IBM Notice of 2008 Annual Meeting and Proxy Statement

2007 Nonqualified deferred compensation narrative

IBM executive deferred compensation plan

General Description

• The IBM Executive Deferred Compensation Plan (EDCP) is a non-tax-qualified deferred compensation plan offered by the Company to all U.S. executives.
• There are two types of accounts under the EDCP:
  • – Basic Account. Executives may elect to defer receipt of salary and incentive payments and to receive a matching contribution on these deferred amounts from the Company under the same formulas as the Company’s tax-qualified 401(k) plan (the IBM Savings Plan).
  • – Deferred IBM Shares. Executives may defer receipt of shares of IBM stock payable under certain equity compensation awards, as described below.
• The 2007 Nonqualified Deferred Compensation Table shows the executive deferrals (contributions), the Company match (contributions), and investment gain or loss (earnings) for each named executive officer during 2007.
• The table also shows the total balance that each named executive officer has accumulated over all the years he has participated in the plan.
• The EDCP balance is not paid to, and cannot be accessed by, the executives until after separation from IBM.
• Consistent with the change in IBM’s approach to retirement benefits, effective January 1, 2008 the EDCP was replaced by a new non-qualified deferred compensation plan, the IBM Excess 401(k) Plus Plan. All IBM employees, including the named executive officers, whose eligible pay is expected to exceed the Internal Revenue Code compensation limit are eligible to participate in the Excess Plan. The purpose of the plan is to provide benefits that would be provided under the qualified 401(k) Plus Plan if the compensation limits did not apply. The Excess Plan like the EDCP, provides employees with the opportunity to save for retirement on a tax-deferred basis.

Purpose of the EDCP

• U.S. tax laws limit the amount of pay employees can defer for retirement into 401(k) plans.
• IBM established the EDCP to give executives the ability to save for retirement with additional tax-deferred funds, as permitted under the current tax authorities, including the Department of Labor and Internal Revenue Service regulations.

Compensation Eligible for Deferral under EDCP:
Basic Account

• An executive may elect to defer between 1% and 80% of salary after the executive has reached either of two annual limits imposed by the Internal Revenue Code on contributions to the IBM Savings Plan.
• These limits are the limit on elective deferrals (which was $15,500 in 2007, or $20,500 if age 50 or older) and the limit on compensation (which was $225,000 in 2007).
• In addition, an executive may elect to defer between 1% and 100% of eligible incentive payments, regardless of whether either of the 401(k) limits have been reached.
• In both cases, the Internal Revenue Code requires the deferral elections to be made before the calendar year in which the compensation is earned.

Compensation Eligible for Deferral under EDCP:
Deferred IBM Shares

• An executive may elect to defer receipt of shares of IBM stock that otherwise would be paid as a result of the vesting of certain restricted stock unit (RSU) awards granted under the Company’s Long-Term Performance Plans (LTPPs).
• An executive may also elect to defer receipt of shares of IBM stock that otherwise would be paid as a result of the vesting of Performance Share Unit (PSU) awards under the Company’s LTPPs.
• Deferral elections must be made in advance of the vesting of the eligible awards and in accordance with Internal Revenue Code rules.
• Not all of the named executive officers have elected to defer shares.
• Dividend equivalents on Deferred IBM Shares are paid in cash at the same rate as the dividends paid to IBM stockholders.
• Effective January 1, 2008, under the new Excess 401(k) Plus Plan, executives will not be able to defer receipt of IBM stock. However, executives who made elections prior to January 1, 2008 to defer receipt of IBM stock granted on or before December 31, 2007 are able to defer the receipt of such stock into the Excess Plan when the awards vest.

EDCP Funding

• The EDCP is unfunded and maintained as a book reserve account.
• No funds are set aside in a trust or otherwise; participants in the plan are general unsecured creditors of the Company for payment of their EDCP accounts.

Company “Match” on Executive’s Contributions

• The Company credits a matching contribution to the EDCP account of each executive who defers salary or incentive payments under the Basic Account.
• The amount of the matching contribution is determined under the same formulas as the IBM Savings Plan.
• For employees hired before 2005, which includes all of the named executive officers, this match is 50% of the first 6% of compensation that the executive defers. For employees hired in 2005 or later, the match is 100% of the first 6% of compensation that the executive defers.
• The Company does not provide any matching contributions for Deferred IBM Shares.

Earnings Measures

• An executive’s contributions to the Basic Account are adjusted for earnings and losses based on investment choices selected by the executive.
• As previously mentioned, IBM does not pay guaranteed, above-market or preferential earnings on deferred compensation.
• The available investment choices are the same as the primary investment choices available under the IBM Savings Plan, which are as follows (with 2007 annual rates of return indicated for each):
  • – Income Plus Life Strategy Fund (6.04%)
  • – Conservative Life Strategy Fund (5.86%)
  • – Moderate Life Strategy Fund (6.85%)
  • – Aggressive Life Strategy Fund (6.28%)
  • – Stable Value Fund (5.60%)
  • – Inflation Protected Bond Fund (11.74%)
  • – Total Bond Market Fund (2.56%)
  • – REIT Index Fund (-16.91%)
  • – Total Stock Market Index Fund (5.72%)
  • – Total International Stock Market Index Fund (16.95%)
  • – Money Market Fund (5.33%)*
  • – Long-Term Corporate Bond Fund (3.48%)
  • – High Yield & Emerging Markets Bond Fund (5.01%)
  • – Equity Income Fund (6.11%)*
  • – Large Company Index Fund (5.54%)
  • – Large-Cap Value Index Fund (-0.12%)
  • – Large-Cap Growth Index Fund (11.78%)
  • – Small/Mid-Cap Stock Index Fund (5.11%)
  • – Small-Cap Value Index Fund (-9.72%)
  • – Small-Cap Growth Index Fund (7.15%)
  • – European Stock Index Fund (13.91%)
  • – Pacific Stock Index Fund (4.80%)
  • – IBM Stock Fund (12.83% including dividend equivalent reinvestment)
  • *  Effective December 29, 2007, these investment choices are no longer available. Unless participants chose to change investments prior to December 29, 2007, amounts that were notionally invested in the Money Market Fund as of December 28, 2007 were transferred to the Stable Value Fund as of December 29, 2007 as notional investments, and accounts that were notionally invested in the Equity Income Fund as of December 28, 2007 were transferred to the Large-Company Index Fund as of December 29, 2007 as notional investments. The rates of return for the Money Market Fund and the Equity Income Fund are through December 28, 2007.

• An executive may change the investment selections for new payroll deferrals as frequently as each semi-monthly pay cycle.
• Investment selections for existing account balances may be changed as frequently as once each month.
• Any changes (whether to new deferrals or existing balances) may be made through an Internet site or telephone call center maintained by the plan’s third-party record keeper.
• Effective January 1, 2008, the Company match under the Excess 401(k) Plus Plan will be notionally invested in the investment options in the same manner participant contributions are notionally invested.
• Because Deferred IBM Shares are credited, maintained and ultimately distributed only as shares of the Company’s stock, they may not be transferred to any other investment choice at any time.
• On a quarterly basis, dividend equivalents are credited to an executive’s account with respect to all or a portion of such account that is deemed to be invested in the IBM Stock Fund at the same rate as dividends to IBM stockholders.
• Deferred IBM Shares earned during the last fiscal year, as reported in column (d) of the 2007 Nonqualified Deferred Compensation Table, are calculated as:
  • – The change in the price of the Company’s stock between December 31, 2006 and December 31, 2007 for all Deferred IBM Shares that were contributed prior to 2007, plus
  • – The change in the price of the Company’s stock between the date of contribution and December 31, 2007 for all Deferred IBM Shares that were contributed during 2007.

Payouts, Withdrawals and Other Distributions

• No payouts, withdrawals or other distributions from the EDCP are permitted prior to termination of employment.
• At separation, the balance in an executive’s Basic Account is paid to the executive in a lump sum unless: (a) the balance exceeds $25,000 and (b) the executive satisfies the following age and service criteria:
  • – At least age 55 with 15 years of service;
  • – At least age 60 with 5 years of service;
  • – Any age with at least 30 years of service, provided that, as of June 30, 1999, the executive had at least 25 years of service or was at least age 40 with 10 years of service; or
  • – Commencing benefits under the IBM Long-Term Disability Plan.
• As of December 31, 2007, Messrs. Palmisano, Loughridge, Mills, Daniels and Elix had satisfied the age and service criteria.
• If the executive has satisfied the age, service and account balance criteria at separation, but has not made a valid advance election of another form of distribution, the executive’s entire Basic Account is paid in a lump sum in February of the year following separation.
• If the executive has satisfied the age, service and account balance criteria at separation and has made a valid advance election, the executive’s entire Basic Account is paid as elected by the executive from among the following choices:
  1. Lump sum upon separation,
  2. Lump sum in February of the year following separation, or
  3. Annual installments (beginning February 1 of the year following separation) for a number of years (between two and ten) elected by the executive.
• Distribution elections may be changed in advance of separation, in accordance with Internal Revenue Code rules.
• At December 31, 2007, the named executive officers had the following distribution elections on file:
  • – Mr. Palmisano—5 annual installments
  • – Mr. Loughridge—immediate lump sum
  • – Mr. Mills—10 annual installments
  • – Mr. Daniels—10 annual installments
  • – Mr. Elix—lump sum in the following year
    
• The balance in an executive’s Basic Account continues to experience investment gains and losses until it has been completely distributed.
• Deferred IBM Shares are distributed only in the form of shares of the Company’s stock.
• Subject to the age and service criteria, an executive may make a separate, advance distribution election as to the timing of distribution of Deferred IBM Shares; none of the named executive officers has made a separate, advance election for Deferred IBM Shares.
• If no separate, advance election has been made, or if the age and service criteria are not satisfied at termination of employment, Deferred IBM Shares are distributed at the same time as the Basic Account.
• These distribution rules are subject to Section 409A of the Internal Revenue Code, including, for example, the rule that a “specified employee” may not receive a distribution of post-2004 deferrals until at least six months following termination of employment; all of the named executive officers were “specified employees” under Section 409A at the end of the last fiscal year.

IBM Australia limited superannuation fund

Mr. Elix has a deferred compensation benefit under the IBM Australia Limited Superannuation Fund (the “Fund”), attributable to his prior employment with IBM Australia. The Fund is disclosed in the table below because it is not tax-qualified under the U.S. Internal Revenue Code. However, it is tax-qualified under Australian law.

General Description and Contributions

• The Fund is a defined contribution plan that provides employer contributions equal to 9% of eligible compensation to a participant’s account during employment.
• As a former employee of IBM Australia, Mr. Elix is considered a “retained member” of the Fund and is no longer eligible to make tax-deferred contributions or to receive employer contributions to his account; he is permitted to make after-tax contributions but did not do so during the last fiscal year.

Earnings Measures

• Earnings on a participant’s account are determined by the participant’s selection of investment options from among the following choices (with 2007 annual rates of return indicated for each):
  • – Growth Option (6.93%)
  • – Balanced Option (5.64%)
  • – 50/50 Option (4.87%)
  • – Capital Stable Option (4.73%)
  • – Cash Option (5.62%)
• These investment options may be changed by the participant monthly.

Payouts, Distributions and Withdrawals

As a retained member who has attained age 55, Mr. Elix may request payment of all or part of his account at any time.

2007 Nonqualified deferred compensation table