2014 Executive summary
In 2014, IBM made tremendous progress in repositioning our business portfolio and making investments in support of our strategic focus on enterprise information technology. The Company generated $92.8 billion in revenue and $21.1 billion in operating pre-tax income from continuing operations. Our revenue declined from the prior year due to a substantial currency translation impact, a planned reduction from the divestitures undertaken to continue our shift to higher value businesses, and the net impact of strong growth in our strategic imperatives (cloud, analytics, mobile, social and security) and lower revenues in some of our transactional businesses (including the mainframe and POWER product cycles). Without the effects of currency and divestitures, our continuing operations delivered revenue that was down 1% for the year. While net income and free cash flow declined for the full year on a continuing operating basis, pretax income margins expanded 30 basis points, we generated $16.2 billion of operating cash flow, invested $5.5 billion in research and development and $3.8 billion in capital, acquired six companies, and returned approximately $17.9 billion in capital to stockholders through $4.3 billion in dividends and $13.7 billion in gross share repurchases, which reduced our average outstanding share count by over 8%.
The centerpiece of IBM’s strategy is our business portfolio shift into five strategic imperatives that we believe are important to the future of enterprise information technology. In 2014, we made significant investments in these areas, launched new businesses such as the Watson Group, and forged landmark partnerships with Apple, Twitter and Tencent to drive long-term growth. Taken together, these five strategic imperatives now constitute 27% of IBM’s revenues, posting double-digit growth for the year, as they did in every quarter in 2014.
At the same time, we repositioned and restructured the Systems and Technology business through both divestitures and the introduction of new offerings, including POWER8 and OpenPOWER. We accomplished all of this while maintaining the #1 market position in middleware and services, and earning the highest number of U.S. patents by a considerable margin over any other company.
Our compensation strategy supports IBM’s ongoing transformation. It is designed to ensure that executives balance short-term objectives against long-term priorities, to align executive and stockholder interests, and to attract and retain the leadership needed to successfully deliver on our shift to higher value. Pay decisions were made in the context of our financial performance relative to our goals, while taking into account the substantial progress in repositioning the portfolio and the Company for the future.
For 2014 performance, the Board approved an annual incentive payment of $3.6 million for Mrs. Rometty, at 90% of target. The payout level considered a balanced view of performance, including financial results that were lower than target, substantial actions taken to reposition the Company in higher value businesses, and marketleading client satisfaction levels. This incentive payment follows a year in which Mrs. Rometty recommended forgoing her annual incentive, which the independent members of the Board accepted. For the other named executive officers, their incentive awards for 2014 ranged from 70% to 90% of target, reflecting Company and Unit performance against predetermined objectives and individual contributions to the transformation. Taking into consideration the actual salary, actual annual incentive payout and actual long-term incentive award for the period 2012–2014, Mrs. Rometty earned 74% of her annual total target compensation in 2014.
For 2015, the independent members of the Board approved a salary increase for Mrs. Rometty from $1.5 million to $1.6 million. This represents Mrs. Rometty’s first salary increase since her appointment as CEO in January 2012. In addition, her target annual incentive was increased from $4 million to $5 million and she was granted a long-term incentive award comprised entirely of 2015–2017 Performance Share Units valued at $13.3 million, which would not pay out until February 2018. Together, these changes were intended to bring Mrs. Rometty’s pay closer to market peers and results in 92% of her total target compensation being variable and tied to performance-based incentives. The absence of time-based incentive awards results in IBM delivering a higher portion of the overall compensation opportunity through performance-based incentives than the typical benchmark company used by the Compensation Committee to assess pay levels and practices. These compensation decisions reflect the Board’s strong confidence in Mrs. Rometty’s leadership of the Company and its strategic direction, as well as our continued commitment to a performance-based culture.
Our overall executive compensation philosophy remains the same as prior years. We continue to align pay with the interests of stockholders while at the same time attracting and retaining top leadership talent. For 2015, we have made adjustments to the Annual Incentive Program to heighten the alignment of executive rewards with the strategic shifts needed for our ongoing transformation. Specifically, a strategic imperatives revenue metric replaces the overall revenue growth metric (both weighted at 20%) to ensure strategic focus on the portfolio shift. In addition, cash flow increases in importance, from a 20% to a 40% weighting, and we have replaced the free cash flow metric with operating cash flow to maintain our strong focus on strategic investment decisions. Operating net income continues as a metric, now weighted at 40%.
IBM does not use the following compensation programs for its senior leaders because they are inconsistent with our performance-based culture: executive separation agreements, change in control agreements, guaranteed incentive payouts, and accelerated vesting of equity awards. In addition, IBM has long-standing robust stock ownership requirements, actively enforces clawbacks and prohibits hedging and pledging for its senior leaders.
Finally, we recognize that it is critical to retain key leaders who are instrumental in driving our ongoing transformation. Along with market-competitive compensation, we selectively use Retention Restricted Stock Units for this purpose.
We recognize that the issue of executive pay is critical to stockholders, members of the public and to our employees. Setting appropriate compensation will always require sound judgment and careful thought. These compensation decisions are best understood when the process surrounding them is transparent and explained in detail for our investors, as set forth on the following pages.
Note: Revenue excluding divestitures and currency, Operating Research and Development, Operating Pre-Tax Income, Operating Pre-Tax Margin, Operating Net Income, Operating Earnings Per Share, Free Cash Flow and Operating Cash Flow (Cash from operations excluding IBM Global Financing receivables) referenced above and elsewhere in this Compensation Discussion and Analysis and Proxy Statement are non-GAAP financial measures on a continuing operations basis. For reconciliation and other information concerning these items refer to pages 23, 40, 45, 46 and 66 of the Company’s 2014 Annual Report, which is Exhibit 13 to the Form 10-K submitted to the SEC on February 24, 2015.
Section 1: Executive compensation program design
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 and why compensation decisions are made.
To that end, IBM's executive compensation practices are designed specifically to meet five key objectives:
With these goals in mind, IBM executives earn their compensation based on performance over three time frames:
- Current Year-Salary and annual incentives that reflect actions and results over 12 months;
- 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
- Full Career-Deferrals, retention payments and retirement accumulations help ensure today's leaders stay with IBM until their working careers end.
The Company considered the results of the management Say on Pay proposal presented to the stockholders for approval in 2014. In light of the support the proposal received, the Company’s compensation policies and decisions, explained in detail in this CD&A, continue to be focused on long-term financial performance to drive stockholder value. The Company has indicated that it will provide an advisory vote on executive compensation (Say on Pay) on an annual basis.
The Company continually reviews its corporate governance and executive compensation structure. As part of this review, it is the Company’s longstanding practice for our executives to meet with a significant number of its largest investors to solicit their feedback on a variety of topics. In 2014, the Company engaged with over 100 institutional investors.
Elements of compensation programs and linkage to objectives
The following is a description of the Company’s compensation elements and the objectives they are designed to support. In total, these elements support the objective to balance rewards between short-term results and the long-term strategic decisions needed to ensure sustained business performance over time.
|Compensation element/eligibility||Description||Linkage to compensation objectives|
|Current Year Performance|
All executives including those executives listed in the proxy statement tables (Named Executive Officers or NEOs)
|Salary is a market-competitive, fixed level of compensation.||Attract and retain highly qualified leaders
Motivate high business performance
All executives, including NEOs
Combined with salary, the target level of annual incentive provides a market-competitive total cash opportunity.
Actual annual incentive payments are driven by business performance against financial metrics and individual performance, as reflected in the Personal Business Commitment review process described under “How and Why Compensation Decisions Are Made.”
Top performers typically earn the greatest payouts; median performers earn much smaller amounts; and the lowest performers earn no incentive payments at all.
|Attract and retain highly qualified leaders
Motivate strong short-term business performance
Vary compensation based on individual and team performance
Select executives, including NEOs
|The SEC 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, on average as of December 31, 2014, additional programs that are restricted to Chairman and CEO and Senior Executive participation amount to less than 1% of their total compensation. See “All Other Compensation” in the 2014 Summary Compensation Table Narrative. 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 Mrs. Rometty in connection with taxes incurred for personal travel by her on the corporate aircraft. While the cost of corporate aircraft usage varies year to year based on several external factors such as 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 175 countries and the realities of security risks throughout the world. Given the personal travel security practice for the Chairman and CEO, family members periodically accompany her on the corporate aircraft. In accordance with tax requirements, income was imputed to Mrs. Rometty for personal travel by her family members on the corporate aircraft in 2014.||Attract and retain highly qualified leaders|
|Compensation element/eligibility||Description||Linkage to compensation objectives|
|Long-term incentive plan|
Performance Share Units (PSUs)*
Approximately 550 executives based on job scope, including NEOs
Equity grant value based on individual performance and retention objectives for each executive. Number of shares granted is adjusted up or down at the end of the three-year performance period based on Company performance against operating earnings per share and free cash flow targets.
Encourages sustained, long-term growth by linking a portion of compensation to the long-term Company performance.
Paid in IBM shares upon completion of the three-year performance period, linking the compensation value further to the long-term performance of IBM.
Align executive and stockholder interests
Attract and retain highly qualified leaders
Motivate strong long-term business performance
|Annual Stock-Based Grant*
Annual equity grants may be made in the form of restricted stock, restricted stock units (RSUs) or stock options, or some combination. These grants vest over time, typically over one to four years.
The amount of an annual grant is dependent on the level of the executive and individual performance, with lowest performers receiving no grant.
Align executive and stockholder interests
Attract and retain highly qualified leaders
Motivate strong business performance
Vary compensation based on individual and team performance
*Planned grant value is converted to a number of shares by dividing the planned value by the predetermined, formulaic planning price in effect for the quarter. IBM’s planning price is computed each quarter using a consistent statistical forecasting procedure based on historical IBM stock price data. IBM uses the quarterly planning price to aid in establishing the overall size of the equity plan and to give more consistency across equity grants made at different points in the quarter.
|Compensation element/eligibility||Description||Linkage to compensation objectives|
|Retention, pension & savings|
|Retention Stock-Based Grants & Cash Awards
Select executives determined each year, including some NEOs
|Periodically, the Chairman and CEO reviews outstanding stock-based awards for the members of the Growth & Transformation Team and other key executives. Depending on individual performance and the competitive environment for senior executive leadership talent, the Chairman and CEO may recommend individual retention awards in the form of restricted stock units or cash, for certain executives. Retention Restricted Stock Unit (RRSU) grants typically vest at the end of five years, however other vesting schedules may be used, and cash awards have a clawback if an executive leaves IBM before a specified date.||
Align executive and stockholder interests
Retain highly qualified leaders
Pension and Savings Plans
All executives, including NEOs
Like all IBM employees, executives participate in the local pension and savings plans sponsored by IBM in their country under the same terms and conditions as all employees.
In the U.S., 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 is determined by the same formulas for executives and non-executives.
The money that U.S. executives save through the IBM 401(k) Plus Plan, as for all U.S. employees, is eligible for a Company match. Effective January 1, 2008, the 401(k) Plus Plan became the only tax-qualified retirement program available to IBM’s U.S. employees for future deferrals and employer contributions. If all eligibility requirements are met, IBM matches a participant’s own contributions dollar-for-dollar up to 6% of eligible pay for those hired or rehired by IBM U.S. before January 1, 2005, and generally up to 5% for those hired or rehired by IBM U.S. on or after that date. In addition, if all eligibility requirements are met, IBM makes automatic contributions to a participant’s 401(k) Plus Plan 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.
Company contributions are made once annually at the end of the year for all eligible participants employed on December 15 of each year. If a participant retires during the year, the individual will receive Company contributions upon retirement. Matching contributions and automatic contributions are made once a participant has completed the plan’s service requirement, typically one year of service.
|Attract and retain highly qualified leaders|
|Other Executive Retention Programs
Select executives, including NEOs hired prior to May 1, 2004
Separate plans established more than 14 years ago in some countries (including the U.S.) to encourage fullcareer retention of key executives. In the U.S., benefits under this retention plan would be forfeited if they left IBM prior to age 60.
Important during a time of significant business transformation for IBM; the programs are now closed.
Accrual of future benefits under the retention plan stopped in the U.S. on December 31, 2007.
|Attract and retain highly qualified leaders|
|Excess 401(k) Plus Plan
U.S. employees with compensation expected to exceed applicable IRS limits, including NEOs
A nonqualified deferred compensation plan established in accordance with U.S. Department of Labor and Internal Revenue Service guidelines to provide employees with the ability to save for use after their career by deferring compensation in excess of limits applicable to 401(k) plans.
IBM does not pay guaranteed, above-market or preferential earnings on deferred compensation. Amounts deferred into the IBM Excess 401(k) Plus Plan are recordkeeping (notional) accounts and are not held in trust for the participants. Participants may invest their notional accounts in the primary investment options available to all employees through the 401(k) Plus Plan. Once participants have completed one year of service, they are also eligible to receive Company matching and automatic contributions on eligible pay deferred into the Excess 401(k) Plus Plan and on money earned in excess of the Internal Revenue Code compensation limits (the match (5% or 6%) and automatic contribution rates (1%, 2% or 4%) for which a participant is eligible, are the same rates for which a participant is eligible under the 401(k) Plus Plan). Company contributions are made once annually at the end of the year for all participants employed on December 15 of each year. If a participant retires during the year, the individual will receive Company contributions upon retirement. On an exceptional basis, pursuant to the terms of the Excess 401(k) Plus Plan, the Company may make a discretionary award to an executive that is credited to the executive’s Excess 401(k) Plus Plan account.
Prior to January 1, 2008, cash and equity could be deferred under the plan. Effective January 1, 2008, equity deferral elections can no longer be made under the plan.
|Align executive and stockholder interests
Attract and retain highly qualified leaders
Senior leadership team—personal stake in IBM’s future through stock ownership requirements
Investors want the leaders of their companies to act like owners. That alignment, we believe, 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 the Company’s Chairman and CEO and Senior Executives (comprised of the Executive Vice President and the Senior Vice Presidents (SVPs)). The following table illustrates which equity holdings count towards stock ownership requirements:
The Chairman and CEO and Senior Executives are all required to own IBM shares or equivalents worth three times their individual total target cash compensation within five years of hire or promotion. Unlike the majority of the Fortune 100 companies who establish ownership guidelines using a multiple of only base salary, IBM uses a multiple of base salary plus target annual incentive. This ensures that meaningful ownership levels are accumulated based on each executive’s annual cash compensation opportunity. As of December 31, 2014, as a group, the Chairman and CEO and Senior Executives owned approximately 1.0 million shares or equivalents valued at over $164 million; in fact, as of that date, this group held, on average, almost twice the amount of IBM shares or equivalents that the Company requires.
Setting performance targets for incentive compensation
Compensation of our senior leaders is linked with Company performance against core business metrics. These metrics and their weightings are aligned with IBM’s financial and strategic objectives and are designed to appropriately balance short- and long-term goals. Targets are set for both the annual and long-term incentive programs at aggressive levels each year. These targets, individually and together, are designed to be challenging to attain and are set within the parameters of our financial model shared with investors each year. As part of IBM’s ongoing management system, targets are evaluated to ensure they do not include an inappropriate amount of risk.
For 2015, five key financial metrics will be measured:
- Strategic Imperatives Revenue
- Operating Net Income
- Operating EPS
- Free Cash Flow
- Operating Cash Flow
IBM shares its financial model each year with investors. However, we do not disclose specific targets under the annual and long-term plans because it would signal IBM’s strategic focus areas and impair IBM’s ability to leverage these areas for competitive advantage. For example, disclosure of our free cash flow targets would provide insight into timing of large capital investments or acquisitions. Knowledge of the targets could also be used by competitors to take advantage of insight into specific areas to target the recruitment of key talent from IBM. Disclosing the specific targets and metrics used in the qualitative assessment made by the Chairman and CEO would give our competitors our insight to key market dynamics and areas that could be used against IBM competitively by industry consultants or competitors targeting existing customers.
Our financial model is well communicated to investors, and our performance targets are based on this model. We also describe annual performance in our discussion of named executive officer compensation decisions. Finally, outlined below is a description of the specific metrics and weightings for the Annual Incentive and the Performance Share Unit Programs.
Annual incentive program
The Company sets business objectives at the beginning of each year which are reviewed by the Board of Directors. These objectives translate to targets for the Company and for each business unit for purposes of determining the target funding of the Annual Incentive Program. Performance against business objectives determines the actual total funding pool for the year which can vary from 0% to 200% of total target incentives for all executives. At the end of the year, management assesses the financial performance for the Company based on performance against financial metrics. Each year the Compensation Committee and the Board of Directors review IBM’s annual business objectives and set the metrics and weightings for the annual program reflecting current business priorities. The metrics and weightings for 2014 and 2015 are listed below.
|Financial metric||2014 weighting in overall score|
|Operating Net Income||60%|
|Free Cash Flow||20%|
|Financial metric||2015 weighting in overall score|
|Operating Net Income||40%|
|Strategic Imperatives Revenue||20%|
|Operating Cash Flow||40%|
For 2015, changes to the financial metrics and weightings were made to reflect IBM’s business priorities. Specifically, the revenue metric is based on IBM’s strategic imperatives to ensure all executives are fully aligned with the strategic shift in the IBM portfolio. Operating cash flow replaces free cash flow to maintain our strong focus on strategic investment decisions.
Overall funding for the Annual Incentive Program, which covers approximately 4,800 executives, is based on the performance results against these targets and may be adjusted for extraordinary events if deemed appropriate by the Chairman and CEO and Compensation Committee. This adjustment can be either up or down. For example, adjustments are usually made for large divestitures and acquisitions. In 2014, no adjustments for extraordinary events were made. In addition, the Chairman and CEO can recommend an adjustment, up or down, to the overall funding of the program based on factors beyond IBM’s financial performance, such as client satisfaction, market share growth and workforce development. Taking such matters into account for 2014, the Compensation Committee approved an upward adjustment to the score in light of strong results in client satisfaction and workforce development in support of the Company’s transformation. The Compensation Committee reviews the financial scoring and qualitative adjustments and approves the Annual Incentive Program funding level. Once the total pool funding level has been approved, a lower-performing executive will receive as little as zero payout and the most exceptional performers are capped at three times their individual target incentive (payouts at this level are rare and only possible when IBM’s performance has also been exceptional). In 2014, IBM reported our Microelectronics business as discontinued operations, which is excluded from operating net income.
Performance share unit program
Operating EPS and free cash flow targets for the Performance Share Unit program are set at the beginning of each three-year performance period, taking into account the Company’s financial model shared with investors, including the impact our share buyback program has on operating EPS. At the end of the three years, the score is calculated based on results against the predetermined targets, with the following weights:
|Financial metric||2014 and 2015 weighting in
|Operating Earnings Per Share||70%|
|Free Cash Flow||
Adjustments can be made for extraordinary events if deemed appropriate by the Chairman and CEO and the Compensation Committee— for example, large divestitures. In 2014, no adjustments were made.
The Compensation Committee approves the determination of actual performance relative to pre-established targets, and the number of Performance Share Units is adjusted up or down based on the approved actual performance from 0% to 150%. There is no discretionary adjustment to the Performance Share Unit program score.
Section 2: How and why 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 Executives, IBM follows an evaluation process, described here in some detail:
1. Making commitments
At the beginning of each year, all IBM employees, including the Chairman and CEO and Senior Executives, make a Personal Business Commitment 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. The Chairman and CEO’s commitments are reviewed directly by the Board of Directors. As part of this process, many factors are considered, including an understanding of the business risks associated with the commitments.
2. Determining compensation for the chairman and the CEO— research, recommendations and review
The chair of the Compensation Committee works directly with the Committee’s compensation consultant, Frederic W. Cook & Co. (Cook & Co.), to provide a decision-making framework for use in making a recommendation for total compensation for the Chairman and CEO. This framework includes a self-assessment of performance against commitments in the year, both qualitative and quantitative, which support the Company’s stated strategic objectives.
In addition to the above, the Committee also reviews an analysis of IBM’s total performance over a multi-year period, a competitive benchmark analysis, and other relevant information and arrives at its recommendation for total compensation for the Chairman and CEO.
The final pay recommendations for the Chairman and CEO are presented to the independent members of the IBM Board of Directors for further review, discussion and final approval.
3. Determining senior executive compensation
Evaluation of Results by the Chairman and CEO
Throughout the year, employees assess their progress against their Personal Business Commitments. 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 Senior Executives are reviewed by the Senior Vice President of Human Resources (SVP HR) and the Chairman and CEO, who evaluate the information, along with the following:
Following this in-depth review and in consultation with the SVP HR, the Chairman and CEO makes compensation recommendations to the Compensation Committee based on an evaluation of each Senior Executive’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 Senior Executives.
The Committee evaluates all of the factors considered by the Chairman and CEO and reviews compensation summaries 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. These summaries provide the Committee with an understanding of how their decisions affect other compensation elements and the impact that separation of employment or retirement will have.
4. Ensuring competitive pay—approach to benchmarking
IBM participates in several executive compensation surveys that provide general trend information and details 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. Given the battle for talent that exists in our industry, the benchmark companies that are used by the Compensation Committee to guide its decision making have included a broad range of key information technology companies, 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. The surveys and benchmark data are supplemented by input from the Compensation Committee’s outside consultant on factors such as recent market trends. The Committee reviews and approves this list annually.
The Compensation Committee re-examined the benchmark group for 2014 and determined that companies which meet the following criteria should be included in the 2014 benchmark group:
|2014 benchmark group|
|Archer Daniels Midland||Dow Chemical||PepsiCo|
|ConocoPhillips||Johnson & Johnson|
Based on overall changes in the industry in which IBM competes for clients and talent, the Committee approved, for 2015, removing Archer Daniels Midland, Bunge, ConocoPhillips and Dell from the benchmark group and adding Amazon.com, Apple, ExxonMobil and Oracle. Archer Daniels Midland and Bunge, two companies in the agricultural products industry, were removed to allow for the inclusion of additional companies in the technology industry. ConocoPhillips, a company in the oil and gas exploration and production industry, was replaced by ExxonMobil, an integrated oil and gas company, which was deemed a better business fit from the energy sector. Dell was removed as the company was taken private and compensation data is no longer available.
|2015 benchmark group|
|AT&T||General Electric||United Technologies|
|Cisco Systems||Johnson & Johnson|
The data from compensation surveys and related sources form the primary external view of the market. The Company’s philosophy is to generally consider a range from the 50th to the 75th percentile of the market for cash and total compensation for comparable job roles at companies within our benchmark group.
Based on our global operating footprint and the breadth of each of our individual lines of business, many of our business units are large enough to be among the Fortune 200 companies if they were stand-alone businesses. We generally compare the compensation for business unit leaders to executives of similarly-sized business units as indicated by the survey reference points. Owing to the size and scope of our business overall, our Chairman and CEO and corporate function heads are generally compared to the 75th percentile of the benchmark group because IBM’s revenues are near this reference point, and the Committee therefore views such positioning as representative of a size-adjusted market rate.
For individual compensation decisions, the benchmark information is used together with an internal view of longer-term potential, individual performance relative to other executives and recognizing that the skills and experience of our senior executives are highly sought after by other companies and, in particular, by the Company’s competitors. Because factors such as performance and retention, as well as size and complexity of the job role, are considered when compensation decisions are made, the cash and total compensation for an individual named executive officer may be higher or lower than the target reference point of the relevant benchmark group.
5. Compensation committee consultant
The Committee enters into a consulting agreement with its outside compensation consultant on an annual basis. The Committee has retained Cook & Co. as its compensation consultant to advise the Committee on market practices and specific IBM policies and programs. Cook & Co. 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. From time to time, the Committee seeks the views of the consultant on items such as incentive program design and market practices. The work done by Cook & Co. for the Committee is documented in a formal agreement which is executed by the consultant and the Committee. Cook & Co. does not perform any other work for the Company, other than services provided to IBM’s Directors and Corporate Governance Committee. The Committee previously retained Semler Brossy Consulting Group, LLC (Semler Brossy) as its compensation consultant through July 2014. The Committee determined that there is no conflict of interest with regard to either Cook & Co. or Semler Brossy.
Chairman and CEO compensation decisions for 2014 and 2015
The Compensation Committee made recommendations for Mrs. Rometty’s 2014 and 2015 compensation following the process and using the pay components that were previously described.
The Compensation Committee noted the following as key points regarding Mrs. Rometty’s performance against her Personal Business Commitments for 2014:
For 2014, the Committee recommended that Mrs. Rometty receive an annual incentive of $3.6 million, which was 90% of her target incentive. This takes into account the shortfall in financial results relative to expectations balanced against the substantial strategic actions taken to reposition the Company, including the expansion into new markets with competitive offerings and execution of significant restructuring and divestitures. This award follows a year in which Mrs. Rometty and other members of her senior team recommended forgoing their annual incentive payout which was accepted by the Committee and the independent members of the IBM Board of Directors, as appropriate. As reflected in the chart below, taking into consideration the actual salary, actual annual incentive payout and actual long-term incentive award for the period 2012–2014, Mrs. Rometty earned 74% of her annual total target compensation in 2014.
For 2015, the Committee recommended, effective July 1, 2015, a base salary increase for Mrs. Rometty from $1.5 million to $1.6 million, her first increase since assuming the role of CEO in January 2012. The Committee also recommended a 2015 annual incentive target of $5 million and a 2015 long-term incentive award comprised entirely of 2015–2017 Performance Share Units valued at $13.3 million. Mrs. Rometty’s PSU award pays out at the end of three years depending on how well the Company performs against targets set at the beginning of the three-year period, and failure to attain the threshold goals would result in forfeiture of the entire award. The award is denominated and paid out in shares of stock, so the value increases or decreases based on IBM’s stock price performance over the term of the grant.
Taking into consideration salary, target incentive and long-term incentive award grant value, the Committee’s recommended pay package for 2015 is 92% performance based. The Committee’s recommendations were approved by the independent members of IBM’s Board of Directors. These compensation decisions reflect the Board’s strong confidence in Mrs. Rometty’s ongoing leadership of the Company through another significant transformation in its over 100-year history.
2014 compensation decisions for Messrs. Schroeter, Keverian, Mills and Kelly
The Compensation Committee also made decisions for the following named executive officers, noting the key points below:
Martin J. Schroeter, Senior Vice President and Chief Financial Officer
Kenneth M. Keverian, Senior Vice President, Corporate Strategy
Steven A. Mills, Senior Vice President and Group Executive, Software and Systems
John E. Kelly III, Senior Vice President and Director, Research
Following the process outlined above and based on business and individual performance, the Compensation Committee approved the 2014 annual incentive payouts below for these named executive officers:
|Name||2014 annual incentive payouts|
|J.E. Kelly III||791,100|
IBM hired Mr. Keverian effective April 1, 2014 and in consideration of his compensation arrangements with his prior employer, the Committee approved the following arrangements as part of his new hire compensation: (i) annual base salary of $600,000, with an annual incentive target of $810,000, both prorated for 2014; (ii) a sign-on bonus of $800,000, payable in two installments, $500,000 was paid in 2014 with the remaining $300,000 to be paid after the one-year anniversary of his hire date; but subject to repayment if Mr. Keverian resigns or if IBM terminates him for cause prior to April 1, 2016; (iii) a sign-on equity grant of RSUs (Sign-On Equity Grant) valued at $4 million; which vests 50% on April 1, 2015, 25% on April 1, 2016, and 25% on April 1, 2017. Further, if Mr. Keverian’s employment is terminated by IBM without cause prior to the Sign-On Equity Grant fully vesting, any unvested portion of the award shall continue to vest as described above; (iv) a PSU award valued at $924,000 for the 2013– 2015 performance period and a PSU award valued at $1,876,000 for the 2014–2016 performance period; (v) a $1 million discretionary award under the IBM Excess 401(k) Plus Plan, which vests 100% on April 1, 2018, payable upon a separation from service in accordance with the general distribution rules of the plan subject to clawback for 12 months after vesting if Mr. Keverian engages in activity that is detrimental to the Company.
The Committee also approved, and the independent directors of the Board ratified, a Retention Restricted Stock Unit award for Mr. Schroeter, valued at $8.0 million, which vests 50% on February 1, 2017 and 50% on February 1, 2019, provided that he is an employee of the Company as of each vesting date.
2015 compensation decisions for Messrs. Schroeter, Keverian, Mills and Kelly
The Committee also approved the following compensation elements for 2015: base salary, annual incentive target and Performance Share Unit (PSU) grants under the Long-Term Performance Plan.
|2015 Cash(1)||2015 Long-term incentive awards|
|Name||Salary rate||Annual incentive target||Performance share units(2)|
|J.E. Kelly III||700,000||945,000||5,000,000|
(1) The 2015 salary rate will be effective July 1, 2015 and the 2015 annual incentive target is effective January 1, 2015.
(2)The PSUs will be granted on June 8, 2015 to the named executive officers, including the Chairman and CEO. 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 2015. The performance period for the PSUs ends December 31, 2017, and the award will pay out in February 2018.
Section 3: Additional information
Compensation program as it relates to risk
IBM management, the Compensation Committee and the Committee’s outside consultant review IBM’s compensation policies and practices, with a focus on incentive programs, to ensure that they do not encourage excessive risk taking. This review includes the cash incentive programs and the long-term incentive plans that cover all executives and employees. Based on this comprehensive review, we concluded that our compensation program does not encourage excessive risk taking for the following reasons:
We are confident that our compensation program is aligned with the interests of our stockholders, rewards for performance and represents strong executive compensation governance practices.
Equity award practices
Under IBM’s long-standing practices and policies, all equity awards are approved before or on the date of grant. The exercise price of at-the-money stock options is the average of the high and low market price on the date of grant or, in the case of premium-priced stock options, 10% above that average.
The approval process specifies the individual receiving the grant, the number of units or the value of the award, the exercise price or formula for determining the exercise price, and the date of grant. As with all compensation decisions, the independent members of the Board approve all equity awards for the Chairman and CEO and ratify all equity awards for the Chief Financial Officer. In addition, all equity awards for Senior Executives are approved by the Compensation Committee. All equity awards for employees other than the Chairman and CEO and Senior Executives are approved by the Chairman and CEO and Senior Executives pursuant to a series of delegations that were approved by the Compensation Committee, and the grants made pursuant to these delegations are reviewed periodically with the Committee.
Equity awards granted as part of annual total compensation for senior leaders and other employees are made on specific cycle dates scheduled in advance. IBM’s policy for new hires and promotions requires approval of any awards before or on the grant date, which is typically the date of the promotion or hire.
IBM does not have any plans, programs or agreements that would provide any payments to any of the named executive officers upon a change in control of the Company, a change in the named executive officer’s responsibilities or a constructive termination of the named executive officer.
Every executive is held accountable to comply with IBM’s high ethical standards: IBM’s Values, including “Trust and Personal Responsibility in all Relationships,” and IBM’s Business Conduct Guidelines. This responsibility is reflected in each executive’s Personal Business Commitments, and is reinforced through each executive’s annual certification to the IBM Business Conduct Guidelines. An executive’s compensation is tied to compliance with these standards; compliance is also a condition of IBM employment for each executive. Annual cash incentive payments are also conditioned on compliance with these Guidelines.
The Company’s equity plans and agreements have a clawback provision—awards may be cancelled and certain gains repaid if an employee engages in activity that is detrimental to the Company, such as violating the Company’s Business Conduct Guidelines, disclosing confidential information or performing services for a competitor. To further reinforce our commitment to ethical conduct, the Excess 401(k) Plus Plan allows the clawback of certain Company contributions if a participant engages in activity that is detrimental to the Company.
In addition, approximately 1,900 of our key executives (including each of the named executive officers) have agreed to a non-competition, non-solicitation agreement that prevents them from working for certain competitors within 12 months of leaving IBM or soliciting employees within two years of leaving IBM.
The Committee has also implemented the following policy for the clawback of cash incentive payments in the event an executive officer’s conduct leads to a restatement of the Company’s financial results:
To the extent permitted by governing law, the Company will seek to recoup any bonus or incentive paid to any executive officer if (i) the amount of such payment was based on the achievement of certain financial results that were subsequently the subject of a restatement, (ii) the Board determines that such officer engaged in misconduct that resulted in the obligation to restate, and (iii) a lower payment would have been made to the officer based upon the restated financial results.
Hedging and pledging practices
IBM has two senior leadership teams: the Performance Team and the Growth and Transformation Team (G&TT). The Performance Team consists of approximately 60 of our senior leaders who run IBM business units and geographies and includes the Chairman and CEO and each Senior Executive. The team is accountable for business performance and the development of cross-unit strategies. The G&TT, which includes all members of the Performance Team, consists of a select group of approximately 340 executives. This team is charged with supporting the Company’s continued transformation through their leadership initiatives to engage their teams and promote innovation, speed and simplicity in service of our clients.
The Company does not allow any member of the G&TT, including any named executive officer, to hedge the economic risk of their ownership of IBM securities, which includes entering into any derivative transaction on IBM stock (e.g., any short-sale, forward, option, collar). Further, the Company does not allow any member of the G&TT to pledge IBM securities at any time, which includes having IBM stock in a margin account or using IBM stock as collateral for a loan.
Section 162(m) of the U.S. Internal Revenue Code of 1986, as amended, limits deductibility of compensation in excess of $1 million paid to the Company’s CEO and to each of the other three highest paid executive officers (not including the Company’s chief financial officer) unless this compensation qualifies as “performance-based.” Based on the applicable tax regulations, taxable compensation derived from certain stock appreciation rights and from the exercise of stock options by Senior Executives under the Company’s Long- Term Performance Plans should qualify as performance-based. The IBM Excess 401(k) Plus Plan permits an executive officer who is subject to Section 162(m) and whose salary is above $1 million to defer payment of a sufficient amount of the salary to bring it below the Section 162(m) limit. In 1999, the Company’s stockholders approved the terms under which the Company’s annual and long-term performance incentive awards should qualify as performance-based. In 2014, as required by the Internal Revenue Code, the stockholders approved the material terms of the performance criteria under which long-term performance incentive awards should qualify as performance- based. These terms do not preclude the Committee from making any payments or granting any awards, whether or not such payments or awards qualify for tax deductibility under Section 162(m), which may be appropriate to retain and motivate key executives.