year rolling targets. Therefore, measuring annual performance against these targets, which is required by the SEC rules, is not meaningful.

 

·                  Payouts in the last 5 years have ranged from 54% to 130%.

 

·                  See Section 2 of the 2006 Compensation Discussion and Analysis as well as the 2006 Summary Compensation Table Narrative for a detailed description of the PSU program including payout calculations.

 

·                  The table below provides the payout levels for all of the outstanding awards for each of the named executive officers.

2006 Outstanding PSU Award Payout Levels

NAME

 

GRANT DATE

 

THRESHOLD

 

TARGET

 

MAXIMUM

 

S.J. Palmisano

 

2/24/2004

 

10,417

 

41,667

 

62,501

 

 

 

3/08/2005

 

8,374

 

33,495

 

50,243

 

 

 

5/08/2006

 

23,619

 

94,475

 

141,713

 

M. Loughridge

 

2/24/2004

 

2,009

 

8,034

 

12,051

 

 

 

3/08/2005

 

1,622

 

6,487

 

9,731

 

 

 

5/08/2006

 

4,688

 

18,750

 

28,125

 

N.M. Donofrio

 

2/24/2004

 

2,402

 

9,606

 

14,409

 

 

 

5/08/2006

 

4,531

 

18,125

 

27,188

 

D.T. Elix

 

2/24/2004

 

2,729

 

10,917

 

16,376

 

 

 

3/08/2005

 

2,392

 

9,569

 

14,354

 

 

 

5/08/2006

 

4,531

 

18,125

 

27,188

 

S.A. Mills

 

2/24/2004

 

2,327

 

9,307

 

13,961

 

 

 

3/08/2005

 

2,079

 

8,315

 

12,473

 

 

 

5/08/2006

 

4,375

 

17,500

 

26,250

 

 

43




Performance-Based RSUs

·                  The 10,753 unit award shown for Mr. Palmisano in Column (i) of the 2006 Outstanding Equity Awards at Fiscal Year-End Table was a performance-based RSU granted on March 8, 2005 in connection with the transaction with Lenovo involving IBM’s Personal Computing business.

 

·                  The vesting of this award was contingent on performance-based and retention criteria.

 

·                  The performance-based criteria was satisfied on April 30, 2005 with the successful close of the Lenovo transaction, and the retention criteria was satisfied on March 8, 2007.

Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested (Column (j))

The amounts in this column are the value of PSUs and performance-based RSUs disclosed in column (i), calculated by multiplying the number of units by the closing price of IBM stock on the last business day of the fiscal year.

 

44




2006 Outstanding Equity Awards at Fiscal Year-End Table

 

 

Option Awards

 

Stock Awards

 

Name

 

Grant
Date

 

Number of

Securities

Underlying
Unexercised

Options(1)

 (#)

Exercisable

 

Number of

Securities

Underlying

Unexercised

Options(2) (#)

Unexercisable

 

Equity

Incentive

Plan

Awards:

Number

of

Securities

Underlying

Unexercised

Unearned

Options (#)

 

Option

Exercise

Price ($)

 

Option

Expiration

Date

 

Grant

Date

 

Number of

Shares

or Units

of

Stock

That

Have

Not

Vested(3) (#)

 

Market

Value

of Shares

or Units

of Stock

That Have

Not

Vested(4) 

($)

 

Grant Date

 

Equity

Incentive

Plan

Awards:

Number of

Unearned

Shares,

Units or

Other

Rights

That

Have

Not

Vested(5) 

(#)

 

Equity

Incentive

Plan

Awards:

Market

or Payout

Value of

Unearned

Shares,

Units or

Other

Rights

That Have

 Not

Vested(4) ($)

 

(a)

 

 

 

(b)

 

(c)

 

(d)

 

(e)

 

(f)

 

 

 

(g)

 

(h)

 

 

 

(i)

 

(j)

 

S.J Palmisano.

 

7/29/1997

 

64,000

 

0

 

N/A

 

$

51.8600

 

7/28/2007

 

7/27/1999

 

25,000

 

$

2,428,750

 

2/24/2004

 

62,501

 

$

6,071,972

 

 

 

2/24/1998

 

120,000

 

0

 

 

 

51.1550

 

2/23/2008

 

 

 

 

 

 

 

3/8/2005

 

50,243

 

4,881,107

 

 

 

2/23/1999

 

100,000

 

0

 

 

 

88.9550

 

2/22/2009

 

 

 

 

 

 

 

3/8/2005