UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934  (Amendment No.        )

Filed by the Registrant  x

Filed by a Party other than the Registrant  o

Check the appropriate box:

o  Preliminary Proxy Statement

o  Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

x  Definitive Proxy Statement

o  Definitive Additional Materials

o  Soliciting Material Pursuant to §240.14a-12

Armonk, New York 10504

March 12, 2012

Dear Stockholders:

You are cordially invited to attend the Annual Meeting of Stockholders on Tuesday, April 24, 2012 at 10 a.m., in the Charleston Area Convention Center, North Charleston, South Carolina.

At this year’s Annual Meeting, you will once again be asked to provide an advisory vote on executive compensation. The Board’s recommendation on this item is set forth in the proposal, and your support is important.

Stockholders of record can vote their shares by using the Internet or the telephone. Instructions for using these convenient services are set forth on the enclosed proxy card. You also may vote your shares by marking your votes on the enclosed proxy card, signing and dating it, and mailing it in the enclosed envelope. If you will need special assistance at the meeting because of a disability, please contact the Office of the Secretary, International Business Machines Corporation, Armonk, NY 10504.

Very truly yours,

Samuel J. Palmisano

Chairman of the Board

Your vote is important.

Please vote by using the Internet, the telephone,

or by signing, dating, and returning the enclosed proxy card.

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Notice of Meeting

The Annual Meeting of Stockholders of International Business Machines Corporation will be held on Tuesday, April 24, 2012 at 10 a.m., in the Charleston Area Convention Center, 5001 Coliseum Drive, North Charleston, South Carolina 29418. The items of business are:

1. Election of directors proposed by the Company’s Board of Directors for a term of one year, as set forth in this Proxy Statement.

2. Ratification of the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm.

3. Advisory vote on executive compensation.

4. Three stockholder proposals if properly presented at the meeting.

These items are more fully described in the following pages, which are a part of this Notice.

Michelle H. Browdy

Vice President and Secretary

This Proxy Statement and the accompanying form of proxy card are being mailed beginning on or about March 12, 2012 to all stockholders entitled to vote. The IBM 2011 Annual Report, which includes consolidated financial statements, is being mailed with this Proxy Statement.

Important Notice Regarding the Availability of Proxy Materials for the Stockholder Meeting to be held on April 24, 2012: The Proxy Statement and the Annual Report to Stockholders are available at www.ibm.com/investor/material/.

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Table of Contents

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1. Election of Directors for a Term of One Year

The Board proposes the election of the following directors of the Company for a term of one year. Below is information about each nominee, including biographical data for at least the past five years. If one or more of these nominees become unavailable to accept nomination or election as a director, the individuals named as proxies on the enclosed proxy card will vote the shares that they represent for the election of such other persons as the Board may recommend, unless the Board reduces the number of directors.

Alain J.P. Belda, 68, is a managing director at Warburg Pincus LLC, a global private equity and investment firm. He is a member of IBM’s Executive Compensation and Management Resources Committee. Mr. Belda joined Alcoa in 1969 and subsequently held various executive positions. From 1979 to 1994, he was president of Alcoa Aluminio S.A. in Brazil, Alcoa’s Brazilian subsidiary. He was named executive vice president of Alcoa Inc. in 1994, vice chairman in 1995, president and chief operating officer in 1997 and president and chief executive officer in 1999. Mr. Belda was chairman and chief executive officer from 2001 until 2008; he remained chairman until his retirement in 2010. He is a director of Citigroup Inc. and Renault S.A. Additionally, during the past five years, he served as a director of E. I. du Pont de Nemours and Company. Mr. Belda became an IBM director in 2008.

William R. Brody, 68, is president of the Salk Institute for Biological Studies, a non-profit scientific research institution. He is a member of IBM’s Directors and Corporate Governance Committee. From 1987 to 1994, Dr. Brody was the Martin Donner Professor and director of the Department of Radiology, professor of electrical and computer engineering, and professor of biomedical engineering at The Johns Hopkins University and radiologist-in-chief of The Johns Hopkins Hospital. He was the provost of the Academic Health Center at the University of Minnesota from 1994 until 1996. Dr. Brody was president of The Johns Hopkins University from 1996 to early 2009. He is a director of Novartis AG and all T. Rowe Price fund companies. Additionally, during the past five years, he served as a director of Medtronic, Inc. Dr. Brody became an IBM director in 2007.

Kenneth I. Chenault, 60, is chairman and chief executive officer of American Express Company, a financial services company. Mr. Chenault joined American Express in 1981 and was named president of the U.S. division of American Express Travel Related Services Company, Inc. in 1993, vice chairman of American Express Company in 1995, president and chief operating officer in 1997 and chairman and chief executive officer in 2001. He is a director of The Procter & Gamble Company. Mr. Chenault became an IBM director in 1998.

Michael L. Eskew, 62, is retired chairman and chief executive officer of United Parcel Service, Inc., a provider of specialized transportation and logistics services. He is chair of IBM’s Audit Committee and a member of IBM’s Executive Committee. Mr. Eskew joined United Parcel Service in 1972. He was named corporate vice president for industrial engineering in 1994, group vice president for engineering in 1996, executive vice president in 1999, vice chairman in 2000, and he was chairman and chief executive officer from 2002 until his retirement at the end of 2007. Mr. Eskew remains on the board of United Parcel Service, and he is also a director of Eli Lilly and Company and 3M Company and chairman of the Annie E. Casey Foundation. Mr. Eskew became an IBM director in 2005.

David N. Farr, 57, is chairman and chief executive officer of Emerson Electric Co., a diversified manufacturing and technology company. He is a member of IBM’s Audit Committee. Mr. Farr joined Emerson in 1981 and subsequently held various executive positions. He was named senior executive vice president and chief operating officer in 1999, chief executive officer in 2000 and chairman and chief executive officer in 2004. Mr. Farr was named chairman, president and chief executive officer in 2005 and chairman and chief executive officer in 2010. He is a director of the US-China Business Council. Additionally, during the past five years, he served as a director of Delphi Corporation. Mr. Farr became an IBM director in 2012.

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Shirley Ann Jackson, 65, is president of Rensselaer Polytechnic Institute. She is a member of IBM’s Directors and Corporate Governance Committee. Dr. Jackson was a theoretical physicist at the former AT&T Bell Laboratories from 1976 to 1991, professor of theoretical physics at Rutgers University from 1991 to 1995 and chairman of the U.S. Nuclear Regulatory Commission from 1995 until she assumed her current position in 1999. Dr. Jackson is a director of FedEx Corporation, Marathon Oil Corporation, Medtronic, Inc., and Public Service Enterprise Group Incorporated. She is a member of the National Academy of Engineering, the President’s Council of Advisors on Science and Technology, the board of governors of the Financial Industry Regulatory Authority (FINRA) and the International Security Advisory Board to the United States Secretary of State. Dr. Jackson is a fellow of the American Academy of Arts and Sciences, a trustee of the Brookings Institution and a past president of the American Association for the Advancement of Science. She is a member of the Council on Foreign Relations, the American Philosophical Society and the board of regents of the Smithsonian Institution. Additionally, during the past five years, she served as a director of NYSE Euronext. Dr. Jackson became an IBM director in 2005.

Andrew N. Liveris, 57, is chairman, president and chief executive officer of The Dow Chemical Company, a diversified chemical company. He is a member of IBM’s Executive Compensation and Management Resources Committee. Mr. Liveris joined Dow in 1976 and subsequently held various executive positions, including vice president of specialty chemicals from 1998 to 2000, business group president for performance chemicals from 2000 to 2003, and president and chief operating officer from 2003 to 2004. Mr. Liveris was named president and chief executive officer of Dow in 2004 and chairman in 2006. Mr. Liveris serves as chairman of the International Council of Chemical Associations, vice chairman of the executive committee of The Business Council and the Business Roundtable, co-chair of the President’s Advanced Manufacturing Partnership and a member of the President’s Export Council. He is a member of the US-India CEO Forum, a trustee of Tufts University, and a member of the board of the Peterson Institute for International Economics. Additionally, during the past five years, he served as a director of Citigroup Inc. Mr. Liveris became an IBM director in 2010.

W. James McNerney, Jr., 62, is chairman, president and chief executive officer of The Boeing Company, an aerospace company and manufacturer of commercial jetliners and military aircraft. He is a member of IBM’s Executive Compensation and Management Resources Committee. Mr. McNerney joined Boeing in his current role in 2005. Beginning in 1982, he served in management positions at General Electric Company, including as president and chief executive officer of GE Aircraft Engines from 1997 to 2000. From 2001 to 2005, he served as chairman and chief executive officer of 3M Company. Mr. McNerney is chairman of the President’s Export Council. He is a director of The Procter & Gamble Company. Mr. McNerney became an IBM director in 2009.

James W. Owens, 66, is retired chairman and chief executive officer of Caterpillar Inc., a manufacturer of construction and mining equipment, diesel and natural gas engines and industrial gas turbines. He is a member of IBM’s Audit Committee. Mr. Owens joined Caterpillar in 1972 as a corporate economist and subsequently held various management positions, including chief financial officer. He was named group president in 1995 and vice chairman in 2003. Mr. Owens served as chairman and chief executive officer of Caterpillar from 2004 until his retirement in 2010. He is a director of Alcoa Inc. and Morgan Stanley. Mr. Owens serves on the boards of the Peterson Institute for International Economics and the Council on Foreign Relations and is a senior advisor at KKR & Co. L.P. He is a trustee of North Carolina State University and was a member of the President’s Economic Recovery Advisory Board. Mr. Owens became an IBM director in 2006.

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Samuel J. Palmisano, 60, is chairman of the Board of IBM and chair of IBM’s Executive Committee. Mr. Palmisano joined IBM in 1973. He was elected senior vice president and group executive of the Personal Systems Group in 1997, senior vice president and group executive of IBM Global Services in 1998, senior vice president and group executive of Enterprise Systems in 1999, president and chief operating officer in 2000, chief executive officer in 2002 and chairman of the Board in 2003. Mr. Palmisano was president and chief executive officer through 2011. Mr. Palmisano is a director of Exxon Mobil Corporation. Mr. Palmisano became an IBM director in 2000.

Virginia M. Rometty, 54, is president and chief executive officer of IBM and a member of IBM’s Executive Committee. Ms. Rometty joined IBM in 1981. She was elected senior vice president of Global Business Services in 2005, senior vice president of Sales and Distribution in 2009, senior vice president and group executive of Sales, Marketing and Strategy in 2010, and president and chief executive officer earlier this year. She is a member of the Council on Foreign Relations, the Board of Trustees of Northwestern University and the Board of Overseers and Board of Managers of Memorial Sloan-Kettering Cancer Center. Additionally, during the past five years, she served as a director of American International Group, Inc. Ms. Rometty became an IBM director in 2012.

Joan E. Spero, 67, is an adjunct senior research scholar at Columbia University’s School of International and Public Affairs. She is a member of IBM’s Audit Committee. She is a former visiting fellow at the Foundation Center. Ms. Spero served as U.S. Ambassador to the United Nations for Economic and Social Affairs from 1980 to 1981. From 1981 to 1993, she held several positions with American Express Company, the last being executive vice president, corporate affairs and communications. From 1993 to 1996, Ms. Spero served as U.S. Under Secretary of State for Economic, Business and Agricultural Affairs, and from 1997 through 2008, she was president of the Doris Duke Charitable Foundation. She is a director of International Paper Company. She is a member of the Council on Foreign Relations, a trustee (emeritus) of Columbia University, a former trustee of the Brookings Institution, and a trustee of the Wisconsin Alumni Research Foundation, the Morgridge Institute for Research and the International Center for Transitional Justice. Additionally, during the past five years, she served as a director of First Data Corporation and a member of the supervisory board of ING Group. Ms. Spero became an IBM director in 2004.

Sidney Taurel, 63, is senior advisor at Capital Royalty L.P., a private equity firm. He is chair of IBM’s Executive Compensation and Management Resources Committee and a member of IBM’s Executive Committee. Mr. Taurel joined Eli Lilly in 1971 and held management positions in the company’s operations in South America and Europe. He was named president of Eli Lilly International Corporation in 1986, executive vice president of the Pharmaceutical Division in 1991, executive vice president of Eli Lilly and Company in 1993, and president and chief operating officer in 1996. He was named chief executive officer of Eli Lilly and Company in 1998 and chairman of the board in 1999. Mr. Taurel retired as chief executive officer in early 2008 and as chairman in late 2008. He is a director of The McGraw-Hill Companies, Inc., a member of The Business Council and the Board of Overseers of the Columbia University Business School and a trustee of the Indianapolis Museum of Art. Mr. Taurel became an IBM director in 2001.

Lorenzo H. Zambrano, 67, is chairman and chief executive officer of CEMEX, S.A.B. de C.V., a producer and marketer of cement and ready-mix concrete products. He is chair of IBM’s Directors and Corporate Governance Committee and a member of IBM’s Executive Committee. Mr. Zambrano joined CEMEX in 1968. He was named chief executive officer in 1985 and has also served as chairman of the board since 1995. Additionally, during the past five years, he served as a director of Fomento Economico Mexicano, S.A.B. de C.V., Grupo Televisa, and Vitro, S.A. de C.V. and as chairman of the board of the Tecnologico de Monterrey. Mr. Zambrano became an IBM director in 2003.

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General Information

IBM Board of Directors

IBM’s Board of Directors is responsible for supervision of the overall affairs of the Company. To assist it in carrying out its duties, the Board has delegated certain authority to several committees. Following the Annual Meeting in 2012, the Board will consist of 14 directors. In the interim between Annual Meetings, the Board has the authority under the by-laws to increase or decrease the size of the Board and to fill vacancies. The Board held 10 meetings during 2011. The Board and the Directors and Corporate Governance Committee recognize the importance of director attendance at Board and committee meetings. In 2011, overall attendance at Board and committee meetings was over 95%. Attendance was at least 75% for each director. Information about board attendance at the Company’s 2011 Annual Meeting of Stockholders and the Company’s policy with regard to board members’ attendance at annual meetings of stockholders is available at http://www.ibm.com/investor/governance/board-of-directors/about-the-board.wss.

IBM’s Board of Directors has long adhered to governance principles designed to assure the continued vitality of the Board and excellence in the execution of its duties. Since 1994, the Board has had in place a set of governance guidelines reflecting these principles, including the Board’s policy of requiring a majority of independent directors, the importance of equity compensation to align the interests of directors and stockholders, and regularly scheduled executive sessions, including sessions of non-management directors without members of management. An executive session with independent directors is scheduled for at least once a year, and the non-management directors met in executive session two times in 2011. The IBM Board Corporate Governance Guidelines reflect the Company’s principles on corporate governance matters. These guidelines are available at http://www.ibm.com/investor/governance/corporate-governance-guidelines.wss.

The Directors and Corporate Governance Committee is responsible for leading the search for qualified individuals for election as directors to ensure the Board has the right mix of skills, expertise and background. The Board believes that the following attributes are key to ensuring the continued vitality of the Board and excellence in the execution of its duties: experience as a leader of a business, firm or institution; mature and practical judgment; the ability to comprehend and analyze complex matters; effective interpersonal and communication skills; and strong character and integrity. Each of the Company’s directors has these attributes. In identifying potential director candidates, the Committee and the Board also focus on ensuring that the Board reflects a diversity of experiences, backgrounds and individuals.

The IBM Board is composed of a diverse group of leaders in their respective fields. Many of the current directors have leadership experience at major domestic and international companies with operations inside and outside the United States, as well as experience on other companies’ boards, which provides an understanding of different business processes, challenges and strategies. Other directors have experience as presidents of significant academic, research and philanthropic institutions, which brings unique perspectives to the Board. Further, the Company’s directors also have other experience that makes them valuable members, such as prior public policy or regulatory experience that provides insight into issues faced by companies.

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The Directors and Corporate Governance Committee and the Board believe that the above-mentioned attributes, along with the leadership skills and other experiences of its Board members described in the table below, provide the Company with the perspectives and judgment necessary to guide the Company’s strategies and monitor their execution.

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Under the IBM Board Corporate Governance Guidelines, the Directors and Corporate Governance Committee and the full Board annually review the financial and other relationships between the non-management directors and IBM as part of the annual assessment of director independence. The Directors and Corporate Governance Committee makes recommendations to the Board about the independence of non-management directors, and the Board determines whether those directors are independent. The independence criteria established by the Board in accordance with New York Stock Exchange requirements and used by the Directors and Corporate Governance Committee and the Board in their assessment of the independence of directors is available at http://www.ibm.com/investor/governance/board-of-directors/director-independence-standards.wss. Applying those standards for the non-management directors standing for election, the Committee and the Board have determined that each of the following directors has met the independence standards: A.J.P. Belda, W.R. Brody, M.L. Eskew, D. N. Farr, S.A. Jackson, A.N. Liveris, W.J. McNerney, Jr., J.W. Owens, J.E. Spero, S. Taurel, and L.H. Zambrano. The Committee and the Board have determined that K.I. Chenault does not qualify as an independent director in view of the commercial relationships between IBM and American Express Company. As a result, Mr. Chenault does not participate on any committee of the Board and does not participate in the determination or approval of the compensation level for the Company’s CEO. The Company holds an executive session of the Board at least once a year that includes only independent directors. Otherwise, Mr. Chenault continues to participate fully in the Board’s activities and to provide valuable expertise and advice. Mr. Eskew’s son is employed by the Company and is not an executive officer. He was hired over a year before Mr. Eskew joined the Company’s Board, and his compensation and other terms of employment are determined on a basis consistent with the Company’s human resources policies. Based on the foregoing, the Board has determined that this relationship does not preclude a finding of independence for Mr. Eskew.

As noted below, the Directors and Corporate Governance Committee is responsible for the continuing review of the governance structure of the Board, and for recommending to the Board those structures and practices best suited to the Company and its stockholders. The Committee and the Board recognize that different structures may be appropriate under different circumstances. During its most recent transitions, the Company has separated the roles of chairman and CEO. At present, Mr. Palmisano serves as IBM’s chairman and Ms. Rometty serves as IBM’s chief executive officer. Additionally, the Board currently has three independent presiding directors, with the Chair of the Board committee responsible for the principal subject under discussion presiding at the executive sessions of non-management directors. For example, the Chair of the Executive Compensation and Management Resources Committee presides at executive sessions in which compensation for the CEO, the Chairman and the CFO is determined. The Directors and Corporate Governance Committee and the Board believe that this leadership structure is appropriate for the Company at this time as it provides for focused engagement by the Board committees and their Chairs in their respective areas of responsibility, while also providing for engagement and participation by all Board members with respect to items presented for deliberation.

In recent years, much attention has been given to the subject of risk and how companies assess and manage risks across the enterprise. At IBM, we believe that innovation and leadership are impossible without taking risks. We also recognize that imprudent acceptance of risk or the failure to appropriately identify and mitigate risks could be destructive of stockholder value. Senior management is responsible for assessing and managing the Company’s various exposures to risk on a day-to-day basis, including the creation of appropriate risk management programs and policies. IBM has developed a consistent, systemic and integrated approach to risk management to help determine how best to identify, manage and mitigate significant risks throughout the Company. The Board is responsible for overseeing management in the execution of its responsibilities and for assessing the Company’s approach to risk management. The Board exercises these responsibilities periodically as part of its meetings and also through the Board’s three committees, each of which examines various components of enterprise risk as part of their responsibilities. The Audit Committee periodically reviews the Company’s enterprise management framework, including the Company’s enterprise risk management processes. In addition, an overall review of risk is inherent in the Board’s consideration of the Company’s long-term strategies and in the transactions and other matters presented to the Board, including capital expenditures, acquisitions and divestitures, and financial matters. The Board’s role in risk oversight of the Company is consistent with the Company’s leadership structure, with the CEO and other members of senior management having responsibility for assessing and managing the Company’s risk exposure, and the Board and its committees providing oversight in connection with those efforts.

The process by which stockholders and other interested parties may communicate with the Board or non-management directors of the Company is available at http://www.ibm.com/investor/governance/board-of-directors/contact-the-board.wss.

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Committees of the Board

As explained above, Mr. Chenault does not qualify as an independent director; therefore, he does not participate on any committee of the Board.

Audit Committee

The Audit Committee is responsible for reviewing reports of the Company’s financial results, audits, internal controls and adherence to IBM’s Business Conduct Guidelines in compliance with applicable laws and regulations including federal procurement requirements. The Committee selects the independent registered public accounting firm and reviews its selection with the Board. In addition, at the beginning of each year, the Audit Committee approves the proposed services to be provided by the accounting firm during the year. Any additional engagements that arise during the course of the year are approved by the Audit Committee or by the Audit Committee chair pursuant to authority delegated by the Audit Committee. The Committee also reviews the procedures of the independent registered public accounting firm for ensuring its independence with respect to the services performed for the Company.

Members of the Committee are non-management directors who, in the opinion of the Board, satisfy the independence criteria established by the Board and the standards of the Securities and Exchange Commission (SEC). The Board has determined that Mr. Eskew qualifies as an Audit Committee Financial Expert as defined by the rules of the SEC. The Committee held six meetings in 2011. The IBM Board of Directors has adopted a written charter for the Committee, which is available at http://www.ibm.com/investor/corpgovernance/cgbc.phtml/. The Business Conduct Guidelines (BCGs) are IBM’s code of ethics for directors, executive officers, and employees. Any amendment to, or waiver of, the BCGs that applies to our directors or executive officers may be made only by the IBM Board or a Board committee and will be disclosed on IBM’s website. The BCGs are available at http://www.ibm.com/investor/governance/business-conduct-guidelines.wss.

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Directors and Corporate Governance Committee

The Directors and Corporate Governance Committee is devoted primarily to the continuing review and articulation of the governance structure of the Board of Directors. As discussed above, the Committee is responsible for recommending qualified candidates to the Board for election as directors of the Company, including the slate of directors that the Board proposes for election by stockholders at the Annual Meeting. The Committee recommends candidates based on their business or professional experience, the diversity of their background, and their talents and perspectives. The Committee identifies candidates through a variety of means, including information the Committee requests from time to time from the Secretary of the Company, recommendations from members of the Committee and the Board, and suggestions from Company management, including the CEO. Any formal invitation to a director candidate is authorized by the full Board. Mr. Farr is a new nominee this year. His nomination was recommended by the Committee and approved by the Board after following this candidate identification process. The Committee also considers candidates recommended by stockholders. Stockholders wishing to recommend director candidates for consideration by the Committee may do so by writing to the Secretary of the Company, giving the recommended candidate’s name, biographical data and qualifications.

The Committee also advises and makes recommendations to the Board on all matters concerning directorship practices, and on the function and duties of the committees of the Board. In addition, the Committee makes recommendations to the Board on compensation for non-management directors. The Committee currently retains DolmatConnell & Partners to assess trends and developments in director compensation practices and to compare the Company’s practices against them. The Committee uses the analysis prepared by the consultant as part of its periodic review of the Company’s director compensation practices. The Committee is responsible for reviewing and considering the Company’s position and practices on significant issues of corporate public responsibility, such as workforce diversity, protection of the environment and philanthropic contributions, and it reviews and considers stockholder proposals dealing with issues of public and social interest. Members of the Committee are non-management directors who, in the opinion of the Board, satisfy the independence criteria established by the Board. The Committee held three meetings in 2011. The IBM Board of Directors has adopted a written charter for the Committee, which is available at http://www.ibm.com/investor/governance/board-of-directors/committees-of-the-board.wss.

Executive Compensation and Management Resources Committee

The Executive Compensation and Management Resources Committee has responsibility for defining and articulating the Company’s overall executive compensation philosophy, and administering and approving all elements of compensation for elected corporate officers.

The Committee approves, by direct action or through delegation, participation in and all awards, grants and related actions under the Company’s various equity plans, reviews changes in the Company’s pension plans primarily affecting corporate officers, and manages the operation and administration of the IBM Supplemental Executive Retention Plan. The Committee has the direct responsibility to review and approve the corporate goals and objectives relevant to the CEO’s compensation, evaluate the CEO’s performance in light of those goals and objectives and, together with the other independent directors, determine and approve the CEO’s compensation level based on this evaluation. The Committee also has responsibility for reviewing the Company’s management resources programs and for recommending qualified candidates to the Board for election as officers. The Committee reviews the compensation structure for the Company’s officers and provides oversight of management’s decisions regarding performance and compensation of other employees. In addition, the Committee monitors compliance of stock ownership guidelines. All equity awards for employees other than senior management are approved by senior management, pursuant to a series of delegations that were approved by the Committee, and the grants made under these delegations are reviewed periodically with the Committee.

The IBM Senior Vice President of Human Resources (SVP HR) works directly with the chair of the Committee to provide a decision-making framework for use in making a recommendation for the CEO’s total compensation. In addition, IBM’s CEO and the SVP HR review the self-assessments of the Senior Vice Presidents and evaluate the information, along with comparisons to market compensation levels for cash compensation and total direct compensation, potential for future roles within IBM and total compensation levels relative to internal peers before and after any recommendations. Following this in-depth review, and in consultation with the SVP HR, the CEO makes compensation recommendations to the Committee based on the CEO’s evaluation of each senior executive’s performance and expectations for the coming year.

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The Committee has the sole authority to retain consultants and advisors as it may deem appropriate in its discretion, and the Committee has the sole authority to approve related fees and other retention terms. The Committee has retained Semler Brossy Consulting Group, LLC as its compensation consultant to advise the Committee on market practices and specific IBM policies and programs. Semler Brossy reports directly to the Compensation Committee Chairman and takes direction from the Committee. The consultant’s work for the Committee includes data analyses, market assessments, and preparation of related reports. Semler Brossy does not perform any other work for the Company, and the work done by them for the Committee is documented in a formal agreement executed by Semler Brossy and the Committee. See Section 1 of the 2011 Compensation Discussion and Analysis for additional information about the Committee’s consultant.

The Committee reports to stockholders as required by the SEC (see 2011 Report of the Executive Compensation and Management Resources Committee of the Board of Directors below). Members of the Committee are non-management directors who, in the opinion of the Board, satisfy the independence criteria established by the Board. Committee members are not eligible to participate in any of the plans or programs that the Committee administers. The Committee held five meetings in 2011. The IBM Board of Directors has adopted a written charter for the Committee, which is available at http://www.ibm.com/ investor/governance/board-of-directors/committees-of-the-board.wss.

Compensation Committee Interlocks and Insider Participation

No member of the Executive Compensation and Management Resources Committee had a relationship that requires disclosure as a Compensation Committee interlock.

Executive Committee

The Executive Committee is empowered to act for the full Board in intervals between Board meetings, with the exception of certain matters that by law may not be delegated. The Committee meets as necessary, and all actions by the Committee are reported at the next Board of Directors meeting. The Committee did not meet in 2011.

Certain Transactions and Relationships

Under the Company’s written related person transactions policy, information about transactions involving related persons is assessed by the independent directors on IBM’s Board. Related persons include IBM directors and executive officers, as well as immediate family members of directors and officers, and beneficial owners of more than five percent of the Company’s common stock. If the determination is made that a related person has a material interest in any Company transaction, then the Company’s independent directors would review, approve or ratify it, and the transaction would be required to be disclosed in accordance with the SEC rules. If the related person at issue is a director of IBM, or a family member of a director, then that director would not participate in those discussions. In general, the Company is of the view that the following transactions with related persons are not significant to investors because they take place under the Company’s standard policies and procedures: the sale or purchase of products or services in the ordinary course of business and on an arm’s-length basis; the employment by the Company where the compensation and other terms of employment are determined on a basis consistent with the Company’s human resources policies; and any grants or contributions made by the Company under one of its grant programs and in accordance with the Company’s corporate contributions guidelines.

From time to time, the Company may have employees who are related to our executive officers or directors. As noted in the discussion above on “General Information—Board of Directors,” Mr. Eskew’s son is employed by the Company. He is an executive of the Company (not an executive officer). In addition, an adult child of Mr. M. E. Daniels (Senior Vice President and Group Executive, Services) and a sibling of Dr. J.E. Kelly III (Senior Vice President and Director, Research) are employed by the Company in non-executive positions. Further, a brother-in-law of Mr. M. Loughridge (Senior Vice President and Chief Financial Officer, Finance and Enterprise Transformation) and the spouse of Mr. T.S. Shaughnessy (Senior Vice President, GTS Services Delivery) are executives of the Company. None of the above-referenced family member employees are executive officers of IBM. Each employee mentioned above received compensation in 2011 between $120,000 and $400,000. Additionally, in 2011 each family member employee mentioned above who is an executive of the Company received an equity grant. In 2011, IBM gave equity grants to approximately 400,000 non-executive employees in connection with IBM’s Centennial; each of the non-executive family member employees mentioned above received this equity grant. The compensation and other terms of employment of each of the family member employees noted above are determined on a basis consistent with the Company’s human resources policies.

Certain Information About Insurance and Indemnification

The Company has renewed its directors and officers indemnification insurance coverage. This insurance covers directors and officers individually where exposures exist other than those for which the Company is able to provide indemnification. This coverage runs from June 30, 2011 through June 30, 2012, at a total cost of approximately $6.4 million. The primary carrier is XL Specialty Insurance Company. Between February 1, 2011 and January 31, 2012, payments in the amount of approximately $47,000 were made pursuant to this liability insurance.

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2011 Director Compensation Narrative

Annual Retainer: In 2011, non-management directors received an annual retainer of $250,000. Chairs of the Directors and Corporate Governance Committee and the Executive Compensation and Management Resources Committee received an additional annual retainer of $20,000, and the chair of the Audit Committee received an additional annual retainer of $25,000.

Under the IBM Deferred Compensation and Equity Award Plan (DCEAP), 60% of the total annual retainer is required to be deferred and paid in Promised Fee Shares (PFS). Each PFS is equal in value to one share of the Company’s common stock. When a cash dividend is paid on the Company’s common stock, each director’s PFS account is credited with additional PFS reflecting a dividend equivalent payment. With respect to the payment of the remaining 40% of the annual retainer, directors may elect one or any combination of the following: (a) deferral into PFS, (b) deferral into an interest-bearing cash account to be paid with interest at a rate equal to the rate on 26-week U.S. Treasury bills updated each January and July, and/or (c) receipt of cash payments on a quarterly basis during service as a Board member. The Company does not pay above-market or preferential earnings on compensation deferred by directors. Under the IBM Board Corporate Governance Guidelines, within five years of initial election to the Board, non-management directors are expected to have stock-based holdings in IBM equal in value to five times the annual retainer initially payable to such director. Stock-based holdings mean (i) IBM shares owned personally or by members of the immediate family sharing the same household and (ii) DCEAP PFS. Stock-based holdings do not include unexercised options.

Payout under the DCEAP: Upon a director’s retirement or other completion of service as a director (a) all amounts deferred as PFS are payable, at the director’s choice, in either cash and/or shares of the Company’s common stock, and (b) amounts deferred into the interest-bearing cash account are payable in cash. The payout of PFS generally is valued based on the average of the high and low sales prices of IBM stock on the New York Stock Exchange on the first day after the date on which the director ceases to be a member of the Board.

Termination of IBM Non-Employee Directors Stock Option Plan (DSOP): Prior to January 1, 2007, non-management directors who had been elected or reelected as a member of the Board as of the adjournment of the Annual Meeting of Stockholders received, on the first day of the month following such meeting, an annual grant of options to purchase 4,000 shares of IBM common stock. The exercise price of the options was the average of the high and low sales prices of IBM stock on the New York Stock Exchange on the date of grant. Each option has a term of ten years and became exercisable in four equal installments commencing on the first anniversary of the date of grant and continuing for the three successive anniversaries thereafter. All options granted under the DSOP have vested. Effective January 1, 2007, the DSOP was terminated. Therefore, the 2011 Director Compensation Table does not include any option awards. However, the table below entitled “Aggregate Number of Option Awards Outstanding for Each Director at Fiscal Year-End” reflects any options outstanding under the DSOP as of year end in 2011.

IBM’s Matching Grants Program: Non-management directors are eligible to participate in the Company’s Matching Grants Program on the same basis as the Company’s employees based in the U.S. Under this program, the Company will provide specified matches in cash or equipment in connection with a director’s eligible contributions to approved educational institutions, medical facilities, and cultural or environmental institutions. Each director is eligible for a Company match on total gifts up to $10,000 per calendar year. Amounts shown in the 2011 Director Compensation Table for matching grants may be in excess of $10,000 because such amounts include Company contributions on gifts that were made by directors in previous years.

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2011 Director Compensation Table

Fees Earned or Paid in Cash (column (b)): Amounts shown in this column reflect the annual retainer paid to each director as described above. A director receives a pro-rated amount of the annual retainer for service on the Board and, if applicable, as a committee chair, based on the portion of the year the director served.

All Other Compensation (column (c)): Amounts shown in this column represent:

·      Dividend equivalent payments on PFS accounts under the DCEAP as described above.

·      Group Life Insurance premiums paid by the Company on behalf of the directors.

·      Value of the contributions made by the Company under the Company’s Matching Grants Program as described above.

Mr. Farr joined the Board in January 2012; therefore, he is not included in the table above.

(1)   Amounts in this column include the following: for Mr. Belda: $16,965 of dividend equivalent payments on PFS; for Dr. Brody: $22,304 of dividend equivalent payments on PFS; for Mr. Chenault: $47,771 of dividend equivalent payments on PFS; for Mr. Eskew: $34,567 of dividend equivalent payments on PFS; for Dr. Jackson: $30,620 of dividend equivalent payments on PFS; for Mr. McNerney: $20,000 contributed by the Company under the Matching Grants Program; for Mr. Owens: $28,290 of dividend equivalent payments on PFS and $20,000 contributed by the Company under the Matching Grants Program; for Ms. Spero: $35,982 of dividend equivalent payments on PFS; for Mr. Taurel: $44,968 of dividend equivalent payments on PFS and $10,000 contributed by the Company under the Matching Grants Program; and for Mr. Zambrano: $37,420 of dividend equivalent payments on PFS.

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Aggregate Number of Option Awards Outstanding for Each Director at Fiscal Year-End

As described above, until the termination of the DSOP effective January 1, 2007, non-management directors received an annual grant of options to purchase 4,000 shares of IBM common stock. All options in the following table are fully exercisable. Because Dr. Brody and Messrs. Belda, Farr, Liveris and McNerney joined the Board after the termination of the DSOP, they did not receive any options and therefore are not included in the following table. In addition, Dr. Jackson had no options outstanding at the end of 2011; therefore, she is not included in the table.

Section 16(a) Beneficial Ownership Reporting Compliance

The Company believes that all reports for the Company’s executive officers and directors that were required to be filed under Section 16 of the Securities Exchange Act of 1934 were timely filed.

Ownership of Securities

Security Ownership of Certain Beneficial Owners

The following sets forth information as to any person known to the Company to be the beneficial owner of more than five percent of the Company’s common stock as of December 31, 2011.

(1)   Based on the Schedule 13G filed with the Securities and Exchange Commission on February 14, 2012 by Warren E. Buffett, Berkshire Hathaway Inc. and National Indemnity Company. Each reported that it had shared voting and dispositive power over all shares beneficially owned. The Schedule 13G does not identify any shares with respect to which there is a right to acquire beneficial ownership. The Schedule 13G states that the shares were acquired and are held in the ordinary course of business and were not acquired and are not held for the purpose of or with the effect of changing or influencing the control of IBM.

(2)   Based on the Schedule 13G filed with the Securities and Exchange Commission on February 9, 2012 by State Street Corporation and certain subsidiaries (State Street). State Street reported that it had shared voting and dispositive power over all shares beneficially owned. The Schedule 13G does not identify any shares with respect to which there is a right to acquire beneficial ownership. The Schedule 13G states that the shares were acquired and are held in the ordinary course of business and were not acquired and are not held for the purpose of or with the effect of changing or influencing the control of IBM.

(3)   Based on the Schedule 13G filed with the Securities and Exchange Commission on February 13, 2012 by BlackRock, Inc. and certain subsidiaries (BlackRock). BlackRock reported that it had sole voting and dispositive power over all shares beneficially owned. The Schedule 13G does not identify any shares with respect to which there is a right to acquire beneficial ownership. The Schedule 13G states that the shares were acquired and are held in the ordinary course of business and were not acquired and are not held for the purpose of or with the effect of changing or influencing the control of IBM.

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Common Stock and Stock-based Holdings of Directors and Executive Officers

The following table sets forth the beneficial ownership of shares of the Company’s common stock as of December 31, 2011 by IBM’s current directors and nominees, the executive officers named in the 2011 Summary Compensation Table, and such directors and all of the Company’s executive officers as of December 31, 2011 as a group. Also shown are shares over which the named person could have acquired voting power or investment power within 60 days after December 31, 2011. Voting power includes the power to direct the voting of shares held, and investment power includes the power to direct the disposition of shares held.

(1)   This column is comprised of shares of IBM common stock beneficially owned by the named person. Unless otherwise noted, voting power and investment power in the shares are exercisable solely by the named person, and none of the shares are pledged as security by the named person. Standard brokerage accounts may include nonnegotiable provisions regarding set-offs or similar rights. This column includes 536,452 shares in which voting and investment power are shared. The directors and officers included in the table disclaim beneficial ownership of shares beneficially owned by family members who reside in their households. The shares are reported in such cases on the presumption that the individual may share voting and/or investment power because of the family relationship. The shares reported in this column do not include 716,426 shares held by the IBM Personal Pension Plan Trust Fund, over which the members of the IBM Retirement Plans Committee, a management committee presently consisting of certain executive officers of the Company, have voting power, as well as the right to acquire investment power by withdrawing authority now delegated to various investment managers.

(2)   For executive officers, this column is comprised of the shares shown in the “Common Stock” column and, as applicable, all restricted stock units including retention restricted stock units, officer contributions into the IBM Stock Fund under the IBM Excess 401(k) Plus Plan, and Company contributions into the IBM Stock Fund under the Excess 401(k) Plus Plan. Some of these restricted stock units may have been deferred under the Excess 401(k) Plus Plan in accordance with elections made prior to January 1, 2008, and they will be distributed to the executive officers after termination of employment as described in the 2011 Nonqualified Deferred Compensation Narrative.

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(3)   For non-management directors, this column is comprised of shares that can be purchased under the IBM Non-Employee Director Stock Option Plan within 60 days after December 31, 2011 (see 2011 Director Compensation Narrative for additional information). For executive officers, this column is comprised of (i) shares that can be purchased under an IBM stock option plan within 60 days after December 31, 2011, and (ii) RSU awards that vest within 60 days after December 31, 2011.

(4)   Promised Fee Shares earned and accrued under the IBM Deferred Compensation and Equity Award Plan (DCEAP) as of December 31, 2011, including dividend equivalents credited with respect to such shares. Upon a director’s retirement, these shares are payable in cash or stock at the director’s choice (see 2011 Director Compensation Narrative for additional information).

(5)   Includes 1,619 shares in which voting and investment power are shared.

(6)   Includes 91,119 shares in which voting and investment power are shared.

(7)   Mr. Farr joined the Board in January 2012.

(8)   Includes 52,674 shares in which voting and investment power are shared.

(9)   Includes 47,944 shares in which voting and investment power are shared.

(10) Voting and investment power are shared.

(11) Includes 263,878 shares in which voting and investment power are shared.

(12) The total of these three columns represents less than 1% of IBM’s outstanding shares, and no individual’s beneficial holdings totaled more than 1/5 of 1% of IBM’s outstanding shares.

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Executive Compensation

2011 Report of the Executive Compensation and Management Resources Committee of the Board of Directors

Set out below is the Compensation Discussion and Analysis, which is a discussion of the Company’s executive compensation programs and policies written from the perspective of how we and management view and use such programs and policies. Given the Committee’s role in providing oversight to the design of those programs and policies, and in making specific compensation decisions for senior executives using those policies and programs, the Committee participated in the preparation of the Compensation Discussion and Analysis, reviewing successive drafts of the document and discussing those with management. The Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement. We join with management in welcoming readers to examine our pay practices and in affirming the commitment of these pay practices to the long-term interests of stockholders.

Sidney Taurel (chair)

Alain J. P. Belda

Andrew N. Liveris

W. James McNerney, Jr.

2011 Compensation Discussion and Analysis

Section 1: Executive Compensation Summary

Trust and personal responsibility in all relationships—relationships with clients, partners, communities, fellow IBMers, and investors—is a core value at IBM. Investors should have as much trust in the integrity of a company’s executive compensation process as clients do in the quality of its products. A breach of this trust is unacceptable. As a part of maintaining this trust, we well understand the need for our investors— not only professional fund managers and institutional investor groups, but also millions of individual investors—to know how and why compensation decisions are made. We have put tremendous effort and rigor into our own executive compensation processes over many years, continually assessing and updating them to meet new voluntary criteria as well as requirements from the SEC. Investors—IBM’s owners—want senior leaders to run the Company in a way that protects and grows their investment over the long term while appropriately managing risk. This is no simple task at any company, and at a company as large and complex as IBM, it is a particularly exciting leadership challenge. IBM holds a unique identity, based on talent, brand, global operating footprint, the size and scope of our business overall, and the size of each of our individual lines of business. Unlike those few other companies of comparable size and scale that tend to operate as holding companies of component businesses, we operate as an integrated entity across a number of significant business lines, most large enough to be among the Fortune 150 biggest companies if they were standalone businesses. Our unique, integrated model delivers great value to our investors and our clients, and demands a senior leadership team of unusual depth, agility and experience.

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To that end, IBM’s executive compensation practices are designed specifically to meet five key objectives:

·    Ensure that the interests of IBM’s leaders are closely aligned with those of our investors;

·    Attract and retain highly qualified senior leaders who can drive a global enterprise to succeed in today’s competitive marketplace;

·    Motivate our leaders to deliver a high degree of business performance without encouraging excessive risk taking;

·    Differentiate compensation so that it varies based on individual and team performance; and

·    Balance rewards for both short-term results and the long-term strategic decisions needed to ensure sustained business performance over time.

With these goals in mind, IBM executives earn their compensation based on performance over three time frames:

1.  Current Year—Salary and annual incentives that reflect actions and results over 12 months;

2.  Longer-term—A long-term incentive plan that reflects results over a minimum of three years, helping to ensure that current results remain sustainable; and

3.  Full Career—Deferrals, retention payments and retirement accumulations help ensure today’s leaders stay with IBM until their working careers end.

The Company considered the results of the management Say on Pay proposal presented to the stockholders for approval in 2011. In light of the support the proposal received, the Company’s compensation policies and decisions, explained in detail in this CD&A, continue to be focused on long-term financial performance to drive stockholder value. The Company has indicated that it will provide an advisory vote on executive compensation (Say on Pay) on an annual basis.

Compensation Elements for Senior Leaders—Focused on Performance

IBM’s senior executives’ annual compensation varies year to year based on business results and individual performance. As reflected in the charts below, for 2011, 92% of Chairman and CEO Palmisano’s total compensation was performance based, with 29% in annual performance based incentive and 63% in long-term elements; similarly, 87% of the Senior Vice Presidents’ (SVPs) total compensation was performance based, using the same elements. This ensures that the interests of senior executives are aligned with the long-term interests of stockholders.

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Current Year’s Performance: Salary and Annual Incentives

Salary. Senior executives at IBM receive a small percentage of their overall compensation in salary. In 2011, for example, as Chairman and CEO, Mr. Palmisano earned 8% of his compensation in salary, and the SVPs earned an average of 13% of their compensation in salary.

Annual Incentive. Senior executives are incented through a program that sets performance targets based on their role and scope. Actual payments are driven by business performance against revenue growth, net income, and cash flow targets and individual performance, as reflected in the Personal Business Commitment review process described under “How and Why Compensation Decisions Are Made.” Top performers earn the greatest payouts; median performers earn much smaller amounts; and the lowest performers earn no incentive payments at all. In 2011, the annual incentive earned by the Chairman and CEO represented 29% of his total compensation; incentives achieved by the SVPs averaged 20% of their total compensation. Additional information about the Annual Incentive Program is outlined in Section 2 of this CD&A, “Setting Performance Targets for Incentive Compensation.”

Other Compensation. The SEC disclosure rules require that companies include certain items in the Summary Compensation Table column entitled “All Other Compensation.” At IBM, many of these items are available to all employees. In fact, on average, additional programs that are restricted to senior executive participation amount to less than 1% of their total compensation. IBM’s security practices provide that all air travel by the Chairman and the CEO, including personal travel, be on Company aircraft. IBM does not provide any tax assistance to the Chairman or the CEO in connection with taxes incurred for personal travel by these officers on the corporate aircraft. While the cost of corporate aircraft usage varies year to year based on several external factors such as fuel costs, using corporate aircraft for all travel is a prudent step to ensure the safety of the Chairman and the CEO given the breadth of IBM’s operations in over 170 countries and the realities of global security risks throughout the world. Given the personal travel security practice for the Chairman and the CEO, family members periodically accompany such officers on the corporate aircraft. In accordance with tax requirements, income was imputed to Mr. Palmisano for personal travel by his family members on the corporate aircraft in 2011. Since 2008, Mr. Palmisano has made a charitable contribution in recognition of his family’s personal travel on the corporate aircraft; in 2011, he contributed $59,000 to the IBM International Foundation.

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Longer-Term Performance: Long-Term Incentive Plan

Long-term incentive plans (LTIP) have been a focal point for much of the discussion over executive compensation in the past several years. Well-designed LTIPs ensure that senior leaders hold a competitive stake in their company’s financial future. At the same time, the size of the awards reflects the value that the company places on the individual executive at the time. Any gain the executives realize in the long run from the program depends on what they and their colleagues do to drive the financial performance of the company. Under IBM’s LTIP, senior leaders may receive certain grants of IBM equity, as explained below.

Performance Share Unit (PSU) Grants. This portion of the LTIP focuses the senior leadership team on delivering business performance over three years against two key financial metrics which drive long-term stockholder value—earnings per share and cash flow. Through this program, the senior leadership team is eligible to earn a target number of shares of IBM stock at the end of a three-year performance period. The award pays out at the end of the three years depending on how well the Company performed against targets set at the beginning of the three-year period. The payouts are made in shares of stock, so the value goes up or down based on stock price performance from the beginning of the grant. Additional information about PSUs is set forth in Section 2 of this CD&A, “Setting Performance Targets for Incentive Compensation.”

In 2011, the long-term incentive grant to the Chairman and CEO and approximately 60 members of the senior leadership team, including each SVP, was comprised entirely of PSUs. For Mr. Palmisano, this represents 63% of his total compensation assuming future performance at target. PSUs were, on average, 67% of the SVPs’ total compensation in 2011. In 2012, the annual long-term incentive grant for this group will again be entirely PSUs.

The IBM Integration & Values Team (I&VT) consists of a select group of approximately 320 executives charged with working to drive growth through integration across IBM’s business segments and by demonstrating IBM’s values. The CEO may grant members of this group additional performance shares (Performance Uplift) for delivering extraordinary results. The Chairman, the CEO and SVPs are not eligible for these awards.

Other Stock-Based Grants. Our LTIP also provides for grants of other stock-based awards in addition to PSUs to focus senior leaders on delivering performance that increases the value of the Company through the growth of IBM’s stock price over the long term. Although since 2009 senior executives have received only PSUs, other stock-based grants have been made to this group in the past and are made to other executives. Other stock-based grants may include stock options, restricted stock, restricted stock units or any combination. These grants vest—become available for sale or exercise—over time, typically over one to four years. Until vested, the grants have no cash value, except that dividend equivalents are paid on restricted stock units granted prior to January 1, 2008. For restricted stock units awarded on or after January 1, 2008, dividend equivalents are not paid. The outstanding stock-based grants for the named executive officers are shown in the 2011 Outstanding Equity Awards at Fiscal Year-End Table in this Proxy Statement.

Full Career Performance: Retention, Pension and Savings

Retention of our key leaders for a full career is an important element of our total compensation strategy. This is accomplished through a combination of retention payments and retirement plans.

Retention Stock-Based Grants & Cash Awards. Periodically, the CEO reviews outstanding stock-based awards for the members of the Company’s senior leadership team and other key executives. Depending on individual performance and the competitive environment for senior executive leadership talent, the CEO may recommend that the Compensation Committee approve individual retention awards in the form of restricted stock units or cash, for certain executives. The retention restricted stock unit (RRSU) grants typically vest at the end of five years, and the cash awards have a clawback (i.e., repayment clause) if an executive leaves IBM before a specified date. These awards make it more difficult for other companies to recruit IBM’s top talent.

Closed Retention Plan. In 1995, IBM created a new plan to help retain, for their full careers, the caliber of senior leaders needed to turn the Company around, preserve its long-term viability, and position it for growth in the future. To discourage these leaders from joining competitors, their benefits under this retention plan would be forfeited if they left IBM prior to age 60. The approach worked, as evidenced by the Company’s historic turnaround in the late 1990s, and its current position of market leadership. Thirteen of the Company’s top 17 senior executives at the end of 2011, including all of the named executive officers, were with IBM and eligible for the Retention Plan at the time it was introduced and remain with the Company today. Because its original purpose had been met, the plan was closed to new participants in 2004. Future accruals under the plan stopped on December 31, 2007, and the Retention Plan will not be replaced by any other plan.

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Pension Plans. Prior to 2008, IBM’s senior executives and other IBM employees in the U.S. participated in pension plans. Future accruals under the pension plans stopped on December 31, 2007. The amount of the pension benefit under these plans is based on pay and service and is determined by the same formulas for executives and non-executives.

Savings Plan. IBM’s senior executives are eligible to participate in the Company’s savings plan just like any other IBM employee. Company contributions to the defined contribution plan comprises a significant portion of the “All Other Compensation” found in the Summary Compensation Table for the CEO and other named executive officers. The money that U.S. executives save through the IBM 401(k) Plus Plan, as for all U.S. employees, is eligible for a Company match. Prior to January 1, 2008, this match equaled 50% of the first 6% of eligible pay that participants saved through the plan for those hired before January 1, 2005, and 100% of the first 6% saved for those hired on or after January 1, 2005. Effective January 1, 2008, the 401(k) Plus Plan, became the only tax-qualified retirement program available to IBM’s U.S. employees for future deferrals and employer contributions. Under the provisions of the plan, IBM matches a participant’s own contributions dollar-for-dollar up to 6% of eligible pay for those hired before January 1, 2005, and up to 5% for those hired on or after that date. In addition, IBM makes automatic contributions to a participant’s 401(k) Plus Plan account—equal to 1%, 2% or 4% of a participant’s eligible pay—depending on the participant’s pension plan eligibility on December 31, 2007. Matching contributions and automatic contributions are made once a participant has completed one year of service.

Deferred Savings Plan. In the U.S., the Department of Labor and Internal Revenue Service also permit employees who exceed certain income thresholds to defer, on a nonqualified basis, receipt of compensation they earn. This also allows IBM to delay paying these obligations and, until they come due and are paid, to retain the cash for operating purposes. In simple terms, this deferred compensation is money earned in the past but not yet paid out. Amounts deferred into IBM’s non-qualified plan, the IBM Excess 401(k) Plus Plan, are recordkeeping (notional) accounts and are not held in trust for the participants. Participants in the Excess 401(k) Plus Plan may invest their notional accounts in the primary investment options available to all employees through the 401(k) Plus Plan. Once participants in the Excess 401(k) Plus Plan have completed one year of service, they are also eligible to receive Company matching and automatic contributions on eligible pay deferred into the Excess 401(k) Plus Plan and on money earned in excess of the Internal Revenue Code compensation limits. IBM does not pay guaranteed, above-market or preferential earnings on deferred compensation. For executives with long and successful careers at IBM, the deferrals can accumulate to sizeable amounts over time.

At the end of 2011, the value of Mr. Palmisano’s Excess 401(k) Plus Plan account was $68,637,022. Of that amount, $32,523,193 represents money that he earned and deferred during the past 16 years that the program has been available. Mr. Palmisano could have chosen not to defer his earned compensation, taken those payments from IBM and put them in other investment vehicles. Had he done so, this amount would not be disclosed here. $4,081,390 represents matching contributions made by the Company based on the formula in the “Savings Plan” described above, which is the same for all U.S. employees with similar service to Mr. Palmisano. The remaining $32,032,439 is made up of investment gains, of which 73% are directly related to the increase in IBM stock price and the reinvestment of IBM dividends during his tenure as a senior executive and CEO. Like all participants, Mr. Palmisano’s savings are subject to investment returns. As a result, the account balance will change over time depending on market performance.

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How and Why Compensation Decisions Are Made

At any level, compensation reflects an employee’s value to the business—market value of skills, individual contribution and business results. To be sure we appropriately assess the value of senior executives, IBM follows an evaluation process, described here in some detail:

1. Making Commitments

At the beginning of each year, all IBM employees, including the Chairman, the CEO and other senior executives, make a Personal Business Commitment (PBC) of the goals, both qualitative and quantitative, they seek to achieve that year in support of the business. These commitments are reviewed and approved by each individual’s manager. The commitments of both the Chairman and the CEO are reviewed directly by the Board of Directors. As part of this process, many factors are considered, including an understanding of the business risks associated with the commitments.

2. Determining Senior Vice Presidents (SVPs) Compensation

Evaluation of Results by the CEO

Throughout the year, employees assess their progress against their PBCs. At year end, employees at all levels, including executives, work with their managers to evaluate their own results—not only with regard to their stated goals, but in relation to how well their peers and the entire Company performed.

The self-assessments of the SVPs are reviewed by the Senior Vice President of Human Resources (SVP HR) and the CEO, who evaluate the information, along with the following:

·   Comparisons to market compensation levels for cash compensation and total direct compensation;

·   Potential for future roles within IBM; and

·   Total compensation levels relative to internal peers before and after any recommendations.

Following this in-depth review and in consultation with the SVP HR, the CEO makes compensation recommendations to the Compensation Committee based on an evaluation of each senior executive’s performance and expectations for the coming year.

Evaluation of Results by the Compensation Committee

The Compensation Committee decides whether to approve or adjust the CEO’s recommendations for the senior executives.

The Committee evaluates all of the factors considered by the CEO and reviews compensation summaries that tally the dollar value of all compensation and related programs, including salary, annual incentive, long-term compensation, deferred compensation, retention payments and pension benefits. These summaries provide the Committee an understanding of how their decisions affect other compensation elements and the impact that separation of employment or retirement will have.

3. Determining Compensation for the Chairman and the CEO—Research, Recommendations and Review

IBM’s SVP HR works directly with the chair of the Compensation Committee to provide a decision-making framework for use in making a recommendation for total compensation for both the Chairman and the CEO. For each officer, this framework includes a self-evaluation of performance against commitments in the year, with a self-assessment of performance against the Company’s stated strategic objectives. In addition to the above, the Committee also reviews an analysis of IBM’s total performance over a multi-year period and a competitive benchmark analysis provided by the Committee’s outside consultant, Semler Brossy.

The Compensation Committee separately reviews all relevant information and arrives at its recommendation for total compensation for both the Chairman and the CEO. In this work, the Committee is assisted by Semler Brossy.

The final pay recommendations for both the Chairman and the CEO are presented to the independent directors on IBM’s Board for further review, discussion and final approval.

4. Ensuring Competitive Pay—Approach to Benchmarking

IBM participates in several executive compensation surveys that provide general trend information and details on levels of salary, target annual incentives and long-term incentives, the relative mix of short- and long-term incentives, and mix of cash and stock-based pay. Given the battle for talent that exists in our industry, the benchmark companies that are used by the Compensation Committee to guide its decision making have included a broad range of key information technology companies, to help us identify trends in the industry. We also include companies outside our industry, with stature, size and complexity that approximate our own, in recognition of the fact that competition for senior management talent is not limited to our industry. The surveys and benchmark data are supplemented by input from the Compensation Committee’s outside consultant on factors such as recent market trends. The Committee reviews and approves this list annually.

The Compensation Committee re-examined the benchmark group for 2011. After reviewing the selection criteria for the benchmark group, the Committee determined that companies from the survey participants that meet the following criteria should be included in the 2011 benchmark group:

·   All companies in the technology industry with revenue that exceeds $15 billion, plus

·   Additional companies (up to two per industry) in industries other than technology, with revenue that exceeds $40 billion and that have a global complexity similar to IBM.

This group does not include companies that have participated in the U.S. Government’s Troubled Asset Relief Program (TARP).

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2011 Benchmark Group:

For the 2012 benchmark group, the Committee approved the same list of companies as above except Archer Daniels Midland and UPS were not included because compensation data was not available through the survey used.

The data from this survey and related sources form the primary external view of the market, and the Company’s philosophy is to generally consider a range from the 50th to 75th percentile of the market for cash and total compensation for IBM job roles compared to jobs of similar size and complexity at companies within our benchmark group. For individual compensation decisions, the benchmark information is used together with an internal view of longer-term potential and individual performance relative to other executives. For the Company’s senior executives, the Compensation Committee also takes into account long-term retention objectives, recognizing that their skills and experience are highly sought after by other companies and, in particular, by the Company’s competitors. Because factors such as performance and retention, as well as size and complexity of the job role, are considered when compensation decisions are made, the cash and total compensation for an individual named executive officer may be higher or lower than the median of the total benchmark group.

5. Compensation Committee Consultant

The Committee enters into a consulting agreement with its outside compensation consultant on an annual basis. The Committee has retained Semler Brossy as its compensation consultant to advise the Committee on market practices and specific IBM policies and programs. Semler Brossy does not perform any other work for the Company, reports directly to the Compensation Committee Chairman, and takes direction from the Committee. The consultant’s work for the Committee includes data analyses, market assessments, and preparation of related reports. The work done by Semler Brossy for the Committee is documented in a formal agreement which is executed by the consultant and the Committee.

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2011 Compensation Decisions for Mr. Palmisano as Chairman and CEO

The Compensation Committee made decisions for Chairman and CEO Palmisano’s 2011 compensation following the process and using the pay components that were previously described. The Compensation Committee noted the following as key points regarding his performance against his Personal Business Commitments for 2011:

·          Achieved very strong financial performance including record profit, cash flow and earnings per share (EPS), outperforming the market and our industry in a challenging economic environment

·          Developed a robust slate of candidates to succeed him, which ultimately led to the appointment of Virginia M. Rometty as President and CEO

·          On track toward achieving our long-term financial roadmap, delivering $13.44 operating earnings per share, well on track to achieve our 2015 roadmap objective of at least $20 operating EPS

·          Returned significant value to shareholders, as reflected by the dividend increase from $3.2 billion in 2010 to $3.5 billion in 2011, $15 billion purchase of shares in 2011, and cumulative total returns for stock that have outperformed the S&P 500 and S&P Information Technology indices for the past 1, 5 and 10 years (see performance graphs on pages 142-143 of IBM’s 2011 Annual Report to Stockholders incorporated by reference into the Company’s Form 10-K for 2011)

·          Continued IBM’s leadership position as the premier globally integrated enterprise

·          Capitalized on growth market strategy by increasing Growth Market Unit’s share of IBM revenue

·          Delivered the Smarter Planet strategy and solutions that allow companies, industries and cities to innovate and work better, enabled by smarter technologies and systems

·          Developed robust offerings to drive client value in use of Cloud, Business Analytics and optimization

·          Increased IBM’s leading market position in middleware and maintained leading market position in services and servers

·          Generated highest software and services pre-tax profit dollars, driven in part by acquisitions and middleware in software, and quality, productivity and global delivery in services

·          Successfully closed and integrated 5 acquisitions for $1.8 billion to strengthen our portfolio of offerings

·          Continued leadership in technology and innovation, earning more U.S. patents than any other company for the 19th consecutive year

·          Invested in workforce and leadership programs for employees worldwide to motivate high performance and drive business objectives

The Committee considered these results and recommended that Mr. Palmisano receive $6,500,000 in annual incentive for his 2011 performance.

Note: Operating earnings per share, referenced above, is a non-GAAP financial measure. For reconciliation and other information concerning this item, see page 38 of IBM’s 2011 Annual Report to Stockholders (GAAP Reconciliation) incorporated by reference into the Company’s Form 10-K for 2011.

2012 Compensation Decisions for Mr. Palmisano as Chairman

The Committee worked with Semler Brossy to review Mr. Palmisano’s total compensation as Chairman, using the framework described earlier in the section “How and Why Compensation Decisions are Made”, as well as Company performance and Mr. Palmisano’s personal performance. Based on this review, the Committee recommended that Mr. Palmisano’s base salary for 2012 remain at $1,800,000 and that his variable compensation be delivered in long-term elements. The annual incentive target was reduced to zero because Mr. Palmisano no longer has operational responsibility. His principal focus is to ensure an orderly transition, and to work with the CEO to deliver the long-term results as detailed in the roadmap for 2015. The Committee recommended a 2012 long-term incentive award comprised entirely of 2012-2014 Performance Share Units valued at $20,000,000 to continue Mr. Palmisano’s focus on positioning the Company for long-term success.

The Committee’s recommendations were approved by the independent directors on IBM’s Board. The PSU award will be made on June 8, 2012.

2012 Compensation Decisions for Ms. Rometty as CEO

The Committee worked with Semler Brossy to review Ms. Rometty’s base salary, annual incentive target and long-term incentive award value using the framework described earlier in the section “How and Why Compensation Decisions are Made”, as well as Company performance and Ms. Rometty’s personal performance. Based on this review, the Committee recommended a base salary of $1,500,000 and a target annual incentive of $3,500,000.

The Committee also recommended a 2012 long-term incentive award comprised entirely of 2012-2014 Performance Share Units valued at $10,000,000. The Committee chose the long-term incentive value for Ms. Rometty in light of competitive benchmarks, the personal skill set she brings to the job and the Committee’s desire to ensure that she has a long-term focus.

The Committee’s recommendations were approved by the independent directors on IBM’s Board. The PSU award will be made on June 8, 2012.

2011 Compensation Decisions for Ms. Rometty as Senior Vice President and Group Executive, Sales, Marketing and Strategy

The Compensation Committee noted the following as key points regarding Ms. Rometty’s performance against her Personal Business Commitments for 2011:

·   Grew revenue and profit and outperformed the industry. Gained significant share in the Growth Markets

·   Drove value creation for clients by achieving IBM growth play targets across Cloud, Business Analytics, Smarter Planet, and Growth Markets

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·   Advanced IBM’s Smarter Planet agenda by producing 400 new references

·   Transformed IBM sales force, simplified coverage, built industry skills and increased the effectiveness of first line sales managers

·   Developed the first IBM Africa strategy and drove execution with emphasis on risk management and controls

The Committee considered these results and recommended that Ms. Rometty receive $1,470,000 in annual incentive for her 2011 performance.

2011 and 2012 Compensation Decisions for Other Named Executive Officers

The Compensation Committee also made decisions for the following named executive officers, noting the key points below:

Mark Loughridge, Senior Vice President and Chief Financial Officer, Finance and Enterprise Transformation

·   Exceeded Board of Directors budget for EPS, net income, and cash

·   IBM’s four key-growth initiatives exceeded full year targets including at least double digit growth for each initiative

·   Improved IBM’s control posture and met Audit Committee commitments

·   Managed IBM portfolio, including 5 new acquisitions

·   Overachieved Enterprise Transformation objectives and grew Global Financing profit

·   Investor sentiment on IBM is very positive; IBM stock significantly outperformed the broader markets

In accordance with IBM’s practice, the Compensation Committee approved Mr. Loughridge’s compensation, which was ratified by the independent directors on IBM’s Board.

Michael E. Daniels, Senior Vice President and Group Executive, Services

·   Services held share while delivering double digit profit growth through margin expansion initiatives

·   Led global Cloud launches with integrated messaging across IBM and established Cloud market leadership

·    In collaboration with IBM Research and the Growth Market Unit, developed an analytic based approach to targeting potential prospects for long term business development

·    Strengthened IBM’s governance, risk, and compliance model to manage material risks, including cyber-security

·    Expanded IBM’s services offerings to deliver unique competitive value, leveraging Smarter Planet and Business Analytics capabilities

Steven A. Mills, Senior Vice President and Group Executive, Software and Systems

·    Grew software revenue and generated nearly $10 billion of segment profit

·    Software Group continued to outperform software competition as evidenced by #1 market share leadership position in almost every key middleware brand

·    Successfully integrated 20 software and hardware acquisitions since the beginning of 2010

·    Advanced IBM’s position to define and capture new growth markets aligned to our 2015 roadmap

·    Grew Systems & Technology Group revenue, profit and margins. Leveraged IBM’s server technology leadership to hold or gain share across the portfolio

·    Drove new performance-based sales model

Based on these results and following the process outlined above, the Compensation Committee approved the following 2011 annual incentive payouts for these named executive officers:

In addition, the Committee also approved the following compensation elements for 2012: base salary, annual incentive target and Performance Share Unit (PSU) grants under the Long-Term Performance Plan.

(1)   The salary rate and annual incentive target for each of these officers is the same as 2011.

(2)   The PSUs will be granted on June 8, 2012. The actual number of PSUs granted on this date to Mr. Palmisano, Ms. Rometty and the other named executive officers will be determined by dividing the value shown above by a predetermined, formulaic planning price for the second quarter 2012. The performance period for the PSUs ends December 31, 2014, and the award will pay out in February 2015.

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Senior Leadership Team—Personal Stake in IBM’s Future through Stock Ownership Requirements

Investors want the leaders of their companies to act like owners. That alignment, we have found, works best when senior leaders have meaningful portions of their personal holdings invested in the stock of their company. This is why IBM sets significant stock ownership requirements for approximately 60 members of the Company’s senior leadership team, including the Chairman and the CEO. The following table illustrates which equity holdings count towards stock ownership requirements:

Included

·      IBM shares owned personally or by members of the immediate family sharing the same household

·      Holdings in the IBM Stock Fund of the 401(k) Plus Plan and the Excess 401(k) Plus Plan

·      Shares of IBM stock deferred under the Excess 401(k) Plus Plan

Not Included

·      Unvested equity awards, including PSUs, RSUs and RRSUs

·      Unexercised stock options

The Chairman, the CEO and SVPs are all required to own IBM stock or equivalents worth three times their individual target cash compensation (their base salary plus the incentive payment they would earn if they achieved their performance targets) within five years of hire or promotion. As a group, the Chairman, the CEO and SVPs owned approximately 1.73 million shares or equivalents valued at over $317 million as of December 31, 2011. In fact, this group currently holds, on average, more than three times IBM stock or equivalents above what the Company requires.

The remaining members of the senior leadership team are required to hold IBM stock or equivalents worth one time their target cash compensation within five years of hire or promotion. Those who have been in place for at least five years have met or exceeded their personal IBM ownership requirements.

IBM Meeting Market Standards for Executive Compensation

We recognize that the issue of executive pay is critical to stockholders and to members of the public whose hopes for the future rest substantially on trust in the conduct of those who lead our corporations. Simply put, those who profit disproportionately to the value they create for stockholders and society, or the value they provide to clients, are breaking faith with all who would do business with them, and all who would risk their hard-earned savings in the future of an enterprise.

We have provided the information in these pages precisely because IBM works to preserve that faith. We know that striking a balance between stockholders’ concepts of fairness and the incentives needed to attract and retain a stellar executive team will always require sound judgment and careful thought. Business, markets, and people are too dynamic for mere formulaic solutions. The numbers can best be understood when the process behind them is transparent.

IBM’s business has always been to help our clients succeed through innovative solutions. Our stockholders deserve no less. We welcome this discussion.

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Section 2: Additional Information

Compensation Program as it Relates to Risk

IBM management, the Compensation Committee and the Committee’s outside consultant review IBM’s compensation policies and practices, with a focus on incentive programs, to ensure that they do not encourage excessive risk taking. This review includes the cash incentive programs and the LTIP that cover all executives and employees. Based on this comprehensive review, we concluded that our compensation program does not encourage excessive risk taking for the following reasons:

·                  Our programs appropriately balance short- and long-term incentives, with approximately 73% of 2012 total target compensation for senior executives provided in equity and focused on long-term performance.

·                  Our executive compensation program pays for performance against financial targets that are set to be challenging to motivate a high degree of business performance, with an emphasis on longer-term financial success and prudent risk management.

·                  Our incentive plans include a profit metric as a significant component of performance to promote disciplined progress toward financial goals. None of IBM’s incentive plans are based solely on signings or revenue targets, which mitigates the risk of employees focusing exclusively on the short term.

·                  Qualitative factors beyond the quantitative financial metrics are a key consideration in the determination of individual executive compensation payments. How our executives achieve their financial results, integrate across lines of business, and demonstrate leadership consistent with the IBM values are key to individual compensation decisions.

·                  As explained in the “2011 Potential Payments Upon Termination Narrative,” we further strengthened our retirement policies on equity grants for our senior leaders beginning in 2009 to ensure that the long-term interests of the Company continue to be the focus even as these executives approach retirement.

·                  Our stock ownership guidelines require that approximately 60 members of the senior leadership team hold a significant amount of IBM equity to further align their interests with stockholders over the long term.

·                  IBM has a policy for “clawback” of cash incentive payments in the event that an executive officer’s conduct leads to a restatement of the Company’s financial results. Likewise, the Company’s equity plan has a clawback provision which states that awards may be cancelled and certain gains repaid if an employee engages in detrimental activity. To further reinforce our commitment to ethical conduct, the IBM Excess 401(k) Plus Plan allows the clawback of Company contributions made after March 2010 if a participant engages in detrimental activity.

We are confident that our compensation program is aligned with the interests of our stockholders, rewards for performance, and is an example of the strong pay practice emphasized by expert commentators on this topic.

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Elements of Compensation Programs and Linkage to Objectives

To supplement the discussion in Section 1 and as required by the SEC, the following is a description of the Company’s compensation elements and the objectives they are designed to support. As noted in Section 1: Executive Compensation Summary, IBM’s compensation practices are designed to meet five key objectives.

In total, these elements support the objective to balance rewards between short-term results and the long-term strategic decisions needed to ensure sustained business performance over time.

*                 IBM’s planning price is computed each quarter using a consistent statistical forecasting procedure based on historical IBM stock price data. IBM uses the quarterly planning price to aid in establishing the overall size of the equity plan and to give more consistency across equity grants made at different points in the quarter.

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*                 IBM’s planning price is computed each quarter using a consistent statistical forecasting procedure based on historical IBM stock price data. IBM uses the quarterly planning price to aid in establishing the overall size of the equity plan and to give more consistency across equity grants made at different points in the quarter.

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Setting Performance Targets for Incentive Compensation

Compensation of our senior leaders is highly linked with Company performance against four key metrics, consistent with our overall financial model:

1. Revenue Growth

2. Net Income

3. EPS

4. Cash Flow

These metrics and their weightings align with IBM’s financial model and are designed to appropriately balance both short- and long-term objectives. Targets are set for both the annual and long-term incentive programs at aggressive levels each year to motivate a high degree of business performance with emphasis on longer-term financial objectives. These targets, individually and together, are designed to be challenging to attain and are set within the parameters of our long-term financial model with profit expansion and growth objectives aligned with our disclosed financial roadmap to 2015. As part of IBM’s ongoing management system, targets are evaluated to ensure they do not include an inappropriate amount of risk.

Apart from the linkage to its long-term financial model, IBM is not disclosing specific targets under the annual and long-term plans because it would signal IBM’s strategic focus areas and impair IBM’s ability to leverage these areas for competitive advantage. For example, disclosure of our cash flow targets would provide insight into timing of large capital investments or acquisitions. Knowledge of the targets could also be used by competitors to take advantage of insight into specific areas to target the recruitment of key skills from IBM. Disclosing the specific targets and metrics used in the qualitative assessment made by the CEO would give our competitors our insight to key market dynamics and areas that could be used against IBM competitively by industry consultants or competitors targeting existing customers.

Our financial model is well communicated to investors, and our performance targets are based on this model. We also describe the performance relative to the pre-set objectives in our discussion of named executive officer compensation decisions. Finally, outlined below is a description of the specific metrics and weightings for the Annual Incentive and the Performance Share Unit Programs.

Annual Incentive Program

The Company sets business objectives at the beginning of each year that are reviewed by the Board of Directors. These objectives translate to targets for the Company and for each business unit for purposes of determining the target funding of the Annual Incentive Program. Performance against business objectives determines the actual total funding pool for the year which can vary from 0% to 200% of total target incentives for all executives. At the end of the year, management assesses the financial performance for the Company based on performance against financial metrics. Each year the Compensation Committee and the Board of Directors review IBM’s annual business objectives and set the metrics and weightings for the annual program reflecting current business priorities. The metrics and weightings for 2011 and 2012 are listed below.

Overall funding for the Annual Incentive Program, which covers approximately 5,100 executives, is based on the performance results against these targets and may be adjusted for extraordinary events if deemed appropriate by the CEO and Compensation Committee. This adjustment can be either up or down. For example, adjustments are usually made for large divestitures and acquisitions. In 2011, no adjustments for extraordinary events were made. In addition, the CEO can recommend an adjustment, up or down, to the overall funding of the program based on factors beyond IBM’s financial performance, such as client satisfaction, market share growth and workforce development, among others. For 2011, the Compensation Committee approved a 1% adjustment to the program funding in light of the efforts of the entire executive population to deliver strong results in client satisfaction, market share and workforce development in a challenging economic environment. The Compensation Committee reviews the financial scoring and qualitative adjustments and approves the Annual Incentive Program funding level. Once the total pool funding level has been approved, a lower-performing executive will receive as little as zero payout and the most exceptional performers are capped at three times their individual target incentive (payouts at that level are rare and only possible when IBM’s performance has also been exceptional).

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Performance Share Unit Program

EPS and cash flow targets for the Performance Share Unit program are set at the beginning of each three-year performance period, taking into account the Company’s financial model shared with investors, including the impact our share buyback program has on EPS. At the end of the three years, the score is calculated based on results against the predetermined targets, with the following weights:

Adjustments can be made for extraordinary events if deemed appropriate by the CEO and the Compensation Committee—for example, large divestitures. In 2011, no adjustments were made.

The Compensation Committee approves the determination of actual performance relative to pre-established targets, and the number of Performance Share Units is adjusted up or down based on the approved actual performance from 0% to 150%. There is no discretionary adjustment to the Performance Share Unit program score.

Equity Award Practices

Under IBM’s long-standing practices and policies, all equity awards are approved before or on the date of grant. The exercise price of at-the-money stock options is the average of the high and low market price on the date of grant or, in the case of premium-priced stock options, 10% above that average.

The approval process specifies the individual receiving the grant, the number of units or the value of the award, the exercise price or formula for determining the exercise price, and the date of grant. All equity awards for senior executives are approved by the Compensation Committee. All equity awards for employees other than senior executives are approved by senior executives pursuant to a series of delegations that were approved by the Compensation Committee, and the grants made pursuant to these delegations are reviewed periodically with the Committee.

Equity awards granted as part of annual total compensation for senior leaders and other employees are made on specific cycle dates scheduled in advance. IBM’s policy for new hires and promotions requires approval of any awards before or on the grant date, which is typically the date of the promotion or hire.

Ethical Conduct

Every executive is held accountable to comply with IBM’s high ethical standards: IBM’s Values, including “Trust and Personal Responsibility in all Relationships,” and IBM’s Business Conduct Guidelines. This responsibility is reflected in each executive’s Personal Business Commitments, and is reinforced through each executive’s annual certification to the IBM Business Conduct Guidelines. An executive’s compensation is tied to compliance with these standards; compliance is also a condition of IBM employment for each executive. Annual cash incentive payments are also conditioned on compliance with these Guidelines.

The Company’s equity plans and agreements have a clawback provision—awards may be cancelled and certain gains repaid if an employee engages in activity that is detrimental to the Company, such as violating the Company’s Business Conduct Guidelines, disclosing confidential information, or performing services for a competitor. To further reinforce our commitment to ethical conduct, the Excess 401(k) Plus Plan allows the clawback of Company contributions made after March 2010 if a participant engages in detrimental activity.

In addition, approximately 1,900 of our key executives (including each of the named executive officers) have agreed to a non-competition, non-solicitation agreement that prevents them from working for certain competitors within 12 months of leaving IBM or soliciting employees within two years of leaving IBM.

The Committee has also implemented a policy for the clawback of cash incentive payments in the event an executive officer’s conduct leads to a restatement of the Company’s financial results as follows:

To the extent permitted by governing law, the Company will seek to recoup any bonus or incentive paid to any executive officer if (i) the amount of such payment was based on the achievement of certain financial results that were subsequently the subject of a restatement, (ii) the Board determines that such officer engaged in misconduct that resulted in the obligation to restate, and (iii) a lower payment would have been made to the officer based upon the restated financial results.

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Hedging Practices

The Company does not allow any member of the I&VT, including any named executive officer, to hedge the economic risk of their ownership of IBM securities, which includes entering into any derivative transaction on IBM stock (e.g., any short-sale, forward, option, collar, etc.).

Tax Considerations

Section 162(m) of the U.S. Internal Revenue Code of 1986, as amended, limits deductibility of compensation in excess of $1 million paid to the Company’s CEO and to each of the other three highest-paid executive officers (not including the Company’s chief financial officer) unless this compensation qualifies as “performance-based.” Based on the applicable tax regulations, taxable compensation derived from certain stock appreciation rights and from the exercise of stock options by senior executives under the Company’s Long-Term Performance Plans should qualify as performance-based. The IBM Excess 401(k) Plus Plan permits an executive officer who is subject to Section 162(m) and whose salary is above $1 million to defer payment of a sufficient amount of the salary to bring it below the Section 162(m) limit. In 1999, the Company’s stockholders approved the terms under which the Company’s annual and long-term performance incentive awards should qualify as performance-based. In 2009, as required by the Internal Revenue Code, the stockholders again approved the terms under which long-term performance incentive awards should qualify as performance-based. These terms do not preclude the Committee from making any payments or granting any awards, whether or not such payments or awards qualify for tax deductibility under Section 162(m), which may be appropriate to retain and motivate key executives.

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2011 Summary Compensation Table Narrative

Salary (Column (c))

Amounts shown in the salary column reflect the salary amount paid to each named executive officer during 2011.

·                  IBM reviews salaries for each named executive officer annually during a common review cycle. In 2011, the Chairman and CEO did not receive a salary increase; the salary increases for the other named executive officers took effect on July 1, 2011.

·                  See Section 1 of the 2011 Compensation Discussion and Analysis for an explanation of the amount of salary and other compensation elements in proportion to total compensation.

Bonus (Column (d))

No bonuses were awarded to named executive officers in the years shown in the 2011 Summary Compensation Table. Payments under the IBM Annual Incentive Program are included under column (g) (Non-Equity Incentive Plan Compensation).

Stock Awards Total (Column (e))

The amounts shown are the aggregate grant date fair values of Performance Share Units granted in each fiscal year shown, computed in accordance with accounting guidance (excluding any risk of forfeiture as per SEC regulations); the values shown are calculated at the Target number, as described below.

Performance Share Units (PSUs)

The following describes the material terms and conditions of PSUs as reported in the column titled Performance Share Units (column (e)) in the 2011 Summary Compensation Table and in the 2011 Grants of Plan-Based Awards Table under the heading Estimated Future Payouts Under Equity Incentive Plan Awards (columns (f), (g) and (h)).

General Terms

·                  One PSU is equivalent in value to one share of IBM common stock.

·                  Executive officers are awarded a number of PSUs during the first year of the three-year performance period. PSUs are generally paid out in IBM common stock after the three-year performance period.

·                  Performance targets for cumulative three-year attainment in earnings per share and cash flow are set at the beginning of the three-year performance period. These targets are approved by the Compensation Committee.

·                  At the end of the three-year performance period, the Compensation Committee approves the determination of actual performance relative to pre-established targets, and the number of PSUs is adjusted up or down based on the approved actual performance.

·                  The performance period for the awards made in 2011 is January 1, 2011 through December 31, 2013.

·                  There are no dividends or dividend equivalents paid on PSUs.

Vesting and Payout Calculations

·                  PSU awards granted in 2011 will be adjusted for performance, as described below. The performance period ends on December 31, 2013, and the awards will pay out in February 2014.

·                  Outstanding PSUs typically are cancelled if the executive’s employment is terminated. See the 2011 Potential Payments Upon Termination Narrative for information on payout of unvested PSUs upon certain terminations.

·                  Payout will not be made for performance below the thresholds, as described below.

·                  For PSUs that were paid out on or before February 1, 2008, the executive could have elected, at least six months prior to vesting, to defer payment of these shares into the IBM Excess 401(k) Plus Plan. For PSUs that pay out after February 1, 2008, deferrals are not permitted.

·                  See Section 2 of the Compensation Discussion and Analysis for information on performance targets for the PSU program.

Threshold Number:

·                  The Threshold number of PSUs (listed in column (f) of the 2011 Grants of Plan-Based Awards Table) is 25% of the Target number.

·                  The Threshold number of PSUs will be earned for achievement of 70% of both business objectives (earnings per share and cash flow).

·                  If only the cumulative earnings-per-share target is met at the Threshold level (and the cash flow target is not met), the number of PSUs earned would be 80% of the Threshold number.

·                  If only the cumulative cash flow target is met at the Threshold level (and the earnings-per-share target is not met), the number of PSUs earned would be 20% of the Threshold number.

Target Number:

The Target number of PSUs (listed in column (g) of the 2011 Grants of Plan-Based Awards Table) will be earned if 100% of the objectives are achieved.

Maximum Number:

·                  The Maximum number of PSUs (listed in column (h) of the 2011 Grants of Plan-Based Awards Table) is 150% of the Target number.

·                  The Maximum number of PSUs will be earned for achieving 120% of both business objectives.

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Restricted Stock Units (RSUs)

There were no Restricted Stock Units (RSUs) or Retention Restricted Stock Units (RRSUs) granted to the named executive officers in the years shown in the 2011 Summary Compensation Table. RRSUs granted in previous years to the named executive officers and outstanding at the end of 2011 are included in the 2011 Outstanding Equity Awards at Fiscal Year-End Table. In addition, the column titled Stock Awards in the 2011 Option Exercises and Stock Vested Table include previously-granted RSUs and RRSUs. Also, Deferred IBM Shares in the 2011 Nonqualified Deferred Compensation Table include certain previously-granted RRSUs.

General Terms

·                  One RSU or RRSU is equivalent in value to one share of IBM common stock. RSUs and RRSUs are generally paid out in IBM common stock at vesting.

·                  Dividend equivalents are not paid on RSUs or RRSUs granted on or after January 1, 2008. Dividend equivalents are paid on RSUs and RRSUs granted before January 1, 2008 at the same rate and at the same time as the dividends paid to IBM stockholders.

Vesting and Payout

·                  Vesting periods for RSUs typically range from one to four years.

·                  Vesting periods for RRSUs typically range from two to five years and can be as long as ten years; these awards are typically given to select senior executives for the purpose of providing additional value to retain the executive through the vesting date.

·                  Payout of RSUs at each vesting date is typically contingent on the recipient remaining employed by IBM through that vesting date. See the 2011 Potential Payments Upon Termination Narrative for information on payout of unvested RSUs upon certain terminations.

·                  Payout of RRSUs is contingent on the recipient remaining employed by IBM until the end of each vesting period.

·                  Executives have not been allowed to defer payment of RSUs.

·                  For RRSUs granted before January 1, 2008, the executive could have elected to defer payment of those shares into the IBM Excess 401(k) Plus Plan. For RRSUs granted on or after January 1, 2008, deferrals are not permitted.

·                  From time to time, special performance-based RSUs may be granted with performance contingent vesting.

Option Awards (Column (f))

·                  There were no option awards granted to the named executive officers in the years shown in the 2011 Summary Compensation Table. Market-priced and premium-priced options granted in previous years to the named executive officers and outstanding at the end of 2011 are included in the 2011 Outstanding Equity Awards at Fiscal Year-End Table.

General Terms

·                  In accordance with IBM’s LTPP, the exercise price of stock options is not less than the average of the high and low prices of IBM common stock on the New York Stock Exchange (NYSE) on the date of grant.

·                  Options generally vest in four equal increments on the first four anniversaries of the grant date.

·                  Options generally expire ten years after the date of grant.

·                  The option recipient must remain employed by IBM through each vesting date in order to receive any potential payout value.

Market-priced options:

·                  From 2005 to 2007, market priced options were awarded to the named executive officers who participated in the IBM stock investment program (the Buy-First Program) by agreeing to invest 5, 10, or 15% of their annual incentive program payout in the IBM Stock Fund under the nonqualified deferred compensation plan.

·                  The exercise price is equal to the average of the high and low prices of IBM common stock on the NYSE on the date of grant.

·                  These options vest 100% three years after the date of grant.

Premium-priced options:

·                  The exercise price is equal to 110% of the average of the high and low prices of IBM common stock on the NYSE on the date of grant.

·                  These options vest in four equal increments on the first four anniversaries of the grant date.

Non-Equity Incentive Plan Compensation (Column (g))

Amounts in this column represent payments under IBM’s Annual Incentive Program (AIP).

General Terms

·                  All executive officers, including the Chairman and CEO, participate in this program. The performance period is the fiscal year (January 1 through December 31, 2011).

·                  Performance goals are set annually in the beginning of the year and generally encompass corporate-wide goals and business unit goals.

·                  See Section 2 of the Compensation Discussion and Analysis for information on performance targets for AIP.

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Payout Range

·                  Chairman and CEO Palmisano had a target of $5,000,000 for 2011.

·                  Mr. Loughridge and Mr. Mills had targets of 135% of their salary rate for 2011, and Mr. Daniels and Ms. Rometty had targets of 175% of their salary rate for 2011. See column (d) of the 2011 Grants of Plan-Based Awards Table for the Target payout.

·                  Threshold payout for each named executive officer is $0 (see column (c) of the 2011 Grants of Plan-Based Awards Table).

·                  Maximum payout for each named executive officer is three times the Target (see column (e) of the 2011 Grants of Plan-Based Awards Table).

Vesting and Payout

·                  In addition to performance against corporate-wide and business unit goals, individual performance against goals set at the beginning of the year determine payout amount.

·                  An executive generally must be employed by IBM at the end of the performance period in order to be eligible to receive an AIP payout. At the discretion of appropriate senior management, the Compensation Committee, or the Board, an executive may receive a prorated payout of AIP upon retirement.

·                  AIP payouts earned between January 1, 2011 and December 31, 2011 will be paid on or before March 15, 2012.

Change in Retention Plan Value (Column (h))

·                  Amounts in the column titled Change in Retention Plan Value represent the annual change in retention plan value from December 31, 2010 to December 31, 2011 for each named executive officer.

·                  See the 2011 Retention Plan Narrative for a description of the Retention Plan.

Change in Pension Value (Column (h))

·                  Amounts in the column titled Change in Pension Value represent the annual change in pension value from December 31, 2010 to December 31, 2011 for each named executive officer.

·                  See the 2011 Pension Benefits Narrative for a description of the IBM Pension Plans.

Nonqualified Deferred Compensation Earnings (Column (h))

·                  IBM does not pay above-market or preferential earnings on nonqualified deferred compensation.

·                  See the 2011 Nonqualified Deferred Compensation Narrative for a description of the nonqualified deferred compensation plans in which the named executive officers participate.

All Other Compensation (Column (i))

Amounts in this column represent the following as applicable:

Tax Reimbursements

·                  Amounts represent payments that the Company has made to the named executive officers to cover taxes incurred by them for certain business-related taxable expenses.

·                  These expenses are: family travel to and attendance at Company-related events, and commutation expenses for Chairman and CEO Palmisano (see Personal Use of Company Autos below).

Company Contributions to Defined Contribution Plans

·                  Amounts represent Company matching and automatic contributions to the individual accounts for each named executive officer.

·                  Under IBM’s 401(k) Plus Plan, participants hired before January 1, 2005, which includes all the named executive officers, are eligible to receive matching contributions up to 6% of eligible compensation. In addition, for all eligible participants, the Company makes automatic contributions equal to a certain percentage of eligible compensation, depending on the participant’s pension plan eligibility on December 31, 2007. In 2011, each named executive officer received automatic contributions equal to 4% of eligible compensation.

·                  Under IBM’s Excess 401(k) Plus Plan, the Company makes matching contributions equal to a percentage of the sum of (i) the amount the participant elects to defer under the Excess 401(k) Plus Plan, and (ii) the participant’s eligible compensation after reaching the Internal Revenue Code compensation limits. Participants hired before January 1, 2005, which includes all the named executive officers, are eligible to receive matching contributions up to 6% of eligible compensation. In addition, for all eligible participants, the Company makes automatic contributions equal to a percentage of the sum of (i) the amount the participant elects to defer under the Excess 401(k) Plus Plan, and (ii) the participant’s eligible compensation after reaching the Internal Revenue Code compensation limits. The automatic contribution percentage depends on the participant’s pension plan eligibility on December 31, 2007, and in 2011, each named executive officer received automatic contributions equal to 4%.

·                  For purposes of calculating the matching contribution and the automatic contribution under the 401(k) Plus Plan, the participant’s eligible compensation excludes the amount the participant elects to defer under the Excess 401(k) Plus Plan.

·                  See the 2011 Nonqualified Deferred Compensation Narrative for additional details on the nonqualified deferred compensation plans.

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Life Insurance Premiums

·                  Amounts represent life insurance premiums paid by the Company on behalf of the named executive officers.

·                  These executive officers are covered by life insurance policies under the same terms as other U.S. full-time regular employees.

·                  Life insurance for employees and executives hired before January 1, 2004, which includes all named executive officers, is two times salary plus annual incentive program target, with a maximum coverage amount of $2,000,000.

·                  In addition, IBM provides Travel Accident Insurance for most employees in connection with business travel. Travel Accident Insurance for all eligible employees and executives is up to five times salary plus annual incentive target with a maximum coverage amount of $15,000,000.

Perquisites

The following describes perquisites (and their aggregate incremental cost calculations) provided to the named executive officers in 2011.

Personal Financial Planning

In 2011, IBM offered financial planning services with coverage generally up to $14,000 annually for senior U.S. executives, including each named executive officer.

Personal Travel on Company Aircraft

General Information

·             Amounts represent the aggregate incremental cost to IBM for travel not directly related to IBM business.

·                  IBM’s security practices provide that all air travel by the Chairman and by the CEO, including personal travel, be on Company aircraft. The aggregate incremental cost for Mr. Palmisano’s personal travel is included in column (i) of the 2011 Summary Compensation Table. These amounts also include the aggregate incremental cost, if any, of travel by Mr. Palmisano’s family or other non-IBM employees on both business and non-business occasions.

·                  Additionally, personal travel in 2011 on IBM aircraft by named executive officers other than Mr. Palmisano, and the aggregate incremental cost, if any, of travel by the officer’s family or other non-IBM employees when accompanying the officer on both business and non-business occasions is also included.

·                  Also, from time to time, named executive officers who are members of the boards of directors of other companies and non-profit organizations travel on IBM aircraft to those outside board meetings. These amounts include travel related to participation on these outside boards.

·                  Any travel by named executive officers for an annual physical under the corporate wellness program is included in these amounts.

Aggregate Incremental Cost Calculation

·                  The aggregate incremental cost for the use of Company aircraft for personal travel, including travel to outside boards, is calculated by multiplying the hourly variable cost rate for the specific aircraft by the number of flight hours used.

·                  The hourly variable cost rate includes fuel, oil, parking/landing fees, crew expenses, aircraft maintenance (based on the hourly operation of the aircraft) and catering.

·                  The rate for each aircraft is periodically reviewed by IBM’s flight operations team and adjusted as necessary to reflect changes in costs.

·                  The aggregate incremental cost includes deadhead flights (i.e., empty flights to and from the IBM hangar or any other location).

·                  The aggregate incremental cost for any charter flights is the full cost to IBM of the charter.

Personal Use of Company Autos

General Information

·                  IBM’s security practices provide that the Chairman and the CEO be driven to and from work by IBM personnel in a car leased by IBM or by an authorized car service.

·                  In addition, under IBM’s security practices, the Chairman and the CEO may use a Company-leased car with an IBM driver or an authorized car service for non-business occasions. Further, the families of both the Chairman and the CEO may use a Company-leased car with an IBM driver or an authorized car service on non-business occasions or when accompanying the Chairman or the CEO on business occasions.

·                  Family members and other non-IBM employees may accompany named executive officers other than the Chairman and the CEO in a Company-leased car with an IBM driver or an authorized car service on business occasions.

·                  Amounts reflect the aggregate incremental cost, if any, for the above-referenced items.

Aggregate Incremental Cost Calculation

·                  The incremental cost for the car and driver for commutation and non-business events is calculated by multiplying the variable rate by the applicable driving time. The variable rate includes drivers’ salary and overtime payments, plus a cost per mile calculation based on fuel and maintenance expense.

·                  The incremental cost for an authorized car service is the full cost to IBM for such service.

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Personal Security

General Information

·                  Under IBM’s security practices, IBM provides security personnel for both the Chairman and the CEO on certain non-business occasions and for the families of the Chairman and the CEO on certain non-business occasions or when accompanying such officer on business occasions.

·                  Amounts include the aggregate incremental cost, if any, of security personnel for those occasions.

·                  In addition, amounts also include the cost of home security systems and monitoring for Mr. Palmisano and any other named executive officers, if applicable.

Aggregate Incremental Cost Calculation

·                  The aggregate incremental cost for security personnel is the cost of any commercial airfare to and from the destination, hotels, meals, car services, and salary and travel expenses of any additional subcontracted personnel if needed.

·                  The aggregate incremental cost for installation, maintenance and monitoring services for home security systems reflects the costs of these items.

Annual Executive Physical

·                  IBM covers the cost of an annual executive physical for the named executive officers under the Company’s corporate wellness program.

·                  Amounts represent any payments by IBM for named executive officers under this program.

Family Travel and Attendance at Company-Related Events

·                  Company-related events may include meetings, dinners and receptions with IBM’s clients, executive management or board members attended by the named executive officers and their family members.

·                  Amounts represent the aggregate incremental cost, if any, of commercial travel and/or meals and entertainment for the family members of the named executive officers to attend Company-related events.

Other Personal Expenses

·                  Amounts represent the cost of meals and lodging for the named executive officers who traveled for their annual executive physical under the Company’s corporate wellness program.

·                  Amounts also include expenses associated with participation on outside boards other than those disclosed as Personal Travel on Company Aircraft.

·                  Amounts also include ground transportation expenses, home office equipment and administrative charges incurred by executives.

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2011 Summary Compensation Table