Revisiting IBM’s Palmisano equation…

Back in October, when International Business Machines (IBM) announced that Samuel Palmisano would step down as chief executive but remain chairman, we footnoted the enormous exit package he was eligible to collect pretty much any time he wanted.

Because of the timing, we were forced to use months-old data. But yesterday, IBM filed its latest proxy, with new figures, though the company continues to use one of the most misleading disclosure gimmicks we’ve seen in a long time. We also talked with a company spokesman, who was eager to let us know how IBM sees the package. More on that shortly.

The bottom line: When Palmisano ultimately leaves IBM, he’s very likely to receive a package of cash and stock of $224.7 million, using December 31, 2011, data. That’s all in — options, restricted stock, pensions, deferred compensation, bells and whistles — and he’ll get it whether he retires, resigns or is shown the door under anything short of serious scandal. (That said, it seems pretty unlikely that he’ll be shown the door, given company performance.)

Palmisano’s payday breaks down into several buckets. One is equity: A whopping $91.9 million of the total (about 41%) consists of stock options he’s accumulated but hasn’t exercised over the years ($58.1 million), plus restricted shares that haven’t yet vested ($33.8 million). Note that IBM excludes from these totals a chunk of equity awarded in 2010 and 2011, because it isn’t yet certain that the company will hit the necessary performance targets for it to vest.

Then there’s the money Palmisano would get more or less just because he’s leaving. That works out to about $29 million. Of that, $22.5 million comes from a “retention plan” — a misnomer if we ever saw one, as we pointed out in our previous post. The remaining $6.5 million is a little tricky: It’s essentially his annual bonus for the year just ended, since he would have been entitled to it if he had left on December 31. In some ways, it’s more like regular pay than severance, but in the end, it’s such a small amount, it doesn’t exactly tip the scale much either way.

The final bucket consists of retirement benefits: just shy of $104 million, made up of his regular pension ($1 million), his supplemental executive retirement plan (or SERP, $34 million), and his deferred-compensation account ($68.6 million).

Now, there are a lot of ways to dissect executive pay, and this isn’t how IBM would prefer to do it. We usually let corporate disclosures speak for themselves — after all, they’re supposed to present a clear and complete picture for ordinary investors. In this case, though, an IBM spokesman reached out to us, presumably on the basis of our previous post, so we wanted to hear him out.

IBM prefers to count two basic buckets: Retirement or departure benefits, which it would interpret narrowly as about $56 million, counting pensions and that weird retention plan. The rest falls into a category best characterized as “stuff Palmisano could have cashed in on already but has chosen not to.”

To a point, we see where IBM is coming from, since Palmisano could have cashed in his options much sooner (he tends to exercise them just before they expire). But here’s the thing: some $33 million of the payout comes from shares that haven’t vested yet — they would continue to vest after he leaves, under terms detailed on page 64 of the proxy that are an exception to the company’s basic principle of forfeiture on departure. Overall, Palmisano has $93.4 million in unvested restricted stock awards from the last three years, including the ones that haven’t met performance thresholds yet, and the proxy says $33 million of it would vest if he had left on December 31. We think it’s fair to count that as part of an exit package.

We also don’t entirely buy the old argument that an executive’s deferred compensation is merely previously earned pay, and thus shouldn’t be counted as future compensation.

For one thing, Palmisano’s cash deferrals in the most recent years make up a tiny part of the growth of his account. In 2011, it was just 5.1% — he deferred $633,330 of his pay, while IBM contributed nearly $1.1 million and promised to pay $10.7 million in interest (for 2011 alone). In 2010 the equivalent figure was 5.4%. Over most of the last five years, the figure has ranged from 3% to 17%, though in one year he contributed $2.9 million in stock (which doesn’t earn matching contributions). Over the longer term, the company notes on page 24 of the proxy, about 47% of the account consists of his own deferred compensation (cash and stock), while the rest is direct company contributions (about 6%) and company-paid interest pegged to various market returns (primarily IBM stock), at 47%. So most of it is still money IBM has chipped in over the years. True, he could have taken the pay earlier and invested it elsewhere, but he didn’t, and so IBM is on the hook for pay, contributions and interest. That’s compensation for services rendered, just like a pension or “retention plan” benefit is. IBM’s spokesman stressed that the deferred-comp plan is open to many other people at the company.

Then there’s that non-disclosure gimmick we mentioned. Once again, IBM mixes apples and oranges in a key table outlining what executives would collect under various departure circumstances. Three columns are lump-sum figures — 2011 bonus plus the value of option and restricted-stock cash-outs — and three columns lay out annual payments he would receive for life or over 5 years. The present-value figures, which we used in our calculations above, are in tables earlier in the filing. But you have to read several footnotes to figure out the distinction; if you just add up the columns, you get a massively understated figure. Any company of that size, with the luminaries it has on its board, should know better. IBM’s spokesman says the company follows SEC rules in presenting that table, but we’ve seen other companies convert annual income into present values for the purposes.

Finally, while we’re combing through IBM’s proxy, we also want to call attention to a couple of perks that figure in Palmisano’s 2011 pay — which totaled some $46 million, all-in, and was summarized in a bare-bones way by Bloomberg Businessweek.

The total includes $489,327 in personal flights on corporate aircraft, which is pretty impressive. But there’s also a fascinating description of a perk that seems to guarantee a car and driver not only for Palmisano, but also for other (unspecified) family members, even when Palmisano isn’t around. Here’s the language, which comes after a line saying Palmisano is taken to work every day by a company chauffeur or car service (emphasis ours):

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

We’re told this isn’t supposed to mean that Palmisano’s family gets a free family car and driver, but rather that it’s intended to reflect family transportation in conjunction with the executive’s activities, while allowing for some flexibility (eg, if they take a car to meet him somewhere). IBM doesn’t break out what the car perk is worth, but does note that it reimbursed Palmisano $13,224 just for the taxes he owed on company-paid “family travel to and attendance at Company-related events, and commutation expenses…”

The fact remains that all of this is a lot more entertaining because IBM is doing well. If Palmisano were sitting on a money-bomb like this after having driven IBM’s share price into the ground, we would expect some outrage. As it is, IBM’s market capitalization rose by $85 billion while Palmisano was chief executive, and that’s no small thing for shareholders. The company’s share price has risen 91% since mid-March 2002 (with most of the gains since 2008), far outstripping the S&P 500.

Shareholders will decide whether Palmisano is worth this kind of pay and exit package. We will say this: IBM provides pretty good detail in its proxy, but the way it mixes annual and lump-sum figures in the termination-payments table is disappointing, and borders on misleading. Hopefully next year IBM will do better.

Image source: Golden Nest Eggs via