IBM Stockholder Proposal on Executive Compensation

Resolved: The Stockholders request that the Board of Directors adopt a policy that executive compensation will be determined in the future without regard to any pension fund money that accounting rules may require the company to treat as income, so that the compensation of senior executives will more closely reflect their performances in managing the business.

Statement of Support

Accounting rules require IBM to treat a portion of certain pension fund surpluses as income even though no pension fund money is transferred to the company. To the extent IBM bases executive compensation on such pension income, it distorts the principle of pay for performance.

At the end of 2000, IBM’s defined benefit pension plans had a total surplus of $10.7 billion in excess of benefit obligations. The surplus arose, in part, from stock market gains, the 1999 creation of a cash balance pension plan that cut the projected retirement pay of many employees, and the withholding of retiree cost of living adjustments from 1989 to 2001. An increase in the expected rate of return on pension assets also contributed to the growth of pension income that was credited to IBM under the accounting rules.

IBM reported “record after-tax profit of $8.1 billion” for 2000. But “net periodic pension income” from the company’s defined benefit plans accounted for $1.17 billion of that total. Without that $1.17 billion in “pension income” IBM’s reported net profit would have fallen from the prior year to just $6.9 billion.

Despite this fact, IBM’s five top executives were given $11.67 million in cash bonus awards “for the year’s performance.” They were given an additional $12.87 million under the Long Term Incentive program based largely on IBM reaching predetermined income targets. It therefore appears that the compensation of these executives was strongly influenced by the “pension income” that permitted IBM to report a “record after-tax profit” for 2000.

We believe compensation ought to be based on performance. It should not be distorted by “pension income” because that source of reported income does not reflect the operational performance of the Company, money actually received by the Company, or the performance of executives.

A related concern, according to a Wall Street Journal report, is the possibility “that companies can use pension accounting to manage their earnings by changing assumptions to boost the amount of pension income that can be factored into operating income.” The possibility of earnings management is increased when changes in assumptions, or cuts in retirement benefits, have the potential to increase the compensation of senior executives by millions of dollars.