IBM Notice of 2009 Annual Meeting and Proxy Statement

2008 Nonqualified deferred compensation narrative

IBM excess 401(k) plus plan

General description

• Effective January 1, 2008, the IBM Executive Deferred Compensation Plan (EDCP) was amended and renamed the IBM Excess 401(k) Plus Plan (Excess 401(k)). All IBM employees, including the named executive officers, whose eligible pay is expected to exceed the IRS compensation limit for the applicable plan year are eligible to participate in the Excess 401(k). The purpose of the Excess 401(k) is to provide benefits that would be provided under the qualified IBM 401(k) Plus Plan if the compensation limits did not apply. The Excess 401(k), like the EDCP, provides employees with the opportunity to save for retirement on a tax-deferred basis.
• The 2008 Nonqualified Deferred Compensation Table shows the employee deferrals (executive contributions), the Company match (registrant contributions), the automatic contributions (registrant contributions) and investment gain or loss (aggregate earnings) for each named executive officer during 2008.
• The table also shows the total balance that each named executive officer has accumulated over all the years he or she has participated in the plan.
• Account balances in the Excess 401(k) are comprised of cash amounts that were deferred by the participant or contributed by the Company before January 1, 2005 and amounts that were deferred or contributed on or after January 1, 2005 (Basic Account), and deferred shares that were deferred before January 1, 2005 and on or after January 1, 2005 (Deferred IBM Shares).
• The Excess 401(k) balance is not paid to, and cannot be accessed by, the participants until after separation from IBM.

Purpose of the Excess 401(k)

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

Compensation eligible for deferral under Excess 401(k)

• An executive may elect to defer between 1% and 80% of salary and between 1% and 80% of eligible performance pay, including annual incentive plan payments.
• In both cases, the Internal Revenue Code requires the deferral elections to be made before the calendar year in which the compensation is earned.

Deferred IBM shares

• Prior to January 1, 2008, under the EDCP, an executive could have elected 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 on or before December 31, 2007 under the Company’s Long-Term Performance Plans (LTPPs).
• In addition, an executive could have also elected to defer receipt of shares of IBM stock that otherwise would be paid on or before February 1, 2008 as a result of the vesting of Performance Share Unit (PSU) awards under the Company’s LTPPs.
• Deferral elections must have been made in advance of the vesting of the eligible awards and in accordance with IRS rules.
• Effective January 1, 2008, executives are not able to defer receipt of IBM stock, which was previously permitted under the EDCP. Executives who made elections prior to January 1, 2008 to defer receipt of IBM stock granted on or before December 31, 2007 were able to defer the receipt of such stock into the Excess 401(k) when the awards vest.
• None of the named executive officers made previous elections to defer IBM stock that resulted in a deferral of stock in 2008.
• Dividend equivalents on Deferred IBM Shares are paid in cash at the same rate and on the same date as the dividends paid to IBM stockholders.

Excess 401(k) funding

• The Excess 401(k) is unfunded and maintained as a book reserve (notional) 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 Excess 401(k) accounts.

Company “match” on participant contributions

• The Company credits a matching contribution to the Basic Account of each participant who defers salary or performance pay (including annual incentive plan payments) under the Excess 401(k).
• The amount of the matching contribution is determined under the same formulas as the IBM 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 under the Excess 401(k) before reaching the IRS pay limit and (ii) 6% of the participant’s eligible pay (disregarding amounts deferred under the Excess 401(k)) after reaching the IRS pay limit. For employees hired on or after January 1, 2005, the match is equal to (i) 5% of compensation that the participant defers under the Excess 401(k) before reaching the IRS pay limit and (ii) 5% of the participant’s eligible pay (disregarding amounts deferred under the Excess 401(k)) after reaching the IRS pay limit.
• The Company does not provide any matching contributions for Deferred IBM Shares.

Company automatic contributions

• Effective January 1, 2008, the Company credits an automatic contribution to a participant’s Basic Account.
• The amount of the automatic contribution is determined under the same formulas as the IBM 401(k) Plus Plan.
• For employees hired before January 1, 2005, which includes all of the named executive officers, automatic contributions equal 2-4% of (i) compensation that the participant defers under the Excess 401(k) and (ii) eligible pay (disregarding amounts deferred under the Excess 401(k)) in excess of the IRS pay limit for such year. For employees hired on or after January 1, 2005, the automatic contribution is 1% of (i) the compensation that the participant defers under the Excess 401(k) and (ii) eligible pay (disregarding amounts deferred under the Excess 401(k)) in excess of the IRS pay limit for such year.

Company transition credits

• Effective January 1, 2008, the Company credits a transition credit to a participant’s Basic Account for those employees who were receiving transition credits in their Personal Pension Account under the Qualified Plan as of December 31, 2007. None of the named executive officers have Personal Pension Accounts under the Qualified Plan and therefore they are not eligible to receive transition credits. 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.

Earnings measures

• A participant’s contributions to the Basic Account are adjusted for earnings and losses based on investment choices selected by the participant.
• 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 401(k) Plus Plan, which are as follows (with 2008 annual rates of return indicated for each):
  • – Target Date 2005 Fund (-21.07%)*
  • – Target Date 2010 Fund (-25.23%)*
  • – Target Date 2015 Fund (-29.17%)*
  • – Target Date 2020 Fund (-32.86%)*
  • – Target Date 2025 Fund (-35.62%)*
  • – Target Date 2030 Fund (-36.60%)*
  • – Target Date 2035 Fund (-36.60%)*
  • – Target Date 2040 Fund (-36.60%)*
  • – Target Date 2045 Fund (-36.61%)*
  • – Target Date 2050 Fund (-36.62%)*
  • – Income Plus Life Strategy Fund (-12.32%)
  • – Conservative Life Strategy Fund (-21.34%)
  • – Moderate Life Strategy Fund (-27.70%)
  • – Aggressive Life Strategy Fund (-36.98%)
  • – Stable Value Fund (4.84%)
  • – Inflation Protected Bond Fund (-0.97%)
  • – Total Bond Market Fund (-4.83%)
  • – REIT Index Fund (-38.76%)
  • – Total Stock Market Index Fund (-37.19%)
  • – Total International Stock Market Index Fund (-45.50%)
  • – Long-Term Corporate Bond Fund (-4.21%)
  • – High Yield & Emerging Markets Bond Fund (-15.50%)
  • – Large Company Index Fund (-36.94%)
  • – Large-Cap Value Index Fund (-36.82%)
  • – Large-Cap Growth Index Fund (-38.40%)
  • – Small/Mid-Cap Stock Index Fund (-39.82%)
  • – Small-Cap Value Index Fund (-28.71%)
  • – Small-Cap Growth Index Fund (-38.17%)
  • – European Stock Index Fund (-44.65%)
  • – Pacific Stock Index Fund (-34.32%)
  • – IBM Stock Fund (-20.83% including dividend equivalent reinvestment)
    
    

    * 2008 returns reflect returns since the Target Date Funds’ inception date of January 2, 2008

• A participant 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 daily, subject to excessive trading restrictions.
• 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 is 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 common stock, they may not be transferred to any other investment choice at any time.
• On a quarterly basis, dividend equivalents are credited to a participant’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 2008 Nonqualified Deferred Compensation Table, are calculated as:
  • – The change in the price of the Company’s common stock between December 31, 2007 and December 31, 2008 for all Deferred IBM Shares that were contributed prior to 2008, plus
  • – The change in the price of the Company’s common stock between the date of contribution and December 31, 2008 for all Deferred IBM Shares that were contributed during 2008.

Payouts, withdrawals and other distributions

• No payouts, withdrawals or other distributions from the Basic Account are permitted prior to termination of employment.
• At separation, the balance in an executive’s Basic Account that was deferred prior to January 1, 2005 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 62 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, 2008, Mr. Palmisano, Mr. Loughridge, Mr. Daniels and Mr. Mills had satisfied the age and service criteria, and Ms. Rometty had not.
• If the participant 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 amount of the participant’s Basic Account that was deferred prior to January 1, 2005 is paid in a lump sum in February of the year following separation.
• If the participant has satisfied the age, service and account balance criteria at separation and has made a valid advance election, the amount of the participant’s Basic Account that was deferred prior to January 1, 2005 is paid as elected by the participant 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 participant.
• With respect to amounts deferred on or after January 1, 2005, at separation such amounts in the Basic Account are distributed in a lump sum immediately following termination, unless the total balance of a participant’s Basic Account exceeds 50% of the applicable IRS pay limit ($115,000 in 2008). In such case the participant’s Basic Account with respect to amounts deferred on or after January 1, 2005 may be distributed in the following forms as elected by the participant:
  • 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 participant.
• Distribution elections may be changed in advance of separation, in accordance with Internal Revenue Code rules.
• Different distribution elections are permitted to be made for the Basic Account and the Deferred Shares Account. Further, within the Basic Account and the Deferred Shares Account, different distribution elections are permitted to be made for the amounts that were deferred before January 1, 2005 and the amounts that were deferred on or after January 1, 2005.
• At December 31, 2008, the named executive officers had the following distribution elections on file:
  • – Mr. Palmisano — 5 annual installments for all amounts
  • – Mr. Loughridge — immediate lump sum for all amounts
  • – Mr. Daniels — 10 annual installments for pre-2005 amounts, and immediate lump sum for all post-2004 amounts
  • – Mr. Mills — 10 annual installments for all amounts
  • – Ms. Rometty — 10 annual installments for all amounts
• The balance in a participant’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 common stock.
• Subject to the age and service criteria, a participant 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.

2008 Nonqualified deferred compensation table