Executive compensation

Pension benefits

The 2013 Pension Benefits Table shows the number of years of credited service, present value of accumulated benefit and payments during the last fiscal year for each eligible named executive officer under the IBM Personal Pension Plan. Effective January 1, 2005, the IBM Personal Pension Plan was closed to new participants. Mr. Weber was hired after the IBM Personal Pension Plan was closed and therefore, he is not eligible for an IBM Personal Pension Plan benefit.

The IBM Personal Pension Plan consists of a tax-qualified plan and a non-tax qualified plan. Effective January 1, 2008, the non-tax qualified plan was renamed the IBM Excess Personal Pension Plan and is referred to herein as the Nonqualified Plan, and the tax-qualified plan is referred to as the Qualified Plan. The combined plan is referred to herein as the IBM Personal Pension Plan.

Qualified Plan and Nonqualified Plan Descriptions—General

Plan Description

  • Effective July 1, 1999, IBM amended the IBM Personal Pension Plan to provide a new benefit formula, but allowed participants who met certain age and service conditions as of June 30, 1999, to elect to continue to earn benefits under the prior formulas, including the Pension Credit Formula.
  • Accrual of future benefits under the IBM Personal Pension Plan stopped on December 31, 2007. Accordingly, a participant's pension benefit does not consider pay earned and service credited after December 31, 2007.
  • The Qualified Plan provides funded, tax-qualified benefits up to the limits on compensation and benefits under the Internal Revenue Code.
  • The Nonqualified Plan provides unfunded, nonqualified benefits in excess of the limits on compensation.

IBM Personal Pension Plan (Qualified Plan)

Purpose of the Qualified Plan

  • The Qualified Plan was designed to provide tax-qualified pension benefits that are generally available to all U.S. regular employees.
  • Effective January 1, 2008, all eligible employees, including the named executive officers, became eligible for Company contributions under a new defined contribution plan, the IBM 401(k) Plus Plan, on eligible pay up to the compensation limits of the Internal Revenue Code. Under the plan, participants are eligible for Company contributions up to 10% of eligible pay, depending on their pension plan formula participation as of December 31, 2007 and the amount they contribute to the plan. In 2013, Mrs. Rometty, Mr. Loughridge and Mr. Mills, received Company contributions equal to 10% of total eligible pay. Mr. Kelly received Company contributions equal to 8% of total eligible pay. Mr. Weber received Company contributions equal to 6% of total eligible pay.
  • The cessation of accruals under the IBM Personal Pension Plan and the replacement of Qualified Plan accruals with contributions under the new tax-qualified defined contribution plan reflect the Company's desire to provide appropriate benefits for its employees, consistent with the changing needs of IBM's workforce and the changing nature of retirement benefits provided by the Company's current competition.

Material Terms and Conditions: Pension Credit Formula under the Qualified Plan

  • The benefits under the Qualified Plan for Mrs. Romet ty, Mr. Loughridge and Mr. Mills are determined under the Pension Credit Formula. Each of these named executive officers satisfied the eligibility requirements for the Pension Credit Formula in 1999.
  • The Pension Credit Formula is a pension equity formula that provides annual benefits based on a participant's total point value divided by an annuity conversion factor.
  • The total point value is equal to total base points times final average pay plus total excess points times final average pay in excess of Social Security Covered Compensation.
  • For purposes of the Pension Credit Formula, final average pay is equal to average compensation over the final five years of employment or the highest consecutive five calendar years of compensation, whichever is greater, prior to 2008.
  • The annuity conversion factor is determined according to a table set forth in the IBM Personal Pension Plan document.
  • Prior to 2008, participants earned points as follows: 0.16 base points each year until a 4.25 base point cap was reached, and 0.03 excess points each year until a 0.75 excess point cap was reached.
  • The total point value is converted to an annuity at the benefit commencement date based on pre-determined annuity conversion factors.
  • A participant may receive his or her benefit immediately following termination of employment, or may defer benefit payments until any time between early retirement age and normal retirement age.
  • Early retirement age is defined as:
        − Any age with 30 years of service;
        − Age 55 with 15 years of service; or
        − Age 62 with five years of service.
  • As of December 31, 2013, the named executive officers noted above had attained early retirement age.
  • Under the Pension Credit Formula, a participant who terminates employment and whose pension benefit commences before his or her normal retirement age will receive smaller monthly annuity payments than if his or her benefit commences at normal retirement age.
  • Instead of receiving his or her entire benefit under the Pension Credit Formula as an annuity, a participant may elect to receive a portion of the benefit as an unsubsidized lump sum. The amount that may be paid as a lump sum is based on the benefit the participant earned before January 1, 2000.

Material Terms and Conditions: Personal Pension Account Formula under the Qualified Plan

  • Mr. Kelly's benefit under the Qualified Plan is determined under the Personal Pension Account formula which is a cash balance formula.
  • According to the terms of the Qualified Plan, under the Personal Pension Account formula prior to 2008, Mr. Kelly receives pay credits and interest credits to his Personal Pension Account. The pay credits for a year were equal to 5% of his eligible compensation for that year. The interest credits are based on the annual interest rate on one-year Treasury Constant Maturities plus 1%. Further, Mr. Kelly may receive his benefit under the Personal Pension Account formula at any time following his termination of employment, but may not defer his benefit later than normal retirement age. If his benefit begins to be paid before normal retirement age, it will be reduced when compared to the benefit that would commence at normal retirement age. He may receive his benefit in the following forms: a lump sum equal to his Personal Pension Account, an annuity that is actuarially equivalent to his Personal Pension Account, or both a partial lump sum and a reduced annuity.

Compensation Elements Included in Calculations

  • Prior to 2008, eligible compensation was generally equal to the total amount that is included in income including:
        −Salary;
        −Recurring payments under any form of variable compensation plan (excluding stock options and other equity awards); and
        −Amounts deducted from salary and variable compensation under IBM's Internal Revenue Code Section 125 plan (cafeteria plan), and amounts deferred under IBM's 401(k) Plus Plan and Excess 401(k) Plus Plan.
  • Equity compensation-stock options, RSUs, RRSUs and PSUs- was excluded from eligible compensation.
  • Compensation for a year was limited to the compensation limit under the Internal Revenue Code. For 2007, the last year that benefits accrued under the Qualified Plan the compensation limit was $225,000. In addition, benefits provided under the Qualified Plan may not exceed an annual benefit limit under the Internal Revenue Code (which in 2013 was $205,000 payable as an annual single life annuity beginning at normal retirement age).

Qualified Plan Funding

  • Benefits under the Qualified Plan are funded by an irrevocable tax-exempt trust.
  • A participant's benefits under the Qualified Plan are payable from the assets held by the tax-exempt trust.

Policy Regarding Extra Years of Credited Service

  • Generally, a participant's years of credited service are based on the years an employee participates in the Plan.
  • The years of credited service for the eligible named executive officers are based only on their service while eligible for participation in the Plan. Because accruals under the Qualified Plan stopped on December 31, 2007, service performed after such date is not counted.

IBM Excess Personal Pension Plan (Nonqualified Plan)

Purpose of the Nonqualified Plan

  • The Nonqualified Plan provides Qualified Plan participants with benefits that may not be provided under the Qualified Plan because of the tax limits on eligible compensation.
  • The benefit provided to a participant is payable only as an annuity beginning on the first day of the month following a separation from service from IBM (subject to the six-month delay for "specified employees" as required under Section 409A of the Code).

Material Terms and Conditions of the Nonqualified Plan

The Nonqualified Plan provides a benefit that is equal to the benefit that would be provided under the Qualified Plan if the compensation and benefit limits did not apply minus the benefit actually provided under the Qualified Plan disregarding the benefit limits.

Nonqualified Plan Funding

  • The Nonqualified Plan is unfunded and maintained as a book reserve (notional) account.
  • No funds are set aside in a trust or otherwise; participants in the Nonqualified Plan are general unsecured creditors of the Company with respect to the payment of their Nonqualified Plan benefits.

Policy Regarding Extra Years of Credited Service

  • Like the Qualified Plan, generally a participant's years of credited service are based on the years an employee participates in the Plan.
  • The years of credited service for the eligible named executive officers are based only on their service while eligible for participation in the Plan. Because accruals under the Nonqualified Plan stopped on December 31, 2007, service performed after such date is not counted.

Available Forms of Payment

  • A portion of the benefit that is available to each of the eligible named executive officers under the Qualified Plan may be paid as a lump sum. The portion is determined on the benefit that was earned before January 1, 2000.
  • According to the terms of the Qualified Plan Personal Pension Account formula, Mr. Kelly's entire benefit may be paid as a lump sum. Further, he has elected to receive his Nonqualified Plan benefit in a lump sum immediately following separation from employment.
  • The maximum lump sum amount that the eligible named executive officers could have elected to receive as of January 1, 2014 if they had a separation from service from IBM on December 31, 2013 was equal to:
  Maximum Lump Sum
Name Qualified Plan Nonqualified Plan Total Available Lump Sum
V.M. Rometty $325,634 $0 $325,634
M. Loughridge 458,531 0 458,531
J.E. Kelly III 432,483 940,445 1,372,928
S.A. Mills 828,662 0 828,662
  • A participant may elect to receive his or her entire benefit, or the portion of the benefit that is not paid as a lump sum, in the form of a single life annuity or in certain other actuarially equivalent forms of payment.

Annual Pension Benefits

The annual pension benefit that was earned as of December 31, 2007, and that is payable as a single life annuity beginning at normal retirement age for each of the eligible named executive officers is below. Because Mr. Kelly elected a lump sum payment for his Nonqualified Plan benefits, no amount is represented in the Nonqualified Plan column below:

  Annual Pension Benefit at
Normal Retirement Age
Name Qualified Plan Nonqualified Plan Total Benefit
V.M. Rometty $82,083 $342,761 $424,844
M. Loughridge 84,094 598,252 682,346
J.E. Kelly III 36,802 N/A 36,802
S.A. Mills 93,188 594,573 687,761

Present Value of Accumulated Benefit

  • The present value of accumulated benefit is the value as of December 31, 2013 of the annual pension benefit that was earned as of December 31, 2007.
  • The annual pension benefit is the benefit that is payable for the eligible named executive officer's life beginning at his or her normal retirement age.
  • The normal retirement age is defined as the later of age 65 or the completion of one year of service.
  • Certain assumptions were used to determine the present value of accumulated benefits. Those assumptions are described immediately following the 2013 Pension Benefits Table.

2013 Pension Benefits Table

As noted in the Introduction and Purpose to the 2013 Retention Plan Narrative, the 2013 Pension Benefits Table does not include amounts reflected in the 2013 Retention Plan Table.

Name
(a)
Plan Name
(b)
Number of Years Credited Service (1)
(#)
(c)
Present Value of Accumulated Benefit (2)
($)
(d)
Payments During Last Fiscal Year
($)
(e)
V.M. Rometty Qualified Plan 26 $751,404 $0
  Nonqualified Plan   3,137,682 0
  Total Benefit   $3,889,086 $0
M. Loughridge Qualified Plan 30 $1,230,341 $0
  Nonqualified Plan   8,752,776 0
  Total Benefit   $9,983,117 $0
J.E. Kelly III Qualified Plan 27 $371,882 $0
  Nonqualified Plan   792,704 0
  Total Benefit   $1,164,586 $0
S.A. Mills Qualified Plan 34 $1,076,993 $0
  Nonqualified Plan   6,871,598 0
  Total Benefit   $7,948,591 $0
(1) Reflects years of credited service as of December 31, 2007, which was the date accruals under the Qualified Plan and the Nonqualified Plan stopped. Each of the eligible named executive officers has six additional years of service with IBM after that date.

(2) While the accruals under the Qualified Plan and the Nonqualified Plan stopped on December 31, 2007, the value of the Qualified Plan and Nonqualified Plan benefits for the eligible named executive officers will continue to change based on their ages and the assumptions used to calculate the present value of the accumulated benefit.

 

Assumptions to determine present value for Mr. Loughridge:

  • Interest rate for present value: 4.5%
  • Mortality table: RP 2000 Combined Healthy Mortality, sex distinct with 41 year improvement using scale AA
  • Annual benefits shown are actual benefits based on a retirement date of December 31, 2013 and a benefit commencement date of January 1, 2014. Present value of benefits is measured as of December 31, 2013 based on benefits payable as a single life annuity as of January 1, 2014. The six-month delay under the Nonqualified Plan for "specified employees" as required under Section 409A of the Internal Revenue Code was disregarded for this purpose. In addition to those outlined above, change in pension value from December 31, 2012 to December 31, 2013 also includes a change in retirement age for the Qualified Plan and the Nonqualified Plan (from age 65 to age 60).

Assumptions to determine present value as of December 31, 2013 for each eligible named executive officer (other than Mr. Loughridge):

  • Measurement date: December 31, 2013
  • Interest rate for present value: 4.5%
  • To determine Personal Pension Account benefit:
           - Interest crediting rate: 1.1% for 2014 and after
           - Interest rate to convert Personal Pension Account balance to single life annuity: 1.3333% for years 1-5, 4.5767% for years 6-20, and 5.5733% for year 21 and after
           - Mortality table to convert Personal Pension Account balance to single life annuity is 2014 Personal Pension Account Optional Combined Unisex Table
  • Mortality (pre-commencement): None
  • Mortality (post-commencement): RP 2000 Combined Healthy Mortality, sex distinct with 41 year improvement using scale AA
  • Separation from service from IBM: Later of age 65 or current age
  • Accumulated benefit is calculated based on credited service and compensation history as of December 31, 2007.
  • Benefit payable as a single life annuity in the case of the Pension Credit Formula and lump sum in the case of the Personal Pension Account Formula beginning on the first day of the month following a separation from service from IBM. The six-month delay under the Nonqualified Plan for "specified employees" as required under Section 409A of the Internal Revenue Code was disregarded for this purpose.
  • The Pension Credit Formula conversion factor is based on age at December 31, 2007 and commencement at age 65.
  • All results shown are estimates only; actual benefits will be based on precise credited service and compensation history, which will be determined at separation from service from IBM.

Assumptions to determine present value as of December 31, 2012:

  • The column titled Change in Pension Value in the 2013 Summary Compensation Table quantifies the change in the present value of the pension benefit from December 31, 2012 to December 31, 2013.
  • To determine the present value of the pension benefit as of December 31, 2012, the same assumptions that are described above to determine the present value as of December 31, 2013 were used, except a (1) 3.6% interest rate and the RP 2000 Combined Healthy Mortality, sex distinct with 38 year improvement using scale AA, and (2) to determine the Personal Pension Account benefit, the following were used:
         - Interest crediting rate: 1.2%
         - Interest rate to convert Personal Pension Account balance to single life annuity: 1.0367% for years 1-5, 3.6633% for years 6-20, and 4.59% for year 21 and after.