As the business world welcomes Virginia —Ginni Rometty to the helm of International Business Machines (IBM) — her appointment was announced yesterday — much of the attention has been on the arrival as IBM’s first female chief executive, and one of the few women running major U.S. companies. We salute her for that as well.
But as someone surely said before us, for every hello there’s a goodbye, and in this case it’s goodbye to Samuel Palmisano, who’s stepping down as chief executive of IBM after nearly a decade. The company said he’ll retire when Rometty takes over the CEO’s spot on January 1, but will remain as chairman, apparently indefinitely. Palmisano has had a good run, and there’s something to be said for quitting while he’s ahead. Yet after leafing through the company’s proxy and other filings, we couldn’t help but notice a few things about Palmisano’s timing.
For one thing, he’s retiring not long after he turned 60. That’s fortunate, because it seems to make him eligible to receive payouts of any stock options and restricted stock units (including performance-linked RSUs) that are at least a year old and haven’t already vested. In fact, he conveniently became eligible for that cash-out upon turning 60 with 15 years of service at IBM. (The 15-year hurdle is no problem: Palmisano started at IBM in 1973, when he was in his early 20s.)
The board could nix the payout, as it turns out. But assuming it doesn’t, this provision means big bucks for Palmisano. The proxy estimated the value of his unvested stock options at $47 million, and his unvested performance-restricted stock units at $18.7 million, as of December 31 last year. IBM’s shares have only gone up since then, and additional equity grants have passed the one-year cut-off, so we wouldn’t be at all surprised to learn that they’re worth even more now.
This retirement trigger, incidentally, is designed to “ensure that the interests of IBM’s senior leaders are aligned with the Company’s long-term interests as they approach retirement…” We’re not quite sure how it aligns an executive’s interest with the company’s long-term interests if he can cash out his equity on retirement, which after all is something he has a lot of control over, but presumably the board put more thought into this than we have.
(This also isn’t the first coincidence of good timing when it comes to retirement and Palmisano’s career. We notice that IBM closed its older retiree-health plan, but grandfathered in those who were within five years of meeting certain criteria by mid-1999, including either 30 years of service with the company, or 15 years of service and age 55; Palmisano cleared that first hurdle in 1998, just in the nick of time.)
Although the equity acceleration is the biggest chunk of Palmisano’s potential retirement payout, the proxy lists more, including $1.5 million a year for life under IBM’s Supplemental Executive Retention Plan (which essentially functions as an additional pension plan; the total present value value at year-end was about $20 million). He’d also get $4.9 million a year in cash for five years, and $6.3 million a year for five years in IBM shares, from the company’s deferred compensation program, again calculated as of December 31. (His total deferred-comp balance then was $56.1 million.)
Deferred comp, of course, is made up in part of the executive’s pay, set aside in a sort of 401(k) plan on steroids; but as with a lot of executive plans, much of the money actually comes from IBM, not Palmisano’s deferred pay — last year, for example, the company matched Palmisano’s $378,300 in deferrals, and threw in another $252,200 more, in addition to crediting him with $2.6 million in what amounts to interest on his existing balance.
Then there’s Palmisano’s pension: As of December 31, it was worth some $29.8 million, or about $3.2 million a year for life.
Our rough estimate for the total present value of Palmisano’s exit package: a little over $170 million. And that’s ignoring the fact that most of the underlying calculations date back almost a year, to December 31. It’s undoubtedly higher now. (IBM also doesn’t make it easy to add up: The usual “payments upon termination” table in the proxy confusingly lists some figures as annual amounts and some figures as lump-sum or present-value amounts, which only becomes clear in the footnotes. To get the total, you have to look at a handful of separate tables.)
In the end, of course, whether Palmisano gets all of that now or later depends on whether his retirement as CEO, while staying on as chairman, is enough to count as a retirement under IBM’s rules (and the board’s discretion, for some elements). In our experience, it’s usually more than enough — and this is the same IBM, after all, that showered departing board member Cathy Black with $3.3 million, as we footnoted in March.
Nonetheless, we’ll keep an eye out for the filings that clarify this — as well as the ones that spell out Rometty’s new pay. Given that her total compensation was $6.4 million last year as a senior vice-president, $1.9 million of it in cash, we have no doubt it’ll make for good reading all around.
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