During this time, employee compensation has become IBM's single
biggest investment -- one that must track closely with IBM's revenue
and profit growth. Our compensation investment must also be
delivered in a way that explicitly shows our commitment to pay
competitively and to reward our top performers for their
contribution to IBM's success. To help make sure this happens, IBM
will make some important changes to employee pay programs.

Beginning this year, we will introduce three important types of
compensation investment (details below):

IBM will specifically target a portion of our salary investment
toward new Market-Based Adjustments (MBAs) designed to ensure that
employees are paid competitively. This reflects IBM's commitment to
competitive pay – one that has been challenging to meet when market
pay rates move quickly for high-demand skills. MBAs will be used to
increase base salary for employees in eligible job roles and
countries where pay is lagging the market. The same job families
will not qualify for MBAs every year. When your job family does
qualify, all employees in that family who have received a "2" rating
or higher, and are paid below the market, will receive a Market-
Based Adjustment.

For 2007, reflecting our focus on incentives rather than base pay,
those on sales and services incentive plans will not be eligible for
Market-Based Adjustments in most countries.

Once we have completed our market-based salary adjustments (see
above section), we will use the remainder of our salary investment
to reward top performers in all jobs and markets. These Top
Contributor Rewards will recognize employees whose contributions for
the year outpace those of their peers. As in the past, managers will
make these determinations based on each employee's relative
contribution to their team and business success.

While those on sales and services incentive plans will not be
eligible for Top Contributor Rewards in 2007, they may receive sales
and services incentives for top contributors, which are also
designed to direct IBM's pay investment toward those who deliver the
best results.

Finally, we are making a major change to our employee bonus program.
Reflecting IBM's overall focus on profitable growth, IBM is
introducing a new, worldwide Growth Driven Profit-sharing program,
which effectively replaces the Performance Bonus program
immediately. This new program is designed to return a portion of
revenue and profit growth right back to the employees who help drive
that growth. For starters, all eligible employees will participate
in a single, worldwide "One IBM" profit-sharing pool, reinforcing
our commitment to cross-enterprise collaboration and integration. We
will no longer base results on separate unit-specific pools.
Further, results will be driven by how well IBM grows revenue and
profit, year-over-year, rather than the more complex measures we
have been using in recent years.

The company will set aside funds, based on growth results, so you'll
be able to see how overall opportunity accumulates throughout the
year. This focus on business growth is easy to understand and
directly supports our company's most critical imperative – the need
for sustained profitable growth, year in and year out.

As with the current Performance Bonus program, Growth Driven Profit-
sharing applies only to IBM employees who are not on sales or
services incentive plans. The payment opportunity remains up to 12%
of pay for employees in bands 1 - 9 or up to 24% for band 10,
depending on business and individual performance. From a practical
perspective, though, the new profit-sharing approach is designed to
produce greater funding than in the past in those years when the
company grows – and less in those years when we fail to do so.
Managers will continue to determine these individual payments,
within suggested guidelines, to reward those who make the strongest
contribution. More complete information about this new program will
be available in the plan document on w3 later this year.

Implementation of these compensation changes will be in accordance
with local law and process, including industrial relations
information and/or consultation requirements, if any. The current
cycle for the 2006 Performance Bonus, which is paying out now based
on 2006 business results, is not affected by these changes.

IBM is committed to investing in competitive pay that reflects
business performance and individual contribution. We are doing many
things enterprise-wide to foster growth. These compensation changes
support that growth agenda for you and for all SWG and IBM
employees. Thank you in advance for your support and for your
commitment to IBM.