International Business Machines (IBM)

Proxy released 3/9/2015 Big bonus at IBM: The board approved annual incentive at 90% of her $4 million target for CEO Virginia Rometty, for a total of $3.6 million. Last year Rometty recommended forgoing her annual bonus.  For 2014, as noted in the proxy statement, “Financial results were lower than target.”  Notably, the company’s revenue declined, net income and free cash flow also declined.

The proxy discloses that the overall funding for the annual incentive plan was to be based 60% on operating net income, 20% on revenue growth, and 20% on free cash flow, but does not state the actual targets and whether they were achieved.  However, it notes that:  “the Compensation Committee approved an upward adjustment to the score in light of strong results in client satisfaction and workforce development in support of the Company’s transformation.”

The repositioning and investment in research by the board and management may well be wise choices resulting in a significant transformation.  If so, CEO Virginia Rometty will be handsomely rewarded with the increased value of her options and performance share units. An annual incentive, however, is designed -- in the words of the proxy statement -- to ‘motivate strong short-term business performance.’ IBM shareholders may balk at this bonus. These decision may pay off in the long run, in which case that is when the rewards should be paid.

No matter how IBM shareholders fare this year, Rometty will do fine. Her base salary for 2015 has been increased to $1.6 million, and her target annual incentive has been increased from $4 million to $5 million. Presumably this bonus could also be given despite failure to meet financial goals.