IBM
Notice of 1994 Annual Meeting and Proxy Statement

    Dear Stockholders,



    You are cordially invited to attend the Annual Meeting of Stockholders on
    Monday,Tuesday, April 25, at 10 a.m., in the Metro Toronto Convention Centre, Toronto,
Ontario, Canada.Ovens Auditorium, Charlotte, North
    Carolina. 

    We are very pleased that Mr.Dr. Charles F. Knight, chairmanM. Vest, president of the board and chief
executive officer, Emerson Electric Co.,Massachusetts
    Institute of Technology, who was elected to the Board in July
1993, is a nomineeJune 1994; Mr. Alex
    Trotman, chairman and chief executive officer of the Ford Motor Company, who
    was elected to the Board in November 1994; Mr. Jerome B. York, senior vice
    president and chief financial officer of IBM, who was elected to the Board
    in November 1994 and joined the Board in January 1995; and Mr. Lucio A.
    Noto, chairman and chief executive officer of Mobil Corporation, who was
    elected to the Board in January 1995, are nominees for the first time.

    Mr. Stephen D. Bechtel,Paul J. Rizzo left the Board in December 1994 upon his  retirement from
    IBM. We thank Mr. Rizzo for his dedicated service as Vice Chairman for these
    past two years. Mr. James E. Burke, Mr. Thomas S. Murphy, and Mr. Edgar S.
    Woolard, Jr., Mr. Jack D. Kuehler, Dr. Richard W. Lyman, Mr. J.
Richard Munro, and Dr. Helmut Sihler retired will retire from the Board during 1993in April and Mr.
Thomas F. Frist, Jr., Mrs. Judith Richards Hope, and Mr. John R. Opel have
decidedare not to standnominees for
    reelectionelection this year. We are grateful for their many contributions during
    their years of service. We especially thank Mr. Opel for
his dedicated service, as a Board member for 21 years and his stewardship as
chairman from 1983 to 1986.we will miss their participation on the Board.

    Please sign, date, and return the enclosed Proxy Card in the envelope
    provided as soon as possible so that your shares can be voted at the meeting
    in accordance with your instructions. If you plan to attend the meeting,
    please mark the box where indicated on the Proxy Card. If you will need
    special assistance at the meeting because of a disability, please contact
    the Office of the Secretary, Armonk, N.Y. 10504.

    A summary of the proceedings of the meeting will be mailed to all stockholders
of record.

                                        Very truly yours,


    /s/ Louis V. Gerstner, Jr.
    --------------------------
    Louis V. Gerstner, Jr.
    Chairman of the Board



                             YOUR VOTE IS IMPORTANT

                   Please Sign, Date, and Return Your vote is important.
                Please sign, date, and return your Proxy Card.Card


                                     International Business Machines Corporation
                                     Armonk, New York 10504
                                     March 14, 19941995




    Notice of Meeting



    The Annual Meeting of Stockholders of International Business Machines
    Corporation will be held on Monday,Tuesday, April 25, 1994,1995, at 10 a.m., in the
    Metro
Toronto Convention Centre, Toronto, Ontario, Canada.Ovens Auditorium, 2700 East Independence Boulevard, Charlotte, North
    Carolina. The items of business are:
   
    1.  Election of directors for a term of one year.
    2.  Ratification of the appointment of auditors.
    3.  Adoption of the IBM 19941995 Employees Stock Purchase Plan.
    4.  Adoption of the IBM Non-Employee Directors Stock Option Plan to replace
        annual stock awards.
    5.  Approval of Annual Incentive Compensation Terms for Certain Executives.
    6.  Approval of Long-Term Performance Plan.

4.Incentive Compensation Terms for
        Certain Executives.
    7.  Such other matters, including onefive stockholder proposal,proposals, as may
        properly come before the meeting.

    These items are more fully described in the following pages, which are
    hereby made a part of this Notice. Only stockholders of record at the close
    of business on March 7, 1994,1995, are entitled to vote at the meeting.
    Stockholders are reminded that shares cannot be voted unless the signed
    Proxy Card is returned or other arrangements are made to have the shares
    represented at the meeting.


    /s/ John E. Hickey
    ------------------
    John E. Hickey
    Vice President and Secretary

    This Proxy Statement and the accompanying form of Proxy Card are
    being mailed beginning on or about March 14, 1995, to stockholders
    entitled to vote. The IBM 19931994 Annual Report, which includes financial
    statements, is being mailed with this proxy statement.Proxy Statement. Kindly notify
    First Chicago Trust Company of New York, Mail Suite 4688, P.O. Box
    2530, Jersey City, N.J. 07303-2530, telephone 201-324-0405, if you havedid
    not received it,receive a report, and a copy will be sent to you.



IBM Notice of 1994 Annual Meeting and Proxy Statement             1




    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. Following is information about each nominee,
    including biographical data for at least the last five years. Should one
    or more of these nominees become unavailable to accept nomination or
    election as a director, the Proxy Committeeindividuals 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.

            Harold Brown, 66,67, is a counselor, Center for Strategic and
    International Studies, Washington, D.C., and a general partner in Warburg,
    Pincus & Company.Company, a venture banking and money management firm. He is
    chairman of IBM's Directors and Corporate Governance Committee and a member
    of IBM's Executive Compensation and Management Resources Committee. He is a former U.S. Secretary of the Air
    Force. He is a director of Alumax Inc., CBS Inc., Cummins Engine Company,
    Inc., Philip Morris Companies Inc., and Mattel, Inc.; a member of the
    National Academy of Sciences and the National Academy of Engineering; a
    trustee and president emeritus of the California Institute of Technology;
    and chairman of the Arnold and Mabel Beckman Foundation. Dr. Brown was an
    IBM director from 1972 to 1977. After serving as U.S. Secretary of Defense,
    he became an IBM director again in 1981.

            James E. Burke, 69, is retired chairman of Johnson & Johnson, which he
joined in 1953. He is chairman of IBM's Directors and Corporate Governance
Committee and a member of IBM's Executive Committee. He is chairman of the
Partnership for a Drug-Free America; a director of The Prudential Insurance
Company of America and The Washington Post Company; and a member of The
Business Council and The Council on Foreign Relations. Mr. Burke became an IBM
director in 1980.

     Fritz Gerber, 65,66, is chairman and chief executive officer of Roche
    Holding Ltd. and, a pharmaceutical company, positions he has held since 1978.
    He is also executive chairman of Zurich Insurance Company.Company, an international
    insurance provider. He joined Zurich Insurance Company in 1958, became chief
    executive officer in 1969, and chairman of the board of directors in 1977.
    HeMr. Gerber is a member of IBM's Directors and Corporate Governance
    Committee. He is a director of Nestle S.A. and Credit Suisse. He is a member
    of the International Advisory Council of The Chase Manhattan Bank and of
    the European Advisory Council of Tenneco Europe, Limited, and he holds
    membership in various economic and cultural organizations such as the
    European Round Table. Mr. Gerber became an IBM director in 1989.


IBM Notice of 1994 Annual Meeting and Proxy Statement             2





            Louis V. Gerstner, Jr., 52,53, is chairman of the Board and chief
    executive officer of IBM and chairman of IBM's Executive Committee. From
    1989 until joining IBM, he was chairman of the board and chief executive
    officer of RJR Nabisco Holdings Corp., a food and tobacco company. From
    1985 to 1989, heMr. Gerstner was president of American Express Company, and
    from 1983 to 1989, he was chairman and chief executive officer of American
    Express Travel Related Services Co., Inc. He is a member of the board of
    directors of Bristol-Myers Squibb Company and The New York Times Company, and
RJR Nabisco Holdings Corp.Company.
    Mr. Gerstner is a member of the board of Lincoln Center for the Performing
    Arts and vice chairman of the board of the New American School Development
    Corp. HeMr. Gerstner is also a member of The Council on Foreign Relations.Relations and
    a board member of The America/China Society and The Japan Society. Mr.
    Gerstner became an IBM director in 1993.

            Nannerl O. Keohane, 53,54, is president and professor of political
    science at Duke University. She is a member of IBM's Directors and Corporate
    Governance Committee. She was formerly president of Wellesley College, and a
    former faculty member at Swarthmore College and Stanford University. She is
    a member of The Council on Foreign Relations and the American Academy of
    Arts and Sciences; and a trustee of the Colonial Williamsburg Foundation.
    Dr. Keohane is a member of the MIT Corporation and has served as vice
    president of the American Political Science Association. Dr. Keohane became
    an IBM director in 1986.
   
            Charles F. Knight, 58,59, is chairman and chief executive officer of
    Emerson Electric Co., an electronics company. He is chairman of IBM's
    Executive Compensation and Management Resources Committee and a member of
    IBM's Directors and Corporate GovernanceExecutive Committee. He joined Emerson Electric in 1972 as vice
    chairman and was elected chief executive officer in 1973 and chairman in
    1974. Prior to joining Emerson, he was president of Lester B. Knight &
    Associates, Inc., a consulting engineering firm. He is a director of Southwestern Bell Corporation,
CaterpillarSBC
    Communications Inc., Anheuser Busch Companies, Inc., and The British
    Petroleum Company p.l.c. Mr. Knight became an IBM director in 1993.

            Thomas S. Murphy, 68,Lucio A. Noto, 56, is chairman and chief executive officer of Capital
Cities/ABC, Inc.Mobil
    Corporation, an oil and isgas company. Mr. Noto joined Mobil in 1962 and was
    elected to Mobil's board in 1988. He was elected chief financial officer in
    1989,  president and chief operating officer in 1993, and to his present
    position in 1994. He also serves as chairman of IBM's Executive Compensation and Management
Resources Committee andMobil's executive committee.
    Mr. Noto is a member of IBM's Executive Committee. Mr. Murphy
joined Capital Cities in 1954.The Council on Foreign Relations. He was elected president in 1964 and chairman
and chief executive officer in 1966. From June 1990 to February 1994, he served
as chairman of the board only. He is a director of Johnson & Johnson and Texaco
Inc. He is chairman of the New York University Medical Center Board and a
member of the board of overseers of Harvard College. Mr. Murphy became an IBM
    director in 1987.


          IBM Notice of 1994 Annual Meeting and Proxy Statement             31995.




     Paul J. Rizzo, 66, is vice chairman of the Board of IBM and a member of
IBM's Executive Committee. Mr. Rizzo served as dean of the Kenan-Flagler
Business School at the University of North Carolina-Chapel Hill from 1987 to
1992. He then became a partner in Franklin Street Partners, a Chapel Hill
investment firm. He is also a director of Johnson & Johnson and McGraw-Hill,
Inc. Mr. Rizzo served as an IBM director from 1972 to 1987 and became an IBM
director again in 1993.



            John B. Slaughter, 60,61, is president of Occidental College. He is a
    member of IBM's Audit Committee. He is a former chancellor of the University
    of Maryland and a former director of the National Science Foundation. He is
    a director of the Atlantic Richfield Company, Avery Dennison Corporation,
    Monsanto Company, and Northrop Corporation. He is a member of the National
    Academy of Engineering, a member of the American Academy of Arts and
    Sciences, a fellow of the American Association for the Advancement of
    Science, and a fellow of the Institute of Electrical and Electronics
    Engineers. Dr. Slaughter became an IBM director in 1988.

            Alex Trotman, 61, is chairman and chief executive officer of the
    Ford Motor Company, an automotive manufacturer. He is a member of IBM's
    Executive Compensation and Management Resources Committee. Mr. Trotman
    joined Ford of Britain in 1955 and was elected president of Ford Asia-
    Pacific in 1983 and chairman of Ford of Europe in 1988. He became president
    and chief operating officer of Ford Automotive Group and a director in 1993.
    He was subsequently elected to his present position in 1993. Mr. Trotman
    became an IBM director in 1994.

            Lodewijk C. van Wachem, 62,63, is chairman of the supervisory board of
    Royal Dutch Petroleum Company.Company, an international petrochemical company. He is
    a member of IBM's Audit Committee. In 1992, Mr. van Wachem retired as
    president of Royal Dutch Petroleum, a post he had held since 1982. He is a
    director of ATCO Ltd., Credit Suisse Holding, and Zurich Versicherungs-Gesellschaft;Versicherungs-
    Gesellschaft; and a member of the supervisory boards of AKZO N.V.
and, Philips
    Electronics N.V., and Bavarian Motor Works A.G. Mr. van Wachem became an
    IBM director in 1992.

            Edgar S. Woolard, Jr., 59,Charles M. Vest, 53, is chairmanpresident and chief executive officerprofessor of mechanical
    engineering at the Massachusetts Institute of Technology. He is a member of
    IBM's Executive Compensation and Management Resources Committee. Dr. Vest
    was formerly the provost and vice president for Academic Affairs of the
    University of Michigan. He is a director of E. I. du Pont de Nemours and
    Company. HeCompany, a fellow of the American Association for the Advancement of
    Science, a member of the National Academy of Engineering and the Corporation
    of Woods Hole Oceanographic Institution, and a trustee of Wellesley College.
    Dr. Vest became an IBM director in 1994.

            Jerome B. York, 56, is chairmansenior vice president and chief financial
    officer of IBM's Audit CommitteeIBM and a member of IBM's Executive Committee. Mr. Woolard joined Du PontFrom 1979 until
    joining IBM, he served in 1957a number of executive positions at Chrysler
    Corporation, an automotive manufacturer, including executive vice president-
    finance and was electedchief financial officer from 1990 to Du Pont's board in 1983. He was elected1993 and vice chairman in 1985,
president in 1987, and
    controller from 1989 to his present position in 1989.1990. He also servesserved as a
member of Du Pont's finance committee. He is a director of Citicorp, the North
Carolina Textile Foundation,Chrysler from
    1992 to 1993. Prior to joining Chrysler, he held a number of technical and
    management positions with General Motors Corporation, Ford Motor Company,
    The Hertz Corporation, and Baker Industries, Inc., The Seagram Company Ltd., and The National
Council on Economic Education. He is a trustee of the Winterthur Museum, North
Carolina State University, and the Protestant Episcopal Theological Seminary of
Virginia. Mr. WoolardYork became an IBM
    director in 1988.


          IBM Notice of 1994 Annual Meeting and Proxy Statement             41995.




    General Information


    Board of Directors

    The 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.

    Consistent with the Company's long-standing practice, the majority of the
    Board, twelve of the fourteen current directors, are outside directors who
    are neither officers nor employees of IBM or its subsidiaries. In the
    opinion of the Board, each of the outside directors is independent of
    management and free of any relationship with the Company that would
    interfere with his or her exercise of independent judgment in performing
    the duties of a director.

    In addition, the Audit Committee, the Directors and Corporate Governance
    Committee, and the Executive Compensation and Management Resources Committee
    are composed entirely of outside directors. The committees of the Board, as
    well as the full Board, have access to outside consultants and experts as
    needed in connection with their deliberations.

    The Board of Directors held thirteenten meetings during 1993.1994. Overall attendance at
    Board and committee meetings was 9295 percent. Individual attendanceAttendance was at least 8380
    percent except for Mr. Knight whose attendance, 37 percent, was
affected by previously outstanding commitments at the time of his election to
the Board in July. On the date ofeach director. Following the Annual Meeting, the Board will
    consist of eleven 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 fill vacancies.

    Committees of the Board

    The Executive Committee, the Audit Committee, the Directors and Corporate
    Governance Committee, and the Executive Compensation and Management
    Resources Committee are the standing committees of the Board of Directors.





                                                                  Executive
                                                  Directors       Compensation
                                                  and Corporate   and Corporate Management
    Executive              Audit                  Governance      Resources
    ----------------------------------------------------------------------------

    L.V. Gerstner, Jr.*    E.S. Woolard, Jr.*  J.E. Burke*    T.S. Murphy*

J.E. Burke     J.R. Hope+    H. Brown*       C.F. Knight*
    H. Brown               J.B. Slaughter         F. Gerber       H. Brown

T.S. Murphy    J.B. Slaughter N.O. Keohane   T.F. Frist, Jr.

P.J. RizzoA. Trotman
    C.F. Knight            L.C. van Wachem        C.F. KnightN.O. Keohane    C.M. Vest
    E.S. Woolard, Jr.        J.R. Opel+
    J.B. York

    * Chairman
    Prior to a reorganization of the Board's committee structure in June, functions
now under the jurisdiction of the Directors and Corporate Governance Committee
and the Executive Compensation and Management Resources Committee were handled
by the former Nominating and Executive Compensation Committee, which met seven
times in 1993.


          IBM Notice of 1994 Annual Meeting and Proxy Statement             5

+ Retiring April 25, 1995

    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 held fourtwo meetings in 1993.1994.

    Audit Committee

    The Audit Committee is responsible for reviewing reports of the Company's
    financial results, audits, internal accounting controls, and adherence to its Business
    Conduct Guidelines in compliance with federal procurement laws and
    regulations. The committee recommends to the Board of Directors the
    selection of the Company's outside auditors and reviews their procedures for
    ensuring compliancetheir independence with respect to the Company's policies on conflicts of interest.services performed for the
    Company. 





    The Audit Committee is composed of outside directors who are not officers
    or employees of IBM or its subsidiaries. In the opinion of the Board, these
    directors are independent of management and free of any relationship that
    would interfere with their exercise of independent judgment as members
    of this committee. The committee held fivefour meetings in 1993.1994.

    Directors and Corporate Governance Committee

    The Directors and Corporate Governance 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 advises and makes recommendations to the Board on all
    matters concerning directorship practices, including retirement
    policies and compensation for non-employee directors, and recommendations
    concerning the functions and duties of the committees of the Board.

    The committee reviews and considers the Company's position and practices
    on significant issues of corporate public responsibility, such as equal
    employment opportunity, protection of the environment, and philanthropic
    contributions, and it reviews and considers stockholder proposals dealing
    with issues of public or social interest. Members of this committee are
    outside directors who are not officers or employees of IBM or its
    subsidiaries. In the opinion of the Board, these directors are independent
    of management and free of any relationship that would interfere with
    their exercise of independent judgment as members of this committee. The
    committee held three meetings in 1993.1994.

    Stockholders wishing to recommend director candidates for consideration by
    the committee may do so by writing to the Secretary of the Corporation,
    giving the recommended nominee'scandidate's name, biographical data, and
    qualifications, accompanied
by the written consent of the recommended nominee.qualifications.

    Executive Compensation and Management Resources Committee

    The Executive Compensation and Management Resources Committee has
    responsibility for administering and approving all compensation for
    corporate officers, and salaries for certain other senior management. It
    also approves, by direct action or through delegation, participation in and
    all awards, grants, and related actions under the provisions of the IBM
    Stock Option Plans and the Long-Term Performance Plan,Plans, and reviews changes
    in the IBM Retirement Plan primarily affecting IBM corporate officers. The
    committee reports to stockholders on executive compensation items as
    required by the Securities and Exchange Commission (page 9)12). The committee
    has responsibility for reviewing the Company's management resources programs
    and for recommending qualified candidates to the Board for election as
    officers.

    Members of this committee are outside directors who are not officers or
    employees of IBM or its subsidiaries and are not eligible to participate in
    any of the plans or programs that the committee administers. In the
    opinion of the Board, these directors are independent of management and
    free of any relationship that would interfere with their exercise of
    independent judgment as members of this committee. The committee held threesix
    meetings in 1993.


          IBM Notice of 1994 Annual Meeting and Proxy Statement             6

1994.

    Other Relationships

    The Company and its subsidiaries purchase services, supplies, and equipment
    in the normal course of business from many suppliers and similarly sell and
    lease IBM products and services to many customers. In some instances, these
    transactions occur between IBM and other companies for whom members of IBM's
    Board serve as executive officers. In 1993,1994, none of these transactions were
    individually significant or reportable. In 1993, legal fees were paid to Paul,
Hastings, Janofsky & Walker, of which Mrs. Hope, a director who is not a
nominee for election, is a senior partner.

    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
    direct indemnification. These policies run from June 30, 19931994, through
    June 30, 1994,1995, at a total cost of $914,511.$1,034,011. The primary carrier
    is Federal Insurance Company.  


Directors' Compensation

    Employee directors receive no additional compensation for service onAt the recommendation of the Directors and Corporate Governance Committee,
    the Board of Directors or its committees. Directors who are not employees receive anrecently adopted a number of changes to the
    compensation of IBM's outside directors designed to increase the outside
    directors' proprietary interest in the Company, and to align more closely
    their interests with the interests of the Company's stockholders. These
    changes include paying 50% of the annual retainer fees in stock, and
    limiting the number of $55,000. Committee chairmen receive an additionalyears retirement benefits will be paid to directors.
    Further, to tie more of the directors' compensation to the long-term
    performance of IBM's common stock, the Board has also proposed terminating
    the annual award of stock to directors, and decreasing the annual retainer
    from $55,000 to $50,000, upon approval by stockholders of $5,000. Undera new non-employee
    directors stock option plan. 

    Commencing in 1995, 50% of the annual retainer will be paid in Promised Fee
    Shares of IBM common stock (IBM's $1.25 par value capital stock) under the
    Directors Deferred Compensation and Equity Award Plan (the "DCEAP"),. The
    Promised Fee Shares are valued based upon the market price of IBM common
    stock and are paid in the form of IBM shares or cash. Outside directors maywill
    retain the ability under the DCEAP to defer irrevocably defer all or part of their
    Boardremaining cash compensation to selected later years, to be paid either with
    interest at a rate equal to that of the rate on 26-week U.S. Treasury bills updated
    each January and July, or in Promised Fee Shares of IBM common stock (IBM's $1.25 par value capital
stock) with dividends used to buy additional Promised Fee Shares. In addition,
each non-employee director receives 100 Promised Award Shares of IBM common
stock upon election and an additional 100 Promised Award Shares each May 1
thereafter that the director is reelected at the Annual Meeting of
Stockholders. All shares awardedawards under the DCEAP
    are to be deliveredpaid only upon retirement.retirement or other completion of service as a
    director. 

    Upon approval of the IBM Non-Employee Directors Stock Option Plan, directors
    will no longer receive 100 Promised Award Shares upon election and annually
    thereafter upon reelection to the Board and the annual retainer will be
    decreased by $5,000. In that event, directors who are not employees will
    receive an annual retainer of $50,000 and committee chairmen will continue
    to receive an additional annual retainer of $5,000.

    The DCEAP was adopted in July 1993 and  superseded two plans in
effectBoard also modified the retirement benefits payable to directors so that
    those elected at that time. Awards and balances under those plans were carried forward
on a share-for-share basis under the DCEAP.1995 Annual Meeting or thereafter shall no longer be
    entitled to retirement benefits for the full life of the director. Directors
    with five years or more of service on the Board who are not entitled to
    retirement income under any IBM retirement plan for employees will now be
    eligible to receive, upon retirement or age 70, whichever is later, an
    annual payment equal to 50% of the director's last annual fee.fee, payable
    quarterly during his or her lifetime for a period equal to the length of
    service by the director on the Board.

    The Board is proposing for stockholder approval the IBM Non-Employee
    Directors Stock Option Plan, which is more fully described on pages 22 and
    23 and in Appendix B of this proxy statement.

    Employee directors receive no additional compensation for service on the
    Board of Directors or its committees.

    Stock Ownership

    The following table reflects beneficially ownedtables reflect shares of IBM common stock ofbeneficially owned
    by the named persons, and directors and executive officers as a group, as of
    JanuaryDecember 31, 1994, and indicatesindicate whether voting power and investment power
    are solely exercisable by the person named or shared with others.

    Voting power includes the power to direct the voting of the shares held,
    and investment power includes the power to direct the disposition of shares
    held. Also shown are shares over which any person could have acquired such
    powers within 60 days. Since most shares may appear under both the voting power
    and investment power columns, the individual columns will not add across to
    the total column.


Due


    The following sets forth information as to an inadvertent error in preparing reports for Mr. S.D. Bechtel, Jr., who
retired from the Board in July, two IBM stock transactions were omitted from
two reports timely filed during 1992 pursuantonly persons known
    to Section 16the Company to be the beneficial owner of more than five
    percent of the Securities
Exchange Act of 1934. Amendments to such reports were filed in 1993 to correct
the errors.


          IBM Notice of 1994 Annual Meeting and Proxy Statement             7



Beneficial Ownership of Shares of IBM Common StockCompany's common stock as of JanuaryDecember 31, 1994.

Voting Power Investment Power Percent of Name and Address Sole Shared Sole Shared Total(2) class(2) FMR Corp. (1) 2,236,711 8,050 32,250,466 8,050 32,281,389 5.50% 82 Devonshire Street Boston, Mass. 02109
(1) Based on Schedule 13G filed by FMR Corp. with the Securities and Exchange Commission on February 14, 1995. The Schedule 13G does not identify any shares with respect to which there is a right to acquire beneficial ownership. The Schedule 13G indicates that beneficial ownership of substantially all of these shares arises through the investment advisory activities of Fidelity Management & Research Company and the investment management activities of Fidelity Management Trust Company, each a wholly owned subsidiary of FMR Corp. (2) The Schedule 13G additionally reports that Mr. Edward C. Johnson 3rd, chairman of FMR Corp., and together with other family members part of a controlling group of FMR Corp., is the beneficial owner of the same shares, except that his sole voting power is with respect to 17,700 shares. The following table sets forth the beneficial ownership of shares of the Company's common stock as of December 31, 1994, (1) Acquirable Voting Power Investment Power within 60 Name Sole Shared Sole Shared Total(1)(2) days (3) J.F. Akers 6,998 24 6,998 24 7,022 637,475 H. Brown 0 600 5,357 600 6,518 -- J.E. Burke 4,400 725 4,400 725 5,686 -- T.F. Frist, Jr. 1,000 0 1,000 0 1,561 -- F. Gerber 1,000 0 1,000 0 1,561 -- L.V. Gerstner, Jr. 30,000 456 30,000 456 30,456 125,522 J.R. Hope 1,000 0 1,000 0 1,440 -- N.O. Keohane 0 481 1,129 481 2,171 -- C.F. Knight 2,008 0 2,008 0 2,109 -- R.J. LaBant 9,047 1 1,596 7,452 9,048 81,817 N.C. Lautenbach 10,695 0 988 9,707 10,695 110,417 T.S. Murphy 1,327 0 4,871 0 5,432 -- J.R. Opel 10,889 10,000 10,889 10,000 21,450 76,987 P.J. Rizzo 5,000 0 5,000 0 5,000 104,830 J.B. Slaughter 50 0 1,230 0 1,791 -- P.A. Toole 15,669 120 3,294 12,495 15,789 141,002 L.C. van Wachem 1,000 0 1,000 0 1,208 -- E.S. Woolard, Jr. 200 0 3,805 0 4,366 -- Directorsby IBM's current directors and the executive officers as a group 159,172 13,227 111,569 75,645 193,012* 1,145,768*named in the Summary Compensation Table on page 15.
Voting Power Investment Power Acquirable ------------------ ---------------- within 60 Name Sole Shared Sole Shared Total(1)(2) days (3) - ------------------------------------------------------------------------------------------ H. Brown 0 600 6,320 600 7,591 - J.E. Burke 4,400 725 4,989 725 6,385 - F. Gerber 1,000 0 1,000 0 1,671 - L.V. Gerstner, Jr. 57,500 456 57,500 456 57,956 125,522 N.O. Keohane 0 489 2,025 489 3,185 - C.F. Knight 2,040 0 2,580 0 2,784 - N.C. Lautenbach 10,695 0 988 9,707 10,695 148,397 T.S. Murphy 1,348 0 5,906 0 6,577 - L.A. Noto 697 601 697 601 1,398 - P.J. Rizzo 15,000 0 15,000 0 15,000 200,282 J.B. Slaughter 50 0 1,688 0 2,359 - J.M. Thompson 5,465 0 324 5,141 5,465 132,695 A. Trotman 1,000 0 1,000 0 1,100 - L.C. van Wachem 1,000 0 1,000 0 1,313 - C.M. Vest 100 0 100 0 201 - E.S. Woolard, Jr. 200 0 4,820 0 5,491 - J.B. York 0 20,000 0 20,000 20,000 37,193 - ----------------------------------------------------------------------------------------- Directors and executive officers as a group(4) 183,324 30,205 120,388 113,431 239,334* 1,282,798* - -----------------------------------------------------------------------------------------
* The total of these two columns represents less than 1% of the outstanding shares. (1) No individual's beneficial holdings totaled more than 1/10th of 1% of the outstanding shares. These holdings do not include 975,5381,501,567 shares held by the retirement plan trust funds,IBM Retirement Plan Trust Fund, over which the members of the Board have the right to acquire shared investment power by withdrawing authority now delegated to the Retirement Plans Committee, a management committee. The directors and officers included in the table disclaim beneficial ownership of shares beneficially owned by family members who reside in their household.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. (2) For non-employee directors, this column includes shares earned and awardedaccrued under the Directors Deferred Compensation and Equity Award Plan. They have no voting power over such shares and investment power only with regard to Promised Fee Shares whichthat are acquired as a result of deferring fees paid to them. Therefore, the shares listed in the other columns for them will not equal the total in this column. Fractional shares attributable to participation in this plan are not shown. (3) Shares that can be purchased under an IBM stock option plan within 60 daysplan. (4) None of the date of this proxy statement.directors or named executive officers own any IBM Notice of 1994 Annual Meeting and Proxy Statement 8preferred stock. Report on Executive Compensation The Executive Compensation and Management Resources Committee has responsibility(the "Committee") is responsible for IBM'sadministering the Company's executive compensation policies and practices. The committeepractices and approves all elements of compensation for corporate officersofficers. In carrying out its duties, the Committee has direct access to independent compensation consultants and administers the IBM 1989 Long-Term Performance Plan, approved by stockholders in 1989, under which stock and cash awards are made to officers, other executives and selected key employees.outside survey data. The committeeCommittee reports regularly reports on its activities to the Board of Directors. The committee alsoDirectors on its activities and obtains ratification by the non-employee members of the Board of all items of compensation for the two highest-paid executives. The committee is comprised of three outside directors who are not officers or employees of IBM or its subsidiaries and who are not eligible to participate in any of the plans or programs that the committee administers. Compensation Philosophy IBM'sand Practices The Company's executive compensation programs areprogram is based on the belief that the interests of the executives should be directlyclosely aligned with those of IBM's stockholders. To support this philosophy, the stockholders. The programs are strongly oriented towardsfollowing principles provide a pay-at-risk philosophyframework for the compensation program: - offer compensation opportunities that tiesattract the best talent to IBM; motivate individuals to perform at their highest levels; reward outstanding achievement; and retain the leadership and skills necessary for building long-term stockholder value; - maintain a significant portion of executives' total compensation at risk, tied to both the annual and long-term financial performance of the Company, as well as to long-termthe creation of stockholder return. The committee has established the following principlesvalue. - encourage executives to guide development of the Company's compensation programs and to provide a framework for compensation decisions: - - provide a total compensation package that will attract the best talent to IBM, motivate individuals to perform at their highest levels, reward outstanding performance, and retain executives whose skills are critical for building long-term stockholder value; - - establish annual incentives for senior management that are directly tied to the overall financial performance of the Company; and - - implement long-term incentives to focus executives on managingmanage from the perspective of an ownerowners with an equity stake in the business, and align executive compensation with benefits realized byCompany. While performance against financial objectives is the Company's stockholders. Compensation Programs and Practices The committee determines salary ranges and incentive award opportunitiesprimary measurement for executive officers.officers' annual incentive compensation, non-financial performance also can affect pay. Every executive, as well as every employee, is expected to uphold and comply with IBM's Business Conduct Guidelines, which require the individual to maintain IBM's discrimination-free workplace and high standards of environmental protection. Upholding the Business Conduct Guidelines contributes to the success of the individual employee, and to IBM as a whole. IBM's compensation program for executive officers is designed to provide a total compensation level (including both annual and long-term incentives) that is targeted at approximately the 75th percentile of survey companies. For positions other thanexecutive officers recently recruited by IBM, annual compensation rates and long-term incentive awards reflect amounts necessary to attract them to the chairman and vice chairman, bothCompany. The compensation program is benchmarked by independent consultants using surveys of whom were hired in 1993, the compensation ranges are based on surveys conducted by an independent consultant of competitive pay practices in both the computerinformation processing industry and the thirty largest U.S. market-capitalized companies. TheThese companies, included in these surveyswhich are representative of the firms IBM competes with for executive talent and have jobs similar to those at IBM in magnitude, complexity orand scope of responsibility. The committee believes these companies are representative ofresponsibility, form the Company's main competitionbasis for executive talent. Consequently, the compensation survey group used by the Committee. Consequently, this is a broader and more diverse set of companies than the ten companiesthose included in the S&P Computer Systems Index used for the Performance Graph on page 16. Salary20. Management has initiated new stock ownership guidelines to support the objective of increasing the amount of stock owned by senior executives of the Company. The guidelines provide that within a five-year period of time senior executives should attain an investment position in IBM stock or stock units that is equal to two to four times their base salary, depending on the position of the executive. Components of Executive Compensation The compensation program for executive officers consists of the following components: ANNUAL CASH COMPENSATION includes base salary and Annual Incentivean annual cash incentive (bonus). Salaries are established by the committeeCommittee based on an executive's scope ofjob responsibilities, level of experience, individual performance and contribution to the business, and information obtained from surveys. The annual incentive component of pay is at risk and tied to specific performance measures. The Committee establishes the surveys referredannual incentive opportunity for each executive officer in relation to above. Inhis or her base salary. Actual incentive awards for 1994 were based primarily on performance measured against annual financial targets approved by the caseCommittee early in the year. These targets were pre-tax earnings and cash flow with most of the vice chairman, his salaryweighting on earnings, thus establishing a direct link between executive pay and Company profitability. To a lesser degree, individual performance was measured by factors such as strategy development, leadership of special projects, and customer satisfaction. The final score results in a bonus that may be above or below the executive's target incentive opportunity, depending on the level of overall performance. In 1994, the Company's financial performance exceeded the objectives set by the committee at a level reflecting his consulting rate with IBM priorCommittee, resulting in above-target incentive payouts to his reemployment, his broad experience in the computer industry, and the Company's need for his services during a transition period. The salary levels for the senior vice presidentsexecutive officers named in the Summary Compensation Table,Table. LONG-TERM INCENTIVES include both stock options and otherLong-Term Performance Incentive awards. The objective for both of these awards is to align closely executive officers excludinginterests with the chairmanlonger term interests of stockholders. These awards, which are at risk and vice chairman, are between the median and 75th percentile of the survey group. IBM Notice of 1994 Annual Meeting and Proxy Statement 9 Executive officers have an annual incentive (bonus) opportunity with awards baseddependent on the overall performancecreation of incremental stockholder value or the Company and, if applicable, on the performanceattainment of an IBM business unit. The purpose of this incentive is to tiecumulative financial targets over several years, represent a significant portion of annual pay directlythe total compensation opportunity provided for the executive officers. Award sizes are based on individual performance, level of responsibility, the individual's potential to key financial results. For 1993, the incentive awards related directlymake significant contributions to the business performance factors,Company, and where performance exceeded or did not meet preestablished targets, incentive payments were increased or decreased accordingly. The annual incentives paid to Messrs. Rizzo and Toole were based on the Company's operating results (adjusted for special items) measured against objectives established with the Board of Directors early in the year. The performance factors used were profit and cash, with the primary emphasis being on profit. Because Messrs. Lautenbach and LaBant had responsibility for large business units, their annual incentives were based principally on their business unit performance, equally weighted between financial results (profit, revenue, and cash, with the primary emphasis on profit) and a subjective assessment of other key business unit objectives, and to a lesser degree, on the Company's operating results, as defined above. In the first quarter of 1993, IBM's annual compensation was simplified by eliminating a separate restricted stock unit award so as to delete a component that had been based solely on a judgmental performance assessment. A portion of this award opportunity has been added to salary and the remainder to the incentive compensation opportunity. The allocation of this award opportunity was done so that the resulting relationships between the incentive opportunity and salary for the individuals who had received such awards were similar to the incentive-to-salary ratios for comparable jobslevels at companies in the survey companies. In the case of the three named executive officers who were employedgroup. Long-term incentives granted in prior to 1993, this change from previous years' practice is reflected in both the Salary and Bonus columns of the Summary Compensation Table on page 13.years are also taken into consideration. - Stock Options The committee strongly believes that the interests of senior management must be closely aligned with those of the stockholders. Long-term incentives in the form of stock options provide a vehicleare typically granted annually to reward executives only if there is an increase in stockholder value. Stock options are granted to officers, other executives and other selected employees whose contributions and skills are important to the long-term success of the Company. OptionsThe options are granted at fairwith an exercise price equal to the market valueprice of the Company's common stock on the date of grant, withvest over a ten-year term. Since 1989, grantsperiod of up to four years, and expire after ten years. These options only have been made under the IBM 1989 Long-Term Performance Plan. The 1989 Plan expires in April 1994, and its successor, the IBM 1994 Long-Term Performance Plan, is being proposed for stockholder approval at this year's Annual Meeting and is described starting on page 17. Several factors were considered in determining the size of stock option grantsvalue to the executive officers. These included individual performance,recipients if the lack of market value in options granted prior to 1993, and competitive practicesprice of the companies inCompany's stock appreciates from the survey group referred to above. Relative performance among these companies was not taken into consideration nor was specific weighting given to these factors. The number ofdate when the options granted in 1993 was approximately the same as in the prior year and is at approximately the 75th percentile of the survey companies for the executive officers, excluding the chairman.were granted. - Long-Term Performance Incentive A Long-Term Performance Incentive, an award under the 1989 Long-Term Performance Plan, was introduced early in 1993 toawards provide executive officers and senior management with a multiple-yearan incentive opportunity linked to both tomultiple year corporate financial performance and stockholder value. Awards are intended to be made annually in the form of performance stock units which mustthat are valued based upon the market price of the Company's common stock. For the award in 1994, the stock units can be earned based on achieving cumulative financial targets of earnings-per-share and cash flow, (in each case, as adjusted for special items), equally weighted, over a three-year IBM Notice of 1994 Annual Meeting and Proxy Statement 10 period (1993-1995).period. No payouts will be made for cumulative performance below a 50% threshold level, and there is a maximum payout of 130%150% of the stock units for exceeding target performance. Any payouts from this award will occur in the first quarterAt time of 1996 and the valuepayout, one-half of the performance stockearned units will be based onpaid in cash and one-half in the form of an equivalent number of restricted shares of the Company's stock price at that time. This long-term incentive replaces a prior practice, discontinued in 1992, of making restricted stock awards and is intended to provide an opportunity comparable to the prior program (approximately 20% of annual compensation), but only if the performance targets are achieved at the end of the three-year period. The Long-Term Performance Incentive is further described in the table on page 15.common stock. Compensation for the Chairman and Chief Executive Officer On March 26, 1993, IBM entered into an employment agreement with Mr. Louis V. Gerstner, Jr., to become chairman and chief executive officer of the Company. All aspects of Mr. Gerstner's 1993 compensation were governed by this employment agreement. The committee andIn determining the Board of Directors approvedcompensation for Mr. Gerstner's employment agreement after an extensive search had been conducted by the Board with the assistance of two executive search firms. In settling on the final compensation amounts,Gerstner, the Board focused on the importance of hiring a chairman and chiefan executive officer with an outstanding business record who could provide the leadership necessary to improve IBM's competitiveness and profitability. The Board also recognized the need to consider Mr. Gerstner's compensation at his former employer, as well as the value of benefits under various plans of this employer that would be forfeited upon his resignation. For 1994, Mr. Gerstner's base salary, as well as both his annual cash incentive and Long-Term Performance Incentive target opportunities, were governed by this employment agreement. Based on above-target achievement of the Company's 1994 financial targets (referred to under the section above entitled Annual Cash Compensation), and their assessment of Mr. Gerstner's contributions to the business, the Committee approved an annual incentive payment to him of $2,600,000. In June, the Committee approved a stock option grant for Mr. Gerstner covering 225,000 shares of IBM common stock. In approving this grant, the Committee considered several factors: an analysis prepared by an independent consultant of option grants made to chief executive officers at other leading companies in the survey groups; the size and complexity of IBM; the leadership challenge facing the chairman; and improved business results for the Company. This grant was made with an exercise price of $60.94 (the average market price on June 27, 1994, the date of grant). The terms of Mr. Gerstner's employment agreement are set forthdescribed in the section entitled, "Employment Agreements and Change-in-Control Arrangements" on page 15. Compensation and Separation Payments for the Former Chairman and Chief Executive Officer Mr. John F. Akers was chairman and chief executive officer19. Deductibility of the Company for the first three months of 1993. He retired from IBM on April 30, 1993. For his four months of service, Mr. Akers received one-third of his annual salary and an incentive (bonus) payment, determined by the collective judgment of the committee, that was set at the same relationship to his salary as his 1992 incentive. He also received a stock option grant, along with the other executive officers, on January 7, 1993, the number of shares of which was equal to his grant the prior year. The factors considered by the committee in granting this stock option were the same as set forth above under the section entitled "Stock Options" for other executive officers. At the time of his retirement, Mr. Akers received $2,500,000, an amount equal to his annual compensation rate, as part of a retirement incentive program that was available to other corporate employees during 1993. The compensation rate was based on his annual rate for salary and incentive, assuming all performance objectives had been achieved and a restricted stock unit award had been made. The terms of this program provided for a payment equal to one week of compensation for each six months of service, up to a maximum of fifty-two weeks. The Board of Directors also authorized an additional payment of $925,000, an amount equal to his annual base salary, in recognition of his 33 years of service to the Company. Mr. Akers' stock options vested and his restricted stock and restricted stock units were paid out upon his retirement, in accordance with their terms. (See footnote 1, Summary Compensation Table, page 13.) IBM Notice of 1994 Annual Meeting and Proxy Statement 11 Discussion of Corporate Tax Deduction on Compensation in Excess of $1 Million a Year In 1993, Congress enacted section 162(m) of the U.S. Internal Revenue Code Section 162(m), enactedof 1986, effective for tax years beginning in 1993,1994. This legislation precludes a public corporation from taking a deduction in 1994 or subsequent years for compensation in excess of $1 million per year for its chief executive officer orand any of its four other highest-paid executive officers. CertainHowever, certain performance-based compensation however, is specifically exempt from the deduction limit. The committee has been following this matter closely. In December 1993, the Internal Revenue Service issued proposed regulations implementing this legislation. The regulations will not become final until after a period for public comment and possibly public hearings thereafter. Based on the proposed regulations, any taxable compensation derived from the exercise of stock options or stock appreciation rights granted under the IBM 19891994 Long-Term Performance Plan and prior Stock Option Plans should be exempt from the limit on the corporate tax deduction. Similarly, any future payouts fromAs explained in the Long-Term Performance Incentive awards madeReport on Executive Compensation in 1993 should be excluded from the limit. The new IBMCompany's 1994 Long-Term Performance Plan, being presented for stockholder approval as a successorproxy statement, the Committee was reluctant to make changes at that time to the 1989 Plan, has been designed to meetexecutive compensation program solely for tax purposes. At that time, the proposed regulations so that stock options and stock appreciation rights granted under this Plan will also be excluded from the deduction limit, and to provide flexibility for certain other awards to so qualify. The committee recognizesCommittee indicated it recognized that part of the 1994 annual compensation paid to one or more of the five coverednamed executive officers maymight not qualify for the exemption. The committee is reluctant, however,Although the regulations still have not been finalized, the Committee has taken action designed so that future annual incentive compensation and Long-Term Performance Incentive awards that otherwise would be subject to make changesthe limitations of section 162(m) should not be subject to these deductibility limitations. Accordingly, on pages 23 and 25 of this proxy statement there are two resolutions covering performance-based incentives that are being proposed for stockholder approval at this timeyear's Annual Meeting. * * * The Board believes that the caliber and motivation of IBM's employees, and especially of their leadership, are fundamentally important to achieving our objective of restoring IBM to preeminence in the marketplace and as an investment for our stockholders. The Committee is responsible to the executive compensation programs solelyBoard, and by extension to stockholders, for tax purposes, at least, until final regulationsensuring that the best qualified individuals are issued. Atin key positions and that time,they are compensated in a way that is compatible with IBM's business strategies and that aligns their interests with those of long-term investors. We believe the committeeactions taken by the Committee to strengthen and broaden cash and stock-based incentives will assessprove beneficial to the practical impact ofCompany and the new tax legislation on executive compensationcustomers, communities and determine what action, if any, is appropriate. H. Brown T.F. Frist, Jr. T.S. Murphystockholders IBM serves. Charles F. Knight (chairman) IBM Notice of 1994 Annual Meeting and Proxy Statement 12Alex Trotman Charles M. Vest Summary Compensation Table Name and Annual Compensation
- ----------------------------------------------------------------------------------------------------------- Long-Term Compensation Annual Compensation (1) Awards (2) - ----------------------------------------------------------------------------------------------------------- Name and Other Annual Securities Under- All Other Principal Position Year Salary Bonus Compensation lying Options(#) Compensation - ----------------------------------------------------------------------------------------------------------- L.V. Gerstner, Jr. 1994 $2,000,000 $2,600,000 $0 225,000 $7,755,055(3) Chairman and CEO 1993 1,500,000 1,125,000 160,130 500,000 4,924,596 P.J. Rizzo 1994 1,000,000 1,300,000 0 50,000 2,248(4) Vice Chairman 1993 965,086 750,000 0 80,000 0 J.B. York 1994 575,000 800,000 0 75,000 2,250(4) Senior VP and CFO 1993 371,354 300,000 0 70,000 3,360,473(5) N.C. Lautenbach 1994 490,000 575,000 0 60,000 2,250(4) Senior VP 1993 490,000 300,000 0 40,000 2,698 1992 276,666 637,100 186,800 (6) 40,000 485,688(7) J.M. Thompson 1994 458,000 550,000 0 60,000 110,820(7) Senior VP 1993 448,000 315,000 0 35,000 110,887 1992 298,300 669,679 0 35,000 108,451
(1) Principal Other Annual Restricted Securities Under- All Other Position Year Salary Bonus Compensation Stock Awards lying Options (#) CompensationInformation for Messrs. L.V. Gerstner, Jr. 1993 $1,500,000 $1,125,000 $160,130 (2) $ 0 500,000 $ 4,924,596 (3) Chairman and CEO, P.J. Rizzo, and J.B. York is provided only for 1994 and 1993 965,086 (4) 750,000 0 0 80,000 0 Vice Chairman P.A. Toolebecause none of these individuals were employed by the Company in 1992. In addition, the 1993 450,000 363,000 0 0 42,000 2,698 (5) Senior VP 1992 280,000 393,250 0 0 42,000 2,618 1991 280,000 390,044 0 149,962 23,940 2,542 N.C. Lautenbachannual compensation amounts for these individuals reflect less than a full year, since their employment dates were April 1, 1993, 490,000 300,000 0 0 40,000 2,698(5) Senior VP 1992 276,666 637,100 0 0 40,000 2,618 1991 260,000 280,022 0 149,962 19,388 2,542 R.J. LaBantJanuary 25, 1993, 460,000 312,000 0 0 40,000 2,698 (5) Senior VP 1992 250,000 446,250 0 0 40,000 2,618 1991 209,167 359,971 0 149,962 15,679 2,542 J.F. Akersand May 10, 1993, 308,333 125,000 0 0 97,000 3,427,698 (6) 1992 925,000 375,000 0 0 97,000 2,618 1991 925,000 650,017 0 499,994 89,354 2,542 (1)respectively. (2) At the end of 1993,1994, Mr. Gerstner held 10,30118,961 performance stock units having a value of $582,007;$1,393,634; Mr. Rizzo held 8,24113,437 performance stock units having a value of $465,617;$987,620 (upon his retirement, he forfeited 3,464 units); Mr. TooleYork held 3,09011,376 performance stock units 12,375having a value of $836,136; Mr. Lautenbach held 5,688 performance stock units and 9,707 shares of restricted stock and 1,472 restricted stock units having a combined value of $956,941;$1,131,533; and Mr. LautenbachThompson held 3,0905,173 performance stock units 9,707and 5,141 shares of restricted stock and 1,338 restricted stock units having a combined value of $798,628; Mr. LaBant held 3,090 performance stock units, 7,451 shares of restricted stock and 1,605 restricted stock units having a combined value of $686,249. Mr. Akers' 54,431 shares of restricted stock and 4,281 restricted stock units having a combined value of $2,985,750 were paid out upon his retirement in accordance with their terms.$758,079. Performance stock units were granted as part of the Long-Term Performance Incentive (LTPI) award. These unitsaward and are valued based on the Company's common stock price.price on December 31, 1994. LTPI awards are not included in this table (see page 1517 for additional information)information on the awards made in 1994). Restricted stock may not be sold, transferred, or assigned until retirement or age 60, is forfeitable, and earns dividends at the same rate paid to all stockholders. Restricted(3) Includes: (a) $7,752,854 paid according to Mr. Gerstner's employment contract which calls for the Company to guarantee a yield of $8.125 upon exercise or expiration for each of 3,211,320 shares of RJR Nabisco stock units, last awarded in 1992, are paid out based on the value of the Company's stock at the end of two years and earn dividend equivalents during the period. (2) This amount represents reimbursement for tax liabilities related to certain payments listed in footnote (3) below. (3)which Mr. Gerstner under the termsheld options as a result of his employment agreement, was given these one-time payments in replacement for various benefitswith RJR Nabisco; and rights from his former employer that were forfeited upon joining IBM. These items included: $725,000 for forfeited options for shares of his former employer's stock; $1,478,750 for forfeited performance shares; $500,000 representing his first quarter bonus from his former employer; $1,381,764 for forfeited benefits under his Personal Retirement Account; $25,000 for financial and tax planning services provided by his former employer; and $637,500 representing the difference between $8.125 and the price realized upon selling 300,000 shares of his former employer's stock. Mr. Gerstner was also reimbursed an aggregate of $176,582 for other expenses, including legal fees, relating to his change of employment. (4) This includes an amount paid for services rendered as(b) a consultant during January of 1993 prior to Mr. Rizzo's reemploymentcontribution by the Company. (5) These amounts represent the Company's annual contributionsCompany of $2,201 to the IBM Tax Deferred Savings Plan, a 401(k) plan. All U.S. employees are eligible to participate in this plan.Plan. (4) Represents the Company's contribution to the IBM Tax Deferred Savings Plan. (5) Includes a one-time payment of $3,360,000 given in replacement for various benefits and rights from his former employer that were forfeited upon Mr. York joining IBM, and a contribution of $473 to the IBM Tax Deferred Savings Plan. (6) This amount includes the followingReimbursement for tax liabilities related to payments for overseas assignment (see footnote (7) below). (7) Includes payments to equalize cost-of-living and housing differences, and for certain other expenses, related to assignments outside of home country. For Mr. Akers, who retired April 30, 1993: $2,500,000 as part of a retirement incentive program, an additional payment of $925,000 in recognition of 33 years of service to the Company, andLautenbach, it also includes $2,618 for the Company's annual contribution to the IBM Tax Deferred Savings Plan of $2,698. IBM Notice of 1994 Annual Meeting and Proxy Statement 13Plan. Stock Option/SAR Grants in Last Fiscal Year (1) Individual Grants Number of % of Total Potential Realizable Value at Securities Options/SARs Assumed Annual Rates Underlying Granted to Exercise of Stock Price Appreciation for Options/SARs Employees in Price Expiration Ten-Year Option Term (3) Name Granted (2) Fiscal Year per Share Date 5% 10% L.V. Gerstner, Jr. 500,000 2.80% $47.88 4/22/03 $15,055,000 $38,155,000 P.J. Rizzo {40,000 .22% 46.31 1/07/03 1,164,800 2,952,400 40,000 .22% 52.12 2/04/03 1,311,200 3,322,800 P.A. Toole 42,000 .24% 46.31 1/07/03 1,223,040 3,100,020 N.C. Lautenbach 40,000 .22% 46.31 1/07/03 1,164,800 2,952,400 R.J. LaBant 40,000 .22% 46.31 1/07/03 1,164,800 2,952,400 J.F. Akers 97,000 .54% 46.31 1/07/03 2,824,640 7,159,570 Increase in market value of IBM common stock for all stockholders at 5% (to $78/share) 10% (to $124/share) assumed annual rates of stock price appreciation (as used in the table above) from $47.88 per share, over the ten-year period, based on 581.4 million $17.5 billion $44.4 billion shares outstanding on December 31, 1993.
- ------------------------------------------------------------------------------------------------------------- Individual Grants Number % of Total Potential Realizable Value at of Securities Options/SARs Assumed Annual Rates of Underlying Granted to Exercise Stock Price Appreciation for Options/SARs Employees in Price Expiration Ten-Year Option Term (3) Name Granted (2) Fiscal Year per Share Date 0% 5% 10% - ------------------------------------------------------------------------------------------------------------- L.V. Gerstner, Jr. 225,000 3.24% $ 60.94 6/27/04 $ 0 $ 8,622,000 $ 21,852,000 P.J. Rizzo 50,000 .72% 53.44 2/06/04 0 1,680,500 4,258,500 J.B. York 75,000 1.08% 53.44 2/06/04 0 2,520,750 6,387,750 N.C. Lautenbach 60,000 .86% 53.44 2/06/04 0 2,016,600 5,110,200 J.M. Thompson 60,000 .86% 53.44 2/06/04 0 2,016,600 5,110,200 - -------------------------------------------------------------------------------------------------------------
Increase in market value of IBM common stock for all stockholders 5% (to $99/share) 10% (to $158/share) at assumed annual rates of stock price appreciation (as used in the ---------------- ------------------- table above) from $60.94 per share, over the ten-year period, based $22.5 billion $57.1 billion on 587.7 million shares outstanding on December 31, 1994. - -------------------------------------------------------------------------------------------------------------
(1) No Stock Appreciation Rights (SARs) were granted to the named executive officers during 1993.1994. (2) Included in the total aggregate exercise price for the grants made to each grantof Messrs. Gerstner, York, and Lautenbach is approximately $100,000 of Incentive Stock Options, which become exercisable in two equal installments on the first and second anniversary dates. The balance of their grants, as well as the grants made to Mr. Rizzo and Mr. Thompson, is exercisable in four equal annual installments commencing on the first anniversary date. All options become exercisable upon retirement. In addition, Mr. Gerstner's grant also becomes exercisable on a change-in-control,termination without cause, including upon a "change-in-control," as defined in his employment agreement. (3) Potential Realizable Value is based on the assumed annual growth rates for each of the grants shown over their ten-year option term. For example, a 5% annual growth rate for Mr. Gerstner's grant results in a stock price of $77.99$99.26 per share and a 10% rate results in a price of $124.19$158.06 per share. These potential values are listed in order to comply with Securities and Exchange Commission regulations, and the Company cannot predict whether these values will be achieved. Actual gains, if any, on stock option exercises are dependent on the future performance of the stock. There can be no assurance that the amounts reflected in this table will be achieved. Fiscal Year-End Option/SAR Values (1) Number of Securities Underlying Unexercised Value of Unexercised In-the-Money Options/SARs at Fiscal Year-End Options/SARs at Fiscal Year-End Name Exercisable Unexercisable Exercisable Unexercisable L.V. Gerstner, Jr. 0 500,000 $ 0 $4,310,000 P.J. Rizzo 83,812 80,000 0 582,800 P.A. Toole 106,382 91,809 0 427,980 N.C. Lautenbach 79,781 84,187 0 407,600 R.J. LaBant 53,194 81,247 0 407,600 J.F. Akers 637,475 0 988,430 0
Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Options/SARs at Fiscal Year-End Options/SARs at Fiscal Year-End Name Exercisable Unexercisable Exercisable Unexercisable - --------------------------------------------------------------------------------------------- L.V. Gerstner, Jr. 125,522 599,478 $3,215,874 $12,420,126 P.J. Rizzo 91,300 108,982 510,596 2,435,204 J.B. York 18,012 126,988 445,797 2,791,203 N.C. Lautenbach 108,058 113,551 286,555 2,004,645 J.M. Thompson 95,642 108,303 237,913 1,917,338 - ---------------------------------------------------------------------------------------------
(1) No options were exercised by anya named executive officer during 1993. IBM Notice of 1994 Annual Meeting and Proxy Statement 141994. Long-Term Incentive Plans -- Awards in Last Fiscal Year Performance or Number of Other Period Estimated Future Payouts under Shares, Units Until Maturation Non-Stock Price-Based Plans (1) Name or Other Rights or Payout Threshold (#) Target (#) Maximum (#) L.V. Gerstner, Jr. 10,301 1/93-12/95 2,575 10,301 13,391 P.J. Rizzo 8,241 1/93-12/95 2,060 8,241 10,713 P.A. Toole 3,090 1/93-12/95 773 3,090 4,017 N.C. Lautenbach 3,090 1/93-12/95 773 3,090 4,017 R.J. LaBant 3,090 1/93-12/95 773 3,090 4,017
Long-Term Incentive Plans - Awards in Last Fiscal Year - -------------------------------------------------------------------------------------------------- Performance or Number of Other Period Estimated Future Payouts under Shares, Units Until Maturation Non-Stock Price-Based Plans (1) Name or Other Rights or Payout Threshold(#) Target(#) Maximum(#) - -------------------------------------------------------------------------------------------------- L.V. Gerstner, Jr. 8,660 1/94-12/96 2,165 8,660 12,990 P.J. Rizzo 5,196(2) 1/94-12/96 1,299 5,196 7,794 J.B. York 5,196 1/94-12/96 1,299 5,196 7,794 N.C. Lautenbach 2,598 1/94-12/96 650 2,598 3,897 J.M. Thompson 2,598 1/94-12/96 650 2,598 3,897 - --------------------------------------------------------------------------------------------------
(1) Payouts of incentivesthe Long-Term Performance Incentive (LTPI) awards are tied to achieving specified cumulative business objectives of earnings-per-share and cash flow (in each case, as adjusted for special items).flow. The target amountnumber of performance stock units will be earned if 100% of the targeted objectives isare achieved. The threshold amountnumber will be earned atfor the achievement of 50% of the targeted objectives and the maximum award amountnumber will be earned atfor achieving 110%125% of the targeted objectives. No payout will be made for performance below the threshold. At payout, the value of each performance stock unit will be equal to the average of the closing price of one share of IBM common stock for the month of January 1996.1997. Half of the earned units will be paid in cash and the balance will be paid in an equivalent number of restricted shares of IBM common stock, restricted untilstock. (2) According to the provisions of the award, Mr. Rizzo forfeited 3,464 of these units upon his retirement. Retirement Plan Executive officers participate in the IBM Retirement Plan, which provides retirement income to all covered employees of IBMFor Messrs. Rizzo and its U.S. subsidiaries. For the named executive officers, other than Mr. Gerstner,Lautenbach, retirement benefits payable annually under the IBM Retirement Plan will be determined by the average of the three consecutive highest-paid years of compensation times(as defined) multiplied by total service through year-end 19931994 times 1.43%, minus 1.43% of estimated Social Security benefits timesmultiplied by total service through year-end 1993,1994, plus 1.35% of compensation thereafter. As of January 1, 1994, service credit is limited toIn no event will more than 30 years or accruedof total service at(or total service as of December 31, 1993, if greater.greater than 30 years) be taken into account in calculating the benefit under the above formula. This formula will remain in effect for accruals through December 31, 2000. Effective January 1, 1995, IBM amended the IBM Retirement Plan to introduce an alternative benefit formula if such formula yields a greater benefit than the Plan formula described above. However, the pre-existing Plan formula will yield a greater benefit for most employees until the year 2000. The new formula, which will be phased in over a five-year period, provides for the crediting of age-weighted percentage points annually up to a maximum of 500 points. The total points at retirement are multiplied by average annual compensation over the final five years of compensation (or the highest consecutive five years of compensation if this yields a greater benefit). The result, with minor adjustments, is divided by a benefit conversion factor based on the participant's age at retirement to determine the annual annuity benefit. IBM also introduced the IBM Supplemental Executive Retirement Plan (the "SERP"), effective January 1, 1995, to attract and retain executives whose skills and talents are important to IBM's operations by providing retirement income that supplements benefits under the IBM Retirement Plan. The SERP benefit is calculated in annuity form as the sum of: (1) 1.70% times average annual compensation over the final five years of employment or the highest consecutive five calendar years of compensation, whichever is greater, up to $185,000 times years of service up to 20 years, plus (2) 2.55% of such compensation in excess of $185,000 times years of service up to 20 years, plus (3) 1.30% of such compensation times years of service between 20 and 30 years, plus (4) 0.75% of such compensation times years of service between 30 and 35 years with no accruals past 35 years of service, provided that average annual compensation shall be at least $150,000 and that the SERP benefit will be reduced by the benefit payable under the IBM Retirement Plan. The SERP benefit will phase in until 100% accrual is attained for executives retiring on or after December 31, 1997. SERP benefits are forfeited if an individual is no longer an executive at retirement or fails to comply with the Plan's non-compete provisions. The elements of compensation upon which both the retirement planIBM Retirement Plan and the SERP benefits are based include salary incentives, and payments ofbonus. In addition, the IBM Retirement Plan includes recurring cash and stock awards. The projected IBM plan benefits set forth below assume no change in rate of compensation. Mr. Gerstner's annual pension from the Company under his employment agreement has been set at approximately $1,275,000 pursuant to$1,140,000 at age 60, when his employment agreement (see next paragraph).expires. Mr. Rizzo's retirement incomeRizzo, who retired on December 31, 1994, will be based on his prior employment with the Company and his service subsequent to January 25, 1993, at which time he was reemployed and his currentreceive an annual pension payments underfrom the IBM Retirement Plan were suspended. Prior to any reduction for survivorship options, estimated annual retirement benefits at age 60 for Mr. Toole, Mr. Lautenbach and Mr. LaBant would be, respectively, $480,000, $470,000, and $430,000; annual retirement benefits as of December 31, 1993 for Mr. Rizzo (who became age 65 during 1993 and previously elected a 50% joint and survivor annuity) would have been $545,000. Mr. Akers retired April 30, 1993 and is receiving an annual pension calculated on a 50% joint and survivor annuity basis of $1,294,000.$723,000. In connection with his employment by the Company in 1993, the Company agreed to pay Mr. York an annual pension expressed as the greater of (1) the difference between the vested pension income he receives from Chrysler Corporation (his previous employer) and the income he would have received from Chrysler had he remained a Chrysler employee to the date the Chrysler pension would have commenced, had his annual compensation increases at Chrysler equaled five percent, and had he retired from Chrysler on the date he completes his employment with IBM, or (2) his IBM pension income (with credit added at the time of his employment for 14 years and 1 month of service with Chrysler) less the pension income he receives from Chrysler. His projected pension at age 60 under the Chrysler formula is $515,000, which is greater than his projected pension under the IBM pension formulas. Prior to any reduction for survivorship options and assuming there is no forfeiture of benefits, the estimated annual retirement benefit at age 60 for Mr. Lautenbach would be $560,000. Employees outside the U.S. are covered by different retirement plans, varying from country to country. Mr. Thompson is covered by the retirement plan of IBM Canada, and his estimated annual single life retirement benefit payable in U.S. dollars at age 60, assuming the currency exchange rate in effect as of December 31, 1994, would be $330,000. Other Deferred Compensation Plans The IBM Tax Deferred Savings Plan (the "TDSP") allows all eligible employees to defer up to 12% of their income on a tax favored basis into a tax exempt trust pursuant to Internal Revenue Service guidelines. IBM matches these deferrals at the rate of 50% for the first 6% of compensation deferred. The employee accounts are invested by the plan trustee in up to eight investment funds, including an IBM Stock Fund, as directed by the employees. Corporate officers have participated in the TDSP since its inception in 1983 on the same basis as all other employees except that they could not participate in the IBM Stock Fund investment option. Commencing February 1, 1995, officers are now permitted to invest in the TDSP's IBM Stock Fund consistent with the Company's increased emphasis on stock ownership. Internal Revenue Service limits on the TDSP preclude in 1995 an annual investment of more than $9,240 or an eligible compensation base of more than $150,000 for any one employee. IBM has established the Extended Tax Deferred Savings Plan (the "ETDSP"), effective January 1, 1995, which allows any executive, including officers, whose rate of compensation is at least $150,000 annually, to defer additional monies and receive a Company match on the same basis as the TDSP. The Company match for the ETDSP is credited only in units of IBM common stock which are not transferable to other investment alternatives during employment. In addition, corporate officers and other senior executives can defer all or a portion of their annual incentive until retirement under the ETDSP. The ETDSP is not funded and participants are general creditors of the Company. All investments in the ETDSP earn income based on the results of the actual TDSP funds' performance but the income is paid out of Company funds rather than the actual returns on a dedicated investment portfolio. Employment Agreements and Change-in-Control Arrangements The Company entered into an employment agreement with Mr. Gerstner as of March 26, 1993, whereby he serves as the chairman and chief executive officer of the Company. The agreement provides Mr. Gerstner with: an annual salary of at least $2,000,000; an annual incentive target award opportunity of at least $1,500,000 with a minimum 1993 award of $1,125,000; a long-term performance incentive with a target opportunity of at least $500,000; a special one-time payment of $4,287,096 in 1993 for the value of benefits under various plans of his former employer that were forfeited as a result of his resignation; $160,130 for reimbursement of certain taxes (described in footnotes (2) and (3) of the Summary Compensation Table on page 13);taxes; a 10-year stock option for 500,000 shares of IBM common stock of the Company at $47.88 (the market price on April 23, 1993, the date of grant); and an annual pension at age 60 from IBM of approximately $1,275,000. Of the 30,456 shares listed as owned by Mr. Gerstner in the Beneficial Ownership of Shares table on page 8, none was part of the terms of Mr. Gerstner's employment agreement. Thirty thousand of those shares were purchased by Mr. Gerstner in the open market from April 1993 through January 1994 with his personal funds. The rest had been acquired prior to his employment by IBM. IBM Notice of 1994 Annual Meeting and Proxy Statement 15 $1,140,000. The agreement also callscalled for the Company to payguarantee Mr. Gerstner the difference between the market price upon exercise anda yield of $8.125 for each of 3,211,320 shares of RJR Nabisco stock on which Mr. Gerstner holdsheld options as a result of his employment with RJR Nabisco. To date, Mr. Gerstner has not exercised any of these options and, based on the average of the closing prices of RJR Nabisco stock in the month of February 1994, $7.427, the liability of IBM would be $2,241,501. Also, the agreement guaranteed Mr. Gerstner $8.125 per share for 300,000 RJR Nabisco shares held by RJR Nabisco as collateral for a loan taken by Mr. Gerstner to purchase those shares. In June 1994 and November 1993, the Company paid Mr. Gerstner sold the shares at $6.00 per share$7,752,854 and IBM paid him $637,500, pursuant to this provisionrespectively, in satisfaction of the agreement.these provisions. In the event of termination without cause, or due to a change-in-control"change-in-control" of the Company, as defined in the agreement, Mr. Gerstner would receive 36 months salary, plus prorated incentive payments, the right to exercise all stock options, and other specified benefits. The Company has no other change-in-control arrangements with any of its executive officers. There are no employment agreements with the named executive officers, other than Mr. Gerstner.Gerstner, that provide for their continuing service. Performance Graph Comparison of Five-Year Cumulative Total Return for IBM, S&P 500 Stock Index, and S&P Computer Systems Index (excluding IBM). 1989 1990 1991 1992 1993 1994 IBM Common Stock $100 $126 $104 $ 62 $ 72 $ 95 S&P 500 $100 $ 97 $126 $136 $150 $152 S&P Computer Systems-Exclud. IBM Index $100 $ 90 $ 95 $ 92 $ 84 $104 The above graph compares the five-year cumulative total return for IBM common stock with the comparable cumulative return of two indexes. Since IBM is a company within the Standard & Poor's ("S&P") 500 Stock Index, the Securities and Exchange Commission's proxy rules require the use of that Index. Under those rules, the second index used for comparison may be a published industry or line-of-business index. In IBM's case, the S&P Computer Systems Index (excluding IBM), shown above, is such an index. The graph assumes $100 invested on December 31, 19881989, in IBM common stock and $100 invested at that same time in each of the S&P indexes. The comparison assumes that all dividends are reinvested. 2. Ratification of Appointment of Auditors The Board of Directors has appointed the firm of Price Waterhouse LLP, independent accountants, to be IBM's auditors for the year 19941995 and recommends to stockholders that they vote for ratification of that appointment. IBM Notice of 1994 Annual Meeting and Proxy Statement 16 Price Waterhouse LLP served in this capacity for the year 1993.1994. Its representative will be present at the Annual Meeting and will have an opportunity to make a statement and be available to respond to appropriate questions. The appointment of auditors is approved annually by the Board and subsequently submitted to the stockholders for ratification. The decision of the Board is based on the recommendation of the Audit Committee, which reviews and approves in advance the audit scope, the types of nonaudit services, and the estimated fees for the coming year. The committee reviewedalso reviews and approvedapproves proposed 1994 nonaudit services and concludedto ensure that they will not impair the independence of the accountants. Before making its recommendation to the Board for appointment of Price Waterhouse LLP, the Audit Committee carefully considered that firm's qualifications as auditors for the Company. This included a review of its performance in prior years, as well as its reputation for integrity and competence in the fields of accounting and auditing. The committee has expressed its satisfaction with Price Waterhouse LLP in all of these respects. The committee's review included inquiry concerning any litigation involving Price Waterhouse LLP and any proceedings by the Securities and Exchange Commission against the firm. In this respect, the committee has concluded that the ability of Price Waterhouse LLP to perform services for the Company is in no way adversely affected by any such investigation or litigation. The IBM Board of Directors recommends a vote FOR this proposal. 3. Adoption of the 1994 Long-Term PerformanceIBM 1995 Employees Stock Purchase Plan In 1958, IBM stockholders first approved an employees stock purchase plan designed to give employees a greater stake in the Company through increased stock holdings. Subsequently, stockholders have approved additional, consecutive stock purchase plans, the last of which was approved on April 1989, stockholders approved adoption30, 1990. At the end of the 1989 Long-Term Performance Plan ("1989 LTPP")1994, approximately 218,000 employees were eligible to provide for the granting of stock optionsparticipate and other cash and stock awards. The 1989 LTPP replacedapproximately 67,000 employees were participating in the IBM 1986Employees 1990 Stock OptionPurchase Plan previous versions of(the "1990 Plan"), which had been approved by stockholders since 1956.became effective July 1, 1990. From July 1, 1990, to December 31, 1994, employees purchased nearly 35,000,000 shares under the 1990 Plan. No directors or officers participated during that period. The Board of Directors continues to believe that stock-based incentives are important factorsan employees stock purchase plan is in attracting, retaining,IBM's best interest and rewarding officers and other selected employees and closely aligning their interests with those of stockholders. Therefore, the Boardtherefore recommends to stockholders adoption of a new five-year plan on essentially the 1994 Long-Term Performancesame terms and conditions as were set forth in the 1990 Plan, ("1994 LTPP"with the exceptions noted below. The following summary describes features of the IBM 1995 Employees Stock Purchase Plan (the "Plan"). This summary is qualified in its entirety by reference to replace the 1989 LTPP, which expires April 24, 1994. Some changes have been made to reflect or comply with intervening legislative and regulatory developments, nonespecific provisions of the Plan, the full text of which is set forth as Appendix A. If approved by stockholders, the Plan will have a substantive effect on the way awards are granted or the plan administered. All executive officers (currently 14), all other corporate officers (currently 44),become effective July 1, 1995, and other executives and selected employees (now approximately 2,000)25,000,000 shares of authorized common stock will be eligible to participate in the 1994 LTPP. Participants are recommended by their management. The Executive Compensation and Management Resources Committee of the Board will review and act on all 1994 LTPP grants and awards for IBM officers and, consistent with procedures under the 1989 LTPP and subject to approval by stockholders of the 1994 LTPP, the committee will delegate to the chief executive officer the authority to make grants and awards under the 1994 LTPP to other eligible employees. In administering the 1994 LTPP, the committee has the power to interpret its provisions and to promulgate, amend, and rescind rules and regulations for its administration. The Board is authorized to amend the 1994 LTPP, except that it may not increase the maximum number of shares for which awards may be made without stockholder approval or make other specified amendments. Awards of stock may be subject to restrictions established by the committee. The 1994 LTPP permits the grant of any form of stock option, stock appreciation right, stock or cash award whether granted singly, in combination or in tandem. One or more stock options can be granted to any participant. No individual participant may receive, under the 1994 LTPP, stock options or stock appreciation rights ("SARs") the aggregate of which shall exceed 5% of the shares authorizedreserved for issuance under the 1994 LTPP. As in the case of all previous IBM stock plans for executives, stock optionsPlan. The 1990 Plan would be superseded and no additional shares would be issued thereunder after June 30, 1995. The Plan will be granted at not less than 100% of the average market price of IBM common stock on the New York Stock Exchange on the date of grant ("Fair Market Value") and other stock awards will also be based on at least Fair Market Value. Stock options and SARs may not be exercised for at least six months from date of grant. It is expected that options and SARs will be granted for periods of 10 years or less and can continue in effect after termination of employment. Up to $100,000 of options based on Fair IBM Notice of 1994 Annual Meeting and Proxy Statement 17 Market Value on date of grant may become exercisable for the first time inhave a calendar year, per optionee, in the form of an incentive stock option ("ISO") in compliance with Section 422 of the Internal Revenue Code. In addition to the foregoing types of awards, the 1994 LTPP permits the Board to grant such other award forms as shall be consistent with the purposes of the plan within the limits of the plan. Such grants may be paid at the discretion of the Board in cash, shares of common stock or any combination thereof. The duration of the 1994 LTPP will be five years, subject to earlier termination by the Board of Directors. The new planPlan permits employees to purchase IBM common stock through payroll deductions during five consecutive annual offerings, beginning July 1, 1995. Eligible employees on each offering date may purchase full or fractional shares through payroll deductions of up to 10% of compensation, but in no event can more than $25,000 worth of common stock be purchased in a calendar year. The price an employee pays is 85% of the average market price on the last day of the applicable pay period. Shares for the Plan may be either shares purchased in the open market, or authorized and unissued shares. Eligibility will be extended to all regular and certain other employees of the Company and of its subsidiaries, as defined in the Plan, except that officers of IBM subject to reporting requirements under Section 16 of the Securities Exchange Act of 1934 remain ineligible. There are two significant changes to the Plan designed to further the Company's philosophy of encouraging employees to invest in and retain IBM common stock. First, stock optionees who are not officers subject to reporting requirements under Section 16 of the Securities Exchange Act of 1934 or other selected executives will now be able to participate in the Plan. Second, subject to approval of the Internal Revenue Service, the Plan will be amended to provide that employees who dispose of shares acquired during any one-year offering period before the end of that period will be suspended from continued Plan participation for the remainder of that period and the next one-year offering period. For federal income tax purposes, an employee does not realize income at the time of entry into the Plan or purchase of a share. If no disposition of the stock is made within two years from the July 1 offering date, and one year from the date the share is transferred to the employee, upon subsequent disposition of the stock, ordinary income will be realized to the extent of the lesser of (1) 15% of the average market value on the July 1 offering date, or (2) the amount by which the net proceeds of the sale exceed the price paid. Any further gain is treated as capital gain. No income tax deduction will be allowed the Company for shares transferred to an employee, provided such shares are held for the periods described above. If the shares are disposed of within the periods described above, the employee will recognize ordinary income for the taxable year of the disposition equal to the excess of the fair market value of the shares on the date of purchase over the price paid. Generally, the Company will be entitled to a deduction equal to the amount of ordinary income recognized by the employee. The Plan will be administered by a committee composed of the Board composed entirely of directorssenior management who are not eligible to participate in the plan, in compliance with rules and regulations issued under the Internal Revenue Code and federal securities laws. If approvedparticipate. The Plan may be amended by stockholders, the Board of Directors has authorized for issuancebut may not be amended, without prior stockholder approval, to increase the number of shares, to reduce the purchase price per share, to remove the Plan's administration from a committee whose members are not eligible to participate, or to change the designation of subsidiaries eligible to participate in the Plan. The proceeds of the sale of stock and of administrative fees received under the 1994 LTPP 29,105,600 sharesPlan will constitute general funds of the Company and may be used by it for any purpose. The Plan provides for proportionate adjustments to reflect stock splits, stock dividends, or other changes in the capital stock. On February 28, 1995, IBM common stock which is 5% of the shares of the Company's common stock outstanding on February 10, 1994. The stock's Fair Market Value on that day was $53.19 per share. All stock-based awards and awards denominated in stock units (whether payable in stock or cash) are subject to this limit. Similar to the 1989 LTPP, the 1994 LTPP does not specify a limit for cash awards. No benefits or amounts have been allocated under the 1994 LTPP, nor are any such benefits or amounts now determinable. For comparison purposes, please refer to the grants and awards that were made under the 1989 LTPP in 1993, shown in the Stock Option Grants table on page 14 and in the Long-Term Incentive Plans table on page 15. In addition to the data shown in those tables, in 1993, 1,068,000 stock options were granted to all current executive officers as a group and 12,676,772 stock options and 4,083,920 SARs were granted to all employees, including all current officers who are not executive officers as a group. The dollar value of Long-Term Incentive Awards in 1993 for these two groups was $2,567,000 and $5,244,000, respectively. No awards were made to directors who are not executive officers. See also the February 7, 1994 stock option awards described below. On April 23, 1993, the Board authorized the forfeit of options granted from 1984 through 1992 to be exchanged on an average 2.5-to-1 basis for new options that were issuedclosed at the April 23, 1993 Fair Market Value, $47.88. Approximately 1,200 executives participated. Executive officers were excluded from the program. The new ten-year term options do not vest for two years (50% then, 25% additional each of the next two years). For the first nine years of their term, before any of these options can be exercised, the average of the closing prices of IBM common stock$75.25 on the New York Stock Exchange for 30 consecutive calendar days, must be at or above $71.82. After nine years, there is no precondition to their exercise. The objective of this program was to retain and motivate many of IBM's key people during a difficult time of transition. On February 7, 1994, ten-year stock options at $53.44 per share (the Fair Market Value), which vest over a four-year period, were granted under the 1989 LTPP to Mr. Rizzo, 50,000 shares, to Messrs. Toole, Lautenbach, and LaBant, 60,000 shares each, to the current executive officers as a group, 655,000 shares, and to employees including current officers who are not executive officers as a group, 5,205,000 shares. There is currently no accounting charge to the income of the Company in connection with the grant or exercise of a stock option; most other LTPP awards do require a charge. SARs result in such a charge when the market value of the shares to which the SAR grants relate exceeds the exercise price at which the SARs were granted. The Financial Accounting Standards Board is considering whether the accounting treatment of stock options should be changed. The effective date of any such change, which could result in material increased compensation expense to the Company, is not expected to occur until after 1996. Charges for awards other than stock options are not expected to be a material expense to the Company. As discussed in the Report on Executive Compensation, the 1994 LTPP has been designed to meet the new requirements in Section 162(m) of the Internal Revenue Code for stock options and SARs and to provide flexibility for certain other awards to so qualify (see page 12). Final regulations are not expected to be issued governing this complex area with IBM Notice of 1994 Annual Meeting and Proxy Statement 18 regard to other 1994 LTPP awards until after the April 25, 1994 meeting of IBM stockholders. IBM's management and the Executive Compensation and Management Resources Committee of the Board will determine what action, if any, is appropriate, when final regulations are issued. The 1994 LTPP is printed in its entirety as Appendix A beginning on page 22 and the Federal income tax consequences of the issuance and exercise of stock options, SARs, and other awards are set forth as Appendix B on page 29.Exchange. The IBM Board of Directors recommends a vote FOR this proposal. 4.Adoption of the IBM Non-Employee Directors Stock Option Plan to Replace Annual Stock Awards On February 28, 1995, the Board of Directors of the Company approved for submission to the stockholders at the 1995 Annual Meeting the IBM Non-Employee Directors Stock Option Plan (the "Option Plan"). The following summary describes features of the Option Plan. This Summary is qualified in its entirety by reference to the specific provisions of the Option Plan, the full text of which is set forth as Appendix B. At the recommendation of the Directors and Corporate Governance Committee, the Board of Directors recently proposed a number of changes to the compensation of its non-employee directors. These changes are more fully described on page 9 of this proxy statement and include paying 50% of the annual retainer in shares and limiting the period during which retirement benefits are paid to outside directors who are elected at the 1995 Annual Meeting and thereafter. Upon approval of the Option Plan, the Board also proposes to cancel the annual award of shares under the Directors Deferred Compensation and Equity Award Plan and to reduce the annual retainer from $55,000 to $50,000. The Board has determined that these changes will work to increase the non-employee directors' proprietary interest in the Company and to align more closely their interests with the interests of the Company's stockholders. The Option Plan will also maintain the Company's ability to attract and retain the services of experienced and highly qualified non-employee directors. If approved by the stockholders, the Option Plan provides for automatic annual grants, commencing in 1995, of stock options to each director who is not an IBM employee. Each annual grant will permit the holder, for a period of up to ten years from the date of grant, to purchase from the Company 1,000 shares of the Company's common stock (subject to adjustment as provided in the Option Plan) at 100% of the fair market value of such shares on the date the option is granted. Each option shall become exercisable in four equal installments commencing on the first anniversary date of grant. One-quarter of the total number of shares covered by the option shall be exercisable on the first anniversary and an additional one-quarter shall become exercisable on each anniversary thereafter until on the fourth anniversary all the shares subject to the option shall be fully vested. Under the Option Plan, option grants are made on the first day of the month following the date of the Company's Annual Meeting to each individual who is elected to the Board of Directors at such meeting, provided such individual is not also an employee of the Company or any of its subsidiaries. In the event of the retirement or death of a non-employee director, all options granted to such director shall become immediately exercisable and shall expire after ten years from the date of grant. In addition, an option will be forfeited upon a director's resignation from or refusal to serve on the board, other than any resignation, termination, or not standing for reelection at the retirement age or at the request or with the consent of the Company. Each option and all rights shall be nonassignable and non-transferrable other than by will or the laws of descent and distribution. Options for a maximum of 25,000 shares of common stock per year (subject to adjustment as provided in the Option Plan) can be granted under the Option Plan in any year for all directors combined. Subject to the exception noted below, it is currently expected that shares received by a non-employee director upon exercise of an option will be subject to the restriction that if such director resigns from the Board or otherwise refuses to continue to serve as a member of the Board, such director will forfeit such shares and receive only the lesser of their fair market value or the option price paid with respect to such shares. The restriction will lapse when the non-employee director ceases to be a member of the Board other than as a result of such director's refusal to serve. Death, disability, termination, resignation, or not standing for reelection at the retirement age or at the request or with the consent of the Company shall not constitute a breach of the restriction. The options under the Option Plan shall be nonstatutory options not intended to qualify under section 422A of the Internal Revenue Code of 1986 (the "Code"). The grant of options will not result in taxable income to the non-employee director or a tax deduction to the Company. Unless a director makes an election under section 83(b) of the Code, the director will not be subject to tax upon exercise of an option for stock subject to the restriction described above. Rather, upon lapse of the restriction, the non-employee director will recognize taxable ordinary income, and the Company will be entitled to a corresponding deduction, in an amount equal to the excess of the then fair market value of the stock over the fair market value of the stock on the date the option was granted (the option price). The exercise of an option for stock not subject to the restriction described above will result in taxable ordinary income to the non-employee director and a corresponding deduction to the Company on the date of exercise, equal to the difference between the option price and the fair market value on the date the option was exercised. The Option Plan will be administered by the Board of Directors who will be authorized to interpret the Option Plan but have no authority with respect to the selection of directors to receive options, the number of shares subject to the Option Plan or each grant thereunder, or the option price for shares subject to options. The Board shall have no authority to increase materially the benefits under the Option Plan. The Board may amend the Option Plan as it shall deem advisable but may not amend the Option Plan without further approval of the stockholders if such approval is required by law, and may not amend the Option Plan provisions relating to the amount, price, and timing of options more than once every six months other than to comport with changes in the Code, the Employee Retirement Income Security Act of 1974, or the rules thereunder. Adjustments shall be made in the number and kind of shares subject to the Option Plan and the number and kind of shares subject to outstanding and subsequent option grants and in the purchase price of outstanding options, in each such case to reflect changes in the Company's common stock through changes in the Company's corporate structure or capitalization, such as through a merger or stock split. On February 28, 1995, IBM common stock closed at $75.25 on the New York Stock Exchange. The IBM Board of Directors recommends a vote FOR this proposal. 5. Approval of Annual Incentive Compensation Terms for Certain Executives Under section 162(m), which was added to the Internal Revenue Code of 1986 in 1993, in order for compensation in excess of $1,000,000 for any taxable year paid to a person named in the Summary Compensation Table and employed by the Company on the last day of the taxable year to be deductible by the Company, such compensation must qualify as "performance-based." The Executive Compensation and Management Resources Committee (the "Compensation Committee") of the Board of Directors has adopted terms, subject to stockholder approval, under which annual cash incentive compensation to be paid to named executive officers subject to section 162(m) would be performance-based for purposes of exemption from the limitations of section 162(m). The terms adopted by the Compensation Committee are as follows: - - The class of persons covered consists of those senior executives of the Company who are from time to time members of the Corporate Executive Committee (or successor committee, or other successor group of executives, if any) and such other executive officers as are from time to time designated by the Compensation Committee. - - The performance criteria for annual incentive payments to covered executives for performance years 1995 and thereafter will be limited to objective tests based on one or more of the following: earnings, cash flow, customer satisfaction, revenues, financial return ratios, market performance, and total shareholder return, any of which may be measured either in absolute terms or as compared to another company or companies. Use of any other criterion will require ratification by stockholders if failure to obtain such approval would jeopardize the tax deductibility of future incentive payments. - - In administering the incentive program and determining incentive awards, the Compensation Committee will not have the flexibility to pay a covered executive more than the incentive amount indicated by his or her attainment under the applicable payment schedule. The Compensation Committee will have the flexibility, based on its business judgment, to reduce this amount. - - There will be a maximum individual annual cash incentive amount limit of $8,000,000 for any covered executive for any performance year. This annual incentive payment maximum will not be increased without ratification by stockholders if failure to obtain such approval could result in future annual incentive payments not being tax deductible. In addition, on February 28, 1995, the Compensation Committee adopted performance objectives for the 1995 performance year, and established directly related payment schedules for each of the members of the Corporate Executive Committee, consisting of nine persons. If stockholders do not approve the terms set forth above, payments that would have been made pursuant to the Compensation Committee's action on this proposal in February 1995 will not be made. It should be noted that while the Compensation Committee's intent is to prevent section 162(m) from limiting the deductibility of annual incentive compensation payments, final regulations and guidance for section 162(m) have not been adopted by the Internal Revenue Service. For this reason, and because of possible unforeseen future events, it is impossible to be certain that all annual incentive compensation paid by the Company to named executive officers will be tax deductible. The foregoing shall not preclude the Compensation Committee from making other compensation payments under different terms even if they do not qualify for tax deductibility under section 162(m). Hypothetical Payments Based on 1994 Results As discussed above, awards under the terms adopted by the Compensation Committee will be based upon performance goals established with respect to the 1995 performance year and to be established with respect to future years. No incentive compensation under these terms has yet been earned by any covered executive, since the performance periods have not yet been completed. Accordingly, the amount of annual incentive compensation to be paid in the future to the Company's current or future named executive officers subject to section 162(m) cannot be determined at this time, since actual amounts will depend on actual performance measured against the attainment of pre-established performance goals and on the Compensation Committee's discretion to reduce such amounts. The annual incentive compensation actually earned in 1994 by the named executive officers is included in the Summary Compensation Table on page 15, and amounts in excess of $1 million did not qualify for tax deductibility by the Company. In 1995 and future years, the Company will not be entitled to a deduction to the extent that salary payments in excess of $1 million are made to a named executive officer in that year. Had this proposal been in effect for 1994, the Compensation Committee believes that the annual incentives that would have been paid to the named executive officers and to all members of the Corporate Executive Committee as a group would have been reduced so as to be essentially the same as is reported in the Summary Compensation Table on page 15 for the named executive officers and to approximately $8,050,000 for the Corporate Executive Committee as a group. The IBM Board of Directors recommends a vote FOR this proposal. 6.Approval of Long-Term Performance Incentive Compensation Terms for Certain Executives As indicated in the previous proposal, under section 162(m) of the Internal Revenue Code of 1986, in order for compensation in excess of $1,000,000 for any taxable year paid to a person named in the Summary Compensation Table and employed by the Company on the last day of the taxable year to be deductible by the Company, such compensation must qualify as "performance-based." At the 1994 Annual Meeting, the Company's stockholders approved the 1994 Long-Term Performance Plan (the "LTPP"), administered by the Compensation Committee, governing the terms and conditions respecting the payment of long-term incentive compensation to senior management and other selected employees. The Compensation Committee has now adopted terms, subject to stockholder approval, under which Long-Term Performance Incentive awards under the LTPP to be paid to named executive officers subject to section 162(m) would be performance-based for purposes of exemption from the limitations of section 162(m). The requirements of section 162(m) have already been satisfied with respect to stock options granted and to be granted under the LTPP by the Compensation Committee at not less than 100% of fair market value on the date of grant. The proposed terms will not apply to the grant of stock options under the LTPP. The LTPP is not being amended. The terms adopted by the Compensation Committee are as follows: - - The class of persons covered consists of those senior executives of the Company who are from time to time executive officers or members of the Worldwide Management Council (or successor council or committee, or successor group of executives, if any) and such other executives as are from time to time designated by the Compensation Committee. - - The performance criteria for Long-Term Performance Incentive awards made to covered executives for performance periods beginning in 1995 and thereafter will be limited to objective tests based on one or more of the following: earnings, cash flow, customer satisfaction, revenues, financial return ratios, market performance, and total shareholder return, any of which may be measured either in absolute terms or as compared to another company or companies. Use of any other criterion in the future will require ratification by stockholders if failure to obtain such approval would jeopardize the tax deductibility of future payouts of Long-Term Performance Incentive awards. - - In administering the long-term performance incentive program and determining awards, the Compensation Committee will not have the flexibility to pay a covered executive more than the Long-Term Performance Incentive award units indicated by his or her attainment under the applicable payment schedule. The Compensation Committee will have the flexibility, based on its business judgment, to reduce this amount. - - There will be a maximum number of shares of IBM common stock or share equivalents of common stock (stock units) that can be paid to a covered executive for any multi-year performance period of 25,000 shares, subject to adjustment for changes in corporate capitalization, such as a stock split. Performance periods may overlap one another but no performance period may commence within the same calendar year as any other performance period. If an award is denominated in cash rather than in shares of common stock or stock units, the share equivalent for purposes of staying within the maximum will be determined by dividing the highest amount that the award could be under the formula for that year by the closing price of a share of IBM common stock on the first trading day of the applicable performance period. This maximum will not be increased without ratification by stockholders if failure to obtain such approval would result in future payouts of Long-Term Performance Incentive awards not being tax deductible. The shares and stock units used for these awards will be funded out of the LTPP, or any successor plan or plans. On February 28, 1995, Long-Term Performance Incentive awards under the LTPP were approved by the Compensation Committee for each of the members of the class of persons covered by the terms set forth above, consisting of approximately forty persons. Such awards provide those persons with the opportunity to earn compensation based on the achievement of cumulative performance goals for the performance period beginning January 1, 1995, and ending on December 31, 1997. The awards have been made in the form of performance stock units, with each unit having a monetary value equal to the value of a share of IBM common stock. Payment for these awards, to the extent earned, will be partly in cash and partly in restricted stock units, which after the restriction period ends, may be delivered as common stock. If stockholders do not approve this proposal, payments that would have been made pursuant to the Compensation Committee's action on this proposal in February 1995 will not be made. It should be noted that while the Compensation Committee's intent is to prevent section 162(m) from limiting the deductibility of payouts of Long-Term Performance Incentive awards, final regulations and guidance for section 162(m) have not been adopted by the Internal Revenue Service. For this reason, and because of possible unforeseen future events, it is impossible to be certain that all such compensation paid by the Company to named executive officers will be tax deductible by the Company. The foregoing shall not preclude the Compensation Committee from making other compensation payments under different terms even if they do not qualify for tax deductibility under section 162(m). Potential Payments The amount of Long-Term Performance Incentive award compensation to be paid in the future to the Company's current or future named executive officers subject to section 162(m) cannot be determined at this time, since any such amounts depend on actual performance measured against the attainment of performance goals over a multi-year period and on the Compensation Committee's discretion to reduce such amounts. Accordingly, it is not possible to make a comparison with 1994. However, on February 28, 1995, the Compensation Committee granted Long-Term Performance Incentive awards for the 1995-1997 performance period consisting of target performance stock units for the following current named executive officers (Mr. Rizzo retired at the end of 1994), other executive officers, and members of the Worldwide Management Council: Name Target Incentive Stock Units - -------------------------------------------------------------------------------- L.V. Gerstner, Jr. 6,700 J.B. York 6,000 N.C. Lautenbach 6,000 J.M. Thompson 6,000 - -------------------------------------------------------------------------------- All executive officers and members of the Worldwide Management Council as a group 113,917 - -------------------------------------------------------------------------------- Depending on the extent to which the cumulative three-year performance goals are achieved, between 0% and 150% of the target stock units can be earned and eventually paid. The IBM Board of Directors recommends a vote FOR this proposal. 7. Stockholder Proposals Stockholder proposals may be submitted for inclusion in IBM's 19951996 proxy material after the 19941995 Annual Meeting but no later than 5 p.m. EST on November 14, 1994.15, 1995. Proposals must be in writing and sent via registered, certified, or express mail to: Office of the Secretary, IBMInternational Business Machines Corporation, One Old Orchard Road, Armonk, N.Y. 10504. Facsimile or other forms of electronic submissions will not be accepted. Management carefully considers all proposals and suggestions from stockholders. When adoption is clearly in the best interests of the Company and stockholders, and can be accomplished without stockholder approval, the proposal is implemented without inclusion in the proxy material. Examples of stockholder proposals and suggestions that have been adopted over the years include stockholder ratification of the appointment of auditors, improved procedures involving dividend checks and stockholder publications, and changes or additions to the proxy material concerning such matters as abstentions from voting, appointment of alternative proxy, proponent disclosure, and secrecy of stockholder voting. Management opposes the following proposalproposals for the reasons stated after theeach proposal. 4.A. Stockholder Proposal on Affirmation of IBM's Political Non-Partisanship Management has been advised that Mrs. Evelyn Y. Davis, 2600 Virginia Avenue, N.W., Suite 215, Washington, D.C. 20037, the owner of 50 shares, intends to submit the following proposal at the meeting: Resolved:RESOLVED: "That the stockholders of IBM assembled in Annual Meeting in person and by proxy, hereby recommend that the Corporation affirm its political non-partisanship. To this end the following practices are to be avoided: "(a) The handing of contribution cards of a single political party to an employee by a supervisor. "(b) Requesting an employee to send a political contribution to an individual in the Corporation for a subsequent delivery as part of a group of contributions to a political party or fund raising committee. "(c) Requesting an employee to issue personal checks blank as to payee for subsequent forwarding to a political party, committee or candidate. "(d) Using supervisory meetings to announce that contribution cards of one party are available and that anyone desiring cards of a different party will be supplied one on request to his supervisor. "(e) Placing a preponderance of contribution cards of one party at mail station locations." Reasons:REASONS: "The Corporation must deal with a great number of governmental units, commissions and agencies. It should maintain scrupulous political neutrality to avoid embarrassing entanglements detrimental to its business. Above all, it must avoid the appearance of coercion in encouraging its employees to make political contributions against their personal inclinations. The Troy Onio [sic] News has condemned partisan solicitation for political purposes by managers in a local company (not IBM)." IBM NoticeLast year the owners of 1994 Annual Meeting and Proxy Statement 19 32,194,266 shares, representing approximately 10.1% of shares voting, voted FOR this proposal." "If you agree, please mark your proxy for this resolution." - -------------------------------------------------------------------------------- The IBM Board of Directors recommends a vote againstAGAINST this proposal. The proponent submitted an identical proposal for inclusion in IBM's proxy statement for the 1975 stockholders meeting. The proposal received approximately 3% of the vote. IBM, like all corporations, is subject to laws and regulations that limit corporate involvement in political election campaigns. IBM is committed to full compliance with those laws and regulations. In addition, it is IBM's long-standing policy that its employees participate in politics as private citizens, not as IBM employees.to prohibit IBM employees are prohibited from making contributions of Company resources such as money, goods, or services to political candidates or parties. These policies areThis policy is designed to allow employees, as individual citizens, to participate in the political process as they see fit, regardless of party affiliation or political persuasion, while maintaining the non-partisanship of the institution as a whole. In the Board's opinion, IBM's policies, together with federal and state laws and regulations regarding corporate involvement in political campaigns, strike an appropriate balance between allowing IBM employees to exercise lawfully their individual constitutional rights to participate in the political process while maintaining the Company's political neutrality. Therefore, the Board recommends a vote against this proposal. In November of 1992, IBM was notified by the Federal Election Commission that the Commission was investigating solicitations by the then chairman of the board of IBM of campaign contributions that were made by certain senior IBM executives for a fund-raising luncheon in connection with the 1992 presidential election. The notice stated that the Federal Election Commission was investigating whether IBM resources or personnel were improperly utilized in the fund-raising effort in violation of federal election laws and regulations governing the activities of federal contractors. IBM has responded to the Federal Election Commission's inquiry and provided information relating to the solicitations. The Commission has not advised IBM of the outcome of its investigation. IBM does not believe that its resources or personnel were utilized in a manner that violated any applicable law. B.Stockholder Proposal on Elimination of Awards or Bonuses Upon Completion of Service Management has been advised that Mr. John A. Caporuscio, 8360 Prestwick Drive, Manlius, New York 13104, the owner of 1,592.4 shares, intends to submit the following proposal at the meeting: PROPOSAL Resolved, that the Shareholders of IBM request that the Board of Directors eliminate the awards or bonuses, other than normal retirement incentives, to members of IBM's Board of Directors or IBM Employees who have completed their IBM service. At a critical time in our Company's future, when we are downsizing personnel, cutting dividends and employee benefits, I find it inconsistent to give a bonus of $925,000.00 to Mr. Akers. This bonus was for 33 years of dedicated service. There are many employees, who have given 33 years or more of dedicated service, who received no monetary bonuses. I would think that no employee is entitled to, nor should accept, bonuses for doing a job which they were hired to do. Mr. Akers' salary was based on the performance of the Company. Clearly, with the Company's financial difficulties over the past few years, I feel that this was an irresponsible and frivolous action taken by our Board of Directors. The IBM Board of Directors recommends a vote AGAINST this proposal. - -------------------------------------------------------------------------------- The Board believes it is necessary to maintain flexibility involving persons leaving the Company, including the ability to provide payments to individuals and groups where the best interests of the Company are served through termination of employment, whether voluntarily through the use of incentive packages, involuntarily through the use of layoffs, or by other appropriate means. In connection with the Company's efforts to restructure its business, IBM has offered a number of such programs over the past few years that have been implemented with very successful results. These payments must necessarily be tied to the unique circumstances of each situation, and management should have the discretion to tailor such arrangements in the best interests of the Company and shareholders. The payment to Mr. Akers, with which the proponent takes issue, was made in connection with his retirement, and with the best interests of the Company and shareholders in mind. C. Stockholder Proposal on Variable Executive and Other Compensation Management has been advised that Mr. and Mrs. S. R. Guha, 5100 Hogan's Way, Clayton, North Carolina 27520-8003, the owners of 100 shares, intend to submit the following proposal at the meeting: RESOLVED that it may be recommended that IBM's annual net operating profitability level will be, and shall remain to be, the sole determinant of the entire spectrum of corporate compensation, subject to its shareholders' approval, as enunciated below, in pursuant of which when the annual rate of Return on Equity (ROE) of stockholders falls short of 15% no Variable Executive Compensations (VECs) in cash bonuses, financial awards, stock options, stock appreciation rights (SARs), re-pricing of 'target prices' for any stock options, or in any other form, to any Executives, Members of the Board of Directors, Selected Employees, or to any one else, will be permitted, and in all other years recommendations on VEC, if any, of the Executive Compensation and Management Resources Committee, or of any other Committee or person, have to be included in the proxy statement, and may be effectuated if, and only if, such recommendations are approved by at least two-thirds majority of stockholders actively casting proxy votes; and in the event of a yearly operating loss, recourse has to be taken to across the board salary freeze until the next profitable year. REASONS: - -------- The multidimensional VEC derby has become, as a routine, a free-fall-for-all phenomenon, even when the operating net profit is less than the risk-free bellwether Treasury Security, or is even negative. IBM's 1993 Annual Report and 1994 proxy statement revealed that while respectively in 1991, 1992 and 1993 it sustained colossal losses in billions of $2.861 ($5.01/share), $4.964 ($8.70/share) and $8.148 ($14.22/share), dwindling stockholders' equities drastically to $36,679, $27,624 and $19,737 millions, nonetheless the total VECs to its only six top ranking executives totalled $1,690,222, $1,862,072 and $11,495,518. Bigger the loss bigger the VEC. In addition, in 1993 alone the same six executives were given another potential free income from SARs of 799,000 common stocks at 'target prices' of from $46.31 to $52.12 to expire in 2003, the realizable value of which, at the annual stock price appreciations of 5% and 10% for a ten-year term, will come to $23,908,280 and $60,594,590 respectively. Is this all? Worldwide its other 31 executive officers were beneficiaries too of this free-fall, as a routine. And when there is an operating loss, this proposal will, for cost containment, serve as a partial substitute of firing of personnel. A routine free-fall, divorced from corporate performance, does hardly contribute to any motivating force for achieving better results; rather it breeds and perpetuates self-complacency and makes management lose foresights of future realities. If 1991-93 be any eye opener and a lesson, is it not overdue that the shareholders should assert their indelible rights to bring some disciplines to corporate culture, instead of rubber-stamping self-serving management's recommendations? For the general interest we strongly urge shareholders to VOTE IN FAVOR of this proposal for adoption at the 1995 Annual General Meeting. - -------------------------------------------------------------------------------- The IBM Board of Directors recommends a vote AGAINST this proposal. The Board believes it has an appropriate system to administer the Company's executive compensation policies and practices. The Executive Compensation and Management Resources Committee of the Board (the "Committee") is comprised of three outside directors who are not officers or employees of the Company and who are not eligible to participate in any of the plans that the Company administers. This Committee approves all elements of compensation for corporate officers and is responsible for setting the Company's executive compensation philosophy, programs, and practices. The Committee examines compensation programs at least annually and utilizes the services of independent consultants to help ensure that compensation is competitive with others in the industry, as well as with the largest U.S. market-capitalized companies. The Committee also reports regularly to the Board on its activities. The Company's executive compensation programs are based on the belief that the interests of the executives should be closely aligned to those of the stockholders. These programs are strongly oriented toward a pay-at-risk philosophy that ties compensation to both the annual and long-term financial performance of the Company, as well as to long-term stockholder return. The Committee believes the existing measurements are effective methods of creating appropriate incentives and rewards for good performance. The establishment of a program based on the narrow criteria called for in this proposal would significantly affect the competitive nature of IBM's compensation programs and make it substantially more difficult, if not impossible, to attract and retain the best people. This is neither in the best interests of the Company nor its shareholders. D. Stockholder Proposal on Withdrawal of Retirement Plan for Non-Employee Directors Management has been advised that Mr. Milton A. Laitman, 31 Roberts Circle, Basking Ridge, New Jersey 07920, the owner of 9,300 shares, intends to submit the following proposal at the meeting: PROPOSAL: TO TERMINATE RETIREMENT PLAN FOR NON-EMPLOYEE DIRECTORS AS A COST REDUCTION INITIATIVE. The Company has a retirement plan for non-employee directors with five years or more of Board service. Upon retirement after 5 years of service and age 70, eligible directors will receive annual retirement benefit equal to 50% of the director's last annual fee. RESOLVED: That the stockholders of IBM assembled in person and by proxy hereby recommend that the Board of Directors withdraw the retirement plan thus making such a plan unavailable to current and future non-employee directors. REASON: Non-employee directors are more than adequately compensated by IBM. SUPPORTING STATEMENT: a) At present the non-employee director receives an annual retainer of $55,000.00. b) After five years of service, each non-employee director would be eligible to receive a life annuity of at least $27,500. If we assume an average of 10 years of service and retirement at age 70, the director receives an annuity worth $275,000.00 or an average additional annual income of $27,500. c) In addition, each director receives 100 shares of IBM under the DCEAP currently worth $7,500 per year. d) The total compensation would therefore average out over a ten year period to $90,000 per year. This amount is overly excessive, especially when one considers the further points that: 1. The non-employee director is already eligible or will be eligible to receive a major pension benefit as well as group life, medical and dental benefits from his primary employer. 2. The rate of the pension benefit (50% of annual fees after five years or 10% per year for the first five years) far exceeds the normal rate of pension benefits for employees (1 1/2% per year). 3. The average non-employee director already serves on the Board of Directors of about 3 additional commercial companies and is eligible to receive a similar set of benefits from many of these companies. 4. The cancellation of these benefits would still mean that each non-employee director would be receiving $62,500.00 per year exclusive of any additional fees or benefits. 5. The current retirement benefit for non-employee directors after five years - without any personal contributions - is DOUBLE the maximum Social Security retirement benefit available to an employee who has contributed steadily for 40 years. The above supporting statements demonstrate that the provision of these retirement benefits for non-employee directors is wasteful, duplicative, contrary to economic wisdom and reflects a profligate use of company assets. Moreover, this policy cannot help but undermine the morale and productivity of full-time employees. The current minimum annual compensation for directors (almost $5,000 per meeting) should be more than adequate to attract and retain those who are business leaders and whose counsel could benefit the Company. - -------------------------------------------------------------------------------- The IBM Board of Directors recommends a vote AGAINST this proposal. It is in the best interests of IBM and its stockholders to attract and retain outside directors who are leaders in their respective fields and who are recognized for their knowledge, experience, and ability. To accomplish this, IBM must provide a total compensation package that is competitive in today's environment. IBM therefore offers its outside directors a competitive compensation package of equity, cash (which may be deferred into stock), and benefits (including a retirement plan). The Directors and Corporate Governance Committee of the Board periodically reviews the compensation of IBM's non-employee directors to ensure that it remains consistent with industry standards and continues to be fair and appropriate in light of the obligations and responsibilities of corporate directors. At the recommendation of the Committee, the Board recently approved a number of changes to the total compensation afforded to non-employee directors (see page 9 of this proxy statement for a more complete description). Included among these changes is a modification to the retirement benefits paid by IBM to its outside directors. Commencing with directors elected at the 1995 Annual Meeting, retirement benefits for non-employee directors entitled to retirement benefits will be paid for a period equal to the length of service by the director, rather than for life. A recent independent survey has shown that approximately 75% of leading industrial companies provide retirement benefits to their directors and that it is common among these companies to pay benefits for a period equal to the length of service. The Board has determined that the total compensation package for directors remains in line with the practices of other significant companies. E. Stockholder Proposal on Stock Payments to Non-Employee Directors Management has been advised that Mr. Emil Rossi, P.O. Box 249, Boonville, California 95415, the owner of 400 shares, intends to submit the following proposal at the meeting: The shareholders of I.B.M. Corporation request the Board of Directors take the necessary steps to amend the company's governing instruments to adopt the following: Beginning on the 1996 I.B.M. Corporation fiscal year all members of the Board of Director's total compensation will be 1000 shares of I.B.M. Corporation common stock each year. No other compensation of any kind will be paid. SUPPORTING STATEMENT For many years the Rossi family have been submitting for shareholder vote, at this corporation as well as other corporations, proposals aimed at putting management on the same playing field as the shareholders. This proposal would do just that. A few corporations have seen the wisdom in paying directors solely in stock. Most notably, Scott Paper and Travelers. Ownership in the company is the American way. We feel that this method of compensation should be welcomed by anyone who feels they have the ability to direct a major corporation's fortunes. The directors would receive 1000 shares each year. If the corporation does well, the directors will make more money in the value of the stock they receive and the dividend that usually rise with more profits. If things go bad, they will be much more inclined to correct things, because it will be coming directly out of their pockets. Instead of the way it is done now, where directors receive the same compensation for good or bad performance. - -------------------------------------------------------------------------------- The IBM Board of Directors recommends a vote AGAINST this proposal. Each of IBM's directors is required to be a stockholder, and IBM believes that the amount of stock owned by IBM's directors compares well against the amount of stock owned by directors of many other large companies. As described more fully on page 9 of this proxy statement, at the recommendation of the Directors and Corporate Governance Committee, the Board recently approved a number of changes to the compensation of IBM's outside directors, including adoption of two new practices designed to foster increased equity ownership by IBM's outside directors. Commencing in 1995, 50% of the annual retainer paid to outside directors will be paid in stock, receipt of which is deferred until retirement from the Board. Further, outside directors will retain the ability to defer up to 100% of their remaining cash fees into stock; a majority of the Board deferred 100% of their cash fees for 1994 into stock. Giving directors the option to receive cash for the half of their fees not paid in stock provides flexibility to directors to address their particular personal needs as they arise. Further, to tie more of the directors' compensation to the long-term performance of IBM's stock, the Board proposes to withdraw the initial and annual award of stock and to decrease the annual cash retainer upon stockholder approval of the IBM Non-Employee Directors Stock Option Plan (the "Option Plan"), more fully described on pages 22 and 23 and in Appendix B of this proxy statement. Under the Option Plan, it is proposed that each director receive an annual grant of options to purchase 1,000 shares of IBM common stock. The Board has designed the Option Plan to increase the proprietary interest each outside director has in the Company and proposes to restrict receipt of the shares issuable upon exercise of the options. IBM believes that its current compensation package is fair and appropriate in light of the obligations and responsibilities of corporate directors. Moreover, the Board has determined that the above changes to the compensation of its outside directors will work to align more closely the interests of non-employee directors with the interests of stockholders. Other Business Management knows of no other matters that may properly be, or are likely to be, brought before the meeting. If other proper matters are introduced, the Proxy Committeeindividuals named inas Proxies on the enclosed Proxy Card will vote shares it represents. Proxies and Voting at the Meeting The $1.25 par value capital stock of the Company (its common stock) is its only class of security entitled to vote at the April 25, 19941995, meeting. Each stockholder of record at the close of business on March 7, 1994,1995, is entitled to one vote for each share held. The Proxy Card covers the number of shares to be voted, including any full shares held for participants in the IBM Dividend Reinvestment Plan and Employees Stock Purchase Plan.Plans. On February 10, 1994,1995, there were 582,112,340587,947,623 common shares outstanding and entitled to be voted. Directors are elected by a plurality of votes cast. A majority of the votes cast is required to ratify the appointment of auditors, to approve the Annual Incentive Compensation Terms for Certain Executives and the Long-Term Performance Incentive Compensation Terms for Certain Executives, and to recommend that the Board consider adoption of thea stockholder proposal. Under the law of New York, IBM's state of incorporation, "votes cast" at a meeting of stockholders by the holders of shares entitled to vote are determinative of the outcome of the matter subject to vote. Abstentions, broker non-votes, and withheld votes will not be considered "votes cast" based on IBM's understanding of state law requirements and IBM's Certificate of IBM Notice of 1994 Annual Meeting and Proxy Statement 20 Incorporation and By-laws. Adoption of the 1994 Long-Term PerformanceIBM 1995 Employees Stock Purchase Plan and the IBM Non-Employee Directors Stock Option Plan, pursuant to the requirements of the New York Business Corporation Law, requires the favorable vote of the holders of a majority of all outstanding shares of the common stock of the Company. All stockholder meeting proxies, ballots, and tabulations that identify individual stockholders are kept secret, and no such document shall be available for examination, nor shall the identity or the vote of any stockholder be disclosed except as may be necessary to meet legal requirements under the laws of New York, State, IBM's state of incorporation. Votes are counted by employees of First Chicago Trust Company of New York, IBM's independent transfer agent and registrar, and certified by the Inspectors of Election who are employees of Corporation Trust Company. Shares cannot be voted unless a signed Proxy Card is returned or other specific arrangements are made to have shares represented at the meeting. Any stockholder giving a proxy may revoke it at any time before it is voted. If a stockholder wishes to give a proxy to someone other than the individuals named as Proxies on the Proxy Committee,Card, he or she may cross out the names appearing on the enclosed Proxy Card, insert the name of some other person, sign, and give the Proxy Card to that person for use at the meeting. Stockholders are encouraged to specify their choices by marking the appropriate boxes on the enclosed Proxy Card. Shares will be voted in accordance with such instructions. However, it is not necessary to mark any boxes if you wish to vote in accordance with the Board of Directors' recommendations; merely sign, date, and return the Proxy Card in the enclosed envelope. Solicitation of proxies is being made by the Company through the mail, in person, and by telecommunications. The cost thereof will be borne by the Company. In addition, management has retained Morrow & Co.,Inc., to assist in soliciting proxies for a fee of approximately $45,000,$35,000, plus reasonable out-of-pocket expenses. /s/ John E. Hickey - ---------------------------- John E. Hickey Vice President and Secretary March 14, 1994 IBM Notice of 1994 Annual Meeting and Proxy Statement 211995 APPENDIXAppendix A IBM 1994 Long-Term Performance1995 Employees Stock Purchase Plan 1. Objectives. The purpose of this Plan is to provide employees a continued opportunity to purchase IBM 1994 Long-Term Performance Plan (the "Plan") is designedstock through annual offerings to attract and retain executives and other selected employees whose skills and talents are important tobe made during the Company's operations, and reward them for making major contributions to the successfive-year period commencing July 1, 1995. 25,000,000 shares of the Company. These objectives are accomplished by making long-term incentive awards under the Plan, thereby providing Participants with a proprietary interestIBM stock in the growth and performance of the Company. 2. Definitions. (a) "Award" - The grant of any form of stock option, stock appreciation right, stock or cash award, whether granted singly, in combination or in tandem, to a Plan Participant pursuant to such terms, conditions, performance requirements, and limitations as the Committee may establish in order to fulfill the objectives of the Plan. (b) "Award Agreement" - An agreement between the Company and a Participant that sets forth the terms, conditions, performance requirements, and limitations applicable to an Award. (c) "Board" - The Board of Directors of International Business Machines Corporation. (d) "Capital Stock" or "stock" - Authorized and issued or unissued $1.25 Par Value Capital Stock of the Company. (e) "Code" - The Internal Revenue Code of 1986, as amended from time to time. (f) "Committee" - The committee designated by the Board to administer the Plan. The Committee shall be constituted to permit the Plan to comply with Rule 16b-3 promulgated under the Securities Exchange Act of 1934 or any successor rule. No member of the Committee may receive Awards under the Plan. (g) "Company" - International Business Machines Corporation ("IBM") and its subsidiaries including subsidiaries of subsidiaries and partnerships and other business ventures in which IBM has a significant equity interest, as determined in the sole discretion of the Committee. (h) "Fair Market Value" - The average of the high and low prices of Capital Stock on the New York Stock Exchangeaggregate have been approved for the date in question, provided that, if no sales of Capital Stock were made on said exchange on that date, the average of the high and low prices of Capital Stock as reported for the most recent preceding day on which sales of Capital Stock were made on said exchange. (i) "Participant" - An employee of the Company to whom an Award has been made under the Plan. 3. Eligibility. Employees of the Company eligible for an Award under the Plan are those who hold positions of responsibility and whose performance, in the judgment of the Committee or the management of the Company, can have a significant effect on the success of the Company. IBM Notice of 1994 Annual Meeting and Proxy Statement 22 4. Capital Stock Available for Awards. The number of shares that may be issued under the Plan for Awards granted wholly or partly in stock during the term of the Plan is 29,105,600, which is 5% of the outstanding Capital Stock as determined on February 10, 1994. Included in this share limit are Awards denominated in units of stock that may be redeemed or exercised for cash as well as for stock. As soon as possible after adoption of the Plan by the Company's stockholders, the Company shall take whatever actions are necessary to file required documents with the U.S. Securities and Exchange Commission and any other appropriate governmental authorities and stock exchanges to make shares of Capital Stock available for issuance pursuant to Awards. Capital Stock related to Awards that are forfeited, terminated, expire unexercised, settled in cash in lieu of stock or in such manner that all or some of the shares covered by an Award are not issued to a Participant, or are exchanged for Awards that do not involve Capital Stock, shall immediately become available for Awards. 5.purpose. 1. Administration. The Plan shall be administered by a Committee appointed by the Board of Directors from members of senior management, consisting of at least three members. Members of the Committee whichshall not be eligible to participate in the Plan. The Committee shall have fullauthority to make rules and exclusive powerregulations for the administration of the Plan; its interpretations and decisions with regard thereto shall be final and conclusive. 2. Eligibility. Except as provided below, all employees of the Corporation or its subsidiaries shall be eligible to interpretparticipate in the Plan to grant waivers of Award restrictions, and to adoptin accordance with such rules regulations and guidelines for carrying outas may be prescribed by the Committee from time to time, which rules, however, shall neither permit nor deny participation in the Plan as it may deem necessary or proper, all of which powers shall be executed incontrary to the best interestsrequirements of the Company and in keeping with the objectives of the Plan. These powers include,Internal Revenue Code (including, but are not limited to, the adoption of modifications, amendments, procedures, subplansSection 423 (b)(3), (4), (5), and (8) thereof) and the like as are necessary to comply with provisionsregulations promulgated thereunder. No employee may be granted an option if such employee, immediately after the option is granted, owns 5% or more of the laws and regulationstotal combined voting power or value of the countries in whichstock of the Company operates in order to assure the viability of Awards granted under the Plan and to enable Participants regardless of where employed to receive advantages and benefits under the Plan andCorporation or any subsidiary, or if such laws and regulations. 6. Delegation of Authority. The Committee may delegateemployee is subject to the chief executive officer and to other senior officers of the Company its dutiesreporting requirements under the Plan pursuant to such conditions or limitations as the Committee may establish, except that only the Committee may select, and grant Awards to, Participants who are subject to Section 16 of the Securities Exchange Act of 1934. For purposes of the preceding sentence, the rules of Section 424(d) of the Internal Revenue Code shall apply in determining the stock ownership of an employee, and stock that the employee may purchase under outstanding options shall be treated as stock owned by the employee. 3. Offerings. The Corporation shall make one or more annual offerings to employees to purchase IBM stock under this Plan. Each offering period shall be 12 months in duration, during which (or during such portion thereof as an employee may elect to participate) the amounts received as compensation by an employee shall constitute the measure of such of the employee's participation in the offering as is based on compensation. 4. Participation. An employee eligible on the effective date of any offering may participate in such offering at any time by completing and forwarding a payroll deduction authorization to the employee's appropriate payroll location. The form will authorize a regular payroll deduction from the employee's compensation, and must specify the date on which such deduction is to commence, which may not be retroactive. 5. Deductions. The Corporation shall maintain payroll deduction accounts for all participating employees. With respect to any offering made under this Plan, an employee may authorize a payroll deduction of a whole percentage (up to a maximum of 10%) of the compensation the employee receives during the offering period (or during such portion thereof in which the employee may elect to participate). No employee may be granted an option that permits his or her rights to purchase stock under this Plan, and any other stock purchase plan of the Corporation and its subsidiaries, to accrue at a rate that exceeds $25,000 of the fair market value of such stock (determined at the effective date of the applicable offering) for each calendar year in which the option is outstanding at any time. 6. Deduction Changes. An employee may increase or decrease the employee's payroll deduction by filing a new payroll deduction authorization at any time during an offering period. The change may not become effective sooner than the next pay period after receipt of the authorization. 7. Awards.Purchase of Shares. Each employee participating in any offering under this Plan shall be granted an option, upon the effective date of such offering, for as many full and fractional shares of IBM stock as the participating employee may elect to purchase with up to 10% of the compensation received during the specified offering period (or during such portion thereof as the employee may elect to participate), to be paid by payroll deductions during such period. Notwithstanding the foregoing, in no event shall the number of shares purchased by an employee during an offering period exceed 1,000 shares. The purchase price for each share purchased shall be 85% of the average market price on the last day of a participating employee's pay period. As of the last day of the pay period during any offering, the account of each participating employee shall be totaled, and the employee shall be deemed to have exercised an option to purchase one or more full or fractional shares at the then-applicable price; the employee's account shall be charged for the amount of the purchase; and the ownership of such share or shares shall be appropriately evidenced on the books of the Corporation. Additional shares covered by the employee's option shall be purchased in the same manner, as of the last day of each subsequent pay period during the offering period. A participating employee may not purchase a share under any offering period beyond 12 months from the effective date thereof. Any balance remaining in an employee's payroll deduction account at the end of an offering period will be carried forward to the next offering period. 8. Employee Accounts and Certificates. Upon purchase of one or more full or fractional shares by a Plan participant pursuant to Section 7 hereof, the Corporation shall establish a book entry account in the name of the employee to reflect the share(s) purchased at that time. Certificates shall be issued only on request for full shares and also when necessary to comply with transaction requirements outside the United States. To request certificates, employees may call the Voice Response Service on tieline 771-7000 (201-324-0218) or send a note on VM/PROFS to RHQVM14(STOCK). In the event a participant terminates his or her account, any fractional share held in the account will be paid to the participant in cash. 9. Registration of Shares. Shares may be registered only in the name of the employee, or, if the employee so indicates on the employee's payroll deduction authorization form, in the employee's name jointly with a member of the employee's family, with right of survivorship. An employee who is a resident of a jurisdiction that does not recognize such a joint tenancy may have shares registered in the employee's name as tenant in common or as community property with a member of the employee's family, without right of survivorship. 10. Definitions. The term "Corporation" or "IBM" means International Business Machines Corporation, a New York corporation. The term "IBM stock" means the common stock of IBM. The phrase "average market price" means the average of the high and low composite prices of IBM stock on the New York Stock Exchange on a given day or, if no sales of IBM stock were made on that day, the average of the high and low composite prices of IBM stock on the next preceding day on which sales were made on said Exchange. The term "subsidiary" means a subsidiary of the Corporation within the meaning of Section 424(f) of the Internal Revenue Code and the regulations promulgated thereunder, provided, however, that this Plan shall not be deemed to cover the employees of any subsidiary that did not participate in the IBM Employees 1990 Stock Purchase Plan, unless so authorized by the Committee. 11. Rights as a Stockholder. None of the rights or privileges of a stockholder of the Corporation shall exist with respect to shares purchased under this Plan unless and until such shares shall have been appropriately evidenced on the books of the Corporation. 12. Rights on Retirement, Death, or Termination of Employment. In the event of a participating employee's retirement, death, or termination of employment, the employee shall be ineligible to continue to participate in the Plan, and no payroll deduction shall be taken from any pay due and owing to the employee after the pay period during which the employee became ineligible. 13. Rights Not Transferable. Rights under this Plan are not transferable by a participating employee other than by will or the laws of descent and distribution, and are exercisable during the employee's lifetime only by the employee. 14. Application of Funds and Administrative Fees. All funds received or held by the Corporation under this Plan may be used for any corporate purpose. The Committee may impose reasonable administrative fees on participating employees to defray the administrative costs of the Plan, which shall determinein no event exceed the typeactual administrative costs of the Plan. Initially, the fee shall be $10 per participating employee per offering period. 15. Adjustments in Case of Changes Affecting IBM Stock. In the event of a subdivision of outstanding shares, or typesthe payment of Award(s) to be made to each Participanta stock dividend, the number of shares approved for this Plan, and shallthe share limitation set forth in Section 7 hereof, shall be increased proportionately, and such other adjustments shall be made as may be deemed equitable by the related Award AgreementBoard of Directors. In the event of any other change affecting IBM stock, such adjustments shall be made as may be deemed equitable by the Board of Directors to give proper effect to such event. 16. Disposition Restriction. Subject to approval of the Internal Revenue Service, the Committee will amend the Plan, effective after giving at least one month's written notice to participating employees, to provide for a holding period of up to one year following the purchase of each share under the Plan, with the disposition of such share during the offering period in which it was acquired resulting in suspension of the participant from further Plan participation for a period not extending beyond the end of the first offering period that begins after the date of the disposition; provided that the issuance of a stock certificate may be treated as a disposition for this purpose; and provided further that a participant shall not be so suspended if the disposition is required by legal process. 17. Amendment of the Plan. The Board of Directors may at any time, or from time to time, amend this Plan in any respect, except that, without the approval of a majority of the shares of stock of the Corporation then issued and outstanding and entitled to vote, no amendment shall be made (i) increasing the number of shares approved for this Plan (other than as provided in Section 15 hereof), (ii) decreasing the purchase price per share, (iii) withdrawing the administration of this Plan from a Committee consisting of persons not eligible to participate in the Plan, or (iv) changing the designation of subsidiaries eligible to participate in the Plan. 18. Termination of the Plan. This Plan and all rights of employees under any offering hereunder shall terminate: (a) on the day that participating employees become entitled to purchase a number of shares equal to or greater than the number of shares remaining available for purchase. If the number of shares so purchasable is greater than the shares remaining available, the available shares shall be allocated by the Committee among such participating employees in such manner as it deems fair, or (b) at any time, at the discretion of the Board of Directors. No offering hereunder shall be made which shall extend beyond June 30, 2000. 19. Governmental Regulations. The Corporation's obligation to sell and deliver IBM stock under this Plan is subject to the approval of any governmental authority required in connection with the authorization, issuance, or sale of such stock. 20. Plan Shares Purchases. Purchases of outstanding shares may be made pursuant to and on behalf of this Plan, upon such terms as the Corporation may approve, for delivery under this Plan. Appendix B IBM Non-Employee Directors Stock Option Plan 1. Purpose. The purpose of the IBM Non-Employee Directors Stock Option Plan (the "Plan") is to secure for International Business Machines Corporation (the "Company") and its stockholders the benefits of the incentive inherent in increased common stock ownership by the members of the Board of Directors (the "Board") of the Company who are not employees of the Company or any of its subsidiaries. 2. Administration. The Plan shall be administered by the Board. The Board shall have all the powers vested in it by the terms conditions, performance requirements,of the Plan, such powers to include authority (within the limitations described herein) to prescribe the form of the agreement embodying awards of stock options made under the Plan (the "Options") and limitations applicablethe power to each Award. Awardsdetermine the restrictions, if any, on the ability of participants to earn-out and to dispose of any stock issued in connection with the exercise of any options granted pursuant to the Plan. The Board shall, subject to the provisions of the Plan, have the power to construe the Plan, to determine all questions arising thereunder and to adopt and amend such rules and regulations for the administration of the Plan as it may include but are not limiteddeem desirable. Any decisions of the Board in the administration of the Plan, as described herein, shall be final and conclusive. The Board may authorize any one or more of their number or the Secretary or any other officer of the Company to those listedexecute and deliver documents on behalf of the Board. The Board hereby authorizes the Secretary to execute and deliver all documents to be delivered by the Board pursuant to the Plan. No member of the Board shall be liable for anything done or omitted to be done by such member or by any other member of the Board in this Section 7. Awardsconnection with the Plan, except for such member's own willful misconduct or as expressly provided by statute. 3. Amount of Stock. The stock which may be issued and sold under the Plan will be the Common Stock (par value $1.25 per share) of the Company. The total amount of stock for which Options may be granted singly,under the Plan in combinationany year shall not exceed 25,000 Common Stock shares, subject to adjustment as provided in Paragraph 6 below. The stock to be issued may be either authorized and unissued shares or in tandem. Awards may also be made in combinationissued shares acquired by the Company or in tandem with, in replacementits subsidiaries. 4. Eligibility. Each member of or as alternatives to, grants or rights under any other employee planthe Board of the Company includingwho is not an employee of the planCompany or any of its subsidiaries (a "Non-Employee Director") shall be eligible to receive an Option in accordance with Paragraph 5 below. The adoption of this Plan shall be not deemed to give any acquired entity. No Participantdirector any right to be granted an Option, except to the extent and upon such terms and conditions, in accordance with the terms of the Plan, as may receive,be determined by the Board. 5. Terms and Conditions of Options. Each Option granted under the Plan stock options or stock appreciation rightsshall be evidenced by an agreement in such form as the aggregate of whichBoard shall exceed 1,455,280 shares, which is 5%prescribe from time to time in accordance with the Plan, and shall comply with the following terms and conditions: (a) The Option exercise price shall be the fair market value of the Common Stock shares authorized for issuance hereunder. (a) Stocksubject to such Option - A grant of a right to purchase a specified number of shares of Capital Stockon the purchase price ofdate the Option is granted, which shall be not less than 100%the average of Fair Market Valuethe high and the low sales prices of a Common Stock share on the date of grant as reported on the New York Stock Exchange Composite Transactions Tape or, if the New York Stock Exchange is closed on that date, on the last preceding date on which the New York Stock Exchange was open for trading. (b) Each year, as of such right,the first day of the month following the Annual Meeting of Stockholders of the Company, each Non-Employee Director who has been elected or reelected as determineda member of the Board as of the adjournment of the Annual Meeting shall automatically receive an Option for 1,000 shares of Common Stock. (c) The Option shall not be transferable by the Committee. A stock option may be inoptionee otherwise than by will or the formlaws of an incentive stock option ("ISO") which, in addition to being subject to applicable terms, conditionsdescent and limitations established by the Committee, complies with Section 422 of the Code which, among other limitations, provides that the aggregate Fair Market Value (determined at the time the option is granted) of Capital Stock for which ISO's are exercisable for the first time by a Participant during any calendar year shall not exceed $100,000; that ISO's shall be priced at not less than IBM Notice of 1994 Annual Meetingdistribution, and Proxy Statement 23 100% of the Fair Market Value on the date of the grant; and that ISO's shall be exercisable for a periodduring the lifetime of not more thanthe optionee only by the optionee. (d) No Option or any part of an Option shall be exercisable: (i) after the expiration of ten years. Theyears from the date the Option was granted, (ii) unless written notice of the exercise is delivered to the Company specifying the number of shares of stock that shallto be available for ISO's granted under the Plan is limited to ten million. (b) Stock Appreciation Right - A right to receive apurchased and payment in cash and/or Capital Stock, equal tofull is made for the excess of the Fair Market Value of a specified number of shares of CapitalCommon Stock on the date the stock appreciation right (SAR) is exercised over the Fair Market Value on the date of grant of the SAR as set forth in the applicable Award Agreement. (c) Stock Award - An Award made in stock or denominated in units of stock. All or part of any stock award may be subject to conditions established by the Committee, and set forth in the Award Agreement, which may include, but are not limited to, continuous service with the Company, achievement of specific business objectives, increases in specified indices, attaining growth rates, and other comparable measurements of Company performance. Such Awards may be based on Fair Market Value or other specified valuation. (d) Cash Award - An Award denominated in cash with the eventual payment amount subject to future service and such other restrictions and conditions as may be established by the Committee, and as set forth in the Award Agreement, including, but not limited to continuous service with the Company, achievement of specific business objectives, increases in specified indices, attaining growth rates, and other comparable measurements of Company performance. Awards payable, in whole or in part, in stock must be held for at least six months (i) in the case of a stock option or SAR, from the date of grant to the date of exercise and (ii) in the case of other Awards, from the date of acquisition to the date of disposition. 8. Payment of Awards. Payment of Awards may be made in the form of cash, stock or combinations thereof and may include such restrictions as the Committee shall determine, including in the case of stock, restrictions on transfer and forfeiture provisions. When transfer of stock is so restricted or subject to forfeiture provisions, it is referred to as "Restricted Stock." Further, with Committee approval, payments may be deferred, either in the form of installments or as a future lump sum payment. The Committee may permit selected Participants to elect to defer payments of some or all types of Awards in accordance with procedures established by the Committee which are intended to permit such deferrals to comply with applicable requirements of the Code including, at the choice of Participants, the capability to make further deferrals for payment after retirement. Any deferred payment, whether elected by the Participant or specified by the Award Agreement or by the Committee, may require the payment to be forfeited in accordance with the provisions of Section 13 of the Plan. Dividends or dividend equivalent rights may be extended to and made part of any Award denominated in stock or units of stock, subject to such terms, conditions and restrictions as the Committee may establish. The Committee may also establish rules and procedures for the crediting of interest on deferred cash payments and dividend equivalents for deferred payments denominated in stock or units of stock. At the discretion of the Committee, a Participant may be offered an election to substitute an Award for another Award or Awards of the same or different type. 9. Stock Option Exercise. The price at which shares of Capital Stock may be purchased under a Stock Option shall be paid in fullbeing acquired thereunder at the time of exercise; such payment shall be made (a) in United States dollars by check, or bank draft, or (b) by tendering to the exercise in cash or, if permittedCompany Common Stock shares owned by the Committee, by meansperson exercising the Option and having a fair market value equal to the cash exercise price applicable to such Option, such fair market value to be the average of tendering Capitalthe high and low sales prices of a Common Stock or surrendering another Award, including Restricted Stock, valued at Fair Market Valueshare on the date of exercise as reported on the New York Stock Exchange Composite Transactions Tape, or, any combination IBM Notice of 1994 Annual Meeting and Proxy Statement 24 thereof. The Committeeif the New York Stock Exchange is closed on that date, on the last preceding date on which the New York Stock Exchange was open for trading, it being understood that the Board shall determine acceptable methods for tendering CapitalCommon Stock or other Awardsshares and may impose such conditions on the use of CapitalCommon Stock or other Awardsshares to exercise a Stock OptionOptions as it deems appropriate.appropriate, or (c) by a combination of United States dollars and Common Stock shares as aforesaid; and (iii) unless the person exercising the Option has been, at all times during the period beginning with the date of grant of the Option and ending on the date of such exercise, a Director of the Company, except that if such person shall cease to be such a Director by reason of Retirement or death while holding an Option that has not expired and has not been fully exercised, such person, or in the case of death, the executors, administrators, or distributees, as the case may be, may at any time after the date such person ceased to be such a Director (but in no event after the Option has expired under the provisions of subparagraph 5(d)(i) above), exercise the Option with respect to any shares of Common Stock as to which such person has not exercised the Option on the date the person ceased to be such a Director. In the event sharesany Option is exercised by the executors, administrators, legatees, or distributees of Restricted Stock are tendered as consideration for the exerciseestate of a Stockdeceased optionee, the Company shall be under no obligation to issue stock thereunder unless and until the Company is satisfied that the person or persons exercising the Option a numberare the duly appointed legal representatives of the shares issued upondeceased optionee's estate or the exerciseproper legatees or distributees thereof. (e) One-quarter (25%) of the Stock Option, equal to thetotal number of shares of RestrictedCommon Stock covered by the Option shall become exercisable beginning with the first anniversary date of the grant of the Option; thereafter an additional one-quarter (25%) of the total number of shares of Common Stock covered by the Option shall become exercisable on each subsequent anniversary date of the grant of the Option until on the fourth anniversary date of the grant of the Option the total number of shares of Common Stock covered by the Option shall become exercisable. In the event the Non-Employee Director ceases to be a Director by reason of Retirement or death, the total number of shares of Common Stock covered by the Option shall thereupon become exercisable. (f) Options granted to a person shall automatically be forfeited by such person if such person shall cease to be a Director for reasons other than Retirement or death. (g) As used as consideration therefor,in this Paragraph 5, the term "Retirement" means the termination of a Director's service on the Board, including resignation from the Board upon reaching retirement age or otherwise resigning or not standing for reelection with the approval of the Board, but shall not include any termination of service resulting from an act of (i) fraud or intentional misrepresentation or (ii) embezzlement, misappropriation or conversion of assets or opportunities of the Company or any direct or indirect majority-owned subsidiary of the Company, by such Non-Employee Director. The determination of whether termination results from any such act shall be subject to the same restrictions as the Restricted Stock so submitted plus any additional restrictions that may be imposedmade by the Committee. 10. Tax Withholding. TheBoard, whose determination shall be conclusive. 6. Adjustment in the Event of Change in Stock. In the event of changes in the outstanding Common Stock of the Company shall haveby reason of any stock split, stock dividend, recapitalization, merger, consolidation, split-up, split-off, spin-off, combination or exchange of shares, a sale by the rightCompany of all or part of its assets, any distribution to deduct applicable taxes from any Award paymentstockholders other than a normal cash dividend, a repurchase by the Company of its stock at a price above the prevailing market price and withhold, at the time of delivery or vestinglike, the aggregate number and class of shares available under the Plan, an appropriateand the number, class, and the price of shares for payment of taxes requiredCommon Stock subject to outstanding Options shall be appropriately adjusted by law or to take such other actionthe Board, whose determination shall be conclusive. 7. Miscellaneous Provisions. (a) Except as may be necessaryexpressly provided for in the opinionPlan, no Non-Employee Director or other person shall have any claim or right to be granted an Option under the Plan. Neither the Plan nor any action taken hereunder shall be construed as giving any Non-Employee Director any right to be retained in the service of the Company to satisfy all obligations for withholding of such taxes. If Capital Stock or Restricted Stock is used to satisfy tax withholding, such stock shall be valued based on the Fair Market Value when the tax withholding is required to be made. 11. Amendment, Modification, Suspension or Discontinuance of the Plan. The Board may amend, modify, suspend or terminate the Plan for the purpose of meeting or addressing any changes in legal requirements or for any other purpose permitted by law. Subject to changes in law or other legal requirements that would permit otherwise,Company. (b) An optionee's rights and interest under the Plan may not be amended without the consentassigned or transferred in whole or in part either directly or by operation of the holders of a majority of the shares of Capital Stock then outstanding, to (i) increase the aggregate number of shares of Capital Stock that may be issued under the Planlaw or otherwise (except for adjustments pursuant to Section 15 of the Plan), (ii) decrease the option price, (iii) materially modify the requirements as to eligibility for participation in the Plan, (iv) withdraw administration of the Plan from the Committee, or (v) extend the period during which Awards may be granted. 12. Termination of Employment. If the employment of a Participant terminates, other than pursuant to paragraphs (a) through (c) of this Section 12, all unexercised, deferred and unpaid Awards shall be canceled immediately, unless the Award Agreement provides otherwise. (a) Retirement under a Company Retirement Plan. When a Participant's employment terminates as a result of retirement with management approval in accordance with the terms of a Company retirement plan, the Committee (in the form of an Award Agreement or otherwise) may permit Awards to continue in effect beyond the date of retirement in accordance with the applicable Award Agreement and the exercisability and vesting of any Award may be accelerated. (b) Resignation in the Best Interests of the Company. When a Participant resigns from the Company and, in the judgment of the chief executive officer or other senior officer designated by the Committee, the acceleration and/or continuation of outstanding Awards would be in the best interests of the Company, the Committee may (i) authorize, where appropriate, the acceleration and/or continuation of all or any part of Awards granted prior to such termination and (ii) permit the exercise, vesting and payment of such Awards for such period as may be set forth in the applicable Award Agreement, subject to earlier cancellation pursuant to Section 13 or at such time as the Committee shall deem the continuation of all or any part of the Participant's Awards to be not in the Company's best interests. (c) Death or Disability of a Participant. (i) In the event of a Participant'san optionee's death, the Participant's estate or beneficiaries shall have a period specified IBM Notice of 1994 Annual Meeting and Proxy Statement 25 in the Award Agreement within which to receive or exercise any outstanding Award held by the Participant under such terms as may be specified in the applicable Award Agreement. Rights to any such outstanding Awards shall pass by will or the laws of descent and distributiondistribution), including, but not by way of limitation, execution, levy, garnishment, attachment, pledge, bankruptcy, or in any other manner, and no such right or interest of any participant in the following order: (a)Plan shall be subject to beneficiaries so designated byany obligation or liability of such participant. (c) No Common Stock shares shall be issued hereunder unless counsel for the Participant; if none, then (b) toCompany shall be satisfied that such issuance will be in compliance with applicable Federal, state, and other securities laws and regulations. (d) It shall be a legal representative of the Participant; if none, then (c)condition to the persons entitled thereto as determined by a courtobligation of competent jurisdiction. Subject to subparagraph (iii) below, Awards so passing shall be exercised or paid out at such times and in such manner as if the Participants were living. (ii) In the event a Participant is deemed by the Company to be disabled and eligible for benefits pursuantissue Common Stock shares upon exercise of an Option, that the optionee (or any beneficiary or person entitled to the terms of the IBM Long-Term Disability Plan, any successor plan, or similar plan of another employer, Awards and rights to any such Awards may be paid to or exercised by the Participant, if legally competent, or a committee or other legally designated guardian or representative if the Participant is legally incompetent by virtue of such disability. act under subparagraph 5(d)(iii) After the death or disability of a Participant, the Committee may in its sole discretion at any time (1) terminate restrictions in Award Agreements; (2) accelerate any or all installments and rights; and (3) instruct the Company to pay the total of any accelerated payments in a lump sum to the Participant, the Participant's estate, beneficiaries or representative - notwithstanding that, in the absence of such termination of restrictions or acceleration of payments, any or all of the payments due under the Awards might ultimately have become payable to other beneficiaries. (iv) In the event of uncertainty as to interpretation of or controversies concerning this paragraph (c) of Section 12, the Committee's determinations shall be binding and conclusive. 13. Cancellation and Rescission of Awards. Unless the Award Agreement specifies otherwise, the Committee may cancel any unexpired, unpaid, or deferred Awards at any time if the Participant is not in compliance with all other applicable provisions of the Award Agreement, the Plan and with the following conditions: (a) A Participant shall not render services for any organization or engage directly or indirectly in any business which, in the judgment of the chief executive officer of the Company or other senior officer designated by the Committee, is or becomes competitive with the Company, or which organization or business, or the rendering of services to such organization or business, is or becomes otherwise prejudicial to or in conflict with the interests of the Company. For a Participant whose employment has terminated, the judgment of the chief executive officer shall be based on the Participant's position and responsibilities while employed by the Company, the Participant's post-employment responsibilities and position with the other organization or business, the extent of past, current and potential competition or conflict between the Company and the other organization or business, the effect on the Company's customers, suppliers and competitors of the Participant's assuming the post-employment position, the guidelines established in the then current edition of IBM's booklet, Business Conduct Guidelines, and such other considerations as are deemed relevant given the applicable facts and circumstances. A Participant who has retired shall be free, however, to purchase as an investment or otherwise, stock or other securities of such organization or business so long as they are listed upon a recognized securities exchange or traded over-the-counter, and such investment does not represent a substantial investment to the Participant or a greater than 10 percent equity interest in the organization or business. (b) A Participant shall not, without prior written authorization from the Company, disclose to anyone outside the Company, or use in other than the Company's business, any confidential information or material, as defined in IBM Notice of 1994 Annual Meeting and Proxy Statement 26 the Company's Agreement Regarding Confidential Information and Intellectual Property, relating to the business of the Company, acquired by the Participant either during or after employment with the Company. (c) A Participant, pursuant to the Company's Agreement Regarding Confidential Information and Intellectual Property, shall disclose promptly and assign to the Company all right, title, and interest in any invention or idea, patentable or not, made or conceived by the Participant during employment by the Company, relating in any manner to the actual or anticipated business, research or development work of the Company and shall do anything reasonably necessary to enable the Company to secure a patent where appropriate in the United States and in other countries. (d) Upon exercise, payment or delivery pursuant to an Award, the Participant shall certify on a form acceptable to the Committee that he or she is in compliance with the terms and conditions of the Plan. Failure to comply with the provisions of paragraph (a), (b) or (c) of this Section 13 prior to, or during the six months after, any exercise, payment or delivery pursuant to an Award shall cause such exercise, payment or delivery to be rescinded. The Company shall notify the Participant in writing of any such rescission within two years after such exercise, payment or delivery. Within ten days after receiving such a notice from the Company, the Participant shallabove) pay to the Company, theupon its demand, such amount of any gain realized or payment received as a result of the rescinded exercise, payment or delivery pursuant to an Award. Such payment shall be made either in cash or by returning to the Company the number of shares of Capital Stock that the Participant received in connection with the rescinded exercise, payment or delivery. 14. Nonassignability. (a) Except pursuant to paragraph (c) of Section 12 and except as set forth in paragraph (b) of this Section 14, no Award or any other benefit under the Plan shall be assignable or transferable, or payable to or exercisable by, anyone other than the Participant to whom it was granted. (b) Where a Participant terminates employment in order to assume a position with a governmental, charitable or educational institution, the Committee, in its discretion and to the extent permitted by law, may authorize a third party (including but not limited to the trustee of a "blind" trust), acceptable to the applicable governmental or institutional authorities, the Participant and the Committee, to act on behalf of the Participant with regard to any Awards retained by the Participant pursuant to paragraph (b) of Section 12. 15. Adjustments. In the event of any change in the outstanding Capital Stock of the Company by reason of a stock split, stock dividend, combination or reclassification of shares, recapitalization, merger, or similar event, the Committee may adjust proportionally (a) the number of shares of Capital Stock (i) reserved under the Plan, (ii) available for ISO's, (iii) for which Awards may be granted to an individual Participant, and (iv) covered by outstanding Awards denominated in stock or units of stock; (b) the stock prices related to outstanding Awards; and (c) the appropriate Fair Market Value and other price determinations for such Awards. In the event of any other change affecting the Capital Stock or any distribution (other than normal cash dividends) to holders of Capital Stock, such adjustments as may be deemed equitablerequested by the Committee, including adjustmentsCompany for the purpose of satisfying any liability to avoid fractional shares, shallwithhold Federal, state, local, or foreign income or other taxes. If the amount requested is not paid (which payment may be made to give proper effect to such event. Inin any manner prescribed in subparagraph 5(d)(ii)), the event of a corporate merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation, the Committee shall be authorizedCompany may refuse to issue or assumeCommon Stock Options, whether or not in a transaction to which Section 424(a) of the Code applies, by means of substitution of new Stock Options for previously issued Stock Options or an assumption of previously issued Stock Options. IBM Notice of 1994 Annual Meeting and Proxy Statement 27 16. Notice. Any notice to the Company required by any of the provisionsshares. (e) The expenses of the Plan shall be addressed to the chief human resources officer or to the chief executive officer of the Company in writing, and shall become effective when it is receivedborne by the office of either of them. 17. Unfunded Plan. Insofar as it provides for Awards of cash and Capital Stock, theCompany. (f) The Plan shall be unfunded. Although bookkeeping accounts may be established with respect to Participants who are entitled to cash, Capital Stock or rights thereto under the Plan, any such accounts shall be used merely as a bookkeeping convenience. The Company shall not be required to segregateestablish any special or separate fund or to make any other segregation of assets thatto assure the issuance of shares upon exercise of any Option under the Plan, and the issuance of shares upon exercise of Options shall be subordinate to the claims of the Company's general creditors. (g) By accepting any Option or other benefit under the Plan, each optionee and each person claiming under or through such person shall be conclusively deemed to have indicated his or her acceptance and ratification of, and consent to, any action taken under the Plan by the Company or the Board. 8. Amendment or Discontinuance. The Plan may be amended at any time and from time to time by the Board as the Board shall deem advisable; provided, however, that no amendment shall become effective without stockholder approval if such stockholder approval is required by law, rule, or regulation, and provided further, to the extent required by Rule 16b-3 under Section 16 of the Securities Exchange Act of 1934, in effect from time to time, Plan provisions relating to the amount, price, and timing of Options shall not be represented by cash, Capital Stockamended more than once every six months, except that the foregoing shall not preclude any amendment to comport with changes in the Internal Revenue Code of 1986, the Employee Retirement Income Security Act of 1974, or rights thereto, nor shallthe rules thereunder in effect from time to time. No amendment of the Plan be construed as providing for such segregation, nor shall the Company nor the Board nor the Committee be deemed to be a trusteematerially and adversely affect any right of any cash, Capital Stock or rights thereto to be granted under the Plan. Any liability of the Company to any Participantparticipant with respect to a grantany Option theretofore granted without such participant's written consent. 9. Effective Date of cash, Capital Stock or rights thereto under the Plan shall be based solely upon any contractual obligations that may be created by the Plan and any Award Agreement; no such obligation of the Company shall be deemed to be secured by any pledge or other encumbrance on any property of the Company. Neither the Company nor the Board nor the Committee shall be required to give any security or bond for the performance of any obligation that may be created by the Plan. 18. Governing Law. The Plan and all determinations made and actions taken pursuant hereto, to the extent not otherwise governed by the laws of the United States, shall be governed by the laws of the State of New York and construed accordingly. 19. Effective and Termination Dates. The Plan shall become effective onwhen the date itPlan is approved and adopted by the holders of a majority of the shares of Capital Stock then outstanding.Company's stockholders. 10. Term. The Plan shall terminate five years later, subject to earlier termination bycontinue in effect without limit unless and until the Board pursuant to Section 11, after which no Awards may be made under the Plan, but any such termination shall not affect Awards then outstanding or the authority of the Committee to continue to administer the Plan. IBM Notice of 1994 Annual Meeting and Proxy Statement 28 APPENDIX B Federal Income Tax Consequences The Company has been advised by counsel that, in general, under the Internal Revenue Code, as presently in effect, an optionee will not be deemed to receive any income for federal income tax purposes at the time an option or SAR is granted or a restricted stock award is made, nor will the Company be entitled to a tax deduction at that time. However, when any part of an option or SAR is exercised, when restrictions on restricted stock lapse, or when an unrestricted stock award is made, the federal income tax consequences may be summarized as follows: 1. In the case of an exercise of a nonstatutory option, the optionee will recognize ordinary income in an amount equal to the difference between the option price and the Fair Market Value of the shares on the exercise date. 2. In the case of an exercise of an SAR, the optionee will recognize ordinary income on the exercise date in the amount equal to any cash and unrestricted shares, at Fair Market Value, received. 3. In the case of an exercise of an option or SAR payable in restricted stock, or in the case of an award of restricted stock, the immediate federal income tax effect for the recipient will depend on the nature of the restrictions. Generally, the Fair Market Value of the stock will not be taxable to the recipient as ordinary income until the year in which his or her interest in the stock is freely transferable or is no longer subject to a substantial risk of forfeiture. However, the recipient may elect to recognize income when the stock is received, rather than when his or her interest in the stock is freely transferable or is no longer subject to a substantial risk of forfeiture. If the recipient makes this election, the amount taxed to the recipient as ordinary income is determined as of the date of receipt of the restricted stock. 4. In the case of ISO's, there is no tax liability at time of exercise. However, the excess of the Fair Market Value of the stock on the exercise date over the option price is included in the optionee's income for purposes of the alternative minimum tax. If no disposition of the ISO stock is made before the later of one year from the date of exercise and two years from the date of grant, the optionee will realize a long-term capital gain or loss upon a sale of the stock, equal to the difference between the option price and the sale price. If the stock is not held for the required period, ordinary income tax treatment will generally apply to the amount of any gain at sale or exercise, whichever is less, and the balance of any gain or any loss will be treated as capital gain or loss (long-term or short-term, depending on whether the shares have been held for more than one year). 5. Upon exercise of a nonstatutory option or SAR, the award of stock, or the recognition of income on restricted stock, the Company will generally be allowed an income tax deduction equal to the ordinary income recognized by the employee. The Company does not receive an income tax deduction as a result of the exercise of an ISO, provided that the ISO stock is held for the required period as described above. When a cash payment is made pursuant to the Award, the recipient will recognize the amount of the cash payment as ordinary income, and the Company will generally be entitled to a deduction in the same amount. 6. The Company may not deduct compensation of more than $1,000,000 that is paid in a taxable year to an individual who, on the last day of the taxable year, is the Company's chief executive officer or among one of its four other highest compensated officers for that year. The deduction limit, however, does not apply to certain types of compensation, including qualified performance-based compensation. The Company believes that compensation attributable to stock options and stock appreciation rights granted under the 1994 LTPP will be treated as qualified performance-based compensation and therefore will not be subject to the deduction limit. IBM Notice of 1994 Annual Meeting and Proxy Statement 29otherwise determines. IBM Dear IBM Stockholder: YOUR VOTE IS IMPORTANT. ATTACHED IS YOUR 1994Your vote is important. Attached is your 1995 IBM PROXY CARD. PLEASE READ BOTH SIDES OF THE CARD, AND MARK, SIGN AND DATE IT. DETACH AND RETURN IT PROMPTLY USING THE ENCLOSED ENVELOPE. WE URGE YOU TO VOTE YOUR SHARES.Proxy Card. Please read both sides of the card, and mark, sign and date it. Detach and return it promptly using the enclosed envelope. We urge you to vote your shares. You are invited to attend the Annual Meeting of Stockholders on Monday,Tuesday, April 25, 1994,1995, at 10 a.m. in the Metro Toronto Convention Centre, 255 Front St. W., Toronto, Ontario, Canada.Ovens Auditorium, 2700 East Independence Boulevard, Charlotte, North Carolina. If you plan to attend the Annual Meeting, you should mark the box provided on the attached Proxy Card. An admission ticket is attached for your convenience. As part of IBM's ongoing efforts to reduce expenses, we are asking our stockholders to permit IBM to send only one copy of stockholder publications to their household. If you are receiving multiple copies of stockholder reports at your address and wish to eliminate them for the account shown on the attached Proxy Card, please mark the box provided on the card. You will continue to receive your proxy mailings for shares held in this account. Thank you very much for your cooperation and continued loyalty as an IBM Stockholder. /s/ John E. Hickey - ---------------------------- John E. Hickey Vice President and Secretary /X/ /x/ Please mark your votes as in this example Proxy Card IBM'sIBM Directors recommendrecombed a vote forFOR proposals 1 2,through 6 and 3, and against shareholder proposal 4.AGAINST proposals A through E. SHARES WILL BE SO VOTED UNLESS OTHERWISE INDICATED. IBM's Directors recommend a vote FOR proposals 1 2, and 3.through 6. FOR WITHHELD 1. Election of Directors / / / / (see reverse) For, except vote WITHHELD from the following nominee(s): --------------------------------------------------------------------------------- FOR AGAINST ABSTAIN 2. Ratification of Auditors' Appointmentappointment of auditors / / / / / / (page 16)20) 3. Adoption of Long- Term PerformanceIBM 1995 Employees Stock Purchase Plan / / / / / / (page 21) 4. Adoption of IBM Non- Employee Directors Stock Option Plan to replace annual stock awards (page 17)22) / / / / / / 5. Approval of annual incentive compen- sation terms for certain executives (page 23) / / / / / / 6. Approval of long- term performance incentive compen- sation terms for certain executives (page 25) / / / / / / IBM's Directors recommend a vote AGAINST proposal 4.proposals A through E. Stockholder Proposals on: FOR AGAINST ABSTAIN 4. Stockholder Proposal on PoliticalA. Affirmation of IBM's political non-partisanship / / / / / / Non-Partisanship (page 19)27) B. Elimination of awards or bonuses upon completion of service / / / / / / (page 28) C. Variable exec- utive and other compensation / / / / / / (page 28) D. Withdrawal of retirement plan for non-employee directors / / / / / / (page 30) E. Stock payments to non-employee directors / / / / / / (page 31) Will Attend Annual Meeting / / Discontinue Mailing Publications forto this Accountaccount / / ["IBM" logo] SIGNATURE(S): DATE -------------------------------------- ------------------Signature(s) ________________________________ Date ______ IBM PLEASE SIGN AND DATE HERE, DETACH AND RETURN IN ENCLOSED ENVELOPE. Admission Ticket to the 19941995 Annual Meeting of IBM Stockholders This is your admission ticket for the Annual Meeting of Stockholdersstockholders to be held on Monday,Tuesday, April 25, 1994,1995, at 1010:00 a.m. in the Metro Toronto Convention Centre, 265 Front St. W., Toronto, Ontario, Canada.Ovens Auditorium, 2700 East Independence Boulevard, Charlotte, North Carolina. Stockholders must have a ticket for admission to the meeting. This ticket is issued to the stockholder whose name appears on it and is non-transferable. PROXY CARD IBM International Business Machines Corporation Armonk, New York 10504 Proxy Solicited by the Board of Directors Corporation for the Annual Meeting of Stockholders Armonk, New York 10504 April 25, 19941995 Louis V. Gerstner, Jr., Paul J. Rizzo,Jerome B. York, and John E. Hickey, or any of them individually and each of them with power of substitution, are hereby appointed Proxies of the undersigned to vote all common stock of International Business Machines Corporation owned on the record date by the undersigned at the Annual Meeting of Stockholders to be held in the Metro Toronto Convention Centre, Toronto, Ontario, Canada,Ovens Auditorium, Charlotte, North Carolina, at 1010:00 a.m. on Monday,Tuesday, April 25, 1994,1995, or any adjournment thereof, upon such business as may properly come before the meeting, including the items on the reverse side of this form as set forth in the Notice of 19941995 Annual Meeting and the Proxy Statement dated March 14, 1994. ELECTION OF DIRECTORS, NOMINEES:1995. Election of Directors, Nominees: H. Brown, J.E. Burke, F. Gerber, L.V. Gerstner, Jr., N.O. Keohane, C.F.C. F. Knight, T.S. Murphy, P.J. Rizzo,L.A. Noto, J.B. Slaughter, A. Trotman, L.C. van Wachem, E.S. Woolard, Jr. (SHARES CANNOT BE VOTED UNLESS THIS PROXY CARD IS SIGNED AND RETURNED, OR OTHER SPECIFIC ARRANGEMENTS ARE MADE TO HAVE THE SHARES REPRESENTED AT THE MEETING.C.M. Vest, J.B. York (Shares cannot be voted unless this Proxy Card is signed and returned, or other specific arrangements are made to have the shares represented at the meeting.) PLEASE DETACH AND PRESENT THIS TICKET FOR ADMISSION TO THE ANNUAL MEETING