DEF 14A 1 a15-1543_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.        )

Filed by the Registrant  x

Filed by a Party other than the Registrant  o

Check the appropriate box:

o  Preliminary Proxy Statement

o  Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

x  Definitive Proxy Statement

o  Definitive Additional Materials

o  Soliciting Material Pursuant to §240.14a-12

 

International Business Machines Corporation

(Name of Registrant as Specified In Its Charter)

 

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

 

Payment of Filing Fee (Check the appropriate box):

x  No fee required.

o  Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

 

 

(1)  Title of each class of securities to which transaction applies:

 

 

 

 

 

(2)  Aggregate number of securities to which transaction applies:

 

 

 

 

 

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

 

 

 

 

 

(4)  Proposed maximum aggregate value of transaction:

 

 

 

 

 

(5)  Total fee paid:

 

 

 

o

 

Fee paid previously with preliminary materials.

o

 

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

 

 

(1)  Amount Previously Paid:

 

 

 

 

 

(2)  Form, Schedule or Registration Statement No.:

 

 

 

 

 

(3)  Filing Party:

 

 

 

 

 

(4)  Date Filed:

 

 

 

 

 

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

 



 

IBM Notice of 2015 Annual Meeting and Proxy Statement

International Business Machines Corporation

 

 

Armonk, New York 10504

March 9, 2015

 

DEAR STOCKHOLDERS:

 

You are cordially invited to attend the Annual Meeting of Stockholders on Tuesday, April 28, 2015 at 10 a.m., in the Statehouse Convention Center, Little Rock, Arkansas.

 

We are very pleased that Mr. Alex Gorsky, Chairman and Chief Executive Officer of Johnson & Johnson, and Mr. Peter R. Voser, Retired Chief Executive Officer of Royal Dutch Shell plc, are new nominees for the Board this year.

 

At this year’s Annual Meeting, you will once again be asked to provide an advisory vote on executive compensation. The Board’s recommendation on this item is set forth in the proposal, and your support is important.

 

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

 

Very truly yours,

 

Virginia M. Rometty

Chairman of the Board

 

YOUR VOTE IS IMPORTANT.

 

Please vote by using the Internet, the telephone,

or by signing, dating, and returning the enclosed proxy card.

 

1



 

2



 

NOTICE OF MEETING

 

The Annual Meeting of Stockholders of International Business Machines Corporation will be held on Tuesday, April 28, 2015 at 10 a.m., in the Statehouse Convention Center, #1 Statehouse Plaza, Little Rock, Arkansas. The items of business are:

 

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

 

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

 

3.         Advisory vote on executive compensation.

 

4.         Four stockholder proposals if properly presented at the meeting.

 

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

 

 

Christina M. Montgomery

Vice President and Secretary

 

This Proxy Statement and the accompanying form of proxy card are being mailed beginning on or about March 9, 2015 to all stockholders entitled to vote. The IBM 2014 Annual Report, which includes consolidated financial statements, is being mailed with this Proxy Statement.

 

Important Notice Regarding the Availability of Proxy Materials for the Stockholder Meeting to be held on April 28, 2015: The Proxy Statement and the Annual Report to Stockholders are available at www.ibm.com/investor/material/.

 

3



 

IBM Notice of 2015 Annual Meeting and Proxy Statement

International Business Machines Corporation

 

TABLE OF CONTENTS

 

1.         Election of Directors for a Term of One Year

 

 

 

General Information:

 

·             IBM Board of Directors

 

·             Committees of the Board

 

·             Certain Transactions and Relationships

 

·             Certain Information about Insurance and Indemnification

 

·             2014 Director Compensation

 

·             Section 16(a) Beneficial Ownership Reporting Compliance

 

·             Ownership of Securities

 

 

 

Executive Compensation:

 

2014 Report of the Executive Compensation and Management Resources Committee of the Board of Directors

 

2014 Compensation Discussion and Analysis

 

2014 Summary Compensation

 

2014 Grants of Plan-Based Awards

 

2014 Outstanding Equity Awards at Fiscal Year-End

 

2014 Option Exercises and Stock Vested

 

2014 Retention Plan

 

2014 Pension Benefits

 

2014 Nonqualified Deferred Compensation

 

2014 Potential Payments Upon Termination

 

 

 

Report of the Audit Committee of the Board of Directors

 

 

 

Audit and Non-Audit Fees

 

 

 

2.         Ratification of Appointment of Independent Registered Public Accounting Firm

 

 

 

3.         Advisory Vote on Executive Compensation

 

 

 

4.         Stockholder Proposal for Disclosure of Lobbying Policies and Practices

 

 

 

5.         Stockholder Proposal on the Right to Act by Written Consent

 

 

 

6.         Stockholder Proposal to Limit Accelerated Executive Pay

 

 

 

7.         Stockholder Proposal on Establishing a Public Policy Committee

 

 

 

Frequently Asked Questions

 

 

4



 

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 past five years. If one or more of these nominees become unavailable to accept nomination or election as a director, the individuals named as proxies on the 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.

 

 

Alain J.P. Belda, 71, is a managing director at Warburg Pincus LLC, a global private equity and investment firm. He is a member of IBM’s Directors and Corporate Governance Committee. Mr. Belda joined Alcoa in 1969 and subsequently held various executive positions. From 1979 to 1994, he was president of Alcoa Aluminio S.A. in Brazil, Alcoa’s Brazilian subsidiary. He was named executive vice president of Alcoa Inc. in 1994, vice chairman in 1995, president and chief operating officer in 1997 and president and chief executive officer in 1999. Mr. Belda was chairman and chief executive officer from 2001 until 2008; he remained chairman until his retirement in 2010. He is a director of Renault S.A., Omega Energia Renovavel S.A., Banco Indusval Partners, Pet Center Marginal and Dudalina. Additionally, during the past five years, he served as a director of Citigroup Inc. Mr. Belda became an IBM director in 2008.

 

 

William R. Brody, 71, is president of the Salk Institute for Biological Studies, a non-profit scientific research institution. He is a member of IBM’s Directors and Corporate Governance Committee. From 1987 to 1994, Dr. Brody was the Martin Donner Professor and director of the Department of Radiology, professor of electrical and computer engineering, and professor of biomedical engineering at The Johns Hopkins University and radiologist-in-chief of The Johns Hopkins Hospital. He was the provost of the Academic Health Center at the University of Minnesota from 1994 until 1996. Dr. Brody was president of The Johns Hopkins University from 1996 to 2009. He is a director of all T. Rowe Price fund companies and BioMed Realty Trust. Dr. Brody is a trustee of the W.M. Keck Foundation. Additionally, during the past five years, he served as a director of Novartis AG. Dr. Brody became an IBM director in 2007.

 

 

Kenneth I. Chenault, 63, 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. He is a director of The Procter & Gamble Company. Mr. Chenault became an IBM director in 1998.

 

 

Michael L. Eskew, 65, is retired chairman and chief executive officer of United Parcel Service, Inc., a provider of specialized transportation and logistics services. He is IBM’s Presiding Director, chair of IBM’s Audit Committee and a member of IBM’s Executive Committee. Mr. Eskew joined United Parcel Service in 1972. He was named corporate vice president for industrial engineering in 1994, group vice president for engineering in 1996, executive vice president in 1999, vice chairman in 2000, and he was chairman and chief executive officer from 2002 until his retirement at the end of 2007. Mr. Eskew remained on the board of United Parcel Service until the end of 2014. He is a director of Allstate Corporation, Eli Lilly and Company and 3M Company. In addition, he is chairman of the Annie E. Casey Foundation. Mr. Eskew became an IBM director in 2005.

 

 

David N. Farr, 60, is chairman and chief executive officer of Emerson Electric Co., a diversified manufacturing and technology company. He is a member of IBM’s Audit Committee. Mr. Farr joined Emerson in 1981 and subsequently held various executive positions. He was named senior executive vice president and chief operating officer in 1999, chief executive officer in 2000 and chairman and chief executive officer in 2004. Mr. Farr was named chairman, president and chief executive officer in 2005 and chairman and chief executive officer in 2010. He is a member of the Executive Committee of the National Association of Manufacturers, and a director of the US-China Business Council. Mr. Farr became an IBM director in 2012.

 

5



 

 

Alex Gorsky, 54, is chairman and chief executive officer of Johnson & Johnson, a global healthcare products company. He is a member of IBM’s Executive Compensation and Management Resources Committee. Mr. Gorsky joined Johnson & Johnson in 1988. In 2001, he was appointed president of Janssen Pharmaceutical Inc., and in 2003 he was named company group chairman of the Johnson & Johnson pharmaceutical business in Europe, the Middle East and Africa. Mr. Gorsky left Johnson & Johnson in 2004 to join the Novartis Pharmaceuticals Corporation, where he served as head of the company’s pharmaceutical business in North America. Mr. Gorsky returned to Johnson & Johnson in 2008 as company group chairman for Ethicon. In early 2009, he was appointed worldwide chairman of the Surgical Care Group and member of the executive committee. In September 2009, he was appointed worldwide chairman of the Medical Devices and Diagnostics Group. Mr. Gorsky became vice chairman of the executive committee in January 2011. He was named chief executive officer and joined the board of directors in April 2012 and was named chairman in December 2012. Mr. Gorsky also serves on the boards of the Travis Manion Foundation, Congressional Medal of Honor Foundation, and the National Academy Foundation. Mr. Gorsky became an IBM director in 2014.

 

 

Shirley Ann Jackson, 68, is president of Rensselaer Polytechnic Institute. She is chair of IBM’s Directors and Corporate Governance Committee and a member of IBM’s Executive Committee. Dr. Jackson was a theoretical physicist at the former AT&T Bell Laboratories from 1976 to 1991, professor of theoretical physics at Rutgers University from 1991 to 1995, and chairman of the U.S. Nuclear Regulatory Commission from 1995 until she assumed her current position in 1999. Dr. Jackson is a director of FedEx Corporation, Marathon Oil Corporation, Medtronic, Inc., and Public Service Enterprise Group Incorporated. She is co-chair of the President’s Intelligence Advisory Board, and a member of the International Security Advisory Board to the United States Secretary of State. Dr. Jackson is a fellow of the Royal Academy of Engineering (U.K.), the American Academy of Arts and Sciences, a trustee of the Brookings Institution and a past president of the American Association for the Advancement of Science. She is a member of the Council on Foreign Relations, the National Academy of Engineering, the American Philosophical Society and the Board of Regents of the Smithsonian Institution. Additionally, during the past five years, she served as a director of NYSE Euronext. Dr. Jackson became an IBM director in 2005.

 

 

Andrew N. Liveris, 60, is chairman, president and chief executive officer of The Dow Chemical Company, a global technology company focused on developing innovative solutions at the intersections of the physical, materials, polymer and biological sciences. He is a member of IBM’s Executive Compensation and Management Resources Committee. Mr. Liveris joined Dow in 1976 and subsequently held various executive positions, including vice president of specialty chemicals from 1998 to 2000, business group president for performance chemicals from 2000 to 2003, and president and chief operating officer from 2003 to 2004. Mr. Liveris was named president and chief executive officer of Dow in 2004 and chairman in 2006. Mr. Liveris serves as vice chairman of the executive committee of the Business Roundtable, co-chair of the President’s Advanced Manufacturing Partnership, an Executive Committee member and past chairman of The Business Council and a member of the President’s Export Council. Mr. Liveris is also a trustee of the Herbert H. & Grace A. Dow Foundation, the California Institute of Technology and the United States Council for International Business (USCIB). Additionally, he served as a director of Citigroup Inc. until April 2011. Mr. Liveris became an IBM director in 2010.

 

 

W. James McNerney, Jr., 65, is chairman and chief executive officer of The Boeing Company, an aerospace company and manufacturer of commercial airplanes and defense, space and security systems. He is a member of IBM’s Executive Compensation and Management Resources Committee. Mr. McNerney joined Boeing in his current role in 2005. Beginning in 1982, he served in management positions at General Electric Company, including as president and chief executive officer of GE Aircraft Engines from 1997 to 2000. From 2001 to 2005, he served as chairman and chief executive officer of 3M Company. Mr. McNerney is chairman of the President’s Export Council. He is also a director of The Procter & Gamble Company. Mr. McNerney became an IBM director in 2009.

 

 

James W. Owens, 69, is retired chairman 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 in 1972 as a corporate economist and subsequently held various management positions, including chief financial officer. He was named group president in 1995 and vice chairman in 2003. Mr. Owens served as chairman and chief executive officer of Caterpillar from 2004 until his retirement in 2010. He is a director of Alcoa Inc. and Morgan Stanley. Mr. Owens is chairman of the executive committee of the Peterson Institute for International Economics and a senior advisor at KKR & Co. L.P. He is a trustee of North Carolina State University and was a member of the President’s Economic Recovery Advisory Board. Mr. Owens became an IBM director in 2006.

 

6



 

 

Virginia M. Rometty, 57, is chairman, president and chief executive officer of IBM and chair of IBM’s Executive Committee. Mrs. Rometty joined IBM in 1981. She was elected senior vice president of Global Business Services in 2005, senior vice president of Sales and Distribution in 2009, senior vice president and group executive of Sales, Marketing and Strategy in 2010, president and chief executive officer in early 2012 and chairman in late 2012. She is a member of the Business Roundtable, the Council on Foreign Relations, the President’s Export Council, the Board of Trustees of Northwestern University and the Board of Overseers and Managers of Memorial Sloan-Kettering Cancer Center. Mrs. Rometty became an IBM director in 2012.

 

 

Joan E. Spero, 70, is an adjunct senior research scholar at Columbia University’s School of International and Public Affairs. She is a member of IBM’s Audit Committee. Ms. Spero served as U.S. Ambassador to the United Nations for Economic and Social Affairs from 1980 to 1981. From 1981 to 1993, she held several positions with American Express Company, the last being executive vice president, corporate affairs and communications. From 1993 to 1996, Ms. Spero served as U.S. Under Secretary of State for Economic, Business and Agricultural Affairs, and from 1997 through 2008, she was president of the Doris Duke Charitable Foundation. She is a director of Citigroup Inc. and International Paper Company. From 2009 to 2010, she was a visiting fellow at the Foundation Center. She is a member of the Council on Foreign Relations and the American Philosophical Society, a trustee emeritus of Columbia University, an honorary trustee of the Brookings Institution, and a trustee of the Wisconsin Alumni Research Foundation and the International Center for Transitional Justice. Additionally, during the past five years, she served as a member of the supervisory board of ING Group. Ms. Spero became an IBM director in 2004.

 

 

Sidney Taurel, 66, is senior advisor at Moelis & Company, an investment bank. He is chair 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 held management positions in the company’s operations in South America and Europe. He was named president of Eli Lilly International Corporation in 1986, executive vice president of the Pharmaceutical Division in 1991, executive vice president of Eli Lilly and Company in 1993, and president and chief operating officer in 1996. He was named chief executive officer of Eli Lilly and Company in 1998 and chairman of the board in 1999. Mr. Taurel retired as chief executive officer in early 2008 and as chairman in late 2008. He is a director of McGraw Hill Financial, Inc. He is also a member of the Board of Overseers of the Columbia Business School, a graduate member of The Business Council and a trustee of the Indianapolis Museum of Art. Mr. Taurel became an IBM director in 2001.

 

 

Peter R. Voser, 56, is retired chief executive officer of Royal Dutch Shell plc, a global group of energy and petrochemical companies. He is a member of IBM’s Directors and Corporate Governance Committee. Mr. Voser joined Shell in 1982 and held a variety of finance and business roles including chief financial officer of Oil Products. In 2002, he joined the Asea Brown Boveri (ABB) Group of Companies as chief financial officer and a member of the ABB Group executive committee. Mr. Voser returned to Shell in 2004 becoming a managing director of The Shell Transport and Trading Company, p.l.c. and chief financial officer of the Royal Dutch/Shell Group. He was appointed chief executive officer of the company in 2009 and held that position until his retirement in late 2013. He is a director of Catalyst, Roche Holding Limited, and Temasek. Mr. Voser is also active in a number of international and bilateral organizations, including The Business Council. Additionally, during the past five years he served as a director of UBS AG. Mr. Voser became an IBM director in 2015.

 

7



 

GENERAL INFORMATION

 

IBM Board of Directors

 

IBM’s Board of Directors is responsible for supervision of the overall affairs of the Company. To assist it in carrying out its duties, the Board has delegated certain authority to several committees. Following the Annual Meeting in 2015, the Board will consist of 14 directors. In the interim between Annual Meetings, the Board has the authority under the by-laws to increase or decrease the size of the Board and to fill vacancies. The Board held nine meetings during 2014. The Board and the Directors and Corporate Governance Committee recognize the importance of director attendance at Board and committee meetings. In 2014, overall attendance at Board and committee meetings was over 94%. Attendance was at least 75% for each director except Mr. Zambrano who died in May 2014. Information about board attendance at the Company’s 2014 Annual Meeting of Stockholders and the Company’s policy with regard to board members’ attendance at annual meetings of stockholders is available at http://www.ibm.com/investor/governance/director-attendance-at-annual-meeting.html?subtabs=open.

 

IBM’s Board of Directors has long adhered to governance principles designed to assure the continued vitality of the Board and excellence in the execution of its duties. Since 1994, the Board has had in place a set of governance guidelines reflecting these principles, including the Board’s policy of requiring a majority of independent directors, the importance of equity compensation to align the interests of directors and stockholders, and regularly scheduled executive sessions, including sessions of non-management directors without members of management. An executive session with independent directors is held at least once a year, and the non-management directors met in executive session nine times in 2014. The IBM Board Corporate Governance Guidelines reflect the Company’s principles on corporate governance matters. These guidelines are available at http://www.ibm.com/investor/governance/corporate-governance-guidelines.wss.

 

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

 

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

 

8



 

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

 

A.J.P. Belda

 

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

 

 

· Private equity management experience as a managing director of Warburg Pincus LLC

 

 

· Outside board experience as a director of Renault S.A.

W.R. Brody

 

· Leadership position as president of the Salk Institute for Biological Studies, a leading scientific research institution that develops solutions to a wide range of medical issues

 

 

· Leadership and teaching positions at research universities, including former president of The Johns Hopkins University

 

 

· Outside board experience as a director of all T. Rowe Price fund companies and former director of Novartis AG

 

 

· Experience as a university trustee

 

 

· Experience as a founder and former chief executive officer of a high-tech medical device company

K.I. Chenault

 

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

 

 

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

 

 

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

 

 

· Experience as a university trustee

 

 

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

M.L. Eskew

 

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

 

 

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

 

 

· Chairman of charitable organization

D.N. Farr

 

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

 

 

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

 

 

· Outside board experience as a former director of Delphi Corporation

A. Gorsky

 

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

 

 

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

S.A. Jackson

 

· Leadership position as president of Rensselaer Polytechnic Institute, a leading science and technology university that brings technological innovation to the marketplace

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

· Leadership and teaching positions at a research university

 

9



 

A.N. Liveris

 

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

 

 

· U.S. Government service (co-chair of the President’s Advanced Manufacturing Partnership and member of the President’s Export Council)

 

 

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

 

 

· Outside board experience as a former director of Citigroup Inc.

 

 

· Experience as a university trustee

W.J. McNerney, Jr.

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

· Experience as a university trustee

J.W. Owens

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

· Experience as a university trustee

V.M. Rometty

 

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

 

 

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

 

 

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

 

 

· Experience as a university trustee

J.E. Spero

 

· Experience as senior research scholar, Columbia University’s School of International and Public Affairs

 

 

· Research experience with national non-profit service organization (former visiting fellow at the Foundation Center)

 

 

· Leadership position as former president of the Doris Duke Charitable Foundation

 

 

· Business experience as a former senior executive of American Express Company

 

 

· U.S. Government service (former U.S. Under Secretary of State for Economic, Business and Agricultural Affairs and former U.S. Ambassador to the United Nations for Economic and Social Affairs)

 

 

· Affiliation with leading business and public policy association (member of the Council on Foreign Relations)

 

 

· Outside board experience as a director of Citigroup Inc. and International Paper Company

 

 

· Experience as a university trustee and former university professor

S. Taurel

 

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

 

 

· Private equity management experience as former senior advisor of Capital Royalty L.P.

 

 

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

 

 

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

 

 

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

 

 

· Member of a a university oversight board

P.R. Voser

 

· Global business experience as former chief executive officer of Royal Dutch Shell plc

 

 

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

 

 

· Outside board experience as a director of Roche Holding Limited

 

10



 

Under the IBM Board Corporate Governance Guidelines, the Directors and Corporate Governance Committee and the full Board annually review the financial and other relationships between the non-management directors and IBM as part of the annual assessment of director independence. The Directors and Corporate Governance Committee makes recommendations to the Board about the independence of non-management directors, and the Board determines whether those directors are independent. The independence criteria established by the Board in accordance with New York Stock Exchange requirements and used by the Directors and Corporate Governance Committee and the Board in their assessment of the independence of directors is available at http://www.ibm.com/investor/governance/board-of-directors/director-independence-standards.wss. Applying those standards for the non-management directors standing for election, the Committee and the Board have determined that each of the following directors has met the independence standards: A.J.P. Belda, W.R. Brody, M.L. Eskew, D.N. Farr, A. Gorsky, S.A. Jackson, A.N. Liveris, W.J. McNerney, Jr., J.W. Owens, J.E. Spero, S. Taurel, P.R. Voser, and L.H. Zambrano. The Committee and the Board have determined that K.I. Chenault does not qualify as an independent director in view of the commercial relationships between IBM and American Express Company in 2012 and 2013. As a result, Mr. Chenault does not participate on any committee of the Board and does not participate in the determination or approval of the compensation level for the Company’s CEO. The Company holds an executive session of the Board at least once a year that includes only independent directors. 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 and is not an executive officer. He was hired over a year before Mr. Eskew joined the Company’s Board, and his compensation and other terms of employment are determined on a basis consistent with the Company’s human resources policies. Based on the foregoing, the Board has determined that this relationship does not preclude a finding of independence for Mr. Eskew.

 

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

 

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

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

·             Approve information sent to the Board;

·             Approve meeting agendas for the Board;

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

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

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

 

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

 

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

 

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

 

11



 

Committees of the Board

 

 

 

 

 

 

 

Executive

 

 

 

 

 

 

 

Directors and

 

Compensation

 

 

 

 

 

 

 

Corporate

 

and Management

 

 

 

Name

 

Audit

 

Governance

 

Resources

 

Executive

 

A.J.P. Belda

 

 

 

P

 

 

 

 

 

W.R. Brody

 

 

 

P

 

 

 

 

 

M.L. Eskew

 

Chair

 

 

 

 

 

P

 

D.N. Farr

 

P

 

 

 

 

 

 

 

A. Gorsky

 

 

 

 

 

P

 

 

 

S.A. Jackson

 

 

 

Chair

 

 

 

P

 

A.N. Liveris

 

 

 

 

 

P

 

 

 

W.J. McNerney, Jr.

 

 

 

 

 

P

 

 

 

J.W. Owens

 

P

 

 

 

 

 

 

 

V.M. Rometty

 

 

 

 

 

 

 

Chair

 

J.E. Spero

 

P

 

 

 

 

 

 

 

S. Taurel

 

 

 

 

 

Chair

 

P

 

P.R. Voser

 

 

 

P

 

 

 

 

 

 

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 reviews its selection with the Board. In addition, at the beginning of each year, the Audit Committee approves the proposed services to be provided by the accounting firm during the year. Any additional engagements that arise during the course of the year are approved by the Audit Committee or by the Audit Committee chair pursuant to authority delegated by the Audit Committee. The Committee also reviews the procedures of the independent registered public accounting firm for ensuring its independence with respect to the services performed for 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. Eskew qualifies as an Audit Committee Financial Expert as defined by the rules of the SEC. The Committee held six meetings in 2014. The IBM Board of Directors has adopted a written charter for the Committee, which is available at http://www.ibm.com/investor/governance/board-of-directors/committees-of-the-board.wss. The Business Conduct Guidelines (BCGs) are IBM’s code of ethics for directors, executive officers, and employees. Any amendment to, or waiver of, the BCGs that applies to our directors or executive officers may be made only by the IBM Board or a Board committee and will be disclosed on IBM’s website. The BCGs are available at http://www.ibm.com/investor/governance/business-conduct-guidelines.wss.

 

12



 

Directors and Corporate Governance Committee

 

The Directors and Corporate Governance Committee is devoted primarily to the continuing review and articulation of the governance structure of the Board of Directors. As discussed above, the Committee is responsible for recommending qualified candidates to the Board for election as directors of the Company, including the slate of directors that the Board proposes for election by stockholders at the Annual Meeting. The Committee recommends candidates based on their business or professional experience, the diversity of their background, and their talents and perspectives. The Committee identifies candidates through a variety of means, including information the Committee requests from time to time from the Secretary of the Company, recommendations from members of the Committee and the Board, suggestions from Company management, including the CEO and, from time to time, a third-party search firm. Any formal invitation to a director candidate is authorized by the full Board. The Committee also considers candidates recommended by stockholders. Stockholders wishing to recommend director candidates for consideration by the Committee may do so by writing to the Secretary of 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. In addition, the Committee makes recommendations to the Board on compensation for non-management directors. The Committee currently retains Frederic W. Cook & Co. Inc. (Cook & Co.) 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. Other than services provided to IBM’s Directors and Corporate Governance Committee and IBM’s Executive Compensation and Management Resources Committee, Cook & Co. does not perform any other work for the Company. The Committee determined that Cook & Co. is free of conflicts of interest. 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 four meetings in 2014. The IBM Board of Directors has adopted a written charter for the Committee, which is available at http://www.ibm.com/investor/governance/board-of-directors/committees-of-the-board.wss.

 

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 Supplemental Executive Retention Plan. The Committee has the direct responsibility to review and approve the corporate goals and objectives relevant to the Chairman and CEO’s compensation, evaluate her performance in light of those goals and objectives and, together with the other independent directors, determine and approve the Chairman and CEO’s compensation level based on this evaluation. The Committee also has responsibility for reviewing 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 under these delegations are reviewed periodically with the Committee.

 

The chair of the Committee works directly with the Committee’s compensation consultant to provide a decision-making framework for use in making a recommendation for the Chairman and CEO’s total compensation. In addition, IBM’s Chairman and CEO and the IBM Senior Vice President of Human Resources (SVP HR) review the self-assessments of the Senior Vice Presidents and evaluate the information, along with comparisons to market compensation levels for cash compensation and total direct compensation, potential for future roles within IBM and total compensation levels relative to internal peers before and after any recommendations. Following this in-depth review, and in consultation with the SVP HR, the Chairman and CEO makes compensation recommendations to the Committee based on her evaluation of each senior executive’s performance and expectations for the coming year.

 

13



 

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. Beginning in August 2014, the Committee retained Frederic W. Cook & Co., Inc. (Cook & Co.) as its compensation consultant to advise the Committee on market practices and specific IBM policies and programs. Cook & Co. reports directly to the Compensation Committee Chairman and takes direction from the Committee. The consultant’s work for the Committee includes data analyses, market assessments, and preparation of related reports. Other than services provided to IBM’s Executive Compensation and Management Resources Committee and IBM’s Directors and Corporate Governance Committee, Cook & Co. does not perform any other work for the Company, and the work done by them for the Committee is documented in a formal agreement executed by Cook & Co. and the Committee. The Committee previously retained Semler Brossy Consulting Group, LLC as its compensation consultant through July 2014. See Section 1 of the 2014 Compensation Discussion and Analysis for additional information about the Committee’s consultant.

 

The Committee reports to stockholders as required by the SEC (see 2014 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 2014. The IBM Board of Directors has adopted a written charter for the Committee, which is available at http://www.ibm.com/investor/governance/board-of-directors/committees-of-the-board.wss.

 

Compensation Committee Interlocks and Insider Participation

 

Messrs. Belda, Gorsky, Liveris, McNerney and Taurel served as members of the Executive Compensation and Management Resources Committee in 2014. All members of the Committee were independent directors, and no member was an employee or former employee of IBM. During 2014, none of our executive officers served on the compensation committee or board of directors of another entity whose executive officer served on our Executive Compensation and Management Resources Committee or Board. Therefore, there is no relationship that requires disclosure as a Compensation Committee interlock.

 

Executive Committee

 

The Executive Committee is empowered to act for the full Board in intervals between Board meetings, with the exception of certain matters that by law may not be delegated. The Committee meets as necessary, and all actions by the Committee are reported at the next Board of Directors meeting. The Committee did not meet in 2014.

 

Certain Transactions and Relationships

 

Under the Company’s written related person transactions policy, information about transactions involving related persons is assessed by the independent directors on IBM’s Board. Related persons include IBM directors and executive officers, as well as immediate family members of directors and officers, and beneficial owners of more than five percent of the Company’s common stock. 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.

 

IBM entered into a consulting agreement with Ms. L.S. Sanford, an executive officer of the Company, in connection with her retirement from IBM on December 31, 2014. For a period of one year after Ms. Sanford’s retirement, she may be asked, from time to time, to provide services to the Company as an independent contractor. The fee for such services would be $5,000 per day for each day she provides four or more hours of services and $2,500 per day for each day that she provides less than four hours of services. From time to time, the Company may have employees who are related to our executive officers or directors. As noted in the discussion above in “General Information—IBM Board of Directors,” Mr. Eskew’s son is employed by the Company. He is an executive of the Company (not an executive officer). In addition, a brother-in-law of Mrs. V.M. Rometty (Chairman and CEO) and the wife of Mr. M. Jetter (Senior Vice President, IBM Global Technology Services) are employed as executives of the Company. The wife of Mr. R.J. Picciano (Senior Vice President, IBM Analytics) is also employed by the Company in a non-executive position. None of the above-referenced family member employees are executive officers of IBM. Each employee mentioned above received compensation in 2014 between $120,000 and $850,000. Additionally, in 2014, the above-referenced family members of Mrs. Rometty and Messrs. Eskew and Jetter each received equity grants. The compensation, equity grants and other terms of employment of each of the family member employees noted above are determined on a basis consistent with the Company’s human resources policies.

 

14



 

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 indemnification. This coverage runs from June 30, 2014 through June 30, 2015, at a total cost of approximately $6.8 million. The primary carrier is XL Specialty Insurance Company.

 

2014 DIRECTOR COMPENSATION NARRATIVE

 

Annual Retainer: In 2014, non-management directors received an annual retainer of $250,000. Chairs of the Directors and Corporate Governance Committee and the Executive Compensation and Management Resources Committee received an additional annual retainer of $20,000, the chair of the Audit Committee received an additional annual retainer of $25,000 and the Presiding Director received an additional annual retainer of $15,000.

 

Under the IBM Deferred Compensation and Equity Award Plan (DCEAP), 60% of the total annual retainer is required to be deferred and paid in Promised Fee Shares (PFS). Each PFS is equal in value to one share of 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, 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. Under the IBM Board Corporate Governance Guidelines, within five years of initial election to the Board, non-management directors are expected to have stock-based holdings in IBM equal in value to five times the annual retainer initially payable to such director. Stock-based holdings mean (i) IBM shares owned personally or by members of the immediate family sharing the same household and (ii) DCEAP PFS. Stock-based holdings do not include unexercised options.

 

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

 

Termination of IBM Non-Employee Directors Stock Option Plan (DSOP): Prior to January 1, 2007, non-management directors who had been elected or reelected as a member of the Board as of the adjournment of the Annual Meeting of Stockholders received, on the first day of the month following such meeting, an annual grant of options to purchase 4,000 shares of IBM common stock. The exercise price of the options was the average of the high and low sales prices of IBM common stock on the New York Stock Exchange on the date of grant. Each option has a term of ten years and became exercisable in four equal installments commencing on the first anniversary of the date of grant and continuing for the three successive anniversaries thereafter. All options granted under the DSOP have vested. Effective January 1, 2007, the DSOP was terminated. Therefore, the 2014 Director Compensation Table does not include any option awards. However, the table below entitled “Aggregate Number of Option Awards Outstanding for Each Director at Fiscal Year-End” reflects any options outstanding under the DSOP as of year-end 2014.

 

IBM’s Matching Grants Program: Non-management directors are eligible to participate in the Company’s Matching Grants Program on the same basis as the Company’s employees based in the United States. Under this program, the Company will provide specified matches in cash or equipment in connection with a director’s eligible contributions to approved educational institutions, medical facilities, and cultural or environmental institutions. The Company matches eligible contributions in cash on a 1-to-1 basis and in equipment on a 2-to-1 basis. Each director is eligible for a Company match on total gifts up to $10,000 per calendar year. Amounts shown in the 2014 Director Compensation Table for matching grants may be in excess of $10,000 because such amounts include Company contributions on gifts that were made by directors in previous years.

 

15



 

2014 Director Compensation Table

 

Fees Earned or Paid in Cash (column (b)): Amounts shown in this column reflect the annual retainer paid to each director as described above. A director receives a pro-rated amount of the annual retainer for service on the Board and, if applicable, as Presiding Director or a committee chair, based on the portion of the year the director served.

 

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

 

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

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

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

 

 

 

Fees Earned or

 

All Other

 

 

 

Name

 

Paid in Cash ($)

 

Compensation ($)(1)

 

Total ($)

 

(a)

 

(b)

 

(c)

 

(d)

 

A.J.P. Belda

 

$

250,000

 

$

48,507

 

$

298,507

 

W.R. Brody

 

250,000

 

61,773

 

311,773

 

K.I. Chenault

 

250,000

 

91,193

 

341,193

 

M.L. Eskew

 

285,000

 

72,520

 

357,520

 

D.N. Farr

 

250,000

 

23,094

 

273,094

 

A. Gorsky (2)

 

83,333

 

159

 

83,492

 

S.A. Jackson

 

258,333

 

84,664

 

342,997

 

A.N. Liveris

 

250,000

 

27,066

 

277,066

 

W.J. McNerney, Jr.

 

250,000

 

45,008

 

295,008

 

J.W. Owens

 

250,000

 

54,186

 

304,186

 

J.E. Spero

 

250,000

 

77,945

 

327,945

 

S. Taurel

 

270,000

 

98,724

 

368,724

 

L.H. Zambrano (3)

 

99,000

 

35,945

 

134,945

 

 

Mr. Voser joined the Board in January 2015; therefore, he is not included in the table above.

 


(1)           Amounts in this column include the following: for Mr. Belda: $43,392 of dividend equivalent payments on PFS; for Dr. Brody: $51,657 of dividend equivalent payments on PFS and $10,000 contributed by the Company under the Matching Grants Program; for Mr. Chenault: $91,077 of dividend equivalent payments on PFS; for Mr. Eskew: $72,404 of dividend equivalent payments on PFS; for Mr. Farr: $15,000 contributed by the Company under the Matching Grants Program; for Dr. Jackson: $64,548 of dividend equivalent payments on PFS and $20,000 contributed by the Company under Matching Grants Program; for Mr. Liveris: $26,950 of dividend equivalent payments on PFS; for Mr. McNerney: $29,893 of dividend equivalent payments on PFS and $15,000 contributed by the Company under the Matching Grants Program; for Mr. Owens: $54,070 of dividend equivalent payments on PFS; for Ms. Spero: $72,829 of dividend equivalent payments on PFS; for Mr. Taurel: $88,109 of dividend equivalent payments on PFS and $10,500 contributed by the Company under the Matching Grants Program; and for Mr. Zambrano: $35,896 of dividend equivalent payments on PFS.

 

(2)            Mr. Gorsky joined the Board in September 2014.

 

(3)            Mr. Zambrano died in May 2014. His estate was paid $3,462,114 in earned compensation and dividend reinvestments which had been previously deferred under the DCEAP since his election to the Board in 2003.

 

Aggregate Number of Option Awards Outstanding for Each Director at Fiscal Year-End

 

As described above, until the termination of the DSOP effective January 1, 2007, non-management directors received an annual grant of options to purchase 4,000 shares of IBM common stock. All options in the following table are fully exercisable. Because Dr. Brody and Messrs. Belda, Farr, Gorsky, Liveris, McNerney and Voser joined the Board after the termination of the DSOP, they did not receive any options and therefore are not included in the following table. In addition, Dr. Jackson and Mr. Owens had no options outstanding at the end of 2014; therefore, they are not included in the table.

 

K.I. Chenault

 

4,000

 

M.L. Eskew

 

4,000

 

J.E. Spero

 

8,000

 

S. Taurel

 

8,000

 

 

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.

 

16



 

OWNERSHIP OF SECURITIES

 

Security Ownership of Certain Beneficial Owners

 

The following sets forth information as to any person known to the Company to be the beneficial owner of more than five percent of the Company’s common stock as of December 31, 2014.

 

Name and address

 

Number of Shares Beneficially Owned

 

Percent of Class

 

Warren E. Buffett (1)

 

76,980,817

 

7.8

%

Berkshire Hathaway Inc.(1)

 

 

 

 

 

3555 Farnam Street

 

 

 

 

 

Omaha, NE 68131

 

 

 

 

 

 

 

 

 

 

 

National Indemnity Company (1)

 

 

 

 

 

3024 Harney Street

 

 

 

 

 

Omaha, NE 68131

 

 

 

 

 

 

 

 

 

 

 

The Vanguard Group (2)

 

55,042,685

 

5.56

%

100 Vanguard Boulevard

 

 

 

 

 

Malvern, PA 19355

 

 

 

 

 

 

 

 

 

 

 

State Street Corporation (3)

 

54,654,233

 

5.5

%

State Street Financial Center

 

 

 

 

 

One Lincoln Street

 

 

 

 

 

Boston, MA 02111

 

 

 

 

 

 

 

 

 

 

 

BlackRock Inc.(4)

 

53,231,078

 

5.4

%

55 East 52nd Street

 

 

 

 

 

New York, NY 10022

 

 

 

 

 

 


(1)        Based on the Schedule 13G/A filed with the Securities and Exchange Commission on February 18, 2015 by Warren E. Buffett, Berkshire Hathaway Inc., National Indemnity Company, together with relevant subsidiaries and members of the filing group. Warren E. Buffett reported that he had sole voting and dispositive power over 9,000 shares beneficially owned and shared voting power over 76,971,817 shares beneficially owned. Each of the other members of the filing group reported that it had shared voting and dispositive power over the shares it beneficially owned. The Schedule 13G does not identify any shares with respect to which there is a right to acquire beneficial ownership. The Schedule 13G states that the shares were acquired and are held in the ordinary course of business and were not acquired and are not held for the purpose of or with the effect of changing or influencing the control of IBM.

 

(2)        Based on the Schedule 13G filed with the Securities and Exchange Commission on February 10, 2015 by The Vanguard Group and certain subsidiaries (Vanguard). Vanguard reported that it had sole voting power over 1,605,895 shares and sole and shared dispositive power over all shares beneficially owned. The Schedule 13G does not identify any shares with respect to which there is a right to acquire beneficial ownership. The Schedule 13G states that the shares were acquired and are held in the ordinary course of business and were not acquired and are not held for the purpose of or with the effect of changing or influencing the control of IBM.

 

(3)        Based on the Schedule 13G filed with the Securities and Exchange Commission on February 12, 2015 by State Street Corporation and certain subsidiaries (State Street). State Street reported that it had shared voting and dispositive power over all shares beneficially owned. The Schedule 13G does not identify any shares with respect to which there is a right to acquire beneficial ownership. The Schedule 13G states that the shares were acquired and are held in the ordinary course of business and were not acquired and are not held for the purpose of or with the effect of changing or influencing the control of IBM.

 

(4)        Based on the Schedule 13G filed with the Securities and Exchange Commission on February 6, 2015 by BlackRock, Inc. and certain subsidiaries (BlackRock). BlackRock reported that it had sole voting power over 44,715,277 shares and sole dispositive power over all shares beneficially owned. The Schedule 13G does not identify any shares with respect to which there is a right to acquire beneficial ownership. The Schedule 13G states that the shares were acquired and are held in the ordinary course of business and were not acquired and are not held for the purpose of or with the effect of changing or influencing the control of IBM.

 

17



 

Common Stock and Stock-based Holdings of Directors and Executive Officers

 

The following table sets forth the beneficial ownership of shares of the Company’s common stock as of December 31, 2014 by IBM’s current directors and nominees, the executive officers named in the 2014 Summary Compensation Table, and such directors and all of the Company’s executive officers as of December 31, 2014 as a group. Also shown are shares over which the named person could have acquired voting power or investment power within 60 days after December 31, 2014. Voting power includes the power to direct the voting of shares held, and investment power includes the power to direct the disposition of shares held.

 

 

 

 

 

 

 

Acquirable within 60 days

 

 

 

 

 

Stock-based

 

Options and

 

Directors’

 

Name

 

Common Stock(1)

 

Holdings(2)

 

RSUs(3)

 

DCEAP Shares(4)

 

A.J.P. Belda

 

0

 

0

 

0

 

11,240

 

W.R. Brody

 

0

 

0

 

0

 

13,214

 

K.I. Chenault

 

6,995

(5)

6,995

 

4,000

 

22,630

 

M.L. Eskew

 

0

 

0

 

4,000

 

18,302

 

D.N. Farr

 

3,608

 

3,608

 

0

 

2,431

 

A. Gorsky (6)

 

0

 

0

 

0

 

500

 

S.A. Jackson

 

0

 

0

 

0

 

16,338

 

J.E. Kelly III

 

51,967

(7)

64,757

 

18,571

 

N/A

 

K.M. Keverian

 

200

(8)

27,610

 

0

 

N/A

 

A.N. Liveris

 

0

 

0

 

0

 

7,313

 

W.J. McNerney, Jr.

 

0

 

0

 

0

 

8,016

 

S.A. Mills

 

152,777

(9)

207,715

 

0

 

N/A

 

J.W. Owens

 

3,282

(8)

3,282

 

0

 

13,441

 

V.M. Rometty

 

137,833

 

181,037

 

44,974

 

N/A

 

M.J. Schroeter

 

10,437

 

30,501

 

891

 

N/A

 

J.E. Spero

 

1,000

 

1,000

 

8,000

 

18,272

 

S. Taurel

 

13,003

 

13,003

 

8,000

 

21,991

 

P.R. Voser (10)

 

0

 

0

 

0

 

0

 

Directors and executive officers as a group

 

766,282

(11)

1,248,630

 

158,081

(11)

153,688

(11)

 


(1)    This column is comprised of shares of IBM common stock beneficially owned by the named person. Unless otherwise noted, voting power and investment power in the shares are exercisable solely by the named person, and none of the shares are pledged as security by the named person. Standard brokerage accounts may include nonnegotiable provisions regarding set-offs or similar rights. This column includes 127,394 shares in which voting and investment power are shared. The directors and officers included in the table disclaim beneficial ownership of shares beneficially owned by family members who reside in their households. The shares are reported in such cases on the presumption that the individual may share voting and/or investment power because of the family relationship. The shares reported in this column do not include 344,440 shares held by the IBM Personal Pension Plan Trust Fund, over which the members of the IBM Retirement Plans Committee, a management committee presently consisting of certain executive officers of the Company, have voting power, as well as the right to acquire investment power by withdrawing authority now delegated to various investment managers.

 

(2)     For executive officers, this column is comprised of the shares shown in the “Common Stock” column and, as applicable, all restricted stock units including retention restricted stock units, officer contributions into the IBM Stock Fund under the IBM Excess 401(k) Plus Plan, and Company contributions into the IBM Stock Fund under the Excess 401(k) Plus Plan. Some of these restricted stock units may have been deferred under the Excess 401(k) Plus Plan in accordance with elections made prior to January 1, 2008, and they will be distributed to the executive officers after termination of employment as described in the 2014 Nonqualified Deferred Compensation Narrative. This column also includes certain restricted stock units that had been deferred under the Excess 401(k) Plus Plan and distributed to certain executive officers within 60 days after they retired on December 31, 2014.

 

18



 

(3)     For non-management directors, this column is comprised of shares that can be purchased under the IBM Non-Employee Director Stock Option Plan within 60 days after December 31, 2014 (see 2014 Director Compensation Narrative for additional information). For executive officers, this column is comprised of (i) shares that can be purchased under an IBM stock option plan within 60 days after December 31, 2014, (ii) RSU awards that vest within 60 days after December 31, 2014, and (iii) restricted stock units that had been deferred under the Excess 401(k) Plus Plan and distributed to certain executive officers within 60 days after they retired on December 31, 2014.

 

(4)     Promised Fee Shares earned and accrued under the IBM Deferred Compensation and Equity Award Plan (DCEAP) as of December 31, 2014, including dividend equivalents credited with respect to such shares. Upon a director’s retirement, these shares are payable in cash or stock at the director’s choice (see 2014 Director Compensation Narrative for additional information).

 

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

 

(6)     Mr. Gorsky joined the Board in September 2014.

 

(7)     Includes 23,069 shares in which voting and investment power are shared.

 

(8)     Voting and investment power are shared.

 

(9)     Includes 43,276 shares in which voting and investment power are shared.

 

(10)     Mr. Voser joined the Board in January 2015.

 

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

 

19



 

EXECUTIVE COMPENSATION

 

2014 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 programs and policies. Given the Committee’s role in providing oversight to the design of those programs and policies, and in making specific compensation decisions for senior executives using those policies and programs, the Committee participated in the preparation of the Compensation Discussion and Analysis, reviewing successive drafts of the document and discussing those with management. The Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement. We join with management in welcoming readers to examine our pay practices and in affirming the commitment of these pay practices to the long-term interests of stockholders.

 

Sidney Taurel (chair)

Alex Gorsky

Andrew N. Liveris

W. James McNerney, Jr.

 

2014 COMPENSATION DISCUSSION AND ANALYSIS

 

Executive Summary

 

In 2014, IBM made tremendous progress in repositioning our business portfolio and making investments in support of our strategic focus on enterprise information technology. The Company generated $92.8 billion in revenue and $21.1 billion in operating pre-tax income from continuing operations. Our revenue declined from the prior year due to a substantial currency translation impact, a planned reduction from the divestitures undertaken to continue our shift to higher value businesses, and the net impact of strong growth in our strategic imperatives (cloud, analytics, mobile, social and security) and lower revenues in some of our transactional businesses (including the mainframe and POWER product cycles). Without the effects of currency and divestitures, our continuing operations delivered revenue that was down 1% for the year. While net income and free cash flow declined for the full year on a continuing operating basis, pretax income margins expanded 30 basis points, we generated $16.2 billion of operating cash flow, invested $5.5 billion in research and development and $3.8 billion in capital, acquired six companies, and returned approximately $17.9 billion in capital to stockholders through $4.3 billion in dividends and $13.7 billion in gross share repurchases, which reduced our average outstanding share count by over 8%.

 

The centerpiece of IBM’s strategy is our business portfolio shift into five strategic imperatives that we believe are important to the future of enterprise information technology. In 2014, we made significant investments in these areas, launched new businesses such as the Watson Group, and forged landmark partnerships with Apple, Twitter and Tencent to drive long-term growth. Taken together, these five strategic imperatives now constitute 27% of IBM’s revenues, posting double-digit growth for the year, as they did in every quarter in 2014.

 

At the same time, we repositioned and restructured the Systems and Technology business through both divestitures and the introduction of new offerings, including POWER8 and OpenPOWER. We accomplished all of this while maintaining the #1 market position in middleware and services, and earning the highest number of U.S. patents by a considerable margin over any other company.

 

Our compensation strategy supports IBM’s ongoing transformation. It is designed to ensure that executives balance short-term objectives against long-term priorities, to align executive and stockholder interests, and to attract and retain the leadership needed to successfully deliver on our shift to higher value. Pay decisions were made in the context of our financial performance relative to our goals, while taking into account the substantial progress in repositioning the portfolio and the Company for the future.

 

For 2014 performance, the Board approved an annual incentive payment of $3.6 million for Mrs. Rometty, at 90% of target. The payout level considered a balanced view of performance, including financial results that were lower than target, substantial actions taken to reposition the Company in higher value businesses, and market-leading client satisfaction levels. This incentive payment follows a year in which Mrs. Rometty recommended forgoing her annual incentive, which the independent members of the Board accepted. For the other named executive officers, their incentive awards for 2014 ranged from 70% to 90% of target, reflecting Company and Unit performance against predetermined objectives and individual contributions to the transformation. Taking into consideration the actual salary, actual annual incentive payout and actual long-term incentive award for the period 2012–2014, Mrs. Rometty earned 74% of her annual total target compensation in 2014.

 

20



 

For 2015, the independent members of the Board approved a salary increase for Mrs. Rometty from $1.5 million to $1.6 million. This represents Mrs. Rometty’s first salary increase since her appointment as CEO in January 2012. In addition, her target annual incentive was increased from $4 million to $5 million and she was granted a long-term incentive award comprised entirely of 2015–2017 Performance Share Units valued at $13.3 million, which would not pay out until February 2018. Together, these changes were intended to bring Mrs. Rometty’s pay closer to market peers and results in 92% of her total target compensation being variable and tied to performance-based incentives. The absence of time-based incentive awards results in IBM delivering a higher portion of the overall compensation opportunity through performance-based incentives than the typical benchmark company used by the Compensation Committee to assess pay levels and practices. These compensation decisions reflect the Board’s strong confidence in Mrs. Rometty’s leadership of the Company and its strategic direction, as well as our continued commitment to a performance-based culture.

 

Our overall executive compensation philosophy remains the same as prior years. We continue to align pay with the interests of stockholders while at the same time attracting and retaining top leadership talent. For 2015, we have made adjustments to the Annual Incentive Program to heighten the alignment of executive rewards with the strategic shifts needed for our ongoing transformation. Specifically, a strategic imperatives revenue metric replaces the overall revenue growth metric (both weighted at 20%) to ensure strategic focus on the portfolio shift. In addition, cash flow increases in importance, from a 20% to a 40% weighting, and we have replaced the free cash flow metric with operating cash flow to maintain our strong focus on strategic investment decisions. Operating net income continues as a metric, now weighted at 40%.

 

IBM does not use the following compensation programs for its senior leaders because they are inconsistent with our performance-based culture: executive separation agreements, change in control agreements, guaranteed incentive payouts, and accelerated vesting of equity awards. In addition, IBM has long-standing robust stock ownership requirements, actively enforces clawbacks and prohibits hedging and pledging for its senior leaders.

 

Finally, we recognize that it is critical to retain key leaders who are instrumental in driving our ongoing transformation. Along with market-competitive compensation, we selectively use Retention Restricted Stock Units for this purpose.

 

We recognize that the issue of executive pay is critical to stockholders, members of the public and to our employees. Setting appropriate compensation will always require sound judgment and careful thought. These compensation decisions are best understood when the process surrounding them is transparent and explained in detail for our investors, as set forth on the following pages.

 

Note: Revenue excluding divestitures and currency, Operating Research and Development, Operating Pre-Tax Income, Operating Pre-Tax Margin, Operating Net Income, Operating Earnings Per Share, Free Cash Flow and Operating Cash Flow (Cash from operations excluding IBM Global Financing receivables) referenced above and elsewhere in this Compensation Discussion and Analysis and Proxy Statement are non-GAAP financial measures on a continuing operations basis. For reconciliation and other information concerning these items refer to pages 23, 40, 45, 46 and 66 of the Company’s 2014 Annual Report, which is Exhibit 13 to the Form 10-K submitted to the SEC on February 24, 2015.

 

Section 1: Executive Compensation Program Design

 

Trust and personal responsibility in all relationships—relationships with clients, partners, communities, fellow IBMers, and investors—is a core value at IBM. 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 this trust is unacceptable.

 

As a part of maintaining this trust, we well understand the need for our investors—not only professional fund managers and institutional investor groups, but also millions of individual investors—to know how and why compensation decisions are made.

 

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

 

·        Ensure that the interests of IBM’s leaders are closely aligned with those of our investors by varying compensation based on long-term and annual business results;

·        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 a high degree of business performance without encouraging excessive risk taking;

·        Differentiate rewards to reflect individual and team performance; and

·        Balance rewards for both 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 performance over three time frames:

 

 

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

2.       Longer-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.       Full Career—Deferrals, retention payments and retirement accumulations help ensure today’s leaders stay with IBM until their working careers end.

 

Stockholder Engagement

 

The Company considered the results of the management Say on Pay proposal presented to the stockholders for approval in 2014. In light of the support the proposal received, the Company’s compensation policies and decisions, explained in detail in this CD&A, continue to be focused on long-term financial performance to drive stockholder value. The Company has indicated that it will provide an advisory vote on executive compensation (Say on Pay) on an annual basis.

 

The Company continually reviews its corporate governance and executive compensation structure. As part of this review, it is the Company’s longstanding practice for our executives to meet with a significant number of its largest investors to solicit their feedback on a variety of topics. In 2014, the Company engaged with over 100 institutional investors.

 

21



 

Elements of Compensation Programs and Linkage to Objectives

 

The following is a description of the Company’s compensation elements and the objectives they are designed to support. 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.

 

Compensation Element/Eligibility

 

Description

 

Linkage to Compensation Objectives

Current Year Performance

 

 

 

 

 

 

 

 

 

Salary

 

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

 

Attract and retain highly qualified leaders

 

 

 

 

 

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

 

 

 

Motivate high business performance

 

 

 

 

 

Annual Incentive

 

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

 

Attract and retain highly qualified leaders

All executives, including NEOs

 

 

 

 

 

 

Actual annual incentive payments are driven by business performance against financial metrics and individual performance, as reflected in the Personal Business Commitment review process described under “How and Why Compensation Decisions Are Made.”

 

Motivate strong short-term business performance

 

Vary compensation based on individual and team performance

 

 

 

 

 

 

 

Top performers typically earn the greatest payouts; median performers earn much smaller amounts; and the lowest performers earn no incentive payments at all.

 

 

 

 

 

 

 

Other Compensation

 

Select executives, including NEOs

 

The SEC disclosure rules require that companies include certain items in the Summary Compensation Table column entitled “All Other Compensation.” At IBM, many of these items are available to all employees. In fact, on average as of December 31, 2014, additional programs that are restricted to Chairman and CEO and Senior Executive participation amount to less than 1% of their total compensation. See “All Other Compensation” in the 2014 Summary Compensation Table Narrative. IBM’s security practices provide that all air travel by the Chairman and CEO, including personal travel, be on Company aircraft. IBM does not provide any tax assistance to Mrs. Rometty in connection with taxes incurred for personal travel by her on the corporate aircraft. While the cost of corporate aircraft usage varies year to year based on several external factors such as fuel costs, using corporate aircraft for all travel is a prudent step to ensure the safety of the Chairman and CEO given the breadth of IBM’s operations in over 175 countries and the realities of security risks throughout the world. Given the personal travel security practice for the Chairman and CEO, family members periodically accompany her on the corporate aircraft. In accordance with tax requirements, income was imputed to Mrs. Rometty for personal travel by her family members on the corporate aircraft in 2014.

 

Attract and retain highly qualified leaders

 

22



 

Compensation Element/Eligibility

 

Description

 

Linkage to Compensation Objectives

Long-Term Incentive Plan

 

 

 

 

 

 

 

 

 

Performance Share Units (PSUs)*

 

Approximately 550 executives based on job scope, including NEOs

 

Equity grant value based on individual performance and retention objectives for each executive. Number of shares granted is adjusted up or down at the end of the three-year performance period based on Company performance against operating earnings per share and free cash flow targets.

 

Align executive and stockholder interests

 

Attract and retain highly qualified leaders

 

Motivate strong long-term business performance

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

Annual Stock-Based Grant*

 

All executives

 

Annual equity grants may be made in the form of restricted stock, restricted stock units (RSUs) or stock options, or some combination. These grants vest over time, typically over one to four years.

 

Align executive and stockholder interests

 

Attract and retain highly qualified leaders

 

 

 

 

 

 

 

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

 

Motivate strong business performance

 

Vary compensation based on individual and team performance

 


* Planned grant value is converted to a number of shares by dividing the planned value by the predetermined, formulaic planning price in effect for the quarter. IBM’s planning price is computed each quarter using a consistent statistical forecasting procedure based on historical IBM stock price data. IBM uses the quarterly planning price to aid in establishing the overall size of the equity plan and to give more consistency across equity grants made at different points in the quarter.

 

Retention, Pension & Savings

 

 

 

 

 

 

 

 

 

Retention Stock-Based Grants & Cash Awards

 

 

Select executives determined each year, including some NEOs

 

Periodically, the Chairman and CEO reviews outstanding stock-based awards for the members of the Growth & Transformation Team and other key executives. Depending on individual performance and the competitive environment for senior executive leadership talent, the Chairman and CEO may recommend individual retention awards in the form of restricted stock units or cash, for certain executives. Retention Restricted Stock Unit (RRSU) grants typically vest at the end of five years, however other vesting schedules may be used, and cash awards have a clawback if an executive leaves IBM before a specified date.

 

Align executive and stockholder interests

 

Retain highly qualified leaders

 

23



 

Compensation Element/Eligibility

 

Description

 

Linkage to Compensation Objectives

 

 

 

 

 

Retention, Pension & Savings

 

 

 

 

 

 

 

 

 

Pension and Savings Plans

 

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

 

Attract and retain highly qualified leaders

 

 

 

 

 

Pension Plans

 

All eligible executives, including NEOs

 

In the U.S., future accruals under the pension plans stopped on December 31, 2007. The amount of the pension benefit under these plans is based on pay and service and is determined by the same formulas for executives and non-executives.

 

 

 

 

 

 

 

Savings Plans

 

All executives, including NEOs

 

The money that U.S. executives save through the IBM 401(k) Plus Plan, as for all U.S. employees, is eligible for a Company match. Effective January 1, 2008, the 401(k) Plus Plan became the only tax-qualified retirement program available to IBM’s U.S. employees for future deferrals and employer contributions. If all eligibility requirements are met, IBM matches a participant’s own contributions dollar-for-dollar up to 6% of eligible pay for those hired or rehired by IBM U.S. before January 1, 2005, and generally up to 5% for those hired or rehired by IBM U.S. on or after that date. In addition, if all eligibility requirements are met, IBM makes automatic contributions to a participant’s 401(k) Plus Plan account—equal to 1%, 2% or 4% of a participant’s eligible pay—depending on the participant’s pension plan eligibility on December 31, 2007.

 

 

 

 

 

 

 

 

 

Company contributions are made once annually at the end of the year for all eligible participants employed on December 15 of each year. If a participant retires during the year, the individual will receive Company contributions upon retirement. Matching contributions and automatic contributions are made once a participant has completed the plan’s service requirement, typically one year of service.

 

 

 

24



 

Compensation Element/Eligibility

 

Description

 

Linkage to Compensation Objectives

Retention, Pension & Savings (continued)

 

 

 

 

 

 

 

Other Executive Retention Programs

 

Select executives, including eligible NEOs hired prior to May 1, 2004

 

Separate plans established more than 14 years ago in some countries (including the U.S.) to encourage full-career retention of key executives. In the U.S., benefits under this retention plan would be forfeited if they left IBM prior to age 60.

 

Attract and retain highly qualified leaders

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Accrual of future benefits under the retention plan stopped in the U.S. on December 31, 2007.

 

 

 

 

 

 

 

Excess 401(k) Plus Plan

 

U.S. employees with compensation expected to exceed applicable IRS limits, including NEOs

 

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

 

Align executive and stockholder interests

 

Attract and retain highly qualified leaders

 

 

 

 

 

 

 

IBM does not pay guaranteed, above-market or preferential earnings on deferred compensation. Amounts deferred into the IBM Excess 401(k) Plus Plan are recordkeeping (notional) accounts and are not held in trust for the participants. Participants may invest their notional accounts in the primary investment options available to all employees through the 401(k) Plus Plan. Once participants have completed one year of service, they are also eligible to receive Company matching and automatic contributions on eligible pay deferred into the Excess 401(k) Plus Plan and on money earned in excess of the Internal Revenue Code compensation limits (the match (5% or 6%) and automatic contribution rates (1%, 2% or 4%) for which a participant is eligible, are the same rates for which a participant is eligible under the 401(k) Plus Plan). Company contributions are made once annually at the end of the year for all participants employed on December 15 of each year. If a participant retires during the year, the individual will receive Company contributions upon retirement. On an exceptional basis, pursuant to the terms of the Excess 401(k) Plus Plan, the Company may make a discretionary award to an executive that is credited to the executive’s Excess 401(k) Plus Plan account.

 

Prior to January 1, 2008, cash and equity could be deferred under the plan. Effective January 1, 2008, equity deferral elections can no longer be made under the plan.

 

 

 

25



 

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

 

Investors want the leaders of their companies to act like owners. That alignment, we believe, works best when senior leaders have meaningful portions of their personal holdings invested in the stock of their company. This is why IBM sets significant stock ownership requirements for the Company’s Chairman and CEO and Senior Executives (comprised of the Executive Vice President and the Senior Vice Presidents (SVPs)). The following table illustrates which equity holdings count towards stock ownership requirements:

 

Included

 

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

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

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

 

Not Included

 

·  Unvested equity awards, including PSUs, RSUs and RRSUs

·  Unexercised stock options

 

The Chairman and CEO and Senior Executives are all required to own IBM shares or equivalents worth three times their individual total target cash compensation within five years of hire or promotion. Unlike the majority of the Fortune 100 companies who establish ownership guidelines using a multiple of only base salary, IBM uses a multiple of base salary plus target annual incentive. This ensures that meaningful ownership levels are accumulated based on each executive’s annual cash compensation opportunity. As of December 31, 2014, as a group, the Chairman and CEO and Senior Executives owned approximately 1.0 million shares or equivalents valued at over $164 million; in fact, as of that date, this group held, on average, almost twice the amount of IBM shares or equivalents that the Company requires.

 

Setting Performance Targets for Incentive Compensation

 

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

 

For 2015, five key financial metrics will be measured:

1.  Strategic Imperatives Revenue

2.  Operating Net Income

3.  Operating EPS

4.  Free Cash Flow

5.  Operating Cash Flow

 

IBM shares its financial model each year with investors. However, we do not disclose specific targets under the annual and long-term plans because it would signal IBM’s strategic focus areas and impair IBM’s ability to leverage these areas for competitive advantage. For example, disclosure of our free cash flow targets would provide insight into timing of large capital investments or acquisitions. Knowledge of the targets could also be used by competitors to take advantage of insight into specific areas to target the recruitment of key talent from IBM. Disclosing the specific targets and metrics used in the qualitative assessment made by the Chairman and CEO would give our competitors our insight to key market dynamics and areas that could be used against IBM competitively by industry consultants or competitors targeting existing customers.

 

Our financial model is well communicated to investors, and our performance targets are based on this model. We also describe annual performance in our discussion of named executive officer compensation decisions. Finally, outlined below is a description of the specific metrics and weightings for the Annual Incentive and the Performance Share Unit Programs.

 

26



 

Annual Incentive Program

 

The Company sets business objectives at the beginning of each year which 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. Performance against business objectives determines the actual total funding pool for the year which can vary from 0% to 200% of total target incentives for all executives. At the end of the year, management assesses the financial performance for the Company based on performance against financial metrics. Each year the Compensation Committee and the Board of Directors review IBM’s annual business objectives and set the metrics and weightings for the annual program reflecting current business priorities. The metrics and weightings for 2014 and 2015 are listed below.

 

 

 

2014 Weighting

 

Financial Metric

 

in Overall Score

 

Operating Net Income

 

60

%

Revenue Growth

 

20

%

Free Cash Flow

 

20

%

 

 

 

 

 

 

2015 Weighting

 

Financial Metric

 

in Overall Score

 

Operating Net Income

 

40

%

Strategic Imperatives Revenue

 

20

%

Operating Cash Flow

 

40

%

 

For 2015, changes to the financial metrics and weightings were made to reflect IBM’s business priorities. Specifically, the revenue metric is based on IBM’s strategic imperatives to ensure all executives are fully aligned with the strategic shift in the IBM portfolio. Operating cash flow replaces free cash flow to maintain our strong focus on strategic investment decisions.

 

Overall funding for the Annual Incentive Program, which covers approximately 4,800 executives, is based on the performance results against these targets and may be adjusted for extraordinary events if deemed appropriate by the Chairman and CEO and Compensation Committee. This adjustment can be either up or down. For example, adjustments are usually made for large divestitures and acquisitions. In 2014, no adjustments for extraordinary events were made. In addition, the Chairman and CEO can recommend an adjustment, up or down, to the overall funding of the program based on factors beyond IBM’s financial performance, such as client satisfaction, market share growth and workforce development. Taking such matters into account for 2014, the Compensation Committee approved an upward adjustment to the score in light of strong results in client satisfaction and workforce development in support of the Company’s transformation. The Compensation Committee reviews the financial scoring and qualitative adjustments and approves the Annual Incentive Program funding level. Once the total pool funding level has been approved, a lower-performing executive will receive as little as zero payout and the most exceptional performers are capped at three times their individual target incentive (payouts at this level are rare and only possible when IBM’s performance has also been exceptional). In 2014, IBM reported our Microelectronics business as discontinued operations, which is excluded from operating net income.

 

Performance Share Unit Program

 

Operating EPS and free 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 shared with investors, including the impact our share buyback program has on operating EPS. At the end of the three years, the score is calculated based on results against the predetermined targets, with the following weights:

 

 

 

2014 and 2015

 

Financial Metric

 

Weighting in Overall Score

 

Operating Earnings Per Share

 

70

%

Free Cash Flow

 

30

%

 

Adjustments can be made for extraordinary events if deemed appropriate by the Chairman and CEO and the Compensation Committee—for example, large divestitures. In 2014, no adjustments were made.

 

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

 

27



 

Section 2: How and Why Compensation Decisions Are Made

 

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

 

1.  Making Commitments

 

At the beginning of each year, all IBM employees, including the Chairman and CEO and Senior Executives, make a Personal Business Commitment 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. The Chairman and CEO’s commitments are reviewed directly by the Board of Directors. As part of this process, many factors are considered, including an understanding of the business risks associated with the commitments.

 

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

 

The chair of the Compensation Committee works directly with the Committee’s compensation consultant, Frederic W. Cook & Co. (Cook & Co.), to provide a decision-making framework for use in making a recommendation for total compensation for the Chairman and CEO. This framework includes a self-assessment of performance against commitments in the year, both qualitative and quantitative, which support the Company’s stated strategic objectives.

 

In addition to the above, the Committee also reviews an analysis of IBM’s total performance over a multi-year period, a competitive benchmark analysis, and other relevant information and arrives at its recommendation for total compensation for the Chairman and CEO.

 

The final pay recommendations for the Chairman and CEO are presented to the independent members of the IBM Board of Directors for further review, discussion and final approval.

 

3.  Determining Senior Executive Compensation

 

Evaluation of Results by the Chairman and CEO

 

Throughout the year, employees assess their progress against their Personal Business Commitments. 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 Senior Executives are reviewed by the Senior Vice President of Human Resources (SVP HR) and the Chairman and CEO, who evaluate the information, along with the following:

 

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

·  Potential for future roles within IBM; and

·  Total compensation levels relative to internal peers before and after any recommendations.

 

Following this in-depth review and in consultation with the SVP HR, the Chairman and CEO makes compensation recommendations to the Compensation Committee based on an evaluation of each Senior Executive’s performance and expectations for the coming year.

 

Evaluation of Results by the Compensation Committee

 

The Compensation Committee decides whether to approve or adjust the Chairman and CEO’s recommendations for the Senior Executives.

 

The Committee evaluates all of the factors considered by the Chairman and CEO and reviews compensation summaries that tally the dollar value of all compensation and related programs, including salary, annual incentive, long-term compensation, deferred compensation, retention payments and pension benefits. These summaries provide the Committee with an understanding of how their decisions affect other compensation elements and the impact that separation of employment or retirement will have.

 

4.  Ensuring Competitive Pay—Approach to Benchmarking

 

IBM participates in several executive compensation surveys that provide general trend information and details on levels of salary, target annual incentives and long-term incentives, the relative mix of short- and long-term incentives, and mix of cash and stock-based pay. Given the battle for talent that exists in our industry, the benchmark companies that are used by the Compensation Committee to guide its decision making have included a broad range of key information technology companies, to help us identify trends in the industry. We also include companies outside our industry, with stature, size and complexity that approximate our own, in recognition of the fact that competition for senior management talent is not limited to our industry. The surveys and benchmark data are supplemented by input from the Compensation Committee’s outside consultant on factors such as recent market trends. The Committee reviews and approves this list annually.

 

The Compensation Committee re-examined the benchmark group for 2014 and determined that companies which meet the following criteria should be included in the 2014 benchmark group:

 

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

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

 

28



 

2014 Benchmark Group:

 

Accenture

Dell

Microsoft

Archer Daniels Midland

Dow Chemical

PepsiCo

AT&T

EMC

Pfizer

Boeing

Ford

United Technologies

Bunge

General Electric

UPS

Caterpillar

Google

Verizon

Chevron

Hewlett-Packard

Xerox

Cisco Systems

Intel

 

ConocoPhillips

Johnson & Johnson

 

 

Based on overall changes in the industry in which IBM competes for clients and talent, the Committee approved, for 2015, removing Archer Daniels Midland, Bunge, ConocoPhillips and Dell from the benchmark group and adding Amazon.com, Apple, ExxonMobil and Oracle. Archer Daniels Midland and Bunge, two companies in the agricultural products industry, were removed to allow for the inclusion of additional companies in the technology industry. ConocoPhillips, a company in the oil and gas exploration and production industry, was replaced by ExxonMobil, an integrated oil and gas company, which was deemed a better business fit from the energy sector. Dell was removed as the company was taken private and compensation data is no longer available.

 

2015 Benchmark Group:

 

 

 

 

 

Accenture

EMC

Oracle

Amazon.com

ExxonMobil

PepsiCo

Apple

Ford

Pfizer

AT&T

General Electric

United Technologies

Boeing

Google

UPS

Caterpillar

Hewlett-Packard

Verizon

Chevron

Intel

Xerox

Cisco Systems

Johnson & Johnson

 

Dow Chemical

Microsoft

 

 

The data from compensation surveys and related sources form the primary external view of the market. The Company’s philosophy is to generally consider a range from the 50th to the 75th percentile of the market for cash and total compensation for comparable job roles at companies within our benchmark group.

 

Based on our global operating footprint and the breadth of each of our individual lines of business, many of our business units are large enough to be among the Fortune 200 companies if they were stand-alone businesses. We generally compare the compensation for business unit leaders to executives of similarly-sized business units as indicated by the survey reference points. Owing to the size and scope of our business overall, our Chairman and CEO and corporate function heads are generally compared to the 75th percentile of the benchmark group because IBM’s revenues are near this reference point, and the Committee therefore views such positioning as representative of a size-adjusted market rate.

 

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

 

5.  Compensation Committee Consultant

 

The Committee enters into a consulting agreement with its outside compensation consultant on an annual basis. The Committee has retained Cook & Co. as its compensation consultant to advise the Committee on market practices and specific IBM policies and programs. Cook & Co. reports directly to the Compensation Committee Chairman and takes direction from the Committee. The consultant’s work for the Committee includes data analyses, market assessments and preparation of related reports. From time to time, the Committee seeks the views of the consultant on items such as incentive program design and market practices. The work done by Cook & Co. for the Committee is documented in a formal agreement which is executed by the consultant and the Committee. Cook & Co. does not perform any other work for the Company, other than services provided to IBM’s Directors and Corporate Governance Committee. The Committee previously retained Semler Brossy Consulting Group, LLC (Semler Brossy) as its compensation consultant through July 2014. The Committee determined that there is no conflict of interest with regard to either Cook & Co. or Semler Brossy.

 

29



 

Chairman and CEO Compensation Decisions for 2014 and 2015

 

The Compensation Committee made recommendations for Mrs. Rometty’s 2014 and 2015 compensation following the process and using the pay components that were previously described.

 

The Compensation Committee noted the following as key points regarding Mrs. Rometty’s performance against her Personal Business Commitments for 2014:

 

·      Developed and implementing IBM’s bold new strategy; transforming industries and professions with data; remaking enterprise IT infrastructure for the era of cloud; and enabling systems of engagement for the enterprise, driven by social and mobile technologies, and underscored by security

·      Revenue from continuing operations was $92.8 billion, a 1% decline at constant currency excluding divestitures. In the strategic areas of cloud, analytics, mobile, social and security, revenue grew 16% to $25 billion, and now represent 27% of the IBM portfolio, up from 22% in 2013

·      Operating pre-tax income of $21.1 billion represented a 30 basis point margin expansion

·      Returned approximately $17.9 billion to stockholders through $13.7 billion of gross share repurchase and $4.3 billion of dividends. The quarterly dividend was increased 16% year to year, marking the 11th consecutive year of double-digit increases. Free cash flow declined from $15.0 billion to $12.4 billion

·      Focused investments delivering an ongoing series of recognized market innovations; including Watson Analytics, Bluemix, POWER8, SoftLayer global expansion, Security Analytics, and Verse

·      Repositioned and restructured our Systems & Technology hardware business through the divestiture of the System x business, the announced divestiture of the commercial semiconductor technology business, and the introduction of new offerings including POWER8 and OpenPOWER

·      Maintained #1 market position in middleware and services

·      Completed six acquisitions expanding our capabilities and further enabling our shift to the strategic imperatives

·      Created noteworthy partnerships with Apple, SAP, Tencent and Twitter to drive long-term growth

·      Signed landmark technology partnership agreements with Chinese partners, expanding the reach of IBM hardware and software in the China market

·      Launched the Watson Group as a new business unit

·      Ranked #1 in patents for the 22nd consecutive year, continuing our leadership in technology and innovation, while accelerating new technology commercialization

·      Materially improved the leadership pipeline and the diversity of leadership, by increasing the representation of women executives and through external hiring

·      Improved client satisfaction to market-leading levels

 

For 2014, the Committee recommended that Mrs. Rometty receive an annual incentive of $3.6 million, which was 90% of her target incentive. This takes into account the shortfall in financial results relative to expectations balanced against the substantial strategic actions taken to reposition the Company, including the expansion into new markets with competitive offerings and execution of significant restructuring and divestitures. This award follows a year in which Mrs. Rometty and other members of her senior team recommended forgoing their annual incentive payout which was accepted by the Committee and the independent members of the IBM Board of Directors, as appropriate. As reflected in the chart below, taking into consideration the actual salary, actual annual incentive payout and actual long-term incentive award for the period 2012–2014, Mrs. Rometty earned 74% of her annual total target compensation in 2014.

 

For 2014, Mrs. Rometty earned

74% of her total target compensation

Values in Millions ($)

 

 

For 2015, the Committee recommended, effective July 1, 2015, a base salary increase for Mrs. Rometty from $1.5 million to $1.6 million, her first increase since assuming the role of CEO in January 2012. The Committee also recommended a 2015 annual incentive target of $5 million and a 2015 long-term incentive award comprised entirely of 2015–2017 Performance Share Units valued at $13.3 million. Mrs. Rometty’s PSU award pays out at the end of three years depending on how well the Company performs against targets set at the beginning of the three-year period, and failure to attain the threshold goals would result in forfeiture of the entire award. The award is denominated and paid out in shares of stock, so the value increases or decreases based on IBM’s stock price performance over the term of the grant.

 

Taking into consideration salary, target incentive and long-term incentive award grant value, the Committee’s recommended pay package for 2015 is 92% performance based. The Committee’s recommendations were approved by the independent members of IBM’s Board of Directors. These compensation decisions reflect the Board’s strong confidence in Mrs. Rometty’s ongoing leadership of the Company through another significant transformation in its over 100-year history.

 

30



 

2014 Compensation Decisions for Messrs. Schroeter, Keverian, Mills and Kelly

 

The Compensation Committee also made decisions for the following named executive officers, noting the key points below:

 

Martin J. Schroeter, Senior Vice President and Chief Financial Officer

 

·      Focused investments to build out new offerings and solutions for clients in support of the IBM strategy focused on cloud, analytics, mobile, social and security

·      Delivered increase in year-to-year pre-tax income margin while supporting the shift to growth

·      Effective execution of portfolio re-alignment, including six acquisitions, the divestiture of the System x business and the announced divestiture of the commercial semiconductor technology business

·      Maintained strong asset growth in IBM Global Financing

·      Showcased IBM’s strategic and financial strength by articulating IBM’s new strategy to clients, analysts and investors

 

Kenneth M. Keverian, Senior Vice President, Corporate Strategy

 

·      Drove common strategic agenda across the IBM portfolio

·      Developed partnerships with clients to create an ecosystem to shift technologies in the areas of cloud, analytics, mobile, social and security

·      Strong support to transformation of Go-to-Market activities with a focus on reducing complexity

·      Built strong organizational capability across the corporate strategy community

 

Steven A. Mills, Senior Vice President and Group Executive, Software and Systems

 

·      Repositioned the hardware business through divestitures, streamlining the business, re-aligning resources and developing new technology offerings

·      Maintained #1 market position in middleware, revenue for Software declined 1% at constant currency

·      Continued expansion into new markets with strong revenue growth in cloud, analytics, mobile, social and security, and launched the Watson Group and OpenPOWER

·      Increased relationships with specialty Business Partners to deliver solutions to clients

 

John E. Kelly III, Senior Vice President and Director, Research

 

·      Transformed IBM Research, dedicating talent to high-value growth areas by industry which led to a strong innovation pipeline including next generation Watson development

·      Achieved #1 patent position for 22nd consecutive year

·      Effective execution of the divestiture of the System x business and the announced divestiture of the commercial semiconductor technology business moving the systems business to higher value, while ensuring value creation within the systems portfolio

·      Launched POWER8 as the world’s fastest open server technology

·      Continued to drive automation within the Services businesses

·      Opened innovative “ThinkLab” where IBM and clients can partner to develop industry transforming technologies

 

Following the process outlined above and based on business and individual performance, the Compensation Committee approved the 2014 annual incentive payouts below for these named executive officers:

 

 

 

2014 Annual

 

Name

 

Incentive Payouts

 

M.J. Schroeter

 

$

747,600

 

K.M. Keverian

 

510,300

 

S.A. Mills

 

703,500

 

J.E. Kelly III

 

791,100

 

 

IBM hired Mr. Keverian effective April 1, 2014 and in consideration of his compensation arrangements with his prior employer, the Committee approved the following arrangements as part of his new hire compensation: (i) annual base salary of $600,000, with an annual incentive target of $810,000, both prorated for 2014; (ii) a sign-on bonus of $800,000, payable in two installments, $500,000 was paid in 2014 with the remaining $300,000 to be paid after the one-year anniversary of his hire date; but subject to repayment if Mr. Keverian resigns or if IBM terminates him for cause prior to April 1, 2016; (iii) a sign-on equity grant of RSUs (Sign-On Equity Grant) valued at $4 million; which vests 50% on April 1, 2015, 25% on April 1, 2016, and 25% on April 1, 2017. Further, if Mr. Keverian’s employment is terminated by IBM without cause prior to the Sign-On Equity Grant fully vesting, any unvested portion of the award shall continue to vest as described above; (iv) a PSU award valued at $924,000 for the 2013–2015 performance period and a PSU award valued at $1,876,000 for the 2014–2016 performance period; (v) a $1 million discretionary award under the IBM Excess 401(k) Plus Plan, which vests 100% on April 1, 2018, payable upon a separation from service in accordance with the general distribution rules of the plan subject to clawback for 12 months after vesting if Mr. Keverian engages in activity that is detrimental to the Company.

 

The Committee also approved, and the independent directors of the Board ratified, a Retention Restricted Stock Unit award for Mr. Schroeter, valued at $8.0 million, which vests 50% on February 1, 2017 and 50% on February 1, 2019, provided that he is an employee of the Company as of each vesting date.

 

31



 

2015 Compensation Decisions for Messrs. Schroeter, Keverian, Mills and Kelly

 

The Committee also approved the following compensation elements for 2015: base salary, annual incentive target and Performance Share Unit (PSU) grants under the Long-Term Performance Plan.

 

 

 

2015 Cash (1)

 

2015 Long-Term Incentive Awards

 

 

 

 

 

Annual

 

Performance

 

Name

 

Salary Rate

 

Incentive Target

 

Share Units (2)

 

M.J. Schroeter

 

$

725,000

 

$

979,000

 

$

4,500,000

 

K.M. Keverian

 

600,000

 

810,000

 

3,000,000

 

S.A. Mills

 

745,000

 

1,005,000

 

5,000,000

 

J.E. Kelly III

 

700,000

 

945,000

 

5,000,000

 

 


(1)      The 2015 salary rate will be effective July 1, 2015 and the 2015 annual incentive target is effective January 1, 2015.

 

(2)      The PSUs will be granted on June 8, 2015 to the named executive officers, including the Chairman and CEO. The actual number of PSUs granted on this date will be determined by dividing the value shown above by a predetermined, formulaic planning price for the second quarter 2015. The performance period for the PSUs ends December 31, 2017, and the award will pay out in February 2018.

 

32



 

Section 3: Additional Information

 

Compensation Program as it Relates to Risk

 

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

 

·      Our programs appropriately balance short- and long-term incentives, with approximately 71% of 2015 total target compensation for the Chairman and CEO and Senior Executives as a group provided in equity and focused on long-term performance.

 

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

 

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

 

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

 

·      As explained in the 2014 Potential Payments Upon Termination Narrative, we further strengthened our retirement policies on equity grants for our senior leaders beginning in 2009 to ensure that the long-term interests of the Company continue to be the focus even as these executives approach retirement.

 

·      Our stock ownership guidelines require that members of the Performance Team, which includes the Chairman and CEO and each Senior Executive, hold a significant amount of IBM equity to further align their interests with stockholders over the long term.

 

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

 

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

 

Equity Award Practices

 

Under IBM’s long-standing practices and policies, all equity awards are approved before or on the date of grant. The exercise price of at-the-money stock options is the average of the high and low market price on the date of grant or, in the case of premium-priced stock options, 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. As with all compensation decisions, the independent members of the Board approve all equity awards for the Chairman and CEO and ratify all equity awards for the Chief Financial Officer. In addition, all equity awards for Senior Executives are approved by the Compensation Committee. All equity awards for employees other than the Chairman and CEO and Senior Executives are approved by the Chairman and CEO and Senior Executives pursuant to a series of delegations that were approved by the Compensation Committee, and the grants made pursuant to these delegations are reviewed periodically with the Committee.

 

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

 

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

 

33



 

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. Annual cash incentive payments are also conditioned on compliance with these Guidelines.

 

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

 

In addition, approximately 1,900 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 the following policy for the clawback of cash incentive payments in the event an executive officer’s conduct leads to a restatement of the Company’s financial results:

 

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 and Pledging Practices

 

IBM has two senior leadership teams: the Performance Team and the Growth and Transformation Team (G&TT). The Performance Team consists of approximately 60 of our senior leaders who run IBM business units and geographies and includes the Chairman and CEO and each Senior Executive. The team is accountable for business performance and the development of cross-unit strategies. The G&TT, which includes all members of the Performance Team, consists of a select group of approximately 340 executives. This team is charged with supporting the Company’s continued transformation through their leadership initiatives to engage their teams and promote innovation, speed and simplicity in service of our clients.

 

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

 

34



 

Tax Considerations

 

Section 162(m) of the U.S. Internal Revenue Code of 1986, as amended, limits deductibility of compensation in excess of $1 million paid to the Company’s CEO and to each of the other three highest-paid executive officers (not including the Company’s chief financial officer) unless this compensation qualifies as “performance-based.” Based on the applicable tax regulations, taxable compensation derived from certain stock appreciation rights and from the exercise of stock options by Senior Executives under the Company’s Long-Term Performance Plans should qualify as performance-based. The IBM Excess 401(k) Plus Plan permits an executive officer who is subject to Section 162(m) and whose salary is above $1 million to defer payment of a sufficient amount of the salary to bring it below the Section 162(m) limit. In 1999, the Company’s stockholders approved the terms under which the Company’s annual and long-term performance incentive awards should qualify as performance-based. In 2014, as required by the Internal Revenue Code, the stockholders approved the material terms of the performance criteria under which long-term performance incentive awards should qualify as performance-based. These terms do not preclude the Committee from making any payments or granting any awards, whether or not such payments or awards qualify for tax deductibility under Section 162(m), which may be appropriate to retain and motivate key executives.

 

35



 

2014 SUMMARY COMPENSATION TABLE NARRATIVE

 

Salary (Column (c))

 

Amounts shown in the salary column reflect the salary amount paid to each named executive officer during 2014.

 

·       IBM reviews salaries for each named executive officer annually during a common review cycle. Mrs. Rometty’s salary rate was effective January 1, 2012, the date she became CEO. Mr. Schroeter’s salary rate was effective January 1, 2014, the date he became CFO, and Mr. Keverian’s salary rate was effective April 1, 2014, the date he commenced employment with IBM. Mr. Mills’s and Mr. Kelly’s salary rates were both effective as of July 1, 2014.

 

Bonus (Column (d))

 

No bonuses were awarded to the named executive officers in 2014, other than Mr. Keverian. Mr. Keverian received a sign-on bonus as part of his new hire compensation. Mr. Kelly received patent issuance and invention achievement awards in 2013. All employees are eligible for these awards. Payments under the IBM Annual Incentive Program are included under column (g) (Non-Equity Incentive Plan Compensation).

 

Stock Awards Total (Column (e))

 

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

 

Performance Share Units (PSUs)

 

The following describes the material terms and conditions of PSUs as reported in the column titled Performance Share Units (column (e)) in the 2014 Summary Compensation Table and in the 2014 Grants of Plan-Based Awards Table under the heading Estimated Future Payouts Under Equity Incentive Plan Awards (columns (f), (g) and (h)).

 

General Terms

 

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

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

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

·      At the end of the three-year performance period, the Compensation Committee approves the determination of actual performance relative to pre-established targets, and the number of PSUs is adjusted up or down based on the approved actual performance.

·      PSUs granted to U.S. executives on or after January 1, 2013 vest on December 31 of the end of the performance period. Awards granted prior to such date vest on the payout date. Payout for all PSUs is in the February following the end of the performance period.

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

 

Vesting and Payout Calculations

 

·      The performance period for the awards granted in 2014 is January 1, 2014 through December 31, 2016, and the awards will pay out in February 2017. PSU awards granted in 2014 will be adjusted for performance, as described below.

·      Outstanding PSUs are typically cancelled if the executive’s employment is terminated. See the 2014 Potential Payments Upon Termination Narrative for information on payout of unvested PSUs upon certain terminations.

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

·      For PSUs that were paid out on or before February 1, 2008, the executive could have elected, at least six months prior to vesting, to defer payment of these shares into the IBM Excess 401(k) Plus Plan. For PSUs that pay out after February 1, 2008, deferrals are not permitted.

·      See Section 1 of the 2014 Compensation Discussion and Analysis for information on performance targets for the PSU program.

 

Threshold Number:

 

·         The Threshold number of PSUs (listed in column (f) of the 2014 Grants of Plan-Based Awards Table) is 25% of the Target number.

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

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

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

 

Target Number:

 

·         The Target number of PSUs (listed in column (g) of the 2014 Grants of Plan-Based Awards Table) will be earned if 100% of the objectives are achieved.

 

36



 

Maximum Number:

 

·         The Maximum number of PSUs (listed in column (h) of the 2014 Grants of Plan-Based Awards Table) is 150% of the Target number.

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

 

Restricted Stock Units (RSUs)

 

RSUs may include RRSUs. In 2014, RSUs were granted to Mr. Keverian as part of his new hire compensation; no other RSUs were granted to the named executive officers. RRSUs granted in previous years to any named executive officer and outstanding at the end of 2014 are included in the 2014 Outstanding Equity Awards at Fiscal Year-End Table. In addition, the column titled Stock Awards in the 2014 Option Exercises and Stock Vested Table includes previously-granted RRSUs.

 

General Terms

 

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

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

 

Vesting and Payout

 

·     Vesting periods for RSUs typically range from one to four years.

·     Vesting periods for RRSUs typically range from two to five years and can be as long as ten years; these awards are typically given to select senior executives for the purpose of providing additional value to retain the executive through the vesting date.

·     Payout of RSUs at each vesting date is typically contingent on the recipient remaining employed by IBM through that vesting date. See the 2014 Potential Payments Upon Termination Narrative for information on payout of unvested RSUs upon certain terminations.

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

·     All deferred shares, comprised of shares that were deferred by the participant (Deferred IBM shares), in the 2014 Nonqualified Deferred Compensation Table may include certain previously-granted RRSUs. Executives have not been allowed to defer payment of RSUs.

·     For RRSUs granted before January 1, 2008, the executive could have elected to defer payment of those shares into the IBM Excess 401(k) Plus Plan. For RRSUs granted on or after January 1, 2008, deferrals are not permitted.

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

 

Option Awards (Column (f))

 

·      There were no option awards granted to the named executive officers in the years shown in the 2014 Summary Compensation Table. Market-priced and premium-priced options granted in previous years to the named executive officers and outstanding at the end of 2014 are included in the 2014 Outstanding Equity Awards at Fiscal Year-End Table.

 

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

 

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

 

General Terms

 

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

·      See Section 1 of the 2014 Compensation Discussion and Analysis for information on performance targets for AIP.

 

Payout Range

 

·     Mrs. Rometty had a target of $4 million for 2014. Messrs. Schroeter, Keverian, Mills and Kelly had targets of 135% of their salary rate for 2014. See column (d) of the 2014 Grants of Plan-Based Awards Table for the target payout.

·     Threshold payout for each named executive officer is $0 (see column (c) of the 2014 Grants of Plan-Based Awards Table).

·      Maximum payout for each named executive officer is three times the target (see column (e) of the 2014 Grants of Plan-Based Awards Table).

 

Vesting and Payout

 

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

·      An executive generally must be employed by IBM at the end of the performance period in order to be eligible to receive an AIP payout. At the discretion of appropriate senior management, the Compensation Committee, or the Board, an executive may receive a prorated payout of AIP upon retirement.

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

 

Change in Retention Plan Value (Column (h))

 

·      Amounts in the column titled Change in Retention Plan Value represent the annual change in retention plan value from December 31, 2013 to December 31, 2014 for each named executive officer, other than Mr. Schroeter and Mr. Keverian.

·      See the 2014 Retention Plan Narrative for a description of the Retention Plan.

 

Change in Pension Value (Column (h))

 

·      Amounts in the column titled Change in Pension Value represent the annual change in pension value from December 31, 2013 to December 31, 2014 for each named executive officer, other than Mr. Keverian.

·      See the 2014 Pension Benefits Narrative for a description of the IBM Personal Pension Plan and IBM Excess Personal Pension Plan.

 

37



 

Nonqualified Deferred Compensation Earnings (Column (h))

 

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

·     See the 2014 Nonqualified Deferred Compensation Narrative for a description of the nonqualified deferred compensation plans in which the named executive officers participate.

 

All Other Compensation (Column (i))

 

Amounts in this column represent the following as applicable:

 

Tax Reimbursements

 

·     Amounts represent payments that the Company 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 commutation expenses (see Personal Use of Company Autos below).

 

Company Contributions to Defined Contribution Plans

 

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

·     Under IBM’s 401(k) Plus Plan, participants hired or rehired by IBM U.S. before January 1, 2005, including Mrs. Rometty, Mr. Mills and Mr. Kelly, are eligible to receive matching contributions up to 6% of eligible compensation. Participants hired or rehired by IBM U.S. on or after January 1, 2005, including Mr. Schroeter and Mr. Keverian, who complete the plan’s service requirement, are generally eligible for up to 5% matching contributions. A participant’s hire/rehire date is measured by a participant’s most recent U.S. hire date. Mr. Schroeter rejoined IBM U.S. in 2011 after working for IBM Australia from April 1, 2005 to June 30, 2011. In addition, for all eligible participants, the Company makes automatic contributions equal to a certain percentage of eligible compensation, depending on the participant’s pension plan eligibility on December 31, 2007. In 2014, the automatic contribution percentage was 4% for Mrs. Rometty and Mr. Mills; 2% for Mr. Kelly; 1% for Mr. Schroeter; and 0% for Mr. Keverian, who, as of December 15, 2014, had not yet completed the one-year service requirement.

·     Under IBM’s Excess 401(k) Plus Plan, the Company makes matching contributions equal to a percentage of the sum of (i) the amount the participant elects to defer under the Excess 401(k) Plus Plan, and (ii) the participant’s eligible compensation after reaching the Internal Revenue Code compensation limits. Participants hired or rehired by IBM U.S. before January 1, 2005, including Mrs. Rometty, Mr. Mills and Mr. Kelly, are eligible to receive matching contributions up to 6% of eligible compensation. Participants hired or rehired by IBM U.S. on or after January 1, 2005, including Mr. Schroeter and Mr. Keverian, who complete the plan’s service requirement, are eligible for up to 5% matching contributions. In addition, for all eligible participants, the Company makes automatic contributions equal to a percentage of the sum of (i) the amount the participant elects to defer under the Excess 401(k) Plus Plan, and (ii) the participant’s eligible compensation after reaching the Internal Revenue Code compensation limits. The automatic contribution percentage depends on the participant’s pension plan eligibility on December 31, 2007, and in 2014, the automatic contribution percentage was 4% for Mrs. Rometty and Mr. Mills; 2% for Mr. Kelly; 1% for Mr. Schroeter; and 0% for Mr. Keverian, who, as of December 15, 2014, had not yet completed the one-year service requirement.

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

·     See the 2014 Nonqualified Deferred Compensation Narrative for additional details on the nonqualified deferred compensation plans.

 

Life and Travel Accident Insurance Premiums

 

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

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

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

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

 

Perquisites

 

The following describes perquisites (and their aggregate incremental cost calculations) provided to the named executive officers in 2014.

 

Personal Financial Planning

 

In 2014, IBM offered financial planning services with coverage generally up to $15,000 annually for senior U.S. executives, including each named executive officer.

 

Personal Travel on Company Aircraft

 

General Information

 

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

·     IBM’s security practices provide that all air travel by the Chairman and CEO, including personal travel, be on Company aircraft. The aggregate incremental cost for Mrs. Rometty’s personal travel is included in column (i) of the 2014 Summary Compensation Table. These amounts also include the aggregate incremental cost, if any, of travel by her family members or other non-IBM employees on both business and non-business occasions.

·     Additionally, personal travel in 2014 on IBM aircraft by named executive officers other than Mrs. Rometty, and the aggregate incremental cost, if any, of travel by the officer’s family or other non-IBM employees when accompanying the officer on both business and non-business occasions is also included.

 

38



 

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

·     Any travel by named executive officers for an annual physical under the corporate wellness program is included in these amounts.

 

Aggregate Incremental Cost Calculation

 

·     The aggregate incremental cost for the use of Company aircraft for personal travel, including travel to outside boards, is calculated by multiplying the hourly variable cost rate for the specific aircraft by the number of flight hours used.

·     The hourly variable cost rate includes fuel, oil, parking/landing fees, crew expenses, aircraft maintenance (based on the hourly operation of the aircraft) and catering.

·     The rate for each aircraft is periodically reviewed by IBM’s flight operations team and adjusted as necessary to reflect changes in costs.

·     The aggregate incremental cost includes deadhead flights (i.e., empty flights to and from the IBM hangar or any other location).

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

 

Personal Use of Company Autos

 

General Information

 

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

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

·     Other named executive officers may use a Company-leased car with an IBM driver or an authorized car service in extraordinary circumstances. Family members and other non-IBM employees may accompany named executive officers other than the Chairman and CEO in a Company-leased car with an IBM driver or an authorized car service on business occasions.

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

 

Aggregate Incremental Cost Calculation

 

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

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

 

Personal Security

 

General Information

 

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

·     In 2014, there were no personal security expenses for the Chairman and CEO.

·     Amounts for 2012 and 2013 include the aggregate incremental cost, if any, of security personnel for those occasions.

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

 

Aggregate Incremental Cost Calculation

 

·     The aggregate incremental cost for security personnel is the cost of any commercial airfare to and from the destination, hotels, meals, car services, and salary and travel expenses of any additional subcontracted personnel if needed.

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

 

Annual Executive Physical

 

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

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

 

Family Travel and Attendance at Company-Related Events

 

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

·     Amounts represent the aggregate incremental cost, if any, of 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 the named executive officers who traveled for their annual executive physical under the Company’s corporate wellness program.

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

·     Amounts also include ground transportation expenses, home office equipment, items received in connection with business events and administrative charges incurred by executives.

 

39



 

2014 SUMMARY COMPENSATION TABLE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonqualified

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock

 

Option

 

Non-Equity

 

Change in

 

 

 

Deferred

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance

 

Restricted

 

Awards

 

Awards

 

Incentive Plan

 

Retention Plan

 

Change in

 

Compensation

 

All Other

 

 

 

 

 

 

 

Salary

 

Bonus

 

Share Units (1)

 

Stock Units (2)

 

Total(3)

 

Total(4)

 

Compensation

 

Value(5)

 

Pension Value(6)

 

Earnings(7)

 

Compensation(8) (9)

 

Total(10)

 

Name and Principal Position

 

Year

 

($)

 

($)

 

($)

 

($)

 

($)

 

($)

 

($)

 

($)

 

($)

 

($)

 

($)

 

($)

 

(a)

 

(b)

 

(c)

 

(d)

 

(e)

 

(e)

 

(e)

 

(f)

 

(g)

 

(h)

 

(h)

 

(h)

 

(i)

 

(j)

 

V.M. Rometty

 

2014

 

$

1,500,000

 

$

0

 

$

12,460,409

 

$

0

 

$

12,460,409

 

$

0

 

$

3,600,000

 

$

295,985

 

$

1,106,740

 

$

0

 

$

381,991

 

$

19,345,125

 

Chairman, President and CEO

 

2013

 

1,500,000

 

0

 

11,703,869

 

0

 

11,703,869

 

0

 

0

 

0

 

0

 

0

 

761,808

 

13,965,677

 

 

 

2012

 

1,500,000

 

0

 

9,259,000

 

0

 

9,259,000

 

0

 

3,915,000

 

181,656

 

641,346

 

0

 

687,725

 

16,184,727

 

M.J. Schroeter (11)

 

2014

 

660,000

 

0

 

3,616,006

 

0

 

3,616,006

 

0

 

747,600

 

N/A

 

8,481

 

0

 

80,812

 

5,112,899

 

Senior VP and CFO

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

K.M. Keverian (11)

 

2014

 

450,000

 

500,000

 

2,897,601

 

4,190,813

 

7,088,414

 

0

 

510,300

 

N/A

 

N/A

 

0

 

1,011,731

 

9,560,445

 

Senior VP, Corporate Strategy

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

S.A. Mills

 

2014

 

730,500

 

0

 

4,886,428

 

0

 

4,886,428

 

0

 

703,500

 

328,713

 

1,525,970

 

0

 

94,941

 

8,270,052

 

Executive VP, Software and Systems

 

2013

 

716,000

 

0

 

4,661,284

 

0

 

4,661,284

 

0

 

0

 

0

 

0

 

0

 

214,146

 

5,591,430

 

 

 

2012

 

716,000

 

0

 

4,629,500

 

4,135,911

 

8,765,411

 

0

 

987,360

 

136,953

 

976,530

 

0

 

211,912

 

11,794,166

 

J.E. Kelly III (11)

 

2014

 

638,000

 

0

 

3,909,248

 

0

 

3,909,248

 

0

 

791,100

 

1,043,296

 

92,989

 

0

 

96,193

 

6,570,826

 

Senior VP, Solutions Portfolio & Research

 

2013

 

625,000

 

850

 

4,941,039

 

0

 

4,941,039

 

0

 

0

 

0

 

0

 

0

 

128,016

 

5,694,905

 

 


(1)              The amounts in this column reflect the aggregate grant date fair values of Performance Share Unit (PSU) awards at the Target number (described in the 2014 Summary Compensation Table Narrative), calculated in accordance with accounting guidance; these amounts reflect an adjustment for the exclusion of dividend equivalents. At the Maximum number, these values for Mrs. Rometty would be: 2014: $18,690,613; 2013: $17,555,803; 2012: $13,888,500; for Mr. Schroeter: 2014: $5,424,009; for Mr. Keverian: 2014: $4,346,402; for Mr. Mills: 2014: $7,329,642; 2013: $6,991,926; 2012: $6,944,250; and for Mr. Kelly: 2014: $5,863,960; 2013: $7,411,656.

 

(2)              The amounts in these columns reflect the aggregate grant date fair values of Restricted Stock Units (RSUs) granted to Mr. Keverian as part of his new hire compensation, and Retention Restricted Stock Units (RRSUs) granted to Mr. Mills in 2012, calculated in accordance with accounting guidance; these amounts reflect an adjustment for the exclusion of dividend equivalents.

 

(3)              The amounts in this column reflect the total of the previous two columns (Performance Share Units and Restricted Stock Units). For assumptions used in determining the fair value of stock awards, see Note R (Stock-Based Compensation) to the Company’s 2014 Consolidated Financial Statements.

 

(4)              There were no option awards granted to the named executive officers in the years shown in the 2014 Summary Compensation Table.

 

(5)              Assumptions used to calculate these amounts can be found immediately after the 2014 Retention Plan Table. Even though accruals under the Retention Plan stopped on December 31, 2007, changes in Retention Plan Value can occur based on changes to participants’ ages and actuarial assumptions. For 2014, Change in Retention Plan Value for the eligible named executive officers is due to their age, changes in the discount rate and interest crediting rate, and a new mortality table. For 2013, the negative change in Retention Plan Value was primarily due to increases in the discount rate and the interest crediting rate which resulted in the following negative amounts: for Mrs. Rometty: $(130,705); for Mr. Mills: $(513,849); and for Mr. Kelly: $(602,593).

 

(6)              Assumptions used to calculate these amounts can be found immediately after the 2014 Pension Benefits Table. Even though accruals under the IBM Personal Pension Plan stopped on December 31, 2007, changes in Pension Value can occur based on changes to participants’ ages and actuarial assumptions. For 2014, Change in Pension Value for the eligible named executive officers is due to their age, changes in the discount rate and interest crediting rate, and a new mortality table. For 2013, the negative change in Pension Value was due to increases in the discount rate and the interest crediting rate which resulted in the following negative amounts: for Mrs. Rometty: $(499,471); for Mr. Mills: $(509,879); and for Mr. Kelly: $(17,511).

 

(7)              IBM does not provide above-market or preferential earnings on deferred compensation. See the 2014 Nonqualified Deferred Compensation Narrative for information about deferred compensation.

 

(8)              Amounts in this column include the following for 2014: for Mrs. Rometty: tax reimbursements of $30,785 and Company contributions to defined contribution plans of $150,000; for Mr. Schroeter: Company contributions to defined contribution plans of $55,333; for Mr. Keverian: Company contributions to defined contribution plans of $1,000,000; for Mr. Mills: Company contributions to defined contribution plans of $73,050; and for Mr. Kelly: Company contributions to defined contribution plans of $51,040.

 

(9)              Amounts in this column also include the following perquisites for 2014: for Mrs. Rometty: personal financial planning, personal travel on Company aircraft of $164,060, personal use of Company autos, annual executive physical, family attendance at Company-related events, and other personal expenses; for Mr. Schroeter: personal financial planning, personal security, annual executive physical, family attendance at Company-related events, and other personal expenses; for Mr. Keverian: personal financial planning and family attendance at Company-related events; for Mr. Mills: personal financial planning, personal travel on Company aircraft, personal security, family attendance at Company-related events, and other personal expenses; and for Mr. Kelly: personal financial planning, personal travel on Company aircraft of $35,213, and family attendance at Company-related events. See the 2014 Summary Compensation Table Narrative for a description and information about the aggregate incremental cost calculations for perquisites.

 

(10)       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.

 

(11)       Mr. Keverian was hired effective April 1, 2014. His annual salary rate is $600,000. The amount reflected in column (c) reflects the actual amount earned in 2014. Mr. Schroeter and Mr. Keverian were not named executive officers in the Company’s 2013 and 2014 Proxy Statements. Therefore, this table does not provide 2012 and 2013 data for them. Mr. Kelly was not a named executive officer in the Company’s 2013 Proxy Statement; therefore, this table does not provide 2012 data for him.

 

40



 

2014 GRANTS OF PLAN-BASED AWARDS TABLE

 

 

 

 

 

 

 

 

 

 

 

 

 

All Other

 

All Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock
Awards:

 

Option
Awards:

 

 

 

 

 

Grant Date
Fair Value

 

 

 

 

 

 

 

 

 

Estimated Future Payouts
Under Non-Equity Incentive Plan Awards

 

Estimated Future Payouts
Under Equity Incentive Plan Awards
(3)

 

Number
of Shares
of Stock or

 

Number of
Securities
Underlying

 

Exercise or
Base Price
of Option

 

Closing
Price on
the NYSE

 

of Stock
and
Option

 

 

 

 

 

Grant

 

Compensation

 

Threshold

 

Target(2)

 

Maximum

 

Threshold

 

Target

 

Maximum

 

Units(4)

 

Options

 

Awards

 

on the Date

 

Awards(5)

 

Name

 

Type of

 

Date

 

Committee

 

($)

 

($)

 

($)

 

(#)

 

(#)

 

(#)

 

(#)

 

(#)

 

($/Sh)

 

of Grant

 

($)

 

(a)

 

Award(1)

 

(b)

 

Approval Date

 

(c)

 

(d)

 

(e)

 

(f)

 

(g)

 

(h)

 

(i)

 

(j)

 

(k)

 

($/Sh)

 

(l)

 

V.M. Rometty

 

AIP

 

N/A

 

01/28/2014

 

$

0

 

$

4,000,000

 

$

12,000,000

 

 

 

 

 

 

 

0

 

0

 

N/A

 

N/A

 

 

 

 

 

PSU

 

06/09/2014

 

01/28/2014

 

 

 

 

 

 

 

17,709

 

70,834

 

106,251

 

 

 

 

 

 

 

 

 

$

12,460,409

 

M.J. Schroeter

 

AIP

 

N/A

 

01/28/2014

 

0

 

890,000

 

2,670,000

 

 

 

 

 

 

 

0

 

0

 

N/A

 

N/A

 

 

 

 

 

PSU

 

06/09/2014

 

01/28/2014

 

 

 

 

 

 

 

5,139

 

20,556

 

30,834

 

 

 

 

 

 

 

 

 

3,616,006

 

K.M. Keverian

 

AIP

 

N/A

 

02/25/2014

 

0

 

607,500

 

1,882,500

 

 

 

 

 

 

 

 

 

0

 

N/A

 

N/A

 

 

 

 

 

PSU

 

04/16/2014

 

02/25/2014

 

 

 

 

 

 

 

2,606

 

10,422

 

15,633

 

 

 

 

 

 

 

 

 

1,926,402

 

 

 

PSU

 

04/16/2014

 

02/25/2014

 

 

 

 

 

 

 

1,284

 

5,134

 

7,701

 

 

 

 

 

 

 

 

 

971,199

 

 

 

RSU

 

04/16/2014

 

02/25/2014

 

 

 

 

 

 

 

 

 

 

 

 

 

22,223

 

 

 

 

 

 

 

4,190,813

 

S.A. Mills

 

AIP

 

N/A

 

01/28/2014

 

0

 

1,005,000

 

3,015,000

 

 

 

 

 

 

 

0

 

0

 

N/A

 

N/A

 

 

 

 

 

PSU

 

06/09/2014

 

01/28/2014

 

 

 

 

 

 

 

6,945

 

27,778

 

41,667

 

 

 

 

 

 

 

 

 

4,886,428

 

J.E. Kelly III

 

AIP

 

N/A

 

01/28/2014

 

0

 

879,000

 

2,637,000

 

 

 

 

 

 

 

0

 

0

 

N/A

 

N/A

 

 

 

 

 

PSU

 

06/09/2014

 

01/28/2014

 

 

 

 

 

 

 

5,556

 

22,223

 

33,335

 

 

 

 

 

 

 

 

 

3,909,248

 

 


(1)     Type of Award:

AIP = Annual Incentive Program

PSU = Performance Share Unit

RSU = Restricted Stock Unit

 

Each of these awards was granted under IBM’s 1999 Long-Term Performance Plan. See the 2014 Summary Compensation Table Narrative for additional information on these types of awards.

 

(2)    Mr. Keverian was hired effective April 1, 2014. His annual incentive target was $810,000 for 2014. The amount reflected in column (d) is prorated to reflect the actual time worked in 2014.

 

(3)    PSU awards will be adjusted based on performance and paid in February 2017. Mr. Keverian’s PSU award of 10,422 shares relates to the 2014–2016 performance period and his PSU award of 5,134 shares relates to the 2013–2015 performance period.

 

(4)    Mr. Keverian’s award vests 50% on April 1, 2015, 25% on April 1, 2016 and 25% on April 1, 2017. If Mr. Keverian’s employment is terminated by the Company without cause prior to the award fully vesting, the unvested portion of this award will continue to vest as described in Section 2 of the 2014 Compensation Discussion and Analysis.

 

(5)    The amounts in this column reflect the aggregate grant date fair values of PSU and RSU awards calculated in accordance with accounting guidance. The values shown for the PSU awards are based on the Target number, as described in the 2014 Summary Compensation Table Narrative. The values shown for the PSUs and RSUs reflect an adjustment for the exclusion of dividend equivalents.

 

41


 


 

2014 OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END NARRATIVE

 

Option Awards (Columns (b)—(f))

 

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

·        As of December 31, 2014, all outstanding option awards for the named executive officers were fully vested.

·        IBM has not granted any option awards that are Equity Incentive Plan Awards.

 

General Terms

 

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

·        Options generally vest in four equal increments on the first four anniversaries of the grant date.

·        Options generally expire ten years after the date of grant.

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

 

Market-priced options:

 

·        From 2005 to 2007, market-priced options were awarded to the 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 program payout in the IBM Stock Fund under the nonqualified deferred compensation plan.

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

·       These options vested 100% three years after the date of grant.

 

Premium-priced options:

 

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

·       These options vested in four equal increments on the first four anniversaries of the grant date.

 

Stock Awards (Columns (g)—( j))

 

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

 

The amounts in this column are the number of RSUs and RRSUs that were outstanding as of December 31, 2014.

 

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

 

The amounts in this column are the value of RSU and RRSU awards 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 2014 fiscal year ($160.44).

 

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 that were outstanding as of December 31, 2014.

 

Performance Share Units

 

·        Amounts in column (i) reflect the Maximum number possible for each PSU award.

·        The maximum payout level is 150% of the Target number, 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.

·        See Section 1 of the 2014 Compensation Discussion and Analysis, as well as the 2014 Summary Compensation Table Narrative, for a detailed description of the PSU program, including payout calculations.

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

 

42



 

2014 OUTSTANDING PSU AWARD PAYOUT LEVELS

 

Name

 

Grant Date

 

Threshold

 

Target

 

Maximum

 

V.M. Rometty

 

06/08/2012

 

12,500

 

50,000

 

75,000

 

 

 

01/02/2013

 

15,958

 

63,830

 

95,745

 

 

 

06/09/2014

 

17,709

 

70,834

 

106,251

 

M.J. Schroeter

 

06/08/2012

 

1,654

 

6,615

 

9,923

 

 

 

06/07/2013

 

1,929

 

7,716

 

11,574