IBM Notice of 2009 Annual Meeting and Proxy Statement

The recent unprecedented events related to the collapse of the financial markets in 2008 has prompted investors to question the role that executive compensation programs may have had in contributing to excessive risk taking by senior executives to achieve short-term financial gain at the expense of the long-term health of a company. In light of this, we again reviewed the objectives and design of IBM’s executive compensation program and its related plans and policies so that we could assure our investors that our approach encourages the right decisions and behaviors to align with the long-term interests of our stockholders. We concluded the following:

• Our programs appropriately balance short- and long-term incentives, with approximately 60% of total target compensation for the senior executive team provided in equity and focused on long-term performance.
• Our executive compensation program pays for performance against financial targets that are set to be challenging to motivate a high degree of business performance, with an emphasis on longer-term financial success and prudent risk management.
• Qualitative factors beyond the quantitative financial metrics are a key consideration in the determination of individual executive compensation payments. How our executives achieve their financial results, integrate across lines of business, and demonstrate leadership consistent with the IBM values are key to individual compensation decisions.
• As explained in the “2008 Potential Payments upon Termination Narrative,” we further strengthened our retirement policies on equity grants for our senior leaders beginning in 2009 to ensure that the long-term interests of the Company continue to be the focus even as these executives approach retirement.
• Our share ownership guidelines require that our senior executives hold a significant amount of IBM equity to further align their interests with stockholders over the long term.
• IBM has a policy for “clawback” of cash incentive payments in the event that an officer’s conduct leads to a restatement of the Company’s financial results. Likewise, the Company’s equity plan has a “clawback” provision which states that awards will be cancelled and certain gains must be repaid if an executive engages in detrimental activity.

The remainder of this Compensation Discussion and Analysis describes the key features of our executive compensation program in detail. We are confident that our program is aligned to the interests of our stockholders, rewards for performance, and is an example of the strong pay practice emphasized by expert commentators on this topic.

Section 1: Executive compensation summary — why we pay what we do

Trust and personal responsibility in all relationships — relationships with clients, partners, communities, fellow IBMers, and investors — is a core value at IBM. Investors should have as much trust in the integrity of a company’s executive compensation process as clients do in the quality of its products. A breach of this trust is unacceptable. As a part of maintaining this trust, we well understand the need for our investors — not only professional fund managers and institutional investor groups, but also millions of individual investors — to know how compensation decisions are made. We have put tremendous effort and rigor into our own executive compensation processes over many years, continually updating them to meet new voluntary criteria as well as official requirements from the SEC.

Investors — IBM’s owners — want senior leaders to run the Company in a way that protects and grows their investment over the long term while appropriately managing risk. This is no simple task at any company, and at a company as large and complex as IBM, it is a particularly exciting leadership challenge. IBM holds a unique identity, based on talent, brand, global operating footprint, the size and scope of our business overall, and the size of each of our individual lines of business. Unlike those few other companies of comparable size and scale that tend to operate as holding companies of component businesses, we operate as an integrated entity across a number of significant business lines, most large enough to be among the Fortune 150 biggest companies if they were stand-alone businesses. Our unique, integrated model delivers great value to our investors and our clients, and demands a senior leadership team of unusual depth, agility and experience.

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 and owners;
• Attract and retain highly qualified senior leaders who can drive a global enterprise to succeed in today’s competitive marketplace;
• Motivate our leaders to deliver a high degree of business performance without encouraging unnecessary and excessive risk taking;
• Differentiate compensation so that it varies based on individual and team performance; and
• Balance rewards for both short-term results and the long-term strategic decisions needed to ensure sustained business performance over time.

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

1. Current — Salary and annual incentives that reflect actions and results over 12 months;
2. Longer-term — A long-term incentive plan that reflects results over a minimum of three years, helping to ensure that current results remain sustainable; and
3. Full Career — Deferrals, retention payments and retirement accumulations help ensure today’s leaders stay with IBM until their working careers end.

Compensation elements for senior leaders

On average, 87% of IBM’s senior leaders’ annual compensation varies year to year based on business results, with the remainder coming from salary. In addition, 60% of the Chairman and CEO’s annual pay and 63% of the Senior Vice Presidents’ (SVP) pay, on average, is in long term elements. This ensures that the interests of senior executives are aligned with stockholders.

Current year’s performance: salary and annual incentives

Salary. Senior leaders at IBM receive a small percentage of their overall compensation in salary. In 2008, for example, Chairman and CEO Sam Palmisano earned 10% of his compensation in salary, and the rest of the senior team earned an average of 13% of their average compensation in salary.

Annual Incentive. Senior leaders are incented through a program that sets performance targets based on their role and scope. Actual payments are driven by business performance against revenue growth, net income, and cash flow targets and individual performance, as reflected in the Personal Business Commitment review process described under “How Compensation Decisions Are Made.” Top performers earn the greatest payouts; median performers earn much smaller amounts; and the lowest performers earn no incentive payments at all. Over the past five years, these results-based payouts for individual leaders have ranged from 0.7 times target to a high of 1.66 times target. In 2008, the annual incentive earned by the Chairman and CEO represented 30% of his total compensation; incentives achieved by the rest of the senior team averaged 18% of their total compensation. Additional information about the Annual Incentive Program is outlined in Section 2 of this CD&A, “Setting Performance Targets for Incentive Compensation.”

Team Incentive. When Mr. Palmisano became CEO in 2002, he asked the Board of Directors to take a portion of the annual incentive funding (approximately $3 million) to help create a pool for rewarding teamwork by his most senior leaders. This was done to reinforce IBM’s strategy of integration across the Company, with awards based on how well the SVPs lead efforts to deliver integrated value to IBM’s clients worldwide. For the past six years, an amount ranging up to $250,000 was awarded and paid equally to each member of the senior team. The Chairman and CEO was not eligible to receive a team incentive. In 2008, the SVP team earned the maximum payout of $250,000 for the first time. This represented an average of 6% of total compensation for the SVPs. Given the team’s achievement and in recognition that integration is now part of the management culture, the Team Incentive was discontinued beginning in 2009.

Other Compensation. Disclosure rules require that companies include certain items in the Summary Compensation Table column entitled “All Other Compensation.” At IBM, many of these items are available to all employees. In fact, additional programs that are restricted to senior executive participation amount to less than 1% of their total compensation on average. These programs are limited to services with a direct bearing on individual productivity or security. IBM’s security practices provide that all air travel by the Chairman and CEO, including personal travel, be on Company aircraft. IBM does not provide any tax assistance to Mr. Palmisano in connection with taxes incurred for personal travel by him on the corporate aircraft. While the cost of corporate aircraft usage varies year to year based on several external factors like fuel costs, using corporate aircraft for all travel is a prudent step to ensure the safety of the Chairman and CEO given the breadth of IBM’s operations in over 170 countries which includes many emerging markets where security threats are a reality. Given the personal travel security practice for the Chairman and CEO, family members periodically accompany him on the corporate aircraft. In accordance with tax requirements, income was imputed to Mr. Palmisano for personal travel by his family members on the corporate aircraft. In recognition of his family’s personal travel, Mr. Palmisano has contributed $80,000 to the IBM International Foundation to fund contributions to the National Museum of African American History and Culture for which he serves as a member of the advisory council.

Longer-term performance: long-term incentive plan

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

Performance Share Unit (PSU) Grants. This portion of the LTIP focuses senior leaders on delivering business performance over the next three years against two key financial metrics which drive long-term stockholder value — earnings per share and cash flow. Through this program, senior leaders are eligible to earn a target number of shares of IBM stock at the end of a three-year performance period. The award pays out at the end of the three years depending on how well the Company performed against targets set at the beginning of the three-year period. The payouts are made in shares of stock, so the value goes up or down based on stock price performance from the beginning of the grant. Additional information about PSUs is set forth in Section 2 of this CD&A, “Setting Performance Targets for Incentive Compensation.”

Over the past eight years, program payouts have ranged from a low of 54% to a high of 147% of the target number of shares. In 2008, the long-term incentive grant to the Chairman and CEO was comprised entirely of PSUs, representing 60% of his total compensation assuming future performance at target. PSUs were, on average, 44% of the SVPs’ total compensation in 2008. In 2009, the annual long-term incentive grant for SVPs will be entirely PSUs.

The IBM Integration & Values Team (I&VT) consists of a select group of approximately 300 executives charged with working beyond the scope of their regular job responsibilities to drive growth through integration and demonstrating IBM’s values. The Chairman and CEO may grant members of this group additional performance shares (Chairman’s Performance Uplift) for delivering extraordinary results. The Chairman and CEO and SVPs are not eligible for these I&VT awards.

Other Stock-Based Grants. Another portion of the LTIP provides for stock-based grants to focus senior leaders on delivering performance that increases the value of the Company through growth of IBM’s stock price over the long term. Senior leaders may receive these grants in the form of stock options, restricted stock, restricted stock units or any combination. The grants vest — become available for sale or exercise — over time, typically over either three or four years. Until vested, the grants have no value, except that dividend equivalents are paid on restricted stock units granted prior to January 1, 2008. For restricted stock units awarded after December 31, 2007, dividend equivalents are not paid. Executives awarded these grants typically hold them for extended periods, and have up to 10 years to convert stock option awards to cash or shares. The planned value of the annual other stock-based awards granted in 2008 represented, on average, 19% of the total compensation for the SVPs. As in 2008, the Board has not approved other stock-based grants for the Chairman and CEO in 2009. Similarly, the Compensation Committee has not approved other stock-based grants for the SVPs in 2009.

From 2005 through 2007, market-priced stock options were awarded to executives, including some named executive officers, who chose to participate in an IBM stock investment program. Under this program, which has since been discontinued, executives could invest 5, 10 or 15% of their annual incentive plan payout in IBM stock equivalents and receive IBM stock options, under the terms of the IBM Long-Term Performance Plan, valued at two times their investment.

The values of the other stock-based grants made in 2008 are shown in the Grants of Plan-Based Awards Table. The 2008 expense associated with all outstanding awards, including grants made in 2008 and prior years, is shown in the 2008 Summary Compensation Table.

Full career performance: retention, pension and savings

Retention of our key leaders for a full career is an important element of our total compensation strategy. This is accomplished through a combination of retention payments and retirement plans.

Retention Stock-Based Grants & Cash Awards. Periodically, Chairman and CEO Palmisano reviews outstanding stock-based awards for the members of his senior leadership team and other key executives. Depending on individual performance and the competitive environment for senior executive leadership talent, he may recommend that the Compensation Committee approve individual retention awards, in the form of restricted stock units or cash, for certain executives. The retention restricted stock unit (RRSU) grants typically vest at the end of five years, and the cash awards have a clawback (i.e., repayment clause) if an executive leaves IBM before a specified date. These awards make it more difficult for other companies to recruit IBM’s top talent.

Closed Retention Plan. In 1995, IBM created a new plan to help retain, for their full careers, the caliber of senior leaders needed to turn the Company around, preserve its long-term viability, and position it for growth in the future. To discourage these leaders from joining competitors, their benefits under this retention plan would be forfeited if they left IBM prior to the end of a full career, typically age 60. The approach worked, as evidenced by the Company’s historic turnaround in the late 1990s, and its current position of market leadership. Twelve of the Company’s top 14 executives, including all of the named executive officers, were with IBM and eligible for the Retention Plan when it was introduced and remain with the Company today. Because its original purpose had been met, the plan was closed to new participants in 2004. Future accruals under the plan stopped on December 31, 2007, and the Retention Plan will not be replaced by any other plan.

Pension. Prior to 2008, IBM’s senior executives and other IBM employees in the U.S. participated in pension plans. 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 determined by the same formulas for executives and non-executives.

Savings. The money that U.S. executives save through the IBM 401(k) Plus Plan (formerly the IBM Savings Plan), as for all U.S. employees, is eligible for a Company match. Prior to January 1, 2008, this match equaled 50% of the first 6% of eligible pay that participants save through the plan for those hired before January 1, 2005, and 100% of the first 6% saved for those hired after December 31, 2004. As announced in early 2006, effective January 1, 2008, the provisions of the Savings Plan were changed, and it was renamed the 401(k) Plus Plan, becoming the only tax-qualified retirement program available to IBM’s U.S. employees for future deferrals and employer contributions. Under the new provisions of the plan, IBM matches a participant’s own contributions dollar-for-dollar up to 6% of eligible pay for those hired before January 1, 2005, and up to 5% for those hired on or after that date. In addition, IBM makes automatic contributions to a participant’s 401(k) Plus account — equal to 1%, 2% or 4% of a participant’s eligible pay — depending on the participant’s pension plan eligibility on December 31, 2007. Further, IBM contributes transition credits to participants who were eligible to receive transition credits under their Personal Pension Account. Transition credits are equal to 1%, 2%, 3% or 4% of a participant’s eligible pay up to the Internal Revenue Code pay limit, based on a participant’s age and service as of June 30, 1999. Transition credits will stop on the earliest of the following dates: (i) June 30, 2009, (ii) the date the participant reaches 30 years of service, or (iii) the participant’s termination of employment. Matching contributions and automatic contributions are made once a participant has completed one year of service.

In the U.S., the Department of Labor and Internal Revenue Service also permit individuals who exceed certain income thresholds to defer, on a nonqualified basis, receipt of compensation they earn. This also allows IBM to delay paying these obligations and, until they come due and are paid, IBM retains the cash for operating purposes. In simple terms, this deferred compensation is money earned in the past, but not yet paid out. Amounts deferred into the Excess 401(k) Plus Plan are recordkeeping (notional) accounts and are not held in trust for the participants. Participants in IBM’s nonqualified plan, the Excess 401(k) Plus Plan (formerly the Executive Deferred Compensation Plan) may invest their notional accounts in the primary investment options available to all employees through the 401(k) Plus Plan. Participants in the Excess 401(k) Plus Plan are also eligible to receive company match, automatic contributions, and transition credits, if applicable, on eligible pay deferred into the Excess 401(k) Plus Plan and on money earned in excess of the Internal Revenue Code pay limit once they have completed one year of service. IBM does not pay guaranteed, above-market or preferential earnings on deferred compensation. For executives with long and successful careers at a single company, the deferrals can accumulate to sizeable amounts over time.

The current value of Chairman and CEO Palmisano’s account, made up of money he earned during the past 13 years that the program has been available, is now worth approximately $30 million. Before he was named Chairman and CEO in January 2003, Mr. Palmisano had invested approximately $8 million of his compensation in the account. Mr. Palmisano could have chosen not to defer, taken these funds from IBM and put them in other investment vehicles. Had he done so, these numbers would not be disclosed here.

The table below shows the deferral elections and accumulated balances that are owed to the Chairman and CEO from his prior years’ earned compensation. Like all participants, Mr. Palmisano’s savings are subject to investment returns. As a result, the value of these account balances will change over time depending on market performance. When Mr. Palmisano retires, the value of his deferrals under the Excess 401(k) Plus Plan will be paid to him in five equal installments over five years.

Ten-Year History of Chairman and CEO Palmisano’s Deferred Compensation (Nonqualified)

Year	Deferrals	IBM Match	Year End Balance
1999	$299,500	$41,250	$1,512,020
2000	1,280,125	45,088	2,525,162
2001	1,311,185	68,400	4,782,542
2002	5,021,815	130,600	8,796,332
2003	2,272,900	178,700	12,979,815
2004	6,020,881	208,600	20,935,482
2005	5,000,050	202,050	23,993,254
2006	5,729,377	205,350	34,942,721
2007	750,000	150,000	39,274,203
2008	94,200	389,000	30,677,476

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

1.Making Commitments

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

2.Determining Senior Vice Presidents (SVPs) Compensation

Evaluation of Results by the Chairman and CEO

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

The self-assessments of the SVPs are reviewed by the Senior Vice President of Human Resources (SVP HR) and Chairman and CEO Palmisano, 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, Mr. Palmisano makes compensation recommendations to the Compensation Committee based on his evaluation of each senior manager’s performance and expectations for the coming year.

Evaluation of Results by the Compensation Committee

The Compensation Committee decides whether to approve or adjust the Chairman and CEO’s recommendations for the members of his team.

The Committee evaluates all of the factors considered by the Chairman and CEO and reviews compensation summaries for each senior leader that tally the dollar value of all compensation and related programs, including salary, annual incentive, long-term compensation, deferred compensation, retention payments and pension benefits.

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

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

The Compensation Committee separately reviews all relevant information and arrives at its recommendation for the Chairman and CEO’s total compensation. In this work, they are assisted by the Compensation Committee’s outside consultant.

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

4. Ensuring Competitive Pay — Approach to Benchmarking

IBM participates in several executive compensation benchmarking surveys that provide detail on levels of salary, target annual incentives and long-term incentives, the relative mix of short- and long-term incentives, and mix of cash and stock-based pay. We include in these surveys a broad range of key information technology companies, given the battle for talent that exists in our industry and to help us identify trends in the industry. We also include companies outside our industry, 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. These surveys are supplemented by input from the Compensation Committee’s outside consultant on factors such as recent market trends. The companies used in the benchmarking surveys for 2008 compensation decisions are listed below. The Committee reviews and approves this list annually. For 2009, the Committee has approved the same list of companies with the exception of AIG.

AIG	EDS	PepsiCo
Altria Group	Ford	Pfizer
Apple	General Electric	Procter & Gamble
AT&T	General Motors	Sprint
Bank of America	Hewlett-Packard	Sun Microsystems
Boeing	Honeywell	Texas Instruments
Chevron	Intel	United Technologies
Cisco Systems	Johnson & Johnson	Verizon
Citigroup	Lenovo	Walt Disney
Dell	Lockheed Martin	Wells Fargo
Dow Chemical	Microsoft	Xerox
DuPont	Motorola

The data from these surveys and related sources form the primary external view of the market, and the Company’s philosophy is to generally target the median of the market for cash and total compensation for IBM job roles compared to jobs of similar size and complexity at companies within our benchmarking group. For individual compensation decisions, the information is used together with an internal view of longer-term potential and individual performance relative to other executives. For the Company’s senior level executives, the Compensation Committee also takes into account long-term retention objectives, recognizing that their skills and experience are highly sought after by other companies and, in particular, by the Company’s competitors.

5. Compensation committee consultant

The Committee currently retains a Managing Director of Towers Perrin as its outside compensation consultant to advise the Committee on market practices and the specific IBM policies and programs. This Managing Director does not perform any other consulting work for the Company, 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. The work done by Towers Perrin for the Committee is documented in a formal scope of work and contract which is executed by the consultant and the Committee.

Towers Perrin is one of the few human resource consulting companies with global capabilities, and the Company’s engagements with Towers Perrin primarily involve advice outside the U.S. in a select number of countries where their capabilities lead others in these marketplaces with respect to local benefit issues such as pension design.

The Committee enters into a consulting agreement with its outside compensation consultant on an annual basis. In determining whether or not to renew the engagement with Towers Perrin, the Committee evaluates the quality of the consulting service and annually assesses the nature and significance of the Company’s other engagements with Towers Perrin and the projected scope of work for the coming year. Based on the assessment for 2008, the Committee determined that the consultant is free of any relationships that would impair professional judgment and advice to the Compensation Committee.

Chairman and CEO compensation decisions for 2008 and 2009

The Compensation Committee made decisions for the Chairman and CEO’s 2008 and 2009 compensation following the process described above and using the pay components shown above. The Compensation Committee noted the following as key points regarding the Chairman and CEO’s performance against his Personal Business Commitments for 2008:

• Achieved very strong financial performance including record revenue, profit, cash flow and earnings per share (EPS) in a challenging economic environment
• Continued to drive IBM to be the leading globally integrated enterprise
• Established a growth markets organization to capture the business opportunity in these fast growing economies
• Invested in workforce and leadership programs for employees worldwide to motivate high performance and drive business objectives
• Returned significant value to shareholders including increasing dividends from $2.1 billion in 2007 to $2.6 billion in 2008
• Increased IBM’s leading market position in middleware and maintained leading market position in services and servers
• Generated highest services pre-tax profit dollars and margin in the last 5 years, driven in part by global delivery, quality and efficiency
• Expanded IBM’s capabilities and financial performance through executing the acquisition strategy, including the integration of business intelligence leader Cognos
• Continued leadership in technology and innovation, earning more U.S. patents than any other company for the 16th consecutive year

The Committee considered these results and recommended that Mr. Palmisano receive $5,500,000 in annual incentive for his 2008 performance.

The Committee worked with its outside consultant (Towers Perrin) to review Mr. Palmisano’s base salary, annual incentive target and long-term incentive award value using a framework of competitive benchmark analysis, Company performance and Mr. Palmisano’s personal performance. Based on this review, the Committee recommended that Mr. Palmisano’s base salary and target annual incentive for 2009 remain at $1,800,000 and $5,000,000, respectively.

The Committee recommended a 2009 long-term incentive award comprised entirely of 2009-2011 Performance Share Units valued at $12,000,000. The 2008 award was valued at $11,000,000. The 2009 grant will be made on June 8, 2009. The Committee chose the long-term incentive value to improve Mr. Palmisano’s position relative to competitive benchmarks and to signal the Committee’s desire for him to continue his focus on taking the steps necessary to position the Company for long-term success.

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

SVP compensation decisions for 2008 and 2009

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

Mark Loughridge, Senior Vice President and Chief Financial Officer

• Managed IBM’s long-term financial model to perform ahead of plan
• Exceeded net income and EPS objectives
• Exceeded cash flow objectives in a difficult global economic environment
• Managed IBM’s portfolio, including execution of 15 acquisitions

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

Michael E. Daniels, Senior Vice President, Global Technology Services

• Exceeded cash flow and profit objectives
• Held market share while meeting profit and margin objectives
• Improved client satisfaction with focus on services excellence
• Continued to implement services product lines to drive financial performance

Steven A. Mills, Senior Vice President, Software Group

• Exceeded profit objectives
• Grew middleware brands faster than market
• Integrated acquisitions effectively
• Improved development practices resulting in greater efficiency

Virginia M. Rometty, Senior Vice President, Global Business Services

• Exceeded profit objectives and held market share
• Focused on industry offerings and integrator solutions to drive revenue growth
• Continued to implement operational transformation to increase profit margin and improve delivery excellence
• Completed initiatives to improve alignment of cross-IBM resources and improve client value

Based on these results and following the process outlined above, the Compensation Committee approved the following 2008 annual incentive payments for these named executive officers:

	2008 Incentive Payouts
Name	Annual Incentive	Team Incentive
M. Loughridge	$1,072,500	$250,000
M.E. Daniels	1,035,000	250,000
S.A. Mills	921,200	250,000
V.M. Rometty	892,500	250,000

The team incentive payment reflected Chairman and CEO Palmisano’s assessment of the performance of his entire senior leadership team and their success in working together to integrate across business units to deliver strong 2008 business results.

For 2009, the Committee also approved the following compensation elements: base salary, target annual incentive and Performance Share Unit grants under the Long-Term Performance Plan. There is no change to the salary rate or target incentive from 2008. As previously stated, the team incentive has been eliminated beginning in 2009.

	2009 Cash		2009 Long-Term Incentive Awards
Name	Annual Salary Rate	Incentive Target	Performance Share Units(1)
(1) Performance Share Units (PSUs) will be granted on June 8, 2009. The actual number of PSUs granted on this date will be determined by dividing the value shown above by a predetermined, formulaic planning price for the second quarter 2009. The PSUs will vest in their entirety in February 2012.
M. Loughridge	$720,000	$975,000	$3,500,000
M.E. Daniels	665,000	900,000	3,000,000
S.A. Mills	695,000	940,000	3,000,000
V.M. Rometty	630,000	850,000	3,000,000

Senior leaders — personal stake in IBM’S future

Investors want the leaders of their companies to act like owners. That alignment, we have found, works best when senior leaders have meaningful portions of their personal holdings invested in the stock of their company. This is why IBM sets significant stock ownership requirements for approximately 60 of the Company’s senior leaders, including the Chairman and CEO. The following table illustrates which equity holdings count towards stock ownership requirements:

Included

• IBM shares owned personally or by members of the immediate family sharing the same household
• Holdings in the IBM Stock Fund of the 401(k) Plus Plan and the Excess 401(k) Plus Plan
• Shares of IBM stock deferred under the Excess 401(k) Plus Plan

Not Included

• Unvested equity awards, including RSUs, RRSUs, and PSUs
• Unexercised stock options

The Chairman and CEO and SVPs are all required to own IBM stock or equivalents worth three times their individual target cash compensation (their base salary plus the incentive payment they would earn if they hit their performance targets) within five years of hire or promotion. As a group, the Chairman and CEO and 14 SVPs own 1.26 million shares or equivalents valued at over $106 million as of December 31, 2008. Approximately 40 other senior leaders are required to hold IBM stock or equivalents worth one time their target cash compensation within five years of hire or promotion.

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

IBM meeting market standards for executive compensation

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

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

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