2004 IBM Stockholder Proposal on Executive Compensation.

Resolved: The Stockholders request that the Board of Directors adopt a policy that the compensation of senior executives will be determined in the future without regard to any amount of "periodic pension income" from a defined benefit pension plan that the accounting rules may require IBM to treat as an addition to its income.

Statement of Support

IBM uses criteria to measure and compensate the performance of its senior executives that include "periodic pension income" from defined benefit pension plans. In my view, compensation decisions should not be influenced by that type of income, because it does not reflect the results of operations, money that is actually available for use by the company, or the actual performance of the executives involved.

IBM's annual report for 2002 reports "periodic pension income" from various defined pension benefit plans of about $1.2 billion, or nearly 16% of its pre-tax income. This compares with $1.5 billion, or 13% of its pre-tax income in 2001, and $1.3 billion, or 11% of its pre-tax income in 2000.

In all, "pension income" accounted for more than $4 billion of IBM's pre-tax income for those three years. However, as the managing director of Standard & Poors observed in Investors Business Daily, "it's not the company's money. It stays in the pension fund." (Oct. 25, 2002)

Despite this fact, the 2003 proxy statement reports that senior executives were given millions of dollars in performance-based compensation based, in part, on either net income or earnings-per-share. From 2000 through 2003, this compensation included more than $35 million in annual bonus awards, in addition to $23 million in restricted stock and $28 million in cash under the Long Term Incentive Plan.

Under these circumstances, it appears that the amounts of performance-based compensation were significantly increased on the basis of the $4 billion of reported "pension income." To compound the incongruity, the 2003 proxy statement states that IBM paid the equivalent sum of approximately $4 billion into its U.S. pension plan -- "$2.1 billion in cash with the remaining $1.9 billion in IBM stock"-- in order to assure that it is "fully funded."

I believe IBM has violated the principle of pay for performance by including "pension income" in the measures of performance that it uses to compensate executives. As a Business Week article has noted, that type of income makes corporate earnings "look better than what's really happening with their businesses" (Aug. 13, 2001).

My proposal won 18% of the votes cast at the 2003 Annual meeting. Since then, I have learned that McDermott International has agreed to exclude pension income from its executive compensation decisions, and that General Electric had decided to do so for its long term incentive plan. In addition while Institutional Shareholder Services did not support the proposal in 2003, it emphatically declared that "pension income should not be used to boost executive pay."

With your support, our board may decide to make this important change in compensation policy.