The Director Compensation Project: IBM

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation. We are including companies from 2009’s Fortune 100 and using information found in their 2009 proxy statements. In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence. While substantially the same, there are some minor differences between NYSE and NASDAQ rules that are worth noting.

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards. Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii). This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes all compensation. Rule 303A.06 requires that, in addition to the general independence standards, audit committee members must comport with the requirements of Exchange Act Rule 10A-3 (C.F.R. §240.10A-3), also known as SOX 301.

One can see some of the effects of these rules when looking at the director compensation table from IBM (IBM-NYSE) 2009 proxy statement. According to the proxy statement, the company paid the directors the following amounts:

Name*	Fees Earned or Paid in Cash ($)	All Other Compensation ($)	Total ($)
A.J.P. Belda**	93,334	195	93,529
C. Black	214,167	24,403	238,570
W.R. Brody	208,334	2,325	210,659
K.I. Chenault	208,334	14,697	223,031
J. Dormann**	66,112	517,405	583,517
M.L. Eskew	213,375	7,778	221,153
S.A. Jackson	208,334	21,365	229,699
M. Makihara***	66,112	561,589	627,701
T. Nishimuro**	63,334	46	63,380
L.A. Noto***	167, 195	1,513,345	1,680, 540
J.W. Owens	208, 334	15,559	223,893
J.E. Spero	208,334	11,470	219,804
S. Taurel	129,800	52,140	266,307
L.H. Zambrano	208,334	9,603	217,937

* This table does not include compensation paid to management directors such as Chairman and CEO Samuel J. Palmisano.

** Mr. Belda joined the board in July 2008 and Mr. Nishimuro joined the board in September 2008.

*** Mr. Dorman and Mr. Makihara retired in April 2008. Mr. Noto retired in October 2008

Director Compensation. IBM’s board met ten times in 2008. All directors attended at least 75% of the board meetings and over 90% of board and committee meetings combined. Effective November 1, 2008, the annual retainer for non-management directors increased from $200,000 to $250,000 and retainers for committee chairmen increased to a range of $5,000-$15,000. The average compensation to non-management directors was $134,850. Directors are required to defer 60% of their retainers in Promised Fee Shares (PFS), each with the value of one IBM common share; however, during 2008, all directors elected to defer 100% of their retainers to PFS. IBM ended its stock option plan (DSOP) effective January 1, 2007, for all non-management directors. IBM expects non-management directors, within five years of initial election to the Board, to have stock-based holdings in IBM equal in value to five times their annual retainer. IBM has two matching programs available to directors. In the first, the company will provide specified matches for director donations to certain charitable institutions and in the other, the corporation will pay for 80% of the price of a personal computer for a school if the director pays the first 20% of list price.

Director Tenure. IBM directors serve one year terms. Of the fourteen non-management board members in 2008, two were new to the board and three retired. Ms. Black has the longest tenure of any IBM board member, serving on the board since 1995. Several directors also sit on other boards. Ms. Black serves as a director to The Hearst Corporation, The Coca-Cola Company, the Advertising Council, she is a member of the Council on Foreign Relations, and is a trustee of the University of Notre Dame. Mr. Eskew is also on the board of United Parcel Service, Eli Lilly and Company, 3M, and chairman of the Annie E. Casey Foundation.

Management Director Compensation. Chairman and CEO Samuel J. Palmisano received $28,542,392 in total compensation for 2008. This compensation was comprised of $12,578,433 in total stock compensation, $5,500,000 in non-equity incentives, a salary of $1,800,000, and various other types of compensation. Mr. Palmisano’s compensation increased by $3,411,664 from 2007 to 2008. Included in his compensation was $493,881 worth of personal travel on company aircraft, personal use of company cars, and payment for his personal security. Mark Loughride, IBM’s Senior VP and CFO, earned $7,873,186 in total compensation. Other expenses for Mr. Loughride totaled $363,554 and were similar in nature including personal travel on company aircraft.