IBM Notice of 2009 Annual Meeting and Proxy Statement

Salary (column (c))

Amounts shown in the salary column reflect the salary amount paid to each named executive officer during 2008.

• IBM reviews salaries for each named executive officer annually during a common review cycle. In 2008, salary increases for named executive officers took effect on June 1.
• See Section 1 of the 2008 Compensation Discussion and Analysis for an explanation of the amount of salary, bonus and other compensation elements in proportion to total compensation.

Bonus (column (d))

Amounts shown in the Bonus column represent payouts of the Team Incentive. Amounts in this column do not include payments under the IBM Annual Incentive Plan, which are included under column (g) (Non-Equity Incentive Plan Compensation).

Team Incentive

General Terms

• See 2008 Compensation Discussion and Analysis for an explanation of the Team Incentive. Only the SVPs participated in this program; each participant received the same payout. The Team Incentive program was discontinued beginning in 2009.
• The Chairman and CEO determined how well the participants performed as a team over the course of the year and set the payout amount which was approved by the Compensation Committee.

Performance Period and Payout Range

• This was an annual program with a performance period from January 1 to December 31. Payout occurred no later than March 15 of the year following the performance period.
• Minimum annual payout of $0. Maximum annual payout of $250,000. There was no target.

Stock awards total (column (e))

Amounts shown in the Stock Awards Total column are comprised of three different types of awards (Performance Share Units, Restricted Stock Units and Retention Restricted Stock Units), presented separately to enhance understanding. The amounts shown in the columns for Performance Share Units, Restricted Stock Units and Retention Restricted Stock Units are the dollar amounts recognized for financial statement reporting purposes in 2008 in accordance with FAS 123R for equity award expense (excluding any risk of forfeiture, per SEC regulations). Equity expense calculations for financial statement purposes spread the grant date cost of those awards over the vesting period. Therefore, amounts in this column include the expense for awards granted in 2008 and previous years. All of these awards were granted to the named executive officers under IBM’s 1999 or 1997 Long-Term Performance Plan (LTPP).

Performance Share Units (PSUs)

The following describes the material terms and conditions of PSUs as reported in the column titled Performance Share Units (column (e)) in the 2008 Summary Compensation Table and in the columns under the heading Estimated Future Payouts Under Equity Incentive Plan Awards (columns (f), (g) and (h)) in the 2008 Grants of Plan-Based Awards Table.

General Terms

• One PSU is equivalent in value to one share of IBM common stock. PSUs are paid out in IBM common stock after the three-year performance period.
• Executive officers are awarded a number of PSUs each year at the beginning of the three-year performance period.
• Performance targets for cumulative three-year attainment in earnings per share and cash flow are set at the beginning of the three-year period. These targets are approved by the Compensation Committee.
• At the end of the three-year performance period, the Compensation Committee approves the determination of actual performance relative to pre-established targets.
• At the end of the performance period, that number of PSUs is adjusted up or down based on the approved actual performance relative to the pre-established targets.
• The performance period for the awards made in 2008 is January 1, 2008 through December 31, 2010.
• There are no dividends or dividend equivalents paid on PSUs.

Vesting and Payout Calculations

• PSU awards granted in 2008 will be adjusted for performance (as described below) and will be paid in IBM common stock on February 1, 2011 if the executive has been continuously employed by IBM as of that date.
• See 2008 Potential Payments Upon Termination Narrative for information on payout of unvested PSUs upon certain separations.
• Payout of PSUs is determined by separately assessing performance against each of the pre-established targets. Payout will not be made for performance below the thresholds, as described below.
• For PSUs that were paid out on or before February 1, 2008, the executive could have elected, at least six months prior to vesting, to defer payment of these shares into the IBM Excess 401(k) Plus Plan (formerly the IBM Executive Deferred Compensation Plan). For PSUs that pay out after February 1, 2008, deferrals are not permitted.
• See Section 2 of the Compensation Discussion and Analysis for information on setting performance targets for the PSU program.

Threshold Number:

• – The Threshold number of PSUs (listed in column (f) of the 2008 Grants of Plan-Based Awards Table) is 25% of the Target number.
• – The Threshold number of PSUs will be earned for achievement of 70% of both business objectives (earnings per share and cash flow).
• – If only the cumulative earnings-per-share target is met at the Threshold level (and the cash flow target is not met), the number of PSUs earned would be 80% of the Threshold number.
• – If only the cumulative cash flow target is met at the Threshold level (and the earnings-per-share target is not met), the number of PSUs earned would be 20% of the Threshold number.

Target Number:

The Target number of PSUs (listed in column (g) of the 2008 Grants of Plan-Based Awards Table) will be earned if 100% of the objectives are achieved.

Maximum Number:

• – The Maximum number of PSUs (listed in column (h) of the 2008 Grants of Plan-Based Awards Table) is 150% of the Target number.
• – The Maximum number of PSUs will be earned for achieving 120% of both business objectives.

Restricted Stock Units (RSUs)

The following describes the material terms and conditions of RSUs as reported in the column titled Restricted Stock Units (column (e)) in the 2008 Summary Compensation Table and in the column titled All Other Stock Awards: Number of Shares of Stock or Units (column (i)) in the 2008 Grants of Plan-Based Awards Table.

General Terms

• One RSU is equivalent in value to one share of IBM common stock. RSUs are generally paid out in IBM common stock at vesting.
• RSUs granted before January 1, 2008 earn dividend equivalents at the same rate and at the same time as the dividends paid to IBM stockholders.

Vesting and Payout

• Vesting periods for RSUs typically range from one to four years.
• Payout at each vesting date is contingent on the recipient remaining employed by IBM through that vesting date.
• See 2008 Potential Payments Upon Termination Narrative for information on payout of unvested RSUs upon certain separations.
• From time to time, special performance-based RSUs may be granted with performance contingent vesting.

Retention Restricted Stock Units (RRSUs)

The following describes the material terms and conditions of RRSUs as reported in the column titled Retention Restricted Stock Units (column (e)) in the 2008 Summary Compensation Table and in the column titled All Other Stock Awards: Number of Shares of Stock or Units (column (i)) in the 2008 Grants of Plan-Based Awards Table.

Terms, Vesting and Payout

• RRSUs have the same general terms as RSUs. These awards are typically given to select senior executives for the purpose of providing additional value to retain the executive through the vesting date.
• Vesting periods for RRSUs typically range from two to five years and can be as long as ten years.
• Payout is contingent on the recipient remaining employed by IBM until the end of each vesting period.
• For RRSUs granted on or before December 31, 2007, the executive could have elected to defer payment of those shares into the IBM Excess 401(k) Plus Plan (formerly the IBM Executive Deferred Compensation Plan). For RRSUs granted on or after January 1, 2008, deferrals are not permitted.

Option awards (column (f))

Amounts shown in the Options Awards Total column are comprised of two different types of awards (Premium Priced Options and Market Priced Options), presented separately to enhance understanding. The amounts shown in the columns for Premium Priced Options and Market Priced Options are the dollar amounts recognized for financial statement reporting purposes in 2008 in accordance with FAS 123R for equity award expense (excluding any risk of forfeiture, per SEC regulations). Equity expense calculations for financial statement purposes spread the grant date cost of those awards over the vesting period. Therefore, amounts in this column include the expense for awards granted in 2008 and previous years. All of these options were granted to the named executive officers under IBM’s 1999 LTPP.

General terms

• Options generally expire ten years after the date of grant.
• In accordance with IBM’s LTPP, the exercise price of stock options is not less than the average of the high and low prices of IBM common stock on the New York Stock Exchange (NYSE) on the date of grant.
• The option recipient must remain employed by IBM through each vesting date in order to receive any potential payout value.

Premium priced options:

• – The exercise price is equal to 110% of the average of the high and low prices of IBM common stock on the NYSE on the date of grant.
• – These options vest in four equal increments on the first four anniversaries of the grant date, except if otherwise noted.

Market priced options:

• – The exercise price is equal to the average of the high and low prices of IBM common stock on the NYSE on the date of grant.
• – These options generally vest 100% on the third anniversary of the date of grant.
• – From 2005 to 2007, market priced options were awarded to named executive officers who participated in the IBM stock investment program (the Buy-First Program) by agreeing to invest 5, 10, or 15% of their annual incentive plan payout in the IBM Stock Fund under the nonqualified deferred compensation plan.

Non-equity incentive plan compensation (column (g))

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

General Terms

• All executive officers, including the Chairman and CEO, participate in this plan. The performance period is the fiscal year (January 1 through December 31, 2008).
• Performance goals are set annually in the beginning of the year and generally encompass corporate-wide goals and business unit goals.
• See Section 2 of the Compensation Discussion and Analysis for information on setting performance targets for AIP.

Payout range

• The Chairman and CEO had a target of $5,000,000.
• Each named executive officer other than the Chairman and CEO had a target of approximately 135% of salary rate for 2008.
• Threshold payout for each named executive officer is $0 (see column (c) of the 2008 Grants of Plan-Based Awards Table).
• Maximum payout for each named executive officer is three times the target (see column (e) of the 2008 Grants of Plan-Based Awards Table).

Vesting and Payout

• In addition to performance against corporate-wide and business unit goals, individual performance against goals set at the beginning of the year determine payout amount.
• 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 between January 1, 2008 and December 31, 2008 will be paid on or before March 15, 2009.

Change in retention plan value (column (h))

• Amounts in the column titled Change in Retention Plan Value represent the annual change in retention plan value from December 31, 2007 to December 31, 2008 for each named executive officer.
• See the 2008 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, 2007 to December 31, 2008 for each named executive officer.
• See the 2008 Pension Benefits Narrative for a description of the IBM Pension Plans.

Nonqualified deferred compensation earnings (column (h))

• IBM does not pay above-market or preferential earnings on nonqualified deferred compensation.
• See the 2008 Nonqualified Deferred Compensation Narrative for a description of the nonqualified deferred compensation plans in which the named executive officers may participate.

All other compensation (column (i))

Amounts in this column represent the following as applicable:

Tax reimbursements

• Amounts represent payments that the Company has made to the named executive officers to cover taxes incurred by them for certain business-related taxable expenses.
• These expenses are: family travel to and attendance at Company-related events; and for the Chairman and CEO, commutation in Company-leased cars (see Personal Use of Company Autos below).

Company contributions to defined contribution plans

• Amounts represent Company matching and automatic contributions to the individual accounts for each named executive officer.
• Under IBM’s 401(k) Plus Plan, for those participants who were hired before January 1, 2005, which includes all the named executive officers, and who defer contributions into the plan, the Company matches up to 6% of a participant’s eligible compensation. For those participants who were hired on or after January 1, 2005, the Company matches up to 5% of a participant’s eligible compensation. In addition, for those participants hired before January 1, 2005, the Company makes an automatic contribution to eligible participants in an amount equal to 2-4% of a participant’s eligible compensation, and for those participants hired on or after January 1, 2005, the automatic contribution is equal to 1% of eligible compensation.
• Under IBM’s Excess 401(k) Plus Plan, for employees hired before January 1, 2005, which includes all of the named executive officers, this match is equal to (i) 6% of compensation that a participant defers before reaching the IRS pay limit and (ii) 6% of the participant’s eligible pay after reaching the IRS pay limit. For participants hired on or after January 1, 2005, the match is equal to (i) 5% of compensation that the participant defers before reaching the IRS pay limit and (ii) 5% of the participant’s eligible pay after reaching the IRS pay limit. In addition, for those participants hired before January 1, 2005, the Company makes an automatic contribution to eligible participants in an amount equal to 2-4% of (i) compensation that the participant defers and (ii) compensation in excess of the IRS compensation limit for such year. For participants hired on or after January 1, 2005, the automatic contribution is 1% of (i) the compensation that the participant defers and (ii) compensation in excess of the IRS compensation limit for such year.
• See the 2008 Nonqualified Deferred Compensation Narrative for additional details on the nonqualified deferred compensation plans in which the named executive officers may participate.

Life insurance premiums

• Amounts represent life insurance premiums paid by the Company on behalf of the named executive officers.
• These executive officers are covered by life insurance policies under the same terms as other U.S. full-time regular employees.
• Life insurance for employees and executives hired before January 1, 2004 is two times salary plus annual incentive plan payout, with a maximum coverage amount of $2,000,000.
• In addition, IBM provides Travel Accident Insurance for most employees in connection with business travel. Travel Accident Insurance for employees and executives is five times salary plus incentive with a maximum coverage amount of $15,000,000.

Dividend equivalents

• Amounts represent dividend equivalents paid in cash to the named executive officers in 2008 on RSUs granted before January 1, 2008 that have not yet vested and on any shares of IBM stock for which the officers deferred receipt under the Excess 401(k) Plus Plan.
• Dividend equivalents are paid on unvested RSUs and RRSUs granted prior to January 1, 2008 and on Deferred IBM Shares, in each case, at the same rate and at the same time as the dividends paid to IBM stockholders. IBM does not pay dividend equivalents on PSUs or stock options.
• See the 2008 Nonqualified Deferred Compensation Narrative for a description of the nonqualified deferred compensation plan, including Deferred IBM Shares.

Perquisites

The following describes perquisites (and their aggregate incremental cost calculations) provided to the named executive officers in 2008.

Personal financial planning

In 2008, IBM offered financial planning services with coverage generally up to $14,000 annually for 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 his personal travel is included in this column. These amounts also include the aggregate incremental cost, if any, of travel by his family or other non-IBM employees on both business and nonbusiness occasions.
• Additionally, personal travel on IBM aircraft by named executive officers other than the Chairman and CEO, and the aggregate incremental cost, if any, of travel by the officer’s family or other non-IBM employees when accompanying the officer on both business and nonbusiness occasions is also included.
• Also, from time to time, named executive officers who are members of the boards of directors of other companies and non-profit organizations travel on IBM aircraft to those outside board meetings. These amounts include travel related to participation on these outside boards.
• Travel by named executive officers for an annual physical under the corporate wellness program is included in these amounts.

Aggregate incremental cost calculation

• The aggregate incremental cost for the use of Company aircraft for personal travel, including travel to outside boards, is calculated by multiplying the hourly variable cost rate for the aircraft used by the hours used.
• The hourly variable cost rate includes fuel, oil, parking/landing fees, crew expenses, aircraft maintenance (based on the hourly operation of the aircraft) and catering.
• The rate for each aircraft is periodically reviewed by IBM’s flight operations team and adjusted as necessary to reflect changes in costs.
• The aggregate incremental cost includes deadhead flights (i.e., empty flights to and from the IBM hangar or any other location).
• The aggregate incremental cost for charter flights is the full cost to IBM of the charter.

Personal use of company autos

General information

• IBM’s security practices provide that the Chairman and CEO be driven to and from work by IBM personnel in a car leased by IBM.
• In addition, under IBM’s security practices, the Chairman and CEO may use a Company-leased car with an IBM driver for non-business occasions, and his family may use a Company-leased car on non-business occasions or when accompanying him on business occasions.
• Family members and other non-IBM employees may accompany named executive officers other than the Chairman and CEO in a Company-leased car on business occasions.
• Amounts reflect the aggregate incremental cost, if any, for the above-referenced items.

Aggregate incremental cost calculation

• The incremental cost for the car and driver for commutation and non-business events is calculated by multiplying the variable rate by the number of trips.
• The variable rate includes drivers’ salary and overtime payments, fuel, maintenance, tolls, parking, and drivers’ meals.

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 his family on certain non-business occasions or when accompanying him 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 the specified named executive officers.

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 costs of these items.

Annual executive physical

• IBM covers the cost of an annual executive physical for the named executive officers under the Company’s corporate wellness program.
• Amounts represent payments by IBM for the specified named executive officers under this program.

Family travel and attendance at company-related events

• Company-related events may include meetings, dinners and receptions with IBM’s clients, executive management or Board of Directors attended by the named executive officers and their family members.
• Amounts represent the aggregate incremental cost, if any, of commercial travel and/or meals and entertainment for the family members of the named executive officers to attend Company-related events.

Other personal expenses

• Amounts represent the cost of meals and lodging for executives who traveled for their annual executive physical under the Company’s corporate wellness program.
• Amounts also include expenses associated with participation on outside boards other than those disclosed as Personal Travel on Company Aircraft.
• Amounts also include ground transportation expenses and administrative charges incurred by executives.

2008 Summary compensation table