General description and purpose

During the mid-1990s, an additional form of retention compensation was created for certain IBM U.S. leaders. The plan, formally called the “IBM Supplemental Executive Retention Plan” (Retention Plan), began in 1995 during a particularly trying time in IBM’s history when it faced challenges that many thought put its very existence at risk. Some key leaders were recruited away from IBM during this time. In this environment, IBM created this new plan to help retain for full careers the caliber of senior leaders needed to turn IBM around, preserve its long-term viability and position it for growth in the future.

Because its original purpose had been met, the Retention Plan was closed to new participants effective May 1, 2004, and will not be replaced by any other plan. Future accruals under the Retention Plan stopped on December 31, 2007, therefore, a participant’s Retention Plan benefit does not consider pay earned or service performed after such date.

Payments accrue based on age and service and are typically payable only after age 60, as a way to encourage senior leaders to continue working for IBM past the age when many others at IBM choose to retire.

Even though the Retention Plan provides for the payment of specified benefits after retirement, given the nature of this program as a retention vehicle, the Retention Plan is discussed in its own section instead of in the Pension Benefits section. As a consequence, the amounts reflected below are separately presented in the 2016 Retention Plan Table and are not included in the 2016 Pension Benefits Table.

The 2016 Retention Plan Table shows each eligible named executive officer’s number of years of credited service, present value of accumulated benefit and payments during the last fiscal year under the Retention Plan. The Retention Plan is a U.S. Plan and eligibility is based on U.S. employment. Mrs. Rometty and Dr. Kelly are eligible for a benefit under the Retention Plan. Mr. Schroeter is not eligible for a Retention Plan benefit because he did not meet all of the eligibility criteria. Specifically, he did not continuously remain on the U.S. payroll, as he worked for IBM Australia from April 1, 2005 through June 30, 2011. Messrs. Jetter and Clementi began U.S. employment after the Retention Plan was closed.

Description of retention plan

  • The Retention Plan provides for payment of an annual benefit as long as the participant satisfies the age, service, pay and job level requirements.
  • Effective July 1, 1999, IBM amended the Retention Plan to provide a new benefit formula, but allowed participants who met certain age, service, and pay level conditions as of June 30, 1999 to continue to earn benefits under the prior formula if the prior formula provides a greater benefit.
  • Retention Plan benefits are subject to forfeiture and rescission if an executive is terminated for cause or engages in competitive or other activity detrimental to IBM during or following employment.

Material terms and conditions: 1995 retention plan

  • The benefits provided under the Retention Plan for Dr. Kelly are determined under the Retention Plan formula in effect prior to the July 1, 1999 amendment (1995 Retention Plan).
  • Benefits are available under the 1995 Retention Plan only if a participant terminates employment, becomes disabled or dies on or after meeting the early retirement age and service, holds an executive-level position immediately prior to termination or death, and has final average pay of at least $160,000 immediately prior to termination, disability or death.
  • The benefit provided under the 1995 Retention Plan is payable only as an annuity beginning on the first day of the month following termination of employment (subject to a six-month delay for “specified employees” as required under Section 409A of the Internal Revenue Code).
  • If the participant terminates employment on or after age 60, the 1995 Retention Plan benefit expressed as an annual single life annuity is equal to:

1995 retention plan benefit expressed as an annual single life annuity

  • If the participant terminates employment before age 60, the annual single life annuity resulting from the sum of the amounts specified in (1) through (4) is reduced as specified in the Retention Plan. For example, if a participant terminates at age 59, the benefit is reduced by 3%, at age 58, by 7%, and at age 57, by 11%.
  • The benefit of a participant in the 1995 Retention Plan will not be less than the benefit that would be provided if the participant were in the 1999 Retention Plan, as described in the next subsection.

Material terms and conditions: 1999 retention plan

  • The benefits provided under the Retention Plan to Mrs. Rometty are determined under the Retention Plan formula in effect on and after the July 1, 1999 amendment (1999 Retention Plan).
  • Benefits are available under the 1999 Retention Plan if a participant holds an executive-level position immediately prior to termination or death, has final average pay in excess of $405,400 on both January 1, 2007 and immediately prior to termination or death, and either:
  • Terminates employment for any reason other than cause or dies, in each case after attaining age 60 and completing at least five years of service; or
  • Terminates employment for any reason other than cause or dies, in each case after attaining age 55 and completing at least 15 years of service and either becomes disabled (as determined under IBM’s long-term disability plan), or if approved by the Board in the case of the two highest paid officers (and if approved by the Compensation Committee and the chairman and chief executive officer in the case of any other officer of IBM).
  • If the participant terminates employment after attaining age 60 and completing at least five years of service, the 1999 Retention Plan benefit expressed as an annual single life annuity is equal to:

1999 retention plan benefit expressed as an annual single life annuity

  • In no event will the sum of the amounts in (1) and (2) exceed 65% times final average pay times a fraction (no greater than 1), the numerator of which is the participant’s years of service and the denominator of which is 35.
  • A participant who terminates employment after attaining age 55, but prior to attaining age 60, who completes at least 15 years of service, and who receives Compensation Committee and chairman and chief executive officer approval (or Board approval in the case of the two highest paid officers) as described above, will receive a reduced single life annuity. The reduced single life annuity will be determined by reducing the sum of the amounts specified in (1) and (2) by 0.5% for each month that the benefit commencement date precedes age 60.

Compensation elements included in calculations

The definitions of eligible final average pay and eligible compensation for purposes of the Retention Plan have the same meanings as under the Pension Credit Formula in the IBM Personal Pension Plan.

Funding

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

Policy regarding extra years of credited service

  • Generally, a participant’s years of credited service for benefits are based on the years an employee participated in the IBM Personal Pension Plan through December 31, 2007, the date accrual of future benefits stopped.

Available forms of payment

  • A participant’s benefit is only payable in the form of an annuity with monthly benefit payments beginning on the first day of the month following termination of employment (subject to a six-month delay for “specified employees” as required under Section 409A of the Internal Revenue Code). Lump sum payments are not available under the Retention Plan.
  • A participant may elect to receive his or her benefit in the form of a single life annuity or in certain other actuarially equivalent forms of payment.

Annual retention plan benefit

The annual Retention Plan benefit that was earned as of December 31, 2007 and that is payable as a single life annuity beginning at the earliest unreduced retirement age (as defined in the next subsection) for each eligible named executive officer is detailed in the table below.

Name Annual Retention Plan Benefit at Earliest Unreduced Retirement Age
V.M. Rometty $101,908
J.E. Kelly III 593,835

Present value of accumulated benefit

  • The present value of accumulated benefit shown in the 2016 Retention Plan Table below is the value as of December 31, 2016 of the annual Retention Plan benefit that was earned as of December 31, 2007.
  • The earliest unreduced retirement age is the earliest age an eligible named executive officer may start receiving the Retention Plan benefit without a reduction for early commencement. As of December 31, 2016, Dr. Kelly had reached the earliest unreduced retirement age. Because Mrs. Rometty did not attain age 60 by December 31, 2016, the earliest unreduced retirement age is her age on the first day of the month that coincides with or next follows the attainment of age 60.
  • Certain assumptions were used to determine the present value of the annual accumulated Retention Plan benefit that is payable beginning at the earliest unreduced retirement age. Those assumptions are described immediately following the 2016 Retention Plan Table.

2016 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 Retention Plan 26 $1,659,974 $0
J.E. Kelly III Retention Plan 27 8,933,063 0

(1) Reflects years of credited service as of December 31, 2007, which was the date accruals under the Retention Plan stopped. Each of the eligible named executive officers in this table has nine additional years of service with IBM after that date.

(2) While the accruals under the Retention Plan stopped on December 31, 2007, the value of the Retention Plan benefit for the eligible named executive officers will continue to change based on their ages, the assumptions used to calculate the present value of the accumulated benefit, and the benefit that would be provided under the IBM Personal Pension Plan.

Assumptions to determine present value for each eligible named executive officer, as of December 31, 2016:

  • Measurement date: December 31, 2016
  • Interest rate for present value: 3.8%
  • To determine Personal Pension Account benefit:
    • Interest crediting rate: 1.6% for 2017 and after
    • Interest rate to convert Personal Pension Account balance to single life annuity: 1.4767% for years 1–5, 3.3533% for years 6-20, and 4.29% for year 21 and after
    • Mortality table to convert Personal Pension Account balance to single life annuity is 2017 Personal Pension Account Optional Combined Unisex Table
  • Mortality (pre-commencement): None
  • Mortality (post-commencement):
    • Base Table: Modified RP-2014 White Collar sex-distinct annuitant tables with adjustment to 2011 by backing out MP-2014 improvement and further adjusting the mortality rates at each age (averaging approximately 1.06).
    • Improvement Scale: A modified Scale MP-2016 projection table with projected improvements starting in 2011 for healthy mortality. The modified table is based on the RPEC_2014 v2016 model, with the same 20 year diagonal convergence period and 10 year horizontal convergence period and underlying weighting percentages for the age/period and year-of-birth cohort periods. The long-term improvement rates are 0.75% up to age 85, linearly decreasing to 0.0% at age 115.
  • Withdrawal rates: None
  • Retirement rates: None prior to Assumed Retirement Age
  • Normal Retirement Age: Age 60 for Retention Plan, Age 65 for IBM Personal Pension Plan
  • Assumed Retirement Age: Later of Age 60 for Retention Plan, Age 65 for IBM Personal Pension Plan, or current age
  • Accumulated benefit is calculated based on credited service and final average pay as of December 31, 2007.
  • Offset for benefit payable under the IBM Personal Pension Plan is determined based on the single life annuity that would be payable under the plan beginning on the first day of the month following the assumed termination of employment.
  • Present value is the present value of the single life annuity payable at assumed retirement age beginning on the first day of the month following the assumed termination of employment. The six-month delay under the Retention Plan for “specified employees” as required under Section 409A of the Internal Revenue Code was disregarded for this purpose.
  • All results shown are estimates only; actual benefits will be based on precise credited service and compensation history, which will be determined at termination of employment.

Assumptions to determine present value as of December 31, 2015:

  • The column titled Change in Retention Plan Value in the 2016 Summary Compensation Table quantifies the change in the present value of the Retention Plan benefit from December 31, 2015 to December 31, 2016.
  • To determine the present value of the Retention Plan benefit as of December 31, 2015, the same assumptions that are described above to determine present value as of December 31, 2016 were used, except (1) a 4.0% interest rate and the Modified MP-2015 improvement scale, and (2) to determine the Personal Pension Account benefit, the following were used:
    • Interest crediting rate: 1.3% for 2016 and after
    • Interest rate to convert Personal Pension Account balance to annual single life annuity: 1.66% for years 1–5, 4.06% for years 6–20, and 5.0267% for year 21 and after
    • Mortality table for Personal Pension Account balance conversion: 2016 Personal Pension Account Optional Combined Unisex Table