Executive compensation

2016 Potential payments upon termination narrative

Introduction

IBM does not have any plans, programs or agreements under which payments to any of the named executive officers are triggered by a change of control of IBM, a change in the named executive officer’s responsibilities or a constructive termination of the named executive officer.

The only payments or benefits that would be provided by IBM to a named executive officer following a termination of employment would be provided under the terms of IBM’s existing compensation and benefit programs (as described below). However, Messrs. Jetter and Clementi will be eligible for a payment upon termination pursuant to their IBM U.S. offer letters. These payments represent a one-time replacement payment to compensate Messrs. Jetter and Clementi for the retirement benefits that they would have continued to earn as employees of IBM Germany and IBM Italy, respectively.

Mr. Jetter’s payment equals the difference between (i) the amount of the benefit he would have accumulated, but not yet earned under the IBM Vorsorgeplan (IVP) had he remained an employee of IBM Germany, and (ii) the maximum amount of IBM matching and automatic contributions he is eligible to receive under the IBM 401(k) Plus Plan and the IBM Excess 401(k) Plus Plan (US Plans) regardless of whether he participates. These amounts shall be calculated from February 1, 2015 to the date that Mr. Jetter separates from service with IBM, and in accordance with the terms and conditions of the IVP and the US Plans. Payment shall be made in a lump sum in the February following the year of separation from service. If Mr. Jetter dies or becomes disabled, the payment shall be made 90 days after such death or disability. In order to become eligible for a payment under his offer letter, Mr. Clementi had to complete five years of service following January 1, 2009. After completing such service Mr. Clementi’s payment is equal to $500,000, plus, for each year that Mr. Clementi works beyond January 1, 2014, the amount payable is increased by 10% for a maximum period of five years (through January 1, 2019). The payment shall be made in a lump sum no later than the end of the year after Mr. Clementi separates from service with IBM.

The 2016 Potential Payments Upon Termination Table that follows this narrative reports such payments and benefits for each named executive officer assuming termination on the last business day of the fiscal year end.

As explained below, certain of these payments and benefits are enhanced by or dependent upon the named executive officer’s attainment of certain age and service criteria at termination. Additionally, certain payments or benefits are not available following a termination for cause and/or may be subject to forfeiture and clawback if the named executive officer engages in certain activity that is detrimental to IBM (including but not limited to competitive business activity, disclosure of confidential IBM information and solicitation of IBM clients or employees).

This 2016 Potential Payments Upon Termination Narrative and the 2016 Potential Payments Upon Termination Table do not reflect payments that would be provided to each named executive officer under the IBM 401(k) Plus Plan or the IBM Individual Separation Allowance Plan following termination of employment on the last business day of the fiscal year end because these plans are generally available to all U.S. regular employees similarly situated in age, years of service and date of hire and do not discriminate in favor of executive officers.

Qualified Plan amounts and Nonqualified Plan amounts are not reflected in the 2016 Potential Payments Upon Termination Table. Previously, these amounts were available under one plan, the IBM Personal Pension Plan, which was generally available to all U.S. regular employees similarly situated in years of service and dates of hire and did not discriminate in favor of executive officers. For amounts payable under the Qualified and Nonqualified Plans, see the 2016 Pension Benefits Table. Similarly, the IVP amount is not reflected in the 2016 Potential Payments Upon Termination Table as this amount is available under the IVP which was generally available to IBM Germany regular employees similarly situated in years of service and dates of hire and did not discriminate in favor of executive officers. The 2016 Potential Payments Upon Termination Table also does not quantify the value of retiree medical and life insurance benefits, if any, that would be provided to each named executive officer following such termination of employment because these benefits are generally available to all U.S. regular employees similarly situated in age, years of service and date of hire and do not discriminate in favor of executive officers; however, the named executive officers’ eligibility for such benefits is described below. The 2016 Potential Payments Upon Termination Table does not contain a total column because the Retention Plan payment is paid as an annuity, not a lump sum. Therefore, a total column would not provide any meaningful disclosure.

Annual Incentive Program (AIP)

IBM Long-Term Performance Plans (LTPP)

IBM Supplemental Executive Retention Plan (Retention Plan)

IBM Excess 401(k) Plus Plan

IBM Italy Pension Fund

Retiree Medical and Life Insurance

General Description

Benefits under IBM’s retiree medical and life insurance programs are triggered by a named executive officer’s retirement, as described below. IBM maintains the Retiree Benefits Plan, the Future Health Account, Access to Group Health Care Coverage and the Retiree Group Life Insurance Plan. Eligibility for a particular program is dependent upon date of U.S. hire, age and years of service at termination. Future coverage under such programs remains subject to IBM’s right to amend or terminate the plans at any time. The named executive officers would not have been eligible for the Retiree Benefits Plan following a separation from service on the last business day of the fiscal year end because they had not met the eligibility requirements.

IBM Future Health Account (FHA)

Access to Group Health Care Coverage

IBM Retiree Group Life Insurance

2016 Potential payments upon termination table

  Nonqualified Deferred Compensation  
  LTPP   Excess 401(k) (6)  

Name/
Termination Scenario

Annual
Incentive Program(2)
($)
Stock
Options(3)
($)
Stock
Awards(4)
($)
Retention
Plan(5)
($)
Basic
Account
($)
Deferred IBM
Shares
($)
Italy Pension
Fund
($)
Replacement
Payments(13)
($)
V.M. Rometty                
   Termination(1) $4,950,000 $0 $3,762,495 $0 $1,153,178(7) $463,179(7) N/A N/A
   For Cause 0 0 0 0 $1,153,178(7) $463,179(7) N/A N/A
M.J. Schroeter                
   Termination(1) 1,046,430 42,843 1,091,882 N/A 2,017,687(8) 0 N/A  N/A 
   For Cause  0 0 0 N/A  2,017,687(8)  0 N/A  N/A 
M. Jetter                
   Termination(1) 901,890  0 413,149 N/A  63,706(9) 1,570,099(9) N/A  $2,419,630 
   For Cause  0  0 0 N/A  63,706(9) 1,570,099(9) N/A  2,419,630 
J.E. Kelly III                
   Termination(1) 927,350  0 1,180,355 593,835 4,594,917(10) 537,808(10) N/A  N/A 
   For Cause 0  0  0  0 4,594,917(10) 537,808(10) N/A  N/A 
E. Clementi                
   Termination(1)  889,200  0  1,150,809 N/A   381,907(11)  0  $1,618,975(12)  665,500
   For Cause  0  0  0 N/A   381,907(11) 0  $1,618,975(12)  665,500

(1) Termination includes the following separation scenarios: resignation, retirement and involuntary termination without cause (in all cases, assuming the executive is not entering into competitive or other activity detrimental to IBM).

(2) Assumes that the AIP payment made to each named executive officer following termination of employment on the last business day of the fiscal year end would have been the same as the actual payment made in March 2017.

(3) Assumes each named executive officer exercised all vested, in-the-money options at $165.99 (the fiscal year-end closing price of IBM common stock on the NYSE).

(4) Assumes IBM released each named executive officer’s PSU award, granted in 2014 according to its policy, for the three-year performance period ending December 31, 2016. PSU awards are adjusted for performance and released in shares of IBM common stock (with any fractional shares rounded to the nearest whole share) in February in the year following the end of the performance period. Outstanding 2016 RSU awards are not included because the required service of at least one year since the award date of grant has not been completed.

(5) Reflects the Retention Plan benefit payable for eligible named executive officers as an immediate annual single life annuity. See the IBM Supplemental Executive Retention Plan section above for more details.

(6) Estimated payments to each named executive officer were calculated using the aggregate account balance as of the last business day of the fiscal year end. See the IBM Excess 401(k) Plus Plan section above for more details.

(7) Approximate annual amount payable for 10 years starting in February 2017. Deferred IBM Shares are paid as shares of IBM common stock.

(8) Payable in a lump sum in February 2017.

(9) Payable in an immediate lump sum following termination. Deferred IBM Shares are paid as shares of IBM common stock.

(10) Sum of the amount of Basic Account deferred prior to January 1, 2005 payable in a lump sum in February 2017 ($3,915,333) and the approximate annual amount of the Basic Account deferred on or after January 1, 2005 payable for 10 years starting in February 2017 ($679,584). Deferred IBM Shares are paid as shares of IBM common stock.

(11) Approximate annual amount payable for 10 years starting in February 2017.

(12) Amount represents a lump sum payment of the aggregate balance as of December 31, 2016. Under the terms of the plan, Mr. Clementi does not have to make a distribution election until retirement. He can choose to receive his benefit as an annuity, a lump sum, or a combination of an annuity and lump sum. See the 2016 Nonqualified Deferred Compensation Narrative for more information.

(13) See the 2016 Potential Payments Upon Termination Narrative for more information.