IBM Notice of 2008 Annual Meeting and Proxy Statement

2007 Retention plan narrative

Introduction and purpose

As noted in Section 1 of the Compensation Discussion and Analysis, during the mid-1990s, an additional form of retention compensation was created for certain Company leaders. The plan, formally called the “IBM Supplemental Executive Retention Plan” (Retention Plan), began in 1995 during a particularly trying time in IBM’s history when the Company faced challenges that many thought put its very existence at risk. Some key leaders were recruited away from IBM during this time.

In this environment, IBM created this new plan to help retain for full careers the caliber of senior leaders needed to turn the Company around, preserve its long-term viability and position it for growth in the future. To discourage these leaders from joining competitors even after a full IBM career, they would forfeit any benefits under the Retention Plan if this happened. The approach worked, as evidenced by the Company’s historic turnaround in the late 1990s and its current position of market leadership. Thirteen of the Company’s top 16 executives, including four of the five named executive officers, were with IBM and eligible for the Retention Plan at the time it was introduced and remain with the Company today.

Because its original purpose had been met, the Retention Plan was closed to new participants in 2004. Future accruals under the Retention Plan stopped on December 31, 2007 and it will not be replaced by any other plan.

For individuals who were eligible for the Retention Plan since its inception, payments accrue based on age and service and are typically payable only after age 60, as a way to encourage senior leaders to continue working for the Company past the age when many others at the Company choose to retire.

Even though the Retention Plan provides for the payment of specified benefits after retirement, given the nature of this program as a retention vehicle, the Retention Plan is discussed in its own section instead of in the Pension Benefits section. As a consequence, the amounts reflected below are separately presented in the 2007 Retention Plan Table and are not included in the 2007 Pension Benefits Table.

The 2007 Retention Plan Table shows each named executive officer’s number of years of credited service, present value of accumulated benefit and payments during the last fiscal year under the Retention Plan.

Description of retention plan

• The Retention Plan provides for payment of an annual benefit as long as the participant satisfies the age, service, pay and job level requirements.
• Effective July 1, 1999, IBM amended the Retention Plan to provide a new benefit formula, but allowed participants who met certain age, service, and pay level conditions as of June 30, 1999 to continue to earn benefits under the prior formula if the prior formula provides a greater benefit. Messrs. Palmisano and Mills continue to earn benefits under the prior formula. Messrs. Loughridge, Daniels, and Elix earn benefits under the 1999 plan formula.
• Effective May 1, 2004, the Retention Plan was closed to new participants. Accrual of future benefits under the Retention Plan stopped on December 31, 2007. Accordingly, a participant’s Retention Plan benefit does not consider pay earned or service credited after December 31, 2007.
• Retention Plan benefits are subject to forfeiture and rescission if an executive is terminated for cause or engages in competitive or other activity detrimental to IBM during or following employment.

Material terms and conditions: 1995 Retention plan

• The benefits provided under the Retention Plan for Messrs. Palmisano and Mills are determined under the Retention Plan formula in effect prior to the July 1, 1999 amendment (1995 Retention Plan).
• Benefits are available under the 1995 Retention Plan only if a participant terminates employment or dies on or after early retirement age or normal retirement age, holds an executive level position immediately prior to termination or death, and has final average pay of at least $160,000 immediately prior to termination, disability or death. Early retirement age has the same meaning as it does under the Pension Credit Formula of the IBM Personal Pension Plan.
• Final average pay has the same meaning as it does under the Pension Credit Formula of the IBM Personal Pension Plan.
• The benefit provided under the 1995 Retention Plan is payable only as an annuity beginning on the first day of the month following termination of employment (subject to a six-month delay for “specified employees”, as required under Section 409A of the Internal Revenue Code).
• If the participant terminates employment on or after age 60, the 1995 Retention Plan benefit expressed as an annual single life annuity is equal to:
  
  
• If the participant terminates employment before age 60, the single life annuity resulting from the sum of the amounts specified in (1) through (4) are reduced based on reductions specified in the Retention Plan. For example, if a participant terminates at age 59, the benefit is reduced by 3%, at age 58, by 7%, and at age 57, by 11%.
• The benefit of a participant in the 1995 Retention Plan will not be less than the benefit that would be provided if the participant were in the 1999 Retention Plan, as described in the next subsection.

Material terms and conditions: 1999 Retention plan

• The benefits provided under the Retention Plan to Messrs. Loughridge, Daniels, and Elix are determined under the Retention Plan formula in effect on and after the July 1, 1999 amendment (1999 Retention Plan).
• Benefits are available under the 1999 Retention Plan if a participant terminates employment for any reason other than cause or dies after attaining age 60 and completing at least five years of service, holds an executive-level position immediately prior to termination or death, and has final average pay in excess of $405,400 immediately prior to termination or death.
• Final average pay has the same meaning as it does under the Pension Credit Formula of the IBM Personal Pension Plan.
• Benefits are available if a participant terminates employment for any reason other than cause or dies after attaining age 55 and completing at least 15 years of service, if approved by the Board in the case of the Chairman and CEO and Chief Financial Officer (and if approved by the Compensation Committee and the Chairman and CEO in the case of any other officer of IBM).
• The benefit provided under the 1999 Retention Plan is payable only as an annuity beginning on the first day of the month following termination of employment (subject to a six-month delay for “specified employees”, as required under Section 409A of the Internal Revenue Code).
• If the participant terminates employment after attaining age 60 and completing at least five years of service, the 1999 Retention Plan benefit expressed as an annual single life annuity is equal to:
  
  
• In no event will the sum of the amounts in (1) and (2) exceed 65% times final average pay times a fraction (no greater than 1), the numerator of which is the participant’s years of service and the denominator of which is 35.
• A participant who terminates employment between ages 55 and 60, who completes at least 15 years of service, and who receives Board, or Compensation Committee and Chairman and CEO, approval, as described above, will receive a reduced single life annuity. The reduced single life annuity will be determined by reducing the sum of the amounts specified in (1) and (2) by 0.5% for each month that the benefit commencement date precedes age 60.

Compensation elements included in calculations

The definitions of eligible final average pay and compensation for purposes of the Retention Plan have the same meanings as under the Pension Credit Formula in the IBM Personal Pension Plan.

Funding

• The Retention Plan is unfunded and maintained as a book reserve account.
• No funds are set aside in a trust or otherwise; participants in the Retention Plan are general unsecured creditors of the Company regarding the payment of their Retention Plan benefits.

Policy regarding extra years of credited service

• Generally, a participant’s years of credited service is based on the years an employee participates in the Retention Plan.
• The years of credited service for the named executive officers are based only on their service while eligible for participation in the Retention Plan.

Available forms of payment

• A participant’s benefit is only payable in the form of an annuity with monthly benefit payments. Lump sum payments are not available under the Retention Plan.
• A participant may elect to receive his or her benefit in the form of a single life annuity or in certain other actuarially equivalent forms of payment.

Annual retention plan benefit

The annual Retention Plan benefit that was earned as of December 31, 2007 and that is payable as a single life annuity beginning at the earliest unreduced retirement age under the Retention Plan for each of the named executive officers is detailed in the table below.

Name	Annual Retention Plan Benefit at Earliest Unreduced Retirement Age
S.J. Palmisano	$ 1,529,749
M. Loughridge	255,994
S.A. Mills	293,144
M.E. Daniels	192,387
D.T. Elix	203,720

Present value of accumulated benefit

• The present value of accumulated benefit shown in the 2007 Retention Plan Table is the value as of December 31, 2007 of the annual Retention Plan benefit that was earned as of December 31, 2007.
• The annual Retention Plan benefit, which is reflected in the table in the following subsection titled Annual Retention Plan Benefit, is the benefit that is payable for the named executive officer’s life beginning on his earliest unreduced retirement age.
• The earliest unreduced retirement age is the earliest age a named executive officer may start receiving the Retention Plan benefit without a reduction for early commencement. For a named executive officer who did not attain age 60 by December 31, 2007, the earliest unreduced retirement age is the named executive officer’s age on the first day of the month coincident with or next following the attainment of age 60.
• Certain assumptions were used to determine the present value of the annual accumulated Retention Plan benefit that is payable beginning at the earliest unreduced retirement age. Those assumptions are described immediately following the 2007 Retention Plan Table.

2007 Retention plan table

Name (a)	Plan Name (b)	Number of Years Credited Service (#) (c)	Present Value of Accumulated Benefit ($) (d)	Payments During Last Fiscal Year ($) (e)
S.J. Palmisano	Retention Plan	34	$ 15,069,300	$ 0
M. Loughridge	Retention Plan	30	2,190,511	0
S.A. Mills	Retention Plan	34	2,873,710	0
M.E. Daniels	Retention Plan	32	1,583,508	0
D.T. Elix	Retention Plan	7	2,390,139	0

Assumptions to determine present value as of December 31, 2007:

• Measurement date: December 31, 2007
• Interest rate for present value: 6.00%
• Mortality (pre-commencement): None
• Mortality (post-commencement): 1994 US GAM Male table with 20 year improvement
• Termination of employment: Later of age 60 or current age
• Accumulated benefit is calculated based on credited service and final average pay as of December 31, 2007.
• Offset for benefit payable under the IBM Personal Pension Plan is determined based on the single life annuity that would be payable under the IBM Personal Pension Plan beginning on the first day of the month following the assumed termination of employment, as determined using the assumptions following the 2007 Pension Benefits Table.
• Present value is based on the single life annuity payable beginning on the first day of the month following the assumed termination of employment.
• All results shown are estimates only; actual benefits will be based on data, final average pay and service at time of actual termination of employment.

Assumptions to determine present value as of December 31, 2006:

• The column titled Change in Retention Plan Value in the 2007 Summary Compensation Table quantifies the change in the present value of the Retention Plan benefit from December 31, 2006 to December 31, 2007.
• To determine the present value of the Retention Plan benefit as of December 31, 2006, the same assumptions that are described above to determine present value as of December 31, 2007 were used, except a 5.75% interest rate and the 1994 US GAM Male table with 12 year improvement for post-commencement mortality were used to determine present value and the 2006 assumptions following the 2007 Pension Benefits Table were used to determine the offset for the benefit payable under the IBM Personal Pension Plan.