IBM Performance vs. Execs Compensation, Is There Something Wrong?

The compensation of executives should be in-line with their company performance. It’s not always easy to do a fair evaluation knowing executives have often to take decisions to improve performance on the long term that may have a negative impact on the short term.

Let’s take IBM as an example. IBM will celebrate its 110th birthday this year and it has been one of the most iconic tech corporations. Everybody remembers Stanley Kubrick named its artificial intelligence machine HAL…

In 2012, Ginni Rometty was appointed as CEO of the company. Transforming a large company like IBM amidst the cloud revolution was likely one of the toughest CEO jobs ever. In January 2020, IBM announced that Rometty is stepping down as CEO and will be replaced by Arvind Krishna in April. She will remain executive chairwoman until Dec 31, 2020.

IBM recently announced its financial results for its fiscal 2020. The company reported a 4.5 per cent decline in turnover to $73.6bn. The target had been $80bn. Similarly, the net profit target was $10.7bn but it came in at $7.8bn. The operating cash flow metric of $14.8bn also came up short at $13.8bn.

According to the same document Krishna made $17m. As for Rometty, she was awarded a total of $21m. All the details of the compensation including other executives can be found here.

As I said in my introduction, focusing on a single year to evaluate performance is unfair. So, let’s check IBM performance since 2012. In 2011, IBM revenue was around $107bn and has continuously fallen since to reach $73.6bn in 2020. The net income that was around $16bn was twice less last year. Accenture, one of IBM’s competitors in the IT services business, multiplied its revenue and net income by more than 50% over the same period.

Was it better for shareholders? Not really… The following chart compares IBM stock performance to S&P 500 over the 2012-2020 period. Accenture stock was multiplied by 5 over the same period.

The following graph compares IBM performance with other large-cap US tech stocks.

Although very expensive ($34bn), the acquisition of Red Hat that was done by Rometty in 2019 is a great move for increasing IBM’s cloud market shares. However IBM has now a net debt of $52bn compared to $25bn in 2012. Other long term investments in promising areas like quantum computing, blockchain and AI that Rometty did under her tenure may generate growth in the future but the last fiscal year has not started to demonstrate it yet.

In the meantime, IBM should seriously think about a new compensation plan for its executives. In 2018, IBM was criticized by Wall Street for its execs not being financially rewarded to drive the top line. Last year IBM reintroduced a total revenue component to comprise 20 per cent of execs' pay metrics. For 2021 it has been increased further to account for 50 per cent of the scoring that determines leaders' annual incentive pay and 40 per cent for the performance share unit. Also new is the Diversity Modifier, intended to motivate execs to ensure diversity in the workforce.

Let’s see if the exec compensation in 2021 will better reflect the performance of the company…

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