DEF 14A 1 a18-2910_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.

 



 

 



 

Armonk, New York 10504

March 12, 2018

 

Dear Fellow Stockholders:

 

On behalf of the IBM Board of Directors, you are cordially invited to attend the Annual Meeting of Stockholders on Tuesday, April 24, 2018 at 10 a.m., at the Hyatt Regency Milwaukee in Milwaukee, Wisconsin.

 

Our Board is proud of the relationships we have built with stockholders. In 2017, we continued our long-standing practice of engaging with stockholders to hear their perspective and feedback. Since the 2017 Annual Meeting, our Independent Presiding Director, the chairs of the Executive Compensation and Management Resources Committee and Directors and Corporate Governance Committee, as well as members of IBM management, including myself, have met with investors that own more than half of the shares that voted at the Annual Meeting last year. During these meetings, we discussed IBM’s strategy, corporate governance, board composition and refreshment, executive compensation practices, and our corporate responsibility and sustainability leadership. Through these conversations with our investors, we gained invaluable insight into our investors’ perspectives on matters of critical importance. We very much appreciate the time our investors spent with us, and the thoughtful feedback we received.

 

The refreshed look of this year’s Proxy reflects the feedback we took from our stockholder outreach. You will also notice that this year, in continuation of the Board’s active refreshment practice, Joseph R. Swedish, executive chairman and past president and chief executive officer of Anthem, Inc. and Frederick H. Waddell, chairman and retired chief executive officer of Northern Trust Corporation, joined our Board. Mr. Swedish and Mr. Waddell bring expertise in healthcare and financial services, respectively, two industries that are important to our business and long-term strategy for value creation. With these additions, our Board continues to reflect and refine the skills, as well as diversity of thought, experience and background, that are necessary to oversee and support our strategy over the long term.

 

On behalf of the Board of Directors, thank you for your continued investment and support of IBM. Your vote is important and I encourage you to vote your shares.

 

 

Very truly yours,

 

 

 

 

 

 

Virginia M. Rometty

 

Chairman of the Board

 

 



 

Table of Contents

 

Notice of 2018 Annual Meeting of Stockholders

1

 

 

Proxy Summary

2

 

 

IBM Board of Directors

7

 

 

Item of Business 1.
Election of Directors for a Term of One Year

9

 

 

Board and Governance

16

 

 

Committees of the Board

16

 

 

Corporate Governance

18

 

 

Certain Transactions and Relationships

22

 

 

2017 Director Compensation Narrative

23

 

 

Section 16(a) Beneficial Ownership Reporting Compliance

25

 

 

Ownership of Securities

25

 

 

Executive Compensation

27

 

 

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

27

 

 

2017 Compensation Discussion and Analysis

28

 

 

2017 Summary Compensation Table and Related Narrative

44

 

 

2017 Grants of Plan-Based Awards Table

49

 

 

2017 Outstanding Equity Awards at Fiscal Year-End Table and Related Narrative

50

 

 

2017 Retention Plan Narrative

53

 

 

2017 Pension Benefits Narrative

56

 

 

2017 Nonqualified Deferred Compensation Narrative

59

 

 

2017 Potential Payments Upon Termination Narrative

64

 

 

Report of the Audit Committee of the Board of Directors

68

 

 

Audit and Non-Audit Fees

68

 

 

Item of Business 2.
Ratification of Appointment of Independent Registered Public Accounting Firm

69

 

 

Item of Business 3.
Advisory Vote on Executive Compensation

70

 

 

Item of Business 4.
Stockholder Proposal on Lobbying Disclosure

72

 

 

Item of Business 5.
Stockholder Proposal on Shareholder Ability to Call a Special Shareholder Meeting

73

 

 

Item of Business 6.
Stockholder Proposal to Have an Independent Board Chairman

74

 

 

Frequently Asked Questions

76

 

 

Appendix A — Non-GAAP Financial Information and Reconciliations

80

 

 

Corporate Responsibility & Sustainability at IBM

83

 



 

Notice of 2018 Annual Meeting of Stockholders

 

Items of business:

 

The Annual Meeting of Stockholders of International Business Machines Corporation will be held on Tuesday, April 24, 2018 at 10 a.m., at the Hyatt Regency Milwaukee, 333 West Kilbourn Avenue, Milwaukee, Wisconsin 53203. The items of business are:

 

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

 

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

 

3.              Advisory Vote on Executive Compensation.

 

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

 

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

 

Stockholders of record can vote their shares by using the Internet or the telephone. Instructions for using these convenient services are set forth on the proxy card or the notice of Internet availability of proxy materials. If you received your materials by mail, you also may vote your shares by marking your votes on the enclosed proxy card, signing and dating it, and mailing it in the enclosed envelope. If you will need special assistance at the meeting because of a disability, please contact the Office of the Secretary, International Business Machines Corporation, 1 New Orchard Road, Armonk, NY 10504.

 

 

Christina M. Montgomery

 

Vice President and Secretary

 

 

 

 

Date:

April 24, 2018

 

 

 

 

Time:

10 a.m.

 

 

 

 

Place:

Hyatt Regency Milwaukee

 

 

333 West Kilbourn Avenue

 

 

Milwaukee, WI 53203

 

 

Your vote is important.

 

Please vote by following the instructions on your proxy card or voting instruction form.

 

This Proxy Statement, the proxy card, or the notice of Internet availability of proxy materials, as applicable, are being distributed beginning on or about March 12, 2018 to all stockholders entitled to vote. The IBM 2017 Annual Report, which includes consolidated financial statements, is being provided with this Proxy Statement.

 

Important Notice Regarding the Availability of Proxy Materials for the Stockholder Meeting to be held on April 24, 2018: The Proxy Statement and the Annual Report to Stockholders are available at www.ibm.com/investor/material/.

 

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

 

1



 

Proxy Summary

 

Voting matters

 

Stockholders will be asked to vote on the following matters at the Annual Meeting:

 

 

 

Board’s

 

Where to find

Item of Business

 

recommendation

 

more information

1. Election of thirteen directors

 

FOR all nominees

 

pp. 9–15

2. Ratification of PricewaterhouseCoopers LLP as our independent registered public accounting firm

 

FOR

 

p. 69

3. Advisory Vote on Executive Compensation

 

FOR

 

pp. 70–71

4. Stockholder Proposal on Lobbying Disclosure

 

AGAINST

 

pp. 72–73

5. Stockholder Proposal on Shareholder Ability to Call a Special Shareholder Meeting

 

AGAINST

 

pp. 73–74

6. Stockholder Proposal to Have an Independent Board Chairman

 

AGAINST

 

pp. 74–75

 

This year, our Proxy Statement has been designed to help our stockholders better understand our Board, governance and compensation practices. You will find increased graphics and headers to illuminate the content. We hope you find the new format and our continued dedication to transparency helpful.

 

2



 

IBM Board of Directors

 

Director nominees (PAGE 7)

 

IBM’s Board is composed of a diverse, experienced group of global thought and business leaders. All of our directors are independent except for Virginia Rometty, IBM’s CEO.

 

 

 

 

 

 

 

 

 

 

 

Audit Committee

Director

 

Age

 

Primary Occupation

 

Director Since

 

Committee Memberships

 

Financial Expert

Kenneth I. Chenault

 

66

 

Retired Chairman and Chief Executive Officer, American Express Company

 

1998

 

 

Michael L. Eskew

Presiding Director

 

68

 

Retired Chairman and Chief Executive Officer, United Parcel Service, Inc.

 

2005

 

 

David N. Farr

 

63

 

Chairman and Chief Executive Officer, Emerson Electric Co.

 

2012

 

 

Alex Gorsky

 

57

 

Chairman and Chief Executive Officer, Johnson & Johnson

 

2014

 

 

Shirley Ann Jackson

 

71

 

President, Rensselaer Polytechnic Institute

 

2005

 

 

Andrew N. Liveris

 

63

 

Executive Chairman, DowDuPont Inc. and Chairman and Chief Executive Officer, The Dow Chemical Company

 

2010

 

 

Hutham S. Olayan

 

64

 

Vice Chairman, The Olayan Group

 

2016

 

 

James W. Owens

 

72

 

Retired Chairman and Chief Executive Officer, Caterpillar Inc.

 

2006

 

 

Virginia M. Rometty

 

60

 

Chairman, President and Chief Executive Officer, IBM

 

2012

 

 

Joseph R. Swedish

 

66

 

Executive Chairman and Past President and Chief Executive Officer, Anthem, Inc.

 

2017

 

 

Sidney Taurel

 

69

 

Chairman Emeritus, Eli Lilly and Company Chairman, Pearson plc

 

2001

 

 

Peter R. Voser

 

59

 

Retired Chief Executive Officer, Royal Dutch Shell plc Chairman, ABB Ltd.

 

2015

 

 

Frederick H. Waddell

 

64

 

Chairman and Retired Chief Executive Officer, Northern Trust Corporation

 

2017

 

 

 

Audit:

Directors & Corporate Governance:

Executive Compensation & Management Resources:

Executive:

Audit Committee Financial Expert:

 

 

 

 

 

Diversity of skills and experience of director nominees

 

IBM’s directors collectively contribute significant experience in the areas most relevant to overseeing the Company’s business and strategy.

 

 

3



 

Tenure of director nominees

 

·             The Board represents a deliberate mix of members who have a deep understanding of our business and members who bring new skills and fresh perspectives.

·             Mix of new and tenured directors reflecting our commitment to ongoing and proactive Board refreshment.

 

 

Governance highlights (PAGE 18)

 

Effective Board leadership and independent oversight

 

·             Lead independent Presiding Director with robust and well-defined responsibilities

·             Executive session led by independent Presiding Director at each Board meeting

·             Focus on proactive Board refreshment

 

Overview of IBM’s corporate governance

 

·             Annual election of all directors

·             Majority voting for directors in uncontested elections

·             Stockholder special meeting right

·             No stockholder rights plan

·             Robust stockholder engagement process

·             Proxy access NEW

 

 

4



 

Stockholder engagement highlights

 

Stockholder engagement is a core IBM value that is a significant part of our ongoing review of our corporate governance and executive compensation programs. To that end, our investor outreach program is a year-round process that includes discussion of IBM’s business and long-term strategy, executive compensation programs and practices, corporate governance, and corporate responsibility and sustainability. These discussions ensure that our stockholders understand our key decisions and that we understand their priorities and concerns.

 

·             Every year, we reach out to over 100 of our largest investors, representing more than 70% of our institutional ownership.

·             Our process also includes outreach to more than 250,000 registered and beneficial stockholders, which represent a majority of our retail stockholder base.

·             Since the 2017 Annual Meeting, representatives from senior management and the Board have met with investors that own, in the aggregate, more than 55% of the shares that voted on Say on Pay at the 2017 Annual Meeting.

 

Here is a summary of what we learned during those meetings, and how we responded.

 

What we heard

How we responded

 

 

Stockholders expressed support for a proxy access by-law in line with current market terms

·        In December 2017, the Company adopted a proxy access by-law allowing a stockholder, or a group of up to 20 stockholders, that has owned at least 3% of our outstanding common stock for at least three years, to nominate, and include in the Company’s annual meeting proxy materials, directors constituting the greater of two individuals or 20% of the Board

 

 

 

 

Increased disclosure of our robust Board oversight and other Board practices

·        This Proxy Statement includes more insight into existing Board oversight processes and practices, including, for example, the robust processes our Board follows for succession planning and Board evaluation

 

 

Some stockholders preferred increased transparency around achievement of incentive goals

·        Included disclosure of performance against goals in both the Annual Incentive Program and Long-Term Incentive Plan to provide increased transparency into the rigor of our goals and the linkage of those goals to our business strategy

Some stockholders expressed a preference that a relative metric, such as return on invested capital (ROIC), be included in the Long-Term Incentive Plan

·        Adopted a relative ROIC modifier beginning with Performance Share Units (PSUs) granted in 2018, which may increase or decrease the number of shares paid out based on IBM’s relative ROIC performance

 

Increased information regarding our strong sustainability leadership

·        IBM publishes a comprehensive Corporate Responsibility Report, and in June, IBM published its 27th consecutive annual Corporate Environmental Report; we have provided links to these reports in this Proxy Statement

 

General preference for simplicity and clarity in our Proxy Statement

·        We have included this proxy summary to provide the reader with the highlights of the entire Proxy Statement

 

·        The rest of the Proxy Statement has been redesigned to enhance readability and clarity of disclosure

 

5



 

Business highlights

 

IBM is at the forefront of enterprise technology market opportunities. We have laid a strong foundation for the cognitive era.

 

2017 Performance Highlights

 

 

 

Returned IBM to revenue growth in fourth quarter of 2017, led by:

 

·        Sustained Systems momentum across a revitalized portfolio with the new Z14, Storage products and Power Linux

·        Cloud revenues of $17B and an as-a-service exit run-rate of $10B

·        Security revenue over $3B, leveraging our leadership position in the enterprise

 

 

 

 

 

 

Improved trajectory in gross margins through the year, impacted on the full year by continued investment to scale the IBM Cloud, as well as services portfolio dynamics

 

 

 

 

 

Generated over $11B in GAAP pre-tax income (operating non-GAAP PTI of $13.9B) reflecting ongoing efficiency in operating expenses and monetization of Intellectual Property produced by our investments in research and development

 

 

 

 

 

GAAP cash from operations of nearly $17B, down ($0.4B) year-to-year primarily driven by less cash sourced from global financing receivables

 

Delivered free cash flow of $13B with a realization rate of 116% (excluding the one-time tax charge of $5.5B), returning nearly $10B to stockholders in the form of dividends and share repurchases

 

6



 

IBM Board of Directors

 

Composition of the Board

 

IBM’s Board of Directors is responsible for supervision of the overall affairs of IBM. To assist it in carrying out its duties, the Board has delegated certain authority to several committees. Following the Annual Meeting in 2018, the Board will consist of 13 directors, all of whom are independent except for Mrs. Rometty, IBM’s Chairman and CEO. 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.

 

Director Selection Process

 

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 Committee recommends candidates to the full Board for election.

 

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.

 

The Committee and the Board also focus on ensuring that the Board reflects a diversity of backgrounds (including gender and ethnicity), talents and perspectives.

 

The Committee and Board identifies candidates through a variety of means, including:

 

·   information the Committee requests from the Secretary of IBM;

·   recommendations from members of the Committee and the Board;

·   suggestions from IBM management; and

·   a third-party search firm, from time to time.

 

Any formal invitation to a director candidate is authorized by the full Board. The Committee also considers candidates recommended by stockholders. Stockholders wishing to recommend director candidates for consideration by the Committee may do so by writing to the Secretary of IBM, giving the recommended candidate’s name, biographical data and qualifications.

 

7



 

Director Skills and Qualifications

 

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

 

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

 

IBM BOARD OF DIRECTORS - EXPERIENCE AND SKILLS OF DIRECTOR NOMINEES

 

 

 

Director Experience

Current Director

 

Company or
Academic
Leadership

 

U.S.
Business
Operations

 

Global
Business
Operations

 

CFO

 

Specific Risk
Oversight/Risk
Management
Exposure

 

Technology,
Cybersecurity,
or Digital

 

Healthcare

 

Research/
Academia

 

Government/
Regulatory,
Business
Associations or
Public Policy

 

Public
Board

 

Gender/
Ethnic Diversity

Kenneth I. Chenault

 

 

 

 

 

 

 

 

 

 

 

 

 

Michael L. Eskew

 

 

 

 

 

 

 

 

 

 

 

 

 

 

David N. Farr

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Alex Gorsky

 

 

 

 

 

 

 

 

 

 

 

 

 

Shirley Ann Jackson

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Andrew N. Liveris

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hutham S. Olayan

 

 

 

 

 

 

 

 

 

 

 

 

 

James W. Owens

 

 

 

 

 

 

 

 

 

 

 

 

 

Virginia M. Rometty

 

 

 

 

 

 

 

 

 

 

 

 

Joseph R. Swedish

 

 

 

 

 

 

 

 

 

 

 

 

 

Sidney Taurel

 

 

 

 

 

 

 

 

 

 

 

 

 

Peter R. Voser

 

 

 

 

 

 

 

 

 

 

 

 

 

Frederick H. Waddell

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8



 

1. Election of Directors for a Term of One Year

 

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

 

  THE BOARD RECOMMENDS YOU VOTE FOR EACH OF THE NOMINEES INTRODUCED BELOW.

 

Kenneth I. Chenault

 

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

 

QUALIFICATIONS

 

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

·        U.S. Government service (former 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 and Facebook, Inc.

 

Mr. Chenault, 66, 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, a position he held until his retirement in early 2018. Mr. Chenault now serves as Chairman and Managing Director of General Catalyst Partners, a venture capital firm. He is a director of The Procter & Gamble Company and Facebook, Inc.

 

9



 

Michael L. Eskew

 

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

 

Committees:     Audit (chair) Executive

 

QUALIFICATIONS

 

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

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

·        Chairman of a charitable organization

 

Mr. Eskew, 68, is IBM’s independent Presiding Director. Mr. Eskew joined United Parcel Service in 1972. He was named corporate vice president for industrial engineering in 1994, group vice president for engineering in 1996, executive vice president in 1999, vice chairman in 2000, and he was chairman and chief executive officer from 2002 until his retirement at the end of 2007. Mr. Eskew remained on the board of United Parcel Service until the end of 2014. He is a director of Allstate Corporation, Eli Lilly and Company and 3M Company. In addition, he is chairman of the Annie E. Casey Foundation.

 

David N. Farr

 

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

 

Committees:     Audit

 

QUALIFICATIONS

 

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

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

·        Outside board experience as former director of Delphi Corporation

 

Mr. Farr, 63, joined Emerson in 1981 and subsequently held various executive positions. He was named senior executive vice president and chief operating officer in 1999, chief executive officer in 2000 and chairman and chief executive officer in 2004. Mr. Farr was named chairman, president and chief executive officer in 2005 and chairman and chief executive officer in 2010. He is chairman of the National Association of Manufacturers and a director of the US-China Business Council.

 

10



 

Alex Gorsky

 

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

 

Committees:     Executive Compensation & Management Resources

 

QUALIFICATIONS

 

·        Global business and technology 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)

·        Experience as a university trustee

 

Mr. Gorsky, 57, 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 is a member of the Business Roundtable’s Board of Directors and Chairman of its Corporate Governance Committee. Mr. Gorsky also serves on the boards of the Travis Manion Foundation, Congressional Medal of Honor Foundation, the National Academy Foundation and the Wharton Board of Overseers.

 

Shirley Ann Jackson

 

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

 

Committees:     Directors & Corporate Governance (chair) Executive

 

QUALIFICATIONS

 

·        Leadership and technology experience as president of Rensselaer Polytechnic Institute

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

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

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

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

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

·        Leadership and teaching positions at a research university

 

Dr. Jackson, 71, was a theoretical physicist at the former AT&T Bell Laboratories from 1976 to 1991, professor of theoretical physics at Rutgers University from 1991 to 1995, and chairman of the U.S. Nuclear Regulatory Commission from 1995 until she assumed her current position of president of Rensselaer Polytechnic Institute in 1999. Dr. Jackson is a director of FedEx Corporation, Medtronic plc, and Public Service Enterprise Group Incorporated. She has been co-chair of the President’s Intelligence Advisory Board and a member of the International Security Advisory Board to the United States Secretary of State. Dr. Jackson is a fellow of the Royal Academy of Engineering (U.K.), the American Academy of Arts and Sciences, and a member of the National Academy of Engineering and the American Philosophical Society. Dr. Jackson is a recipient of the National Medal of Science, the highest award in science and engineering awarded by the U.S. Government. Dr. Jackson is a board member of the Council on Foreign Relations. She is a Regent Emerita and former Vice-Chair of the Board of Regents of the Smithsonian Institution, a past president of the American Association for the Advancement of Sciences, and an honorary trustee of the Brookings Institution. Additionally, during the past five years, she served as a director of Marathon Oil Corporation.

 

11



 

Andrew N. Liveris

 

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

 

Committees:        Executive Compensation & Management Resources

 

QUALIFICATIONS

 

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

·        U.S. and international government service (former chairman of the President’s American Manufacturing Committee, member of the President’s Task Force on Apprenticeship Expansion, member of the Australian government’s Industry Growth Centres Advisory Committee and Thailand’s Board of Investment)

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

·   Experience as a university trustee

 

Mr. Liveris, 63, joined Dow in 1976 and subsequently held various executive positions, including vice president of specialty chemicals from 1998 to 2000, business group president for performance chemicals from 2000 to 2003, and president and chief operating officer from 2003 to 2004. Mr. Liveris was named president and chief executive officer of Dow in 2004 and chairman in 2006. In 2016 he transitioned the president role and continued as chairman and chief executive officer of Dow until late 2017 when he transitioned to the position of executive chairman of DowDuPont. Mr. Liveris served as chairman of the President’s American Manufacturing Committee and now serves as a member of the President’s Task Force on Apprenticeship Expansion. Mr. Liveris also serves as vice chairman of the Executive Committee of the Business Roundtable, and as an Executive Committee member and former chairman of The Business Council. Mr. Liveris is also a trustee of The King Abdullah University of Science and Technology (KAUST), the California Institute of Technology and the United States Council for International Business (USCIB).

 

Hutham S. Olayan

 

Vice Chairman, The Olayan Group, a private family-owned multinational enterprise that is a diversified global investor and an operator of industrial and commercial businesses in the Middle East

 

Committees:       Directors & Corporate Governance

 

QUALIFICATIONS

 

·        Global business experience as vice chairman, The Olayan Group and President and Chief Executive Officer, Olayan America

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

·        Outside board experience as a director of Morgan Stanley

·        Experience as a university trustee

 

Ms. Olayan, 64, has been a principal and director of Olayan Investments Company Establishment, the parent company of The Olayan Group, since 1981. Prior to assuming the role of vice chairman in January 2018, she served as president and chief executive officer of Olayan America, heading The Olayan Group’s investment activities in the Americas for more than thirty years. Ms. Olayan is a director of Morgan Stanley. She has previously served as a director of Thermo Electron Corporation. She is also a member of the Executive Advisory Board of General Atlantic. She serves on the boards of the MasterCard Foundation, the Memorial Sloan-Kettering Cancer Center and the Peterson Institute for International Economics. Ms. Olayan is also a member of the Council on Foreign Relations and international advisory bodies affiliated with the Belfer Center for Science and International Affairs of Harvard University and the Carnegie Middle East Center.

 

12



 

James W. Owens

 

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

 

Committees:   Audit

 

QUALIFICATIONS

 

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

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

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

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

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

·        Experience as a university trustee

 

 

Mr. Owens, 72, 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, former chairman of the board of trustees at North Carolina State University, and was a member of the President’s Economic Recovery Advisory Board.

 

Virginia M. Rometty

 

Chairman, President and Chief Executive Officer, IBM

 

Committees:   Executive (chair)

 

QUALIFICATIONS

 

·        Global business and technology 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 (former member of the President’s Export Council)

·        Experience as a university trustee

 

Mrs. Rometty, 60, joined IBM in 1981. She was elected senior vice president of Global Business Services in 2005, senior vice president of Sales and Distribution in 2009, senior vice president and group executive of Sales, Marketing and Strategy in 2010, president and chief executive officer of IBM in early 2012 and chairman in late 2012. She is a member of the Business Roundtable, the Council on Foreign Relations, the Board of Trustees of Northwestern University and the Board of Overseers and Managers of Memorial Sloan-Kettering Cancer Center, and formerly served on the President’s Export Council.

 

13



 

Joseph R. Swedish

 

Executive Chairman and Past President and Chief Executive Officer, Anthem, Inc., a leading health benefits provider

 

Committees:   Directors & Corporate Governance

 

QUALIFICATIONS

 

·        Global business and technology experience as executive chairman, president and chief executive officer of Anthem, Inc.

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

·        Outside board and technology experience as a director of CDW Corporation

·        Experience as the chairman of a university oversight board

 

Mr. Swedish, 66, joined Anthem in 2013 as chief executive officer and was named chairman of Anthem’s board in 2015. He was the chairman, chief executive officer and president until late 2017 when he retired and became the executive chairman. Prior to joining Anthem, he was president and chief executive officer of Centura Health from 1999 to 2004 and then served as president and chief executive officer of Trinity Health Corporation from 2004 to 2013. He also served as a director of the Blue Cross Blue Shield Association, the National Institute for Health Care Management, the Central Indiana Corporate Partnership, Inc. and as a member of the Business Roundtable. Mr. Swedish currently serves as chairman of the Board of Visitors of Duke University’s Fuqua School of Business and as a director of America’s Health Insurance Plans (past chairman). He is a graduate member of The Business Council and a member of the Duke Margolis External Advisory Board. He is also a director of CDW Corporation and Proteus Digital Health, Inc.

 

Sidney Taurel

 

Chairman Emeritus, Eli Lilly and Company, a pharmaceutical company

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

 

Committees:   Executive Compensation & Management Resources (chair) Executive

 

QUALIFICATIONS

 

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

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

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

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

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

·        Member of a university oversight board

 

Mr. Taurel, 69, joined Eli Lilly in 1971 and held management positions in the company’s operations in South America and Europe. He was named president of Eli Lilly International Corporation in 1986, executive vice president of the Pharmaceutical Division in 1991, executive vice president of Eli Lilly and Company in 1993, and president and chief operating officer in 1996. He was named chief executive officer of Eli Lilly and Company in 1998 and chairman in 1999. Mr. Taurel retired as chief executive officer in early 2008 and as chairman in late 2008. He became chairman of Pearson plc in 2016. He is also a member of the Board of Overseers of the Columbia Business School, a graduate member of The Business Council and a trustee of the Indianapolis Museum of Art. Additionally, during the past five years, he was a director of McGraw Hill Financial, Inc.

 

14



 

Peter R. Voser

 

Retired Chief Executive Officer, Royal Dutch Shell plc, a global group of energy and petrochemical companies

 

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

 

Committees:   Audit

 

QUALIFICATIONS

 

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

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

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

 

 

Mr. Voser, 59, joined Shell in 1982 and held a variety of finance and business roles including chief financial officer of Oil Products. In 2002, he joined the Asea Brown Boveri (ABB) Group of Companies as chief financial officer and a member of the ABB Group executive committee. Mr. Voser returned to Shell in 2004 becoming a managing director of The Shell Transport and Trading Company, p.l.c. and chief financial officer of the Royal Dutch/Shell Group. He was appointed chief executive officer of Royal Dutch Shell plc in 2009 and held that position until his retirement in late 2013. Mr. Voser was named chairman of ABB Ltd. in 2015. He is a director of Roche Holding Limited and Temasek. Mr. Voser is also active in a number of international and bilateral organizations.

 

Frederick H. Waddell

 

Chairman and Retired Chief Executive Officer, Northern Trust Corporation, a financial services company

 

Committees:   Directors & Corporate Governance

 

QUALIFICATIONS

 

·        Global business and technology experience as chairman and chief executive officer of the Northern Trust Corporation

·        Outside board experience as a director of AbbVie Inc.

·        Experience as a university trustee

 

 

Mr. Waddell, 64, joined Northern Trust Corporation in 1975 and has served as the chairman of the board since November 2009. He previously served as chief executive officer from 2008 through 2017, as president from 2006 through 2011 and again from October to December 2016, and as chief operating officer from 2006 to 2008. Additionally, Mr. Waddell is a member of the Board of Trustees of Northwestern University and a director of AbbVie Inc.

 

Mark Fields and W. James McNerney, Jr. are not nominees for election, and their terms on the Board will end in April 2018.

 

15



 

Board and Governance

 

Committees of the Board

 

Members of the Audit Committee, Directors and Corporate Governance Committee and the Executive Compensation and Management Resources 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) and the New York Stock Exchange (NYSE).

 

Director

 


Audit

 


Directors &
Corporate Governance

 


Executive Compensation &
Management Resources

 


Executive

 

Michael L. Eskew

 

Chair

 

 

 

 

 

 

David N. Farr

 

 

 

 

 

 

 

 

Mark Fields*

 

 

 

 

 

 

 

 

Alex Gorsky

 

 

 

 

 

 

 

 

Shirley Ann Jackson

 

 

 

Chair

 

 

 

 

Andrew N. Liveris

 

 

 

 

 

 

 

 

W. James McNerney, Jr.*

 

 

 

 

 

 

 

 

Hutham S. Olayan

 

 

 

 

 

 

 

 

James W. Owens

 

 

 

 

 

 

 

 

Virginia M. Rometty

 

 

 

 

 

 

 

Chair

 

Joseph R. Swedish

 

 

 

 

 

 

 

 

Sidney Taurel

 

 

 

 

 

Chair

 

 

Peter R. Voser

 

 

 

 

 

 

 

 

Frederick H. Waddell

 

 

 

 

 

 

 

 

 


*As noted above, Mr. Fields and Mr. McNerney are not nominees for election, and their terms on the Board will end in April 2018.

 

Audit Committee

 

MEMBERS: Michael Eskew (Chair), David Farr, James Owens and Peter Voser

NUMBER OF MEETINGS IN 2017: 6

AUDIT COMMITTEE FINANCIAL EXPERTS: Michael Eskew, David Farr, James Owens and Peter Voser

 

Charter: http://www.ibm.com/investor/governance/audit-committee-charter.html

 

The Audit Committee is responsible for reviewing reports of IBM’s financial results, audit results, internal controls and adherence to IBM’s Business Conduct Guidelines in compliance with applicable laws and regulations, including federal procurement requirements. Concurrent with that responsibility, set out more fully in the Charter, the Audit Committee performs many other functions, including:

 

·        selecting the independent registered public accounting firm and reviewing its selection with the Board;

·        annually preapproving the proposed services to be provided by the accounting firm during the year; and

·        reviewing the procedures of the independent registered public accounting firm for ensuring its independence with respect to the services performed for IBM.

 

The Audit Committee chair, pursuant to authority delegated by the Audit Committee, may approve engagements with the independent registered public accounting firm that are outside the scope of the services and fees approved by the Committee, which are later presented to the Committee.

 

The Board has determined that each member of the Committee qualifies as an Audit Committee Financial Expert as defined by the rules of the SEC.

 

16



 

Directors and Corporate Governance Committee

 

MEMBERS: Shirley Ann Jackson (Chair), Mark Fields, Hutham Olayan, Joseph Swedish, Frederick Waddell
NUMBER OF MEETINGS IN 2017: 5

 

Charter: http://www.ibm.com/investor/governance/director-and-corporate-governance.html

 

The Directors and Corporate Governance Committee is devoted primarily to the continuing review and articulation of the governance structure of the Board. Concurrent with that responsibility, set out more fully in the Charter, the Directors and Corporate Governance Committee performs many other functions, including:

 

·        recommending qualified candidates to the Board for election as directors of IBM, including the slate of directors that the Board proposes for annual election by stockholders at the Annual Meeting;

·        advising and making recommendations to the Board on all matters concerning directorship practices, and on the function and duties of the committees of the Board;

·        making recommendations to the Board on compensation for non-management directors;

·        reviewing and considering IBM’s position and practices on significant issues of corporate public responsibility, such as workforce diversity, protection of the environment, and philanthropic contributions; and

·        reviewing and considering stockholder proposals, including those dealing with issues of public and social interest.

 

As discussed above, the Committee is responsible for recommending qualified candidates to the Board for election as directors of IBM. The Committee recommends candidates based on their business or professional experience, the diversity of their background (including gender and ethnic diversity), and their talents and perspectives.

 

Executive Compensation and Management Resources Committee

 

MEMBERS: Sidney Taurel (Chair), Alex Gorsky, Andrew Liveris, James McNerney
NUMBER OF MEETINGS IN 2017: 5

 

Charter: http://www.ibm.com/investor/governance/executive-compensation-and-management-resources.html

 

The Executive Compensation and Management Resources Committee has responsibility for defining and articulating IBM’s overall executive compensation philosophy, and administering and approving all elements of compensation for elected corporate officers. Concurrent with that responsibility, set out more fully in the Charter, the Compensation Committee performs many other functions, including:

 

·        reviewing and approving the corporate goals and objectives relevant to the Chairman and CEO’s compensation, evaluating her performance in light of those goals and objectives, and, together with the other independent directors, determining and approving the Chairman and CEO’s compensation based on this evaluation;

·        reviewing IBM’s management resources programs, including overseeing, along with the full Board, the succession-planning process of the CEO and other senior management positions;

·        approving, by direct action or through delegation, participation in and all awards, grants, and related actions under IBM’s various equity plans;

·        reviewing changes in IBM’s pension plans primarily affecting corporate officers;

·        managing the operation and administration of the IBM Supplemental Executive Retention Plan;

·        reviewing the compensation structure for IBM’s officers and providing oversight of management’s decisions regarding performance and compensation of other employees; and

·        monitoring compliance with stock ownership guidelines.

 

The Committee reports to stockholders as required by the SEC (see 2017 Report of the Executive Compensation and Management Resources Committee of the Board of Directors below).

 

Members of the Committee are not eligible to participate in any of the plans or programs that the Committee administers.

 

17



 

Compensation Committee Interlocks and Insider Participation: None

 

Messrs. Gorsky, Liveris, McNerney and Taurel served as members of the Executive Compensation and Management Resources Committee in 2017. All members of the Committee were independent directors, and no member was an employee or former employee of IBM. During 2017, 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

 

MEMBERS: Virginia M. Rometty (Chair), Michael L. Eskew, Shirley Ann Jackson, Sidney Taurel
NUMBER OF MEETINGS IN 2017: 0

 

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 2017.

 

Corporate Governance

 

IBM’s Corporate Governance Principles

 

IBM’s Board of Directors has long adhered to governance principles designed to assure the continued vitality of the Board and excellence in the execution of its duties. Since 1994, the Board has had in place a set of governance guidelines reflecting these principles, including the Board’s policy of requiring a majority of the Board to be comprised of independent directors, the importance of equity compensation to align the interests of directors and stockholders, and regularly scheduled executive sessions, including sessions of non-management directors without members of management. The IBM Board Corporate Governance Guidelines reflect IBM’s principles on corporate governance matters. These guidelines are available at https://www.ibm.com/investor/governance/corporate-governance-guidelines.html.

 

IBM also has a code of ethics for directors, executive officers, and employees. The Business Conduct Guidelines are available on our website at https://www.ibm.com/investor/att/pdf/BCG_English_Accessible_2018.pdf. Any amendment to, or waiver of, the Business Conduct Guidelines that applies to one of our directors or executive officers may be made only by the Board or a Board committee, and would be disclosed on IBM’s website.

 

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

 

Independent Board

 

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. Although there is an annual assessment of director independence, independence is monitored by the Directors and Corporate Governance Committee and the full Board on an ongoing basis.

 

The independence criteria established by the Board in accordance with New York Stock Exchange (NYSE) requirements and used by the Directors and Corporate Governance Committee and the Board in their assessment of the independence of directors is available at http://www.ibm.com/investor/governance/director-independence-standards.html.

 

Applying those standards for the non-management directors in 2017, including those not standing for election, the Committee and the Board have determined that each of the following directors has met the independence standards: K.I. Chenault, M.L. Eskew, D.N. Farr, M. Fields, A. Gorsky, S.A. Jackson, A.N. Liveris, W.J. McNerney, Jr., H.S. Olayan, J.W. Owens, J.E. Spero, J.R. Swedish, S. Taurel, P.R. Voser and F.H. Waddell. Mr. Eskew’s son is employed by IBM and is not an executive officer. He was hired over a year before Mr. Eskew joined IBM’s Board, and his compensation and other terms of employment are determined on a basis consistent with IBM’s human resources policies. Based on the foregoing, the Board has determined that this relationship does not preclude a finding of independence for Mr. Eskew.

 

18



 

Independent Leadership Structure

 

The Directors and Corporate Governance Committee is responsible for the continuing review of the governance structure of the Board, and for recommending to the Board those structures and practices best suited to IBM and its stockholders. The Committee and the Board recognize that different structures may be appropriate under different circumstances. Mrs. Rometty serves as IBM’s Chairman and CEO and Mr. Eskew serves as Presiding Director, IBM’s lead independent director, a structure that the Directors and Corporate Governance Committee and the full Board believe is currently in the best interests of IBM and its stockholders. A strong, independent Presiding Director with 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, technology, leadership and oversight experience as the former chairman and chief executive officer of United Parcel Service, Inc.

 

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 is available, as necessary after discussions with the Chairman and Chief Executive Officer, for consultation and direct communication.

 

In addition to these core responsibilities, the Presiding Director engages in other regular activities, including:

 

·        one-on-one debriefs with the Chairman after each meeting;

·        spending time with senior management outside of Board meetings to ensure a deep understanding of the business and strategy of the Company; and

·        attending certain other committee meetings in addition to the committee he chairs.

 

In 2018, following each of their self-assessments and annual reviews, the Directors and Corporate Governance Committee and the Board as a whole continue to believe that this leadership structure provides IBM with the benefits of combining the leadership role of Chairman and CEO, while also recognizing the unique strengths and capabilities of IBM’s Board members, and that Mr. Eskew should continue to serve as the Presiding Director.

 

Director Attendance

 

In 2017, the Board held nine meetings and the committees collectively met 16 times. The Board and the Directors and Corporate Governance Committee recognize the importance of director attendance at Board and committee meetings. In 2017:

 

·        Overall attendance at Board and committee meetings was over 96%; and

·        Attendance was at least 75% for each director.

 

Information about Board attendance at IBM’s 2017 Annual Meeting of Stockholders and IBM’s policy with regard to Board members’ attendance at annual meetings of stockholders is available at http://www.ibm.com/investor/governance/director-attendance-at-annual-meeting.html.

 

Executive Session

 

Regularly scheduled executive sessions, including sessions of non-management directors without members of management, chaired by the Presiding Director, are held at each Board meeting. Additionally, executive sessions of the non-management directors are led by the Chairs of the Directors and Corporate Governance and Executive Compensation & Resources Committees, respectively, at least once per year.

 

19



 

Board Evaluation Process

 

IBM’s Board utilizes a comprehensive, multi-part process for its ongoing self-evaluation to ensure that the Board is operating effectively and that its processes reflect best practices.

 

1                 The Board conducts an annual self-evaluation to review the effectiveness of the Board and its committees. In this comprehensive review, the self-evaluation focuses on:

 

·                  The composition and performance of the Board, including the size, mix of skills and director refreshment practices;

·                  The quality and scope of the materials distributed in advance of meetings;

·                  The Board’s access to Company executives and operations;

·                  The promotion of rigorous decision making by the Board and the committees; and

·                  The overall functioning of the Board and its committees.

 

2                 Each committee also performs a self-evaluation in executive session on an annual basis.

 

·                  The Audit Committee’s evaluation, for example, includes individual, one-on-one interviews with IBM’s internal General Auditor and each member of the Committee.

 

3                 Each year, the Chairman and CEO holds individual, one-on-one interviews with each IBM director to obtain his or her candid assessment of director performance, Board dynamics and the effectiveness of the Board and its committees.

 

4                 The Chairman shares insights from these meetings with the Presiding Director and the full Board.

 

5                 Self-evaluation items requiring follow-up and execution are monitored on an ongoing basis by the Board, each of the committees, and by IBM management. While this formal self-evaluation is conducted on an annual basis, directors share perspectives, feedback, and suggestions continuously throughout the year.

 

Succession Planning

 

IBM has long been recognized for its leadership development. As part of this, one of the Board’s most important responsibilities is to ensure that IBM has the appropriate management to execute the Company’s long-term strategy. To fulfill this responsibility, the full Board meets at least annually to actively review and plan the succession of the CEO and other senior management positions.

 

During these reviews, at least annually, the Board discusses:

 

·         Succession process and timeline;

·         Profile and candidate assessments, both internal and external, as appropriate, for CEO and other senior leadership positions;

·        Leadership pipeline and development plans for the next generation of senior leadership; and

·        Diversity, inclusion and Company culture.

 

The Executive Compensation and Management Resources Committee also regularly reviews succession planning and the Company’s management resources programs.

 

20



 

Stockholder Rights and Accountability

 

At IBM, we routinely evaluate our governance practices to maintain strong Board and management accountability, and to promote stockholder rights through transparent policies that enhance investor and public trust. We believe that sound corporate governance is critical to achieving business success and serves the best interests of our stockholders.

 

Highlights of our commitment to stockholder rights include:

 

·                  Annual election of all Directors

·                  Majority voting for Directors

·                  Stockholder ability to call Special Meetings

·                  Proxy access rights to stockholders owning at least 3% of outstanding shares for 3 years NEW

·                  Robust stockholder engagement program

·                  No stockholder rights plan or poison pill provisions

·                  No supermajority voting provisions

·                  Confidential voting

 

Strategy Oversight

 

The Board actively oversees IBM’s long-term business strategy, and is continuously engaged with management on this topic. For example, each year, the Board holds a two-day strategy session, which includes presentations from many senior executives across the Company’s business units. Additionally, at Board meetings, the Board routinely receives presentations from senior management on critical business matters that tie to the Company’s overall strategy. In addition, the Board periodically travels to key IBM facilities, both domestically and internationally, to obtain a first-hand look at the Company’s operations in strategically important business units and geographic areas. Furthermore, the Board regularly meets with IBMers who represent the next generation of leadership at the Company to ensure that the Company’s leadership pipeline remains diverse and inclusive, and is linked to its long-term strategy.

 

Risk Oversight

 

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 to stockholder value.

 

In addition, an overall review of risk is inherent in the Board’s consideration of IBM’s long-term strategies and in the transactions and other matters presented to the Board, including capital expenditures, acquisitions and divestitures, and financial matters. The Board’s role in risk oversight of IBM is consistent with IBM’s leadership structure, with the CEO and other members of senior management having responsibility for assessing and managing IBM’s risk exposure, and the Board and its committees providing oversight in connection with those efforts.

 

The Board is responsible for overseeing management in the execution of its responsibilities and for assessing IBM’s approach to risk management. The Board exercises these responsibilities periodically as part of its meetings and also through the Board’s three committees, each of which examines various components of enterprise risk as part of their responsibilities.

 

The Audit Committee periodically reviews IBM’s enterprise management framework, including IBM’s enterprise risk management processes.

 

The Executive Compensation and Management Resources Committee is responsible for assessing risks relating to IBM’s compensation programs, as well as IBM’s evolving demands for skilled workers.

 

The Directors and Corporate Governance Committee oversees risks associated with government and industry regulations, as well as environmental and other societal and governance matters.

 

Senior management is responsible for assessing and managing IBM’s various exposures to risk on a day-to-day basis, including the creation of appropriate risk management programs and policies. IBM has developed a consistent, systemic and integrated approach to risk management, including the enterprise risk management framework, to help determine how best to identify, manage and mitigate significant risks throughout IBM. Management regularly reports to the Board and the committees on a variety of risks.

 

Cybersecurity

 

Cybersecurity is a critical part of risk management at IBM. The Board’s cybersecurity oversight includes reporting from senior management and cybersecurity experts in areas such as rapidly evolving cybersecurity threats, cybersecurity technologies and solutions deployed internally and with IBM clients, major cyber risk areas and policies and procedures to address those risks, cybersecurity incidents, and updates from the IBM Security business. The Board and Audit Committee each receive regular updates.

 

21



 

Political Contributions and Lobbying

 

IBM is committed to meaningful management, oversight, and accurate reporting with respect to our engagement with government officials, and we consistently seek to provide our stockholders with relevant data regarding our public policy engagement.

 

Further, IBM:

 

does not have a PAC (Political Action Committee),

does not engage in independent or electioneering communications as defined by law, and

does not provide any financial support to political parties or candidates, directly or indirectly.

 

The IBM Board of Directors, as part of its oversight function, periodically receives reports from senior management relating to IBM’s policies and practices regarding governmental relations, public policy and any associated expenditures.

 

IBM’s Senior Management, specifically the IBM Office of Government and Regulatory Affairs, closely monitors all public policy advocacy efforts, as well as any lobbying activities.

 

IBM’s policies and practices with regard to public policy matters, including lobbying activities and expenditures, are available on its website: http://www.ibm.com/investor/governance/public-policy-matters.html.

 

Insurance and Indemnification

 

IBM has renewed its directors and officers indemnification insurance coverage. This insurance covers directors and officers individually where exposures exist other than those for which IBM is able to provide indemnification. This coverage runs from June 30, 2017 through June 30, 2018, at a total cost of approximately $4.9 million. The primary carrier is XL Specialty Insurance Company.

 

Certain Transactions and Relationships

 

Under IBM’s written related person transactions policy, information about transactions involving related persons is assessed by the independent directors on IBM’s Board. Related persons include IBM directors and executive officers, as well as immediate family members of directors and officers, and beneficial owners of more than five percent of IBM’s common stock. If the determination is made that a related person has a material interest in any IBM transaction, then IBM’s independent directors would review, approve or ratify it, and the transaction would be required to be disclosed in accordance with the SEC rules. If the related person at issue is a director of IBM, or a family member of a director, then that director would not participate in those discussions. In general, IBM is of the view that the following transactions with related persons are not significant to investors because they take place under IBM’s standard policies and procedures: the sale or purchase of products or services in the ordinary course of business and on an arm’s-length basis; the employment by IBM where the compensation and other terms of employment are determined on a basis consistent with IBM’s human resources policies; and any grants or contributions made by IBM under one of its grant programs and in accordance with IBM’s corporate contributions guidelines.

 

From time to time, IBM may have employees who are related to our executive officers or directors. As noted in the discussion above on “Corporate Governance — Independent Board,” Mr. Eskew’s son is employed by IBM. He is an executive of IBM (not an executive officer). In addition, a brother-in-law of Mrs. V.M. Rometty (Chairman and CEO) and the wife of Mr. R.F. Del Bene (Vice President and Controller) are employed as executives of IBM. A daughter of Mr. Del Bene and a brother of Dr. J.E. Kelly III (Senior Vice President, IBM Cognitive Solutions and IBM Research) are also employed by IBM in non-executive positions. None of the above-referenced family member employees are executive officers of IBM. Each employee mentioned above received compensation in 2017 between $120,000 and $900,000. Additionally, in 2017, the above-referenced family members of Mrs. Rometty and Mr. Eskew, as well as the wife of Mr. Del Bene, each received equity grants. The compensation, equity grants and other terms of employment of each of the family member employees noted above are determined on a basis consistent with IBM’s human resources policies.

 

22



 

2017 Director Compensation Narrative

 

Annual Retainer: In 2017, non-management directors received an annual retainer of $300,000. Chairs of the Directors and Corporate Governance Committee and the Executive Compensation and Management Resources Committee received an additional annual retainer of $20,000 and the chair of the Audit Committee received an additional annual retainer of $25,000. The additional retainer for the Presiding Director position is a total of $50,000, inclusive of any committee chair retainer received. For 2017, Mr. Eskew, the Presiding Director and the chair of the Audit Committee, received $25,000 for the Presiding Director role and $25,000 for the Audit Committee chair role.

 

Under the IBM Deferred Compensation and Equity Award Plan (DCEAP), 60% of the total annual retainer is required to be deferred and paid in Promised Fee Shares (PFS). Each PFS is equal in value to one share of IBM’s common stock. When a cash dividend is paid on IBM’s common stock, each director’s PFS account is credited with additional PFS reflecting a dividend equivalent payment. With respect to the payment of the remaining 40% of the annual retainer, directors may elect one or any combination of the following: (a) deferral into PFS, (b) deferral into an interest-bearing cash account, and/or (c) receipt of cash payments on a quarterly basis during service as a Board member. IBM does not pay above-market or preferential earnings on compensation deferred by directors.

 

Stock Ownership Guidelines: For 2017, 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.

 

Beginning in 2018, 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 eight times the equity portion of the annual retainer initially payable to such director. The overall threshold remains consistent and, with this change, our stock ownership guidelines will remain the strongest in our peer group.

 

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

 

IBM’s Matching Grants Program: Non-management directors are eligible to participate in IBM’s Matching Grants Program on the same basis as IBM’s employees based in the United States. Under this program, IBM will match a director’s eligible contributions in cash on a 1-to-1 basis to approved educational institutions, medical facilities and cultural or environmental institutions. Each director is eligible for a Company match on total gifts up to $10,000 per calendar year. Amounts shown in the 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.

 

Director Compensation Consultant: The Committee retained Semler Brossy Consulting Group, LLC (Semler Brossy) in July 2017 to assess trends and developments in director compensation practices and to compare IBM’s practices against them. The Committee uses the analysis prepared by the consultant as part of its periodic review of IBM’s director compensation practices. Other than services provided to IBM’s Directors and Corporate Governance Committee and IBM’s Executive Compensation and Management Resources Committee, Semler Brossy does not perform any other work for IBM. The Committee determined that Semler Brossy is free of conflicts of interest. The Committee previously retained Frederic W. Cook & Co., Inc.

 

23



 

2017 Director Compensation Table

 

 

 

Fees Earned or

 

All Other

 

 

 

Name

 

Paid in Cash ($)

 

Compensation ($)

 

Total ($)

 

(a)

 

(b)

 

(c)(1)

 

(d)

 

Kenneth I. Chenault

 

$

300,000

 

$

173,358

 

$

473,358

 

Michael L. Eskew

 

350,000

 

150,355

 

500,355

 

David N. Farr

 

300,000

 

42,668

 

342,668

 

Mark Fields

 

300,000

 

13,895

 

313,895

 

Alex Gorsky

 

300,000

 

31,621

 

331,621

 

Shirley Ann Jackson

 

320,000

 

139,943

 

459,943

 

Andrew N. Liveris

 

300,000

 

80,254

 

380,254

 

W. James McNerney, Jr.

 

300,000

 

84,755

 

384,755

 

Hutham S. Olayan

 

300,000

 

15,922

 

315,922

 

James W. Owens

 

300,000

 

109,863

 

409,863

 

Joan E. Spero(2)

 

95,833

 

69,861

 

165,694

 

Joseph R. Swedish(3)

 

51,667

 

20

 

51,687

 

Sidney Taurel

 

320,000

 

180,902

 

500,902

 

Peter R. Voser

 

300,000

 

28,418

 

328,418

 

Frederick H. Waddell(3)

 

51,667

 

20

 

51,687

 

 


(1)              Amounts in this column include the following: for Mr. Chenault: $173,236 of dividend equivalent payments on PFS; for Mr. Eskew: $150,234 of dividend equivalent payments on PFS; for Mr. Farr: $32,547 of dividend equivalent payments on PFS and $10,000 contributed by the Company under the Matching Grants Program; for Mr. Fields: $13,773 of dividend equivalent payments on PFS; for Mr. Gorsky: $31,499 of dividend equivalent payments on PFS; for Dr. Jackson: $134,821 of dividend equivalent payments on PFS; for Mr. Liveris: $75,132 of dividend equivalent payments on PFS; for Mr. McNerney: $79,633 of dividend equivalent payments on PFS; for Ms. Olayan: $15,800 of dividend equivalent payments on PFS; for Mr. Owens: $104,741 of dividend equivalent payments on PFS; for Ms. Spero: $59,780 of dividend equivalent payments on PFS and $10,000 contributed by the Company under the Matching Grants Program; for Mr. Taurel: $171,030 of dividend equivalent payments on PFS; and for Mr. Voser: $28,296 of dividend equivalent payments on PFS.

 

(2)              After Ms. Spero’s term on the Board ended in April 2017, Ms. Spero was paid $2,914,625 of earned compensation and dividend reinvestments which had been previously deferred under the DCEAP since her election to the Board in 2004. Ms. Spero elected to defer payment of 6,089 shares.

 

(3)              Mr. Swedish and Mr. Waddell joined the Board in October 2017.

 

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

 

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

 

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

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

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

 

24



 

Section 16(a) Beneficial Ownership Reporting Compliance

 

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

 

Ownership of Securities

 

Security Ownership of Certain Beneficial Owners

 

The following sets forth information as to any person known to IBM to be the beneficial owner of more than five percent of IBM’s common stock as of December 31, 2017.

 

 

 

Number of Shares

 

 

 

Name and address

 

Beneficially Owned

 

Percent of Class

 

The Vanguard Group(1)

 

63,708,222

 

6.88

%

100 Vanguard Boulevard

 

 

 

 

 

Malvern, PA 19355

 

 

 

 

 

 

 

 

 

 

 

BlackRock, Inc.(2)

 

57,755,152

 

6.2

%

55 East 52nd Street

 

 

 

 

 

New York, NY 10022

 

 

 

 

 

 

 

 

 

 

 

State Street Corporation(3)

 

51,885,463

 

5.60

%

State Street Financial Center

 

 

 

 

 

One Lincoln Street

 

 

 

 

 

Boston, MA 02111

 

 

 

 

 

 


(1)    Based on the Schedule 13G filed with the Securities and Exchange Commission on February 9, 2018 by The Vanguard Group and certain subsidiaries (Vanguard). Vanguard reported that it had sole voting power over 1,228,539 shares, shared voting power over 203,527 shares, sole dispositive power over 62,307,270 shares, and shared dispositive power over 1,400,952 shares. 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 8, 2018 by BlackRock, Inc. and certain subsidiaries (BlackRock). BlackRock reported that it had sole voting power over 49,564,818 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.

 

(3)    Based on the Schedule 13G filed with the Securities and Exchange Commission on February 14, 2018 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.

 

25



 

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

 

The following table sets forth the beneficial ownership of shares of IBM’s common stock as of December 31, 2017 by IBM’s current directors and nominees, the executive officers named in the 2017 Summary Compensation Table, and such directors and all of IBM’s executive officers as of December 31, 2017 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, 2017. 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.

 

IBM’s current non-management directors and nominees had beneficial ownership of a total of 229,851 shares and common stock of IBM and DCEAP shares as of December 31, 2017. In the aggregate, these shares were valued at more than $35 million as of December 31, 2017, or an average of more than $2.5 million for each of IBM’s non-management directors.

 

 

 

 

 

 

 

Acquirable within 60 days

 

Value of
Common Stock

and/or Directors’

 

Name

 

Common Stock(1)

 

Stock-based
Holdings(2)

 

Options
and RSUs(3)

 

Directors’
DCEAP Shares(4)

 

DCEAP Shares at
Fiscal Year End ($)(5)

 

Kenneth I. Chenault

 

8,268

(6)

8,268

 

0

 

31,292

 

$

6,069,295

 

Erich Clementi

 

31,425

 

83,064

 

0

 

N/A

 

4,821,224

 

Michael L. Eskew

 

0

 

0

 

0

 

27,503

 

4,219,510

 

David N. Farr

 

4,908

 

4,908

 

0

 

6,383

 

1,732,265

 

Mark Fields

 

400

 

400

 

0

 

3,613

 

615,674

 

Alex Gorsky

 

0

 

0

 

0

 

6,690

 

1,026,380

 

Shirley Ann Jackson

 

0

 

0

 

0

 

24,706

 

3,790,395

 

James J. Kavanaugh

 

34,260

(7)

68,191

 

5,320

 

N/A

 

5,256,169

 

John E. Kelly III

 

83,467

(8)

146,222

 

0

 

N/A

 

12,805,507

 

Andrew N. Liveris

 

0

 

0

 

0

 

14,263

 

2,188,229

 

W. James McNerney, Jr.

 

0

 

0

 

0

 

15,045

 

2,308,204

 

Hutham S. Olayan

 

0

 

0

 

0

 

3,965

 

608,310

 

James W. Owens

 

5,000

(9)

5,000

 

0

 

19,403

 

3,743,908

 

Virginia M. Rometty

 

205,858

 

301,417

 

0

 

N/A

 

31,582,734

 

Martin J. Schroeter

 

41,954

 

98,724

 

0

 

N/A

 

6,436,583

 

Joseph R. Swedish(10)

 

1,261

(9)

1,261

 

0

 

202

 

224,453

 

Sidney Taurel

 

19,487

 

19,487

 

0

 

30,991

 

7,744,335

 

Peter R. Voser

 

0

 

0

 

0

 

6,134

 

941,078

 

Frederick H. Waddell(10)

 

0

 

0

 

0

 

337

 

51,703

 

Directors and executive officers as a group

 

506,027

(11)

906,384

 

5,320

(11)

190,526

(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 55,629 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 93,227 shares held by the IBM Personal Pension Plan Trust Fund, over which the members of the IBM Retirement Plans Committee, a management committee presently consisting of certain executive officers of IBM, have voting power, as well as the right to acquire investment power by withdrawing authority now delegated to various investment managers.

 

(2)              For executive officers, this column is comprised of the shares shown in the “Common Stock” column and, as applicable, all restricted stock units, including retention restricted stock units, officer contributions into the IBM Stock Fund under the IBM Excess 401(k) Plus Plan, and Company contributions into the IBM Stock Fund under the Excess 401(k) Plus Plan. Some of these restricted stock units may have been deferred under the Excess 401(k) Plus Plan in accordance with elections made prior to January 1, 2008, and they will be distributed to the executive officers after termination of employment as described in the 2017 Nonqualified Deferred Compensation Narrative.

 

(3)              For executive officers, this column is comprised of RSU awards that vest within 60 days after December 31, 2017.

 

(4)              Promised Fee Shares earned and accrued under the IBM Deferred Compensation and Equity Award Plan (DCEAP) as of December 31, 2017, 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 2017 Director Compensation Narrative for additional information).

 

(5)              Values in this column are calculated by multiplying the number of shares shown in the “Common Stock” column plus the “Directors’ DCEAP Shares” column by the closing price of IBM stock on the last business day of the 2017 fiscal year ($153.42).

 

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

 

(7)              Includes 15,174 shares in which voting and investment power are shared.

 

(8)              Includes 25,639 shares in which voting and investment power are shared.

 

(9)              Voting and investment power are shared.

 

(10)       Mr. Swedish and Mr. Waddell joined the Board in October 2017.

 

(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.

 

26



 

2017 Executive Compensation

 

Message to Stockholders

 

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

 

Set out below is the Compensation Discussion and Analysis, which is a discussion of IBM’s executive compensation programs and policies written from the perspective of how we and management view and use such programs and policies. Given the Committee’s role in providing oversight to the design of those programs and policies, and in making specific compensation decisions for senior executives using those policies and programs, the Committee participated in the preparation of the Compensation Discussion and Analysis, reviewing successive drafts of the document and discussing those with management. The Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement. We join with management in welcoming readers to examine our pay practices and in affirming the commitment of these pay practices to the long-term interests of stockholders.

 

Alex Gorsky

Andrew N. Liveris

W. James McNerney, Jr.

Sidney Taurel (chair)

 

27



 

2017 Compensation Discussion and Analysis

 

Executive Summary

 

IBM’s financial model is designed to deliver profitable growth through the creation of compelling value for our clients. Over the last several years, the Company has embarked on a multi-year transformation to ensure this financial model delivers for our investors. By prioritizing investments with strong returns, we continue to focus on generating high value for our shareholders, employees and clients while aggressively investing to accelerate our transformation.

 

In 2017, IBM delivered $79.1B in revenue with a 46% gross profit margin, and generated $16.7B cash from operations.

 

 

 

 

Since 2015, we invested $37B, reshaping our business profile with nearly 60% directed toward high growth Strategic Imperatives.

 

Revenue from our Strategic Imperatives of cloud, analytics, mobile, social and security has reached a critical mass in 2017, growing to $36.5B, led by growth in cloud and security.

 

STRATEGIC IMPERATIVES REVENUE

Grew 14% compounded, increasing from 27% to 46% of IBM Revenue

 

CLOUD REVENUE
Grew 34% compounded, more than doubling in size

 

SECURITY REVENUE
Grew 23% compounded, nearly doubling in size

 

 

 

 

 

 

 

Over the past three years, we have worked to aggressively transform, while returning nearly 75% of free cash flow to shareholders.

 

FREE CASH FLOW USE

 

 

 


 

* Based on GAAP from continuing operations, ROIC equals net operating profits after tax (net income plus after tax interest expense) divided by the sum of the average debt and average total stockholders’ equity.

 

28



 

Our compensation strategy supports IBM’s high value business model

 

For 2017, at target, 69% of Mrs. Rometty’s pay was at risk and subject to attainment of specific performance goals:

 

 

For 2017 performance, the Board approved an annual incentive payment of $5.1 million for Mrs. Rometty, 102% of target. The payout level reflects a successful multi-year transformation with a return to revenue growth in 4Q 2017, a remix of the business portfolio, and recognition of the Company as the enterprise leader in artificial intelligence solutions, cloud services, security, blockchain, and quantum computing. The Executive Compensation and Management Resources Committee (the Compensation Committee) also noted significant personal leadership of the CEO in infusing new executive talent into the Company and developing next generation leaders. In addition, she set the standards for workplace inclusion, for responsible stewardship of data and artificial intelligence, and for “new collar” work and training programs on a global basis. Taking into consideration the actual salary, annual incentive payout, vested restricted stock units and long-term incentive award for the period 2015—2017, Mrs. Rometty earned 81% of her annual total target compensation in 2017.

 

The tables below illustrate how Mrs. Rometty’s pay at risk has affected her realized pay, compared to her target pay, in each of the past 3 years. These payouts reflect the multi-year business transformation, rigorous target setting and the strong link between pay and performance.

 

CEO TOTAL ACTUAL VS. TARGET COMPENSATION

 

Values in Millions ($)

 

For 2018, the independent members of the Board made no change to Mrs. Rometty’s base salary, target annual incentive or annual long-term incentive award value, relative to 2017.

 

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

 

29



 

Stockholder Engagement

 

IBM continually reviews and enhances its corporate governance and executive compensation programs. As part of this review, it is IBM’s longstanding practice to meet with a significant number of our largest investors during each proxy season, to solicit their feedback on a variety of topics. In 2017, IBM once again engaged with over 100 institutional investors. Further, our process includes outreach to hundreds of thousands of individual retail and registered stockholders, which represent a majority of our retail base.

 

In addition to our normal, extensive outreach, the Company enhanced its engagement practices in 2017. We engaged in a robust program to gather feedback from investors following the 2017 annual advisory vote on executive compensation (Say on Pay). IBM’s Presiding Director, the Chair of the Executive Compensation and Management Resources Committee, and members of IBM’s senior management participated in a significant portion of this engagement program. Overall, the Company met with investors representing more than 55% of the shares that voted on Say on Pay at the 2017 Annual Meeting.

 

This enhanced, in-depth engagement process provided valuable feedback to the Compensation Committee. Overall, our stockholders continue to be supportive of the Company’s compensation program and practices. Specifically, our stockholders are strongly supportive of the overall design of the program, which focuses on long-term financial performance that drives stockholder value. Still, the Committee and the Board reviewed and considered all of the feedback heard from investors in making decisions relating to the executive compensation programs. The following table summarizes the items raised by our investors and the changes we made to our executive compensation program in response.

 

What we heard

 

Compensation Committee’s Response

 

 

 

On Disclosure Transparency

 

 

·        General preference for simplicity and clarity in the disclosure of the executive compensation program

 

·        Redesigned the proxy to enhance readability and clarity of the disclosure

 

 

 

·        Some preferred increased transparency around achievement of incentive goals

 

·        Provided additional context on the linkage between our business strategy and executive compensation program

 

 

 

 

 

·        Included disclosure of performance against goals in both the Annual Incentive Program and Long-Term Incentive Plan to provide increased transparency into the rigor of our goals and the linkage of those goals to our business strategy

 

 

 

 

 

 

On One-Time Grants

 

 

·        Many disfavored IBM’s one-time grant in 2016

 

·        The Board granted the 2016 CEO premium-priced stock option grant during a critical juncture in the Company’s transformation

 

 

 

 

 

·        The options, which are priced in four tranches up to 25% above the grant price, are not exercisable until 2019

 

 

 

 

 

·        No one-time awards have been granted to the Chairman and CEO or other Named Executive Officers (NEOs) in more than 2 years

 

 

 

 

 

 

On Pay Program Design

 

 

·        Overall, supportive of IBM’s rigorous pay program and did not want to see any major changes to the fundamental design

 

·        Reduced Annual Incentive Program maximum opportunity for the Chairman and CEO to two times target to align with market practice

 

 

 

·        The maximum Annual Incentive Program payout opportunity of three times target is at the high end of market practice for the CEO

 

·        Included a relative ROIC modifier, beginning with PSUs granted in 2018, which may add or subtract the number of shares paid out based on IBM’s relative ROIC performance

 

 

 

·        Some preferred that a relative metric, such as Return on Invested Capital (ROIC), be included in the long-term compensation plan

 

·        Described stock ownership guidelines as a multiple of base salary. IBM’s ownership requirements themselves have not changed and remain at the high end of its peer group

 

 

 

·        Some requested increased clarity around stock ownership guidelines

 

 

 

30



 

Section 1: Executive Compensation Program Design

 

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

 

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

 

·

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

·

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

·

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

·

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

·

Differentiate rewards to reflect individual and team performance.

 

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

 

Type

 

Component

 

Key Characteristics

 

 

 

 

 

Current Year Performance

 

 

Salary

 

Salary is a market-competitive, fixed level of compensation

 

 

 

 

 

 

 

 

 

Annual Incentive

 

At target, annual incentive provides a market-competitive total cash opportunity. Actual annual incentive payments are driven by business performance against financial metrics and individual performance, with top performers typically earning the greatest payouts and the lowest performers earning no incentive payouts. Beginning in 2018, the Committee reduced the maximum payout opportunity for the Chairman and CEO to 2X salary, while the individual maximum payout opportunity remains at 3X salary for all other executives.

 

 

 

 

 

 

 

 

 

 

Long-Term Incentive

 

Performance Share Units (PSUs)

 

Annual Stock-Based Grants

 

 

Equity awards are typically made annually and may be made in PSUs, RSUs or a combination thereof. Equity grants are based on the level of the executive and the individual performance. Lower performers do not receive equity grants. For PSUs, the number of units granted is adjusted at the end of the three-year performance period based on IBM’s performance against predetermined targets for operating earnings per share and free cash flow. Beginning with the 2018 to 2020 performance period, the Committee added a modifier that could adjust the final number of PSUs earned based on IBM’s relative Return on Invested Capital (ROIC) performance. RSUs vest over time; typically over one to four years.

 

 

 

 

 

 

 

 

 

 

Retention

 

Stock-Based Grants & Cash Awards

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental Executive Retention Plan (closed)

 

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

 

 

 

 

 

 

 

 

 

 

Pension & Savings Plans

 

Pension Plans (closed)

 

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 Plan

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Deferred Savings Plan

 

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

 

 

 

 

 

 

 

 

 

 

Other Compensation

 

Perquisites and Other Benefits

 

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

 

31



 

Compensation Governance

 

Overall, IBM’s compensation policies and decisions, explained in detail in this Compensation Discussion and Analysis, continue to be focused on long-term financial performance to drive stockholder value.

 

The table below highlights practices that IBM embraces in support of our pay-for-performance philosophy:

 

What We Do

 

What We Don’t Do

 

 

 

         Tie a significant portion of pay to Company performance

 

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

 

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

 

         Utilize noncompetition and nonsolicitation agreements

 

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

 

         No excise tax gross-ups

 

         No dividend equivalents on unearned RSUs/PSUs

 

         No hedging/pledging of IBM stock

 

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

 

         No guaranteed incentive payouts

 

         No accelerated vesting of equity awards for executive officers

 

         No above-market returns on deferred compensation plans

 

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

 

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

 

What Counts

 

What Does Not Count

 

 

 

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

 

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

 

  Unvested equity awards, including PSUs, RSUs and RRSUs

 

  Unexercised stock options

 

 

 

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

 

 

 

32



 

Stock Ownership Requirements

 

The Chairman and CEO and Senior Vice Presidents are all required to own IBM shares or equivalents in excess of standard market practice within 5 years of hire or promotion. While we have historically expressed our stock ownership requirements as a multiple of target total cash compensation, we are now describing them as a multiple of salary to align with market practice. This does not change the amount of shares required to be held, but we believe it will clarify the stock ownership requirements we have for our NEOs.

 

 

 

Current Approach: Multiple of Total Target
Salary and Non-Stock Compensation

 

New Approach: Multiple of Salary

NEO Name

 

IBM Minimum Requirement

 

IBM Minimum Requirement

 

Median Peer Group Minimum
Requirement

V.M. Rometty

 

3

 

10

 

6

M.J. Schroeter

 

3

 

7

 

3–4

J.E. Kelly III

 

3

 

7

 

3–4

E. Clementi

 

3

 

7

 

3–4

J.J. Kavanaugh

 

3

 

7

 

3–4

 

Mrs. Rometty owns common stock and stock-based holdings equal in value to 24 times her base salary, more than 2 times the required holdings, based on both the current and new approach to disclosure as of December 31, 2017. More information on Mrs. Rometty’s holdings can be found in Common Stock and Stock-Based Holdings of Directors and Executive Officers. As a group, the Chairman and CEO and Senior Vice Presidents owned shares or equivalents valued at over $120 million as of December 31, 2017; in fact, as of that date, this group held, on average, more than 10 times their base salary.

 

Stock Ownership Continues Beyond Retirement

 

Finally, our programs are designed to ensure alignment with IBM’s long-term interests past the retirement date for our Chairman and CEO and Senior Vice Presidents. Share price performance and long-term goal achievement continue to impact the Long-Term Incentive Plan for these retired executives for at least two and a half years post retirement. Shares for Mrs. Rometty that remain restricted and subject to post-retirement performance of IBM represent 1.6 times her share ownership requirement as of December 31, 2017, and assuming future performance at target.

 

Setting Performance Targets for Incentive Compensation

 

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

 

For 2017, IBM continued to measure five key financial metrics:

 

AIP

 

Strategic Imperatives
Revenue

 

Supports portfolio shift into a cognitive solutions and cloud platform company that will deliver the highest value opportunities for our clients and stockholders

 

 

 

 

 

 

 

 

 

Operating Net Income

 

Measures our profit and operational success

 

 

 

 

 

 

 

 

 

Operating Cash Flow*

 

Important measure of our ability to reinvest and return value to stockholders

 

 

 

 

 

 

 

 

 

 

PSU
Program

 

Operating EPS

 

Measures operating profitability on a per share basis

 

 

 

 

 

 

 

 

 

Free Cash Flow

 

Important measure of our ability to reinvest and return value to stockholders over multiple years

 

 

 

 

 

 

*Net Cash from Operating Activities, excluding Global Financing receivables.

 

33



 

IBM shares its financial model each year with investors in the context of its long-term strategy. Based on feedback from recent meetings with our investors, and to increase our transparency further, beginning this year, IBM is disclosing the performance attainment against targets for the most recent performance period, for both the Annual Incentive Program and the Performance Share Unit Program.

 

Annual Incentive Program

 

IBM sets business objectives at the beginning of each year, which are approved by the Board of Directors. The Compensation Committee and the Board of Directors review IBM’s annual business objectives and set the metrics and weightings for the annual program to reflect current business priorities. These objectives translate to targets for IBM and for each business unit for purposes of determining the target funding of the Annual Incentive Program. Performance against business objectives determines the actual total funding pool for the year, which can vary from 0% to 200% of total target incentives for all executives. At the end of the year, performance for IBM is assessed against these predetermined financial targets, which are updated to remove any impact of currency movement or the change in effective tax rate compared to plan. The metrics and weightings for 2017 and 2018, along with IBM’s results compared to financial targets for 2017, are listed below.

 

The financial targets may be adjusted for extraordinary events if recommended by the Chairman and CEO and approved by the Compensation Committee. This adjustment can be either up or down. For example, adjustments are usually made for large divestitures and acquisitions. In addition, the Chairman and CEO can recommend an adjustment, up or down, based on factors beyond IBM’s financial performance, for example, client experience, market share growth and workforce development. Taking such matters into account for 2017, no such adjustment was made. The Compensation Committee reviews the financial scoring and qualitative adjustments and approves the Annual Incentive Program funding level.

 

Financial Metrics

 

2017
Results

 

2017
% Attainment

 

Weight

 

Resulting Incentive
Score*

+/-

Qualitative
Adjustment

=

Final Score

 

Strategic Imperatives Revenue

 

$

36.5B

 

99%

 

20%

 

100

 

0

 

100

 

Operating Net Income**

 

$

12.9B

 

91%

 

40%

 

Operating Cash Flow**

 

$

16.3B

 

101%

 

40%

 

 


* Based on AIP payout table.

** Non-GAAP financial metrics. See Appendix A for information on how we calculate these performance metrics.

 

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 (excluding the Chairman and CEO) 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). The Annual Incentive Program, which covers approximately 5,000 IBM executives, includes this individual cap at three times the individual target to ensure differentiated pay for performance. The Compensation Committee reviewed this plan feature and determined common market practice for the CEO is a cap of two times target. Therefore, beginning in 2018, the Compensation Committee has set the Chairman and CEO’s maximum incentive payment to two times the target amount. Since becoming CEO, Mrs. Rometty’s incentive payments have ranged from 0% to 108% of target.

 

34



 

Performance Share Unit Program

 

The Performance Share Unit (PSU) metrics for the 2015–2017 performance period were Operating EPS and Free Cash Flow, unchanged from previous years.

 

Targets are established at the beginning of each three-year performance period. These targets are based on IBM’s financial model, as shared with investors, and the Board-approved annual budget. The Committee’s longstanding practice is that the Company’s share repurchase activities have no effect on executive compensation. To formalize this practice, for Performance Share awards starting in 2016 and thereafter, actual operating EPS results are adjusted to remove the impact of any difference between the actual share count and the budgeted share count, while simultaneously ensuring that executive compensation targets are normalized for any planned buybacks that are incorporated into the Operating EPS target. Additionally, the scoring for the Performance Share Unit Program takes into account extraordinary events. For the 2015–2017 performance period, there were no such events.

 

At the end of each three-year performance period, 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 from 0% to 150%, based on the approved actual performance. There is no discretionary adjustment to the PSU program score.

 

The PSU score is calculated as a weighted average of results against targets for Operating EPS (70%) and Free Cash Flow (30%). The calculation is demonstrated in the table below, using the 2015–2017 performance period.

 

 

 

Operating

 

Free Cash

 

2015–2017 Performance Period

 

EPS**

 

Flow**

 

3 Year Cumulative Performance

 

$

42.31

 

$

37.7B

 

% Attainment

 

84%

 

93%

 

Incentive Score

 

60

 

83

 

Weighting

 

70%

 

30%

 

Final Score

 

67

 

 


** Non-GAAP financial metrics. See Appendix A for information on how we calculate these performance metrics. 2015–2016 free cash flow results as originally reported, prior to restatement for adoption of FASB guidance on stock-based compensation in 2017.

 

The graph below, which provides PSU payout history since 2014, demonstrates the rigor of our long-term performance goals.

 

PERFORMANCE SHARE UNIT PAYOUTS

 

 

Starting with the 2018–2020 PSU Program, a Relative Return on Invested Capital (ROIC) modifier has been added to the program design. The modifier is based on IBM’s ROIC performance over the three-year performance period, relative to the S&P 500 Index (excluding financial services companies due to lack of comparability) and the S&P Information Technology Index. This modifier reduces the score up to 20 points when performance falls below the S&P 500 Index median, and increases the score up to 20 points when IBM exceeds the median performance of both the S&P 500 Index and the S&P Information Technology Index. The modifier has no impact when IBM’s ROIC performance falls between the S&P 500 Index median and the S&P Information Technology Index median. The following graph illustrates how the modifier can affect the PSU score. In the event the weighted final score of Operating EPS and Free Cash Flow is 0, the ROIC modifier would not apply.

 

RELATIVE ROIC MODIFIER

 

 

35



 

Section 2: How and Why Compensation Decisions Are Made

 

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

 

1. Making Commitments

 

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

 

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

 

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

 

3. Determining Compensation for Senior Vice Presidents

 

Evaluation of Results by the Chairman and CEO

 

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

 

The self-assessments of the Senior Vice Presidents are reviewed by the Senior Vice President of Human Resources (SVP HR) and the Chairman and CEO, who evaluate the information, along with the following:

 

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

·        Potential for future roles within IBM; and

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

 

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

 

Evaluation of Results by the Compensation Committee

 

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

 

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

 

4. Ensuring Competitive Pay — Approach to Benchmarking

 

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

 

36



 

The Compensation Committee re-examined the benchmark group for 2017 and determined that companies which meet the following criteria should be included in the 2017 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.

 

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

 

2017 BENCHMARK GROUP:

 

Accenture

Dow Chemical

Oracle

 

 

 

Alphabet

ExxonMobil

PepsiCo

 

 

 

Amazon.com

Ford

Pfizer

 

 

 

Apple

General Electric

United Technologies

 

 

 

AT&T

Hewlett Packard Enterprise

UPS

 

 

 

Boeing

HP Inc.

Verizon

 

 

 

Caterpillar

Intel

Xerox (removed from 2018 group)

 

 

 

Chevron

Johnson & Johnson

 

 

 

 

Cisco Systems

Microsoft

 

 

For 2018 compensation decisions, the Committee approved the same benchmark group with one change. Xerox was removed from the 2018 benchmark group given recent changes in its corporate structure.

 

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

 

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

 

5. Compensation Committee Consultant

 

The Committee enters into a consulting agreement with its outside compensation consultant on an annual basis. In July 2017, the Committee retained Semler Brossy Consulting Group, LLC (Semler Brossy) as its compensation consultant to advise the Committee on market practices and specific IBM policies and programs. Semler Brossy 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 Semler Brossy for the Committee is documented in a formal agreement which is executed by the consultant and the Committee. Semler Brossy does not perform any other work for IBM, other than services provided to IBM’s Directors and Corporate Governance Committee. The Committee previously retained Frederic W. Cook & Co., Inc. (FW Cook). The Committee determined that there is no conflict of interest with regard to either Semler Brossy or FW Cook.

 

The Compensation Committee made recommendations for Mrs. Rometty’s 2017 and 2018 compensation following the process and using the pay components described above.

 

37



 

2017 Annual Incentive Decision for the Chairman and CEO

 

For 2017 performance, the Board approved an annual incentive payment of $5.1 million for Mrs. Rometty, which represented 102% of her target opportunity.

 

In addition to overall IBM 2017 revenue performance of $79.1B and pre-tax income of $11.4B, the Compensation Committee noted the following achievements for Mrs. Rometty, all of which are clear sign posts of the successful business portfolio shift:

 

· Achieved critical mass with IBM’s Strategic Imperatives — cloud, analytics, mobile, social and security. Grew revenue to $36.5 billion and represented 46% of IBM’s total revenue.

 

· Strengthened Watson as the premier AI platform for business. Continued to extend the reach of Watson on the IBM Cloud to clients, developers, partners and users, touching one billion people in 2017.

 

· Solidified the IBM Cloud as a global leader for enterprise, with $17 billion in revenue and exited the fourth quarter with an as-a-service annual run rate of more than $10 billion.

 

· Continued to modernize our enduring Systems platforms. IBM Z delivered the highest shipped MIPS (millions of instructions per second) in history, demonstrating strong demand for the world’s first system capable of pervasive encryption with no performance degradation. Storage revenue grew every quarter in 2017 for the first time since 2010 and Power systems returned to growth in 4Q with the introduction of Power 9.

 

· Established IBM as the clear leader in quantum computing. Created the world’s first 50 qubit system and launched Q Network on the IBM Cloud which made quantum capabilities available to more than 70,000 users for experimentation and testing.

 

· Achieved global leadership in blockchain. Established blockchain projects with hundreds of clients, including collaborating on 35 active blockchain networks with clients such as Walmart, Maersk and The Depository Trust & Clearing Corporation (DTCC).

 

· Repositioned IBM Services to capitalize on market trends. Returned consulting business to growth in the second half of 2017, but fell short of growth objectives for the year. Grew total services backlog for the year, with an improved trajectory entering into 2018.

 

· Led the world for the 25th consecutive year in U.S. patents earned, set a new record with more than 9,000 patents. Nearly half of those patents were in new areas such as AI, cloud, security, blockchain, and quantum computing that will power the business for years to come.

 

· Drove significant business productivity through continued global support transformation, automation and the deployment of cognitive solutions across IBM. Positioned IBM for future growth by realigning workforce skills with the new portfolio and strengthening all levels of management.

 

· Continued to enhance the all inclusive culture of IBM. Improved executive representation in both female and under represented minorities.

 

Finally, the payout took into consideration Mrs. Rometty’s outstanding personal leadership in infusing new executive talent across the Company, developing the next generation of leaders, and assuming industry leadership on several key issues, including setting new global standards for data responsibility and stewardship and preparing the future workforce for “new collar” work.

 

2018 Compensation Decisions for the Chairman and CEO

 

For 2018, the independent members of the Board made no change to Mrs. Rometty’s base salary or target annual incentive, and reduced the maximum potential payout for her annual incentive from 3X target to 2X target, to align more closely with common market practice. She was granted an annual long-term incentive award valued at $13.3 million, flat compared to the prior two years. This grant is comprised 65% of 2018–2020 Performance Share Units and 35% of Restricted Stock Units. For 2018, 69% of Mrs. Rometty’s annual total target compensation is tied to performance-based incentives.

 

38



 

2017 Annual Incentive Decisions for Mr. Schroeter, Dr. Kelly, Mr. Clementi and Mr. Kavanaugh

 

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

 

Martin J. Schroeter

Senior Vice President and Chief Financial Officer*

 

·        Drove continued transformation and strong return to shareholders, expanded Operating PTI margins**, grew free cash flow (excluding Global Financing receivables)** and maintained strong ROIC.

·        Returned $9.8 billion — about 75% of free cash flow — to shareholders, including an increase to the dividend for the 22nd consecutive year.

·        Grew IBM Global Financing assets by double digits year to year, while increasing return on equity to 33%.

 

John E. Kelly III

Senior Vice President, IBM Cognitive Solutions & IBM Research

 

·        Strengthened Watson as the premier AI platform for business, touching one billion people in 2017.

·        Grew IBM Security to over $3B of revenue, up 55% YTY.

·        Achieved #1 in patents for the 25th consecutive year, setting a new record of more than 9,000 patents. Nearly half of those patents were in new areas such as AI, cloud, security, blockchain and quantum computing that will power the business for years to come.

·        Missed full year profit objective for Cognitive Solutions.

 

Erich Clementi

Senior Vice President, IBM Global Markets*

 

·        Maintained IBM’s global leadership in enterprise cloud with all of the top ten global banks, nine of the top ten retailers and eight of the top ten airlines as IBM Cloud as-a-Service clients.

·        Enabled IBM to deliver $36.5 billion of Strategic Imperatives revenue, up 11%, with strong contributions from IBM’s two biggest geographic markets.

·        Returned North America, IBM’s biggest geographic market, to revenue growth in 4Q, but missed full year growth objective.

 

James J. Kavanaugh

Senior Vice President, Finance and Operations*

 

·        Drove significant productivity savings through work redesign and the deployment of cognitive solutions across IBM’s internal operations.

·        Strengthened IBM as a top-tier IT provider through initiatives to transform and enhance the client experience.

·        Drove cognitive throughout IBM’s internal operations, making IBM the showcase of a cognitive enterprise.

 


* In January 2018, Mr. Schroeter became Senior Vice President, IBM Global Markets, Mr. Clementi became Senior Vice President, IBM Global Integrated Accounts, and Mr. Kavanaugh became Senior Vice President and Chief Financial Officer.

** Non-GAAP financial metrics. See Appendix A for information on how we calculate these performance metrics.

 

39



 

Following the process outlined above and based on business and individual performance, the Compensation Committee approved the 2017 annual incentive payouts below for these named executive officers:

 

Name

 

2017 Annual Incentive Payouts

 

M.J. Schroeter

 

$

1,181,000

 

J.E. Kelly III

 

861,000

 

E. Clementi

 

869,840

 

J.J. Kavanaugh

 

919,000

 

 

Taking into consideration the actual salary, annual incentive payout, vested restricted stock units and long-term incentive award for the period 2015–2017, these named executive officers earned from 76%–81% of their annual total target compensation in 2017.

 

2018 Compensation Decisions for Mr. Schroeter, Dr. Kelly, Mr. Clementi and Mr. Kavanaugh

 

The Committee also approved the following compensation elements for 2018: base salary, annual incentive target, Performance Share Unit (PSU) and Restricted Stock Unit (RSU) grants under the Long-Term Performance Plan. For Long-Term Incentive Plan grants beginning in 2016, the mix of vehicles is now set at 65% PSUs and 35% RSUs, to align better with market practice. This mix provides competitive pay, while at the same time ensuring a strong link between pay and performance, and creates a better balance relative to peers with which we compete for talent. For 2018, based on the compensation decisions detailed below at target, 63% of the NEOs’ (excluding the Chairman and CEO) pay is at risk.

 

63% of the NEOs’, excluding the Chairman and CEO, annual total target compensation is at risk.

 

 

 

2018 Cash(1)

 

2018 Long-Term Incentive Awards(2)

 

Name

 

Salary Rate

 

Annual Incentive Target

 

Performance Share Units

 

Restricted Stock Units

 

M.J. Schroeter

 

$

936,000

 

$

1,264,000

 

$

3,900,000

 

$

2,100,000

 

J.E. Kelly III

 

868,000

 

1,172,000

 

3,705,000

 

1,995,000

 

E. Clementi

 

777,000

 

1,048,000

 

3,575,000

 

1,925,000

 

J.J. Kavanaugh

 

745,000

 

1,005,000

 

3,412,500

 

1,837,500

 

 


(1)    For Mr. Schroeter, Dr. Kelly, Mr. Clementi and Mr. Kavanaugh the 2018 salary rates will be effective July 1, 2018 and the 2018 annual incentive targets were effective January 1, 2018.

 

(2)    PSUs and RSUs will be granted on June 8, 2018 to the named executive officers, including the Chairman and CEO. The actual number of units granted on this date will be determined by dividing the value shown above by a predetermined, formulaic planning price for the second quarter 2018. The performance period for the PSUs ends December 31, 2020, and the award will pay out in February 2021. The restricted stock units will vest 25% per year on each anniversary of the date of grant.

 

40



 

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 2018 annual total target compensation for the Chairman and CEO and Senior Vice Presidents as a group provided in equity.

 

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

 

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

 

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

 

·          As explained in the 2017 Potential Payments Upon Termination Narrative, we further strengthened our retirement policies on equity grants for our senior leaders beginning in 2009 to ensure that the long-term interests of IBM continue to be the focus even as these executives approach retirement.

 

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

 

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

 

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

 

Equity Award Practices

 

Under IBM’s long-standing practices and policies, all equity awards are approved before or on the date of grant. The exercise price of at-the-money stock options is the average of the high and low market price on the date of grant or, in the case of premium-priced stock options, for example, 10% above that average, or as specified by the Compensation Committee.

 

The approval process specifies the individual receiving the grant, the number of units or the value of the award, the exercise price or formula for determining the exercise price, and the date of grant. In the case of planned grant value, the number of shares granted are determined by dividing the planned value by the predetermined, formulaic planning price in effect for the quarter. IBM’s planning price is computed each quarter using a consistent statistical forecasting procedure based on historical IBM stock price data. IBM uses the quarterly planning price to aid in establishing the overall size of the equity plan and to give more consistency across equity grants made at different points in the quarter.

 

As with all compensation decisions, the independent members of the Board approve all equity awards for the Chairman and CEO and ratify all equity awards for the Chief Financial Officer. In addition, all equity awards for Senior Vice Presidents are approved by the Compensation Committee. All equity awards for employees other than the Chairman and CEO and Senior Vice Presidents are approved by the Chairman and CEO and Senior Vice Presidents pursuant to a series of delegations that were approved by the Compensation Committee, and the grants made pursuant to these delegations are reviewed periodically with the Committee.

 

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

 

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

 

41



 

Ethical Conduct

 

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

 

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

 

In addition, approximately 2,000 of our key executives (including each of the named executive officers) have agreed to a noncompetition, nonsolicitation agreement that prevents them from working for certain competitors within 12 months of leaving IBM or soliciting employees within two years of leaving IBM.

 

The Committee has also implemented the following policy for the clawback of cash incentive payments in the event an executive officer’s conduct leads to a restatement of IBM’s financial results:

 

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

 

Hedging and Pledging Practices

 

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

 

IBM does not allow any member of the Acceleration Team, including any named executive officer, to hedge the economic risk of their ownership of IBM securities, which includes entering into any derivative transaction on IBM stock (e.g., any short-sale, forward, option, collar). Further, IBM does not allow any member of the Acceleration Team 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.

 

42



 

Tax Considerations

 

Section 162(m) of the U.S. Internal Revenue Code of 1986, as amended, limits deductibility of compensation in excess of $1 million paid to IBM’s covered employees. Until the Tax Cut and Jobs Act was signed into law on December 22, 2017, performance-based compensation was deductible, even if it caused the covered employee to have compensation in excess of $1 million. The Tax Cut and Jobs Act eliminated this performance-based compensation deduction going forward, but provided limited transition relief for compensation paid pursuant to a contract in effect as of November 2, 2017 that is not materially modified after such date. This means that certain outstanding performance-based compensation may continue to be deductible under Section 162(m), but that all compensation after November 2, 2017, will be subject to the $1 million cap on deductibility. IBM will seek deductions for compensation under the transition relief consistent with applicable law. The Tax Cut and Jobs Act also expanded who a covered employee is under Section 162(m). Effective for 2017, a covered employee under Section 162(m) is the CEO, the CFO (who previously was not included) and each of the other three highest-paid executive officers.

 

Based on applicable tax regulations in effect prior to the Tax Cut and Jobs Act, for the performance-based compensation exception, taxable compensation derived from certain stock appreciation rights and from the exercise of stock options by Senior Vice Presidents under IBM’s Long-Term Performance Plans should qualify as performance-based. The IBM Excess 401(k) Plus Plan permits an executive officer who is subject to Section 162(m) and whose salary and incentive compensation is above $1 million to defer payment of a sufficient amount of the salary and incentive compensation to bring it below the Section 162(m) limit. In 1999, IBM’s stockholders approved the terms under which IBM’s annual and long-term performance incentive awards should qualify as performance-based. In 2014, as required by the Internal Revenue Code, the stockholders approved the material terms of the performance criteria under which long-term performance incentive awards should qualify as performance-based. These terms did 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 have been appropriate to retain and motivate key executives.

 

Although this tax deduction for performance-based compensation has been eliminated, IBM believes that a strong link between pay and performance is critical to align executive and shareholder interests. Going forward, IBM and the Committee will continue to ensure that a significant portion of pay for our Senior Vice Presidents, including the Chairman and CEO, is at risk and subject to the attainment of performance goals.

 

43



 

2017 Summary Compensation Table Narrative

 

Salary (Column (c))

 

Amounts shown in the salary column reflect the salary amount paid to each named executive officer during 2017.

 

·          IBM reviews salaries for each named executive officer annually during a common review cycle. Mrs. Rometty’s salary rate was effective July 1, 2016. The salary rates for the other named executive officers took effect on July 1, 2017.

 

Bonus (Column (d))

 

No bonuses were awarded to the named executive officers in the years shown in the 2017 Summary Compensation Table. Payments under the IBM Annual Incentive Program are included under column (g) (Non-Equity Incentive Plan Compensation).

 

Stock Awards (Column (e))

 

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

 

Performance Share Units (PSUs)

 

The following describes the material terms and conditions of PSUs as reported in the column titled Stock Awards (column (e)) in the 2017 Summary Compensation Table and in the 2017 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 are set at the beginning of the three-year performance period and approved by the Compensation Committee (for example, targets for the 2015–2017 performance period were set for cumulative three-year attainment in operating earnings per share and free cash flow in the beginning of 2015).

 

·        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. Beginning with the 2018–2020 performance period, the number of PSUs that pay out may be modified further based on IBM’s ROIC performance relative to broader market indices. For more information about this ROIC modifier, please refer to the description of our Performance Share Unit Program in Section 1 of the 2017 Compensation Discussion and Analysis.

 

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

 

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

 

Vesting and Payout Calculations

 

·        The performance period for the awards granted in 2017 is January 1, 2017 through December 31, 2019, and the awards will pay out in February 2020. PSU awards granted in 2017 will be adjusted for performance, as described below.

 

·        Outstanding PSUs are typically cancelled if the executive’s employment is terminated. See the 2017 Potential Payments Upon Termination Narrative for information on payout of unvested PSUs upon certain terminations.

 

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

 

·        See Section 1 of the 2017 Compensation Discussion and Analysis for information on performance targets for the PSU program.

 

Threshold Number (listed in column (f) of the 2017 Grants of Plan Based Awards Table):

 

       The Threshold number of PSUs 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 (listed in column (g) of the 2017 Grants of Plan-Based Awards Table):

 

       The Target number of PSUs will be earned if 100% of the objectives are achieved.

 

Maximum Number (listed in column (h) of the 2017 Grants of Plan-Based Awards Table):

 

       The Maximum number of PSUs 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 2017, RSUs, but not RRSUs, were granted to all named executive officers. RRSUs granted in

 

44



 

previous years to any named executive officer and outstanding at the end of 2017 are included in the 2017 Outstanding Equity Awards at Fiscal Year-End Table.

 

General Terms

 

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

 

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

 

Vesting and Payout

 

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

 

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

 

·        Payout of RSUs and RRSUs at each vesting date is typically contingent on the recipient remaining employed by IBM through that vesting date. See the 2017 Potential Payments Upon Termination Narrative for information on payout of unvested RSUs upon certain terminations.

 

·        All deferred shares, comprised of shares that were deferred by the participant (Deferred IBM Shares), in the 2017 Nonqualified Deferred Compensation Table may include certain previously-granted RRSUs. Executives have not been allowed to defer payment of RSUs.

 

Option Awards (Column (f))

 

There were no option awards granted to the named executive officers in the years shown in the 2017 Summary Compensation Table, except for Mrs. Rometty. On January 26, 2016, Mrs. Rometty was granted a one-time award of 1.5 million nonqualified stock options that vest three years from the date of grant, is exercisable in four equal tranches at premium prices of 105%, 110%, 115% and 125% of the average of the high and low prices of IBM common stock on the date of grant, and expires 10 years from the date of grant.

 

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 2017 Compensation Discussion and Analysis for information on performance targets for AIP.

 

Payout Range

 

·        Mrs. Rometty had a target of $5 million for 2017. The other named executive officers had targets of 135% of their salary rate for 2017. See column (d) of the 2017 Grants of Plan-Based Awards Table for the target payout.

 

·        Threshold payout for each named executive officer is $0 (see column (c) of the 2017 Grants of Plan-Based Awards Table).

 

·        Maximum payout for each named executive officer is three times the target (see column (e) of the 2017 Grants of Plan-Based Awards Table). Beginning in 2018, maximum payout opportunity for only the Chairman and CEO is reduced to two times the target.

 

Vesting and Payout

 

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

 

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

 

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

 

Change in Retention Plan Value (Column (h))

 

·        For Mrs. Rometty, Dr. Kelly and Mr. Kavanaugh, amounts in the column titled Change in Retention Plan Value represent the annual change in Retention Plan Value from December 31, 2016 to December 31, 2017. Messrs. Schroeter and Clementi do not have a benefit under the Retention Plan.

 

·        See the 2017 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, 2016 to  December 31, 2017 for each eligible named executive officer.

 

·        See the 2017 Pension Benefits Narrative for a description of the applicable defined benefit pension plan. Mr. Clementi does not have a benefit under any IBM defined benefit pension plan.

 

Nonqualified Deferred Compensation Earnings (Column (h))

 

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

 

·        See the 2017 Nonqualified Deferred Compensation Narrative for a description of the nonqualified deferred compensation plans in which the named executive officers participate.

 

45



 

All Other Compensation (Column (i))

 

Amounts in this column represent the following as applicable:

 

Tax Reimbursements

 

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

 

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

 

IBM Contributions to Defined Contribution Plans

 

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

 

·        Under IBM’s 401(k) Plus Plan, participants hired or rehired by IBM U.S. before January 1, 2005, including Mrs. Rometty, Dr. Kelly and Mr. Kavanaugh, are eligible to receive matching contributions up to 6% of eligible compensation. Participants hired or rehired by IBM U.S. on or after January 1, 2005, including Messrs. Schroeter and Clementi, who complete the plan’s service requirement, are generally eligible for up to 5% matching contributions. A participant’s hire/rehire date is measured by a participant’s most recent U.S. hire date. Mr. Schroeter rejoined IBM U.S. in 2011 after working for IBM Australia from April 1, 2005 to June 30, 2011. Mr. Clementi joined IBM U.S. in 2009 after working for IBM Italy since 1984. In addition, for all eligible participants, IBM makes automatic contributions equal to a certain percentage of eligible compensation, which generally depends on the participant’s pension plan eligibility on December 31, 2007. In 2017, the automatic contribution percentage was 4% for Mrs. Rometty; 2% for Dr. Kelly and Mr. Kavanaugh; and 1% for Messrs. Schroeter and Clementi.

 

·        Under IBM’s Excess 401(k) Plus Plan, IBM makes matching contributions equal to a percentage of the sum of (i) the amount the participant elects to defer under the Excess 401(k) Plus Plan, and (ii) the participant’s eligible compensation after reaching the Internal Revenue Code compensation limits. Participants hired or rehired by IBM U.S. before January 1, 2005, including Mrs. Rometty, Dr. Kelly and Mr. Kavanaugh, are eligible to receive matching contributions up to 6% of eligible compensation. Participants hired or rehired by IBM U.S. on or after January 1, 2005, including Messrs. Schroeter and Clementi, who complete the plan’s service requirement, are eligible for up to 5% matching contributions. In addition, for all eligible participants, IBM makes automatic contributions equal to a percentage of the sum of (i) the amount the participant elects to defer under the Excess 401(k) Plus Plan, and (ii) the participant’s eligible compensation after reaching the Internal Revenue Code compensation limits. The automatic contribution percentage generally depends on the participant’s pension plan eligibility on December 31, 2007, and in 2017, the automatic contribution percentage was 4% for Mrs. Rometty; 2% for Dr. Kelly and Mr. Kavanaugh; and 1% for Messrs. Schroeter and Clementi.

 

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

 

·        See the 2017 Nonqualified Deferred Compensation Narrative for additional details on the nonqualified deferred compensation plans.

 

Life and Travel Accident Insurance Premiums

 

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

 

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

 

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

 

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

 

Perquisites

 

The following describes perquisites (and their aggregate incremental cost calculations) provided to the named executive officers in 2017.

 

Personal Financial Planning

 

In 2017, 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 2017 Summary Compensation Table. These amounts also include the aggregate incremental cost, if any, of travel by her family members or other guests on both business and non-business occasions.

 

·        Additionally, personal travel or commutation in 2017 on Company aircraft by named executive officers other than Mrs. Rometty, and the aggregate incremental cost, if any, of travel by the officer’s family or other guests when

 

46



 

accompanying the officer on both business and non-business occasions is also included.

 

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

 

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

 

Aggregate Incremental Cost Calculation

 

·        The aggregate incremental cost for the use of Company aircraft for personal travel, including travel to outside boards, is calculated by multiplying the hourly variable maintenance cost rate for the specific aircraft by the number of flight hours used, plus the actual costs for fuel, parking, landing fees, crew expenses and catering.

 

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

 

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

 

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

 

Ground Transportation

General Information

 

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

 

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

 

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

 

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

 

Aggregate Incremental Cost Calculation

 

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

 

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

 

Personal Security

General Information

 

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

 

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

 

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

 

Aggregate Incremental Cost Calculation

 

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

 

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

 

Annual Executive Physical

 

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

 

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

 

Family Travel and Attendance at Business-Related Events

 

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

 

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

 

Other Personal Expenses

 

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

 

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

 

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

 

47



 

2017 SUMMARY COMPENSATION TABLE

 

Name and
Principal
Position
(a)
Year
(b)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonqualified
Deferred
Compensation
Earnings(5)
($)
(h)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Change in
Retention
Plan Value(3)
($)
(h)

 

Change in
Pension
Value(4)
($)
(h)

 

 

 

 

 

 

 

 

 

 

 

Stock
Awards(1)
($)
(e)

 

Option
Awards(2)
($)
(f)

 

 

 

 

 

All Other
Compensation(6)(7)
($)
(i)

 

 

 

 

Salary
($)
(c)

 

Bonus
($)
(d)

 

 

 

 

 

 

 

 

Total(8)
($)
(j)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

V.M. Rometty, Chairman, President and CEO

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

$

1,600,000

 

$

0

 

$

10,428,720

 

$

0

 

$

5,100,000

 

$

79,951

 

$

494,882

 

$

0

 

$

891,797

 

$

18,595,350

 

2016

 

1,600,000

 

0

 

12,822,238

 

12,094,414

 

4,950,000

 

87,660

 

300,605

 

0

 

840,782

 

32,695,699

 

2015

 

1,550,000

 

0

 

12,905,329

 

0

 

4,500,000

 

0

 

0

 

0

 

866,621

 

19,821,950

 

M.J. Schroeter, Senior VP and CFO(9)

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

$

828,500

 

$

0

 

$

4,312,687

 

$

0

 

$

1,181,000

 

N/A

 

$

11,436

 

$

0

 

$

138,538

 

$

6,472,162

 

2016

 

754,000

 

0

 

4,820,379

 

0

 

1,046,430

 

N/A

 

6,227

 

0

 

173,159

 

6,800,195

 

2015

 

692,500

 

0

 

11,425,266

 

0

 

881,100

 

N/A

 

1,295

 

0

 

112,191

 

13,112,352

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

$

830,500

 

$

0

 

$

4,312,687

 

$

0

 

$

861,000

 

$

127,911

 

$

70,056

 

$

0

 

$

240,339

 

$

6,442,493

 

2016

 

754,500

 

0

 

5,302,514

 

0

 

927,350

 

0

 

66,423

 

0

 

240,583

 

7,291,370

 

2015

 

675,500

 

0

 

11,887,195

 

0

 

850,500

 

0

 

42,393

 

0

 

184,207

 

13,639,795

 

E. Clementi, Senior VP, IBM Global Markets(9)(10)