IBM Shifts Options Rules For Top Executives

The move to let the company's top 300 execs cash out options only if the company's share price rises more than 10% is designed to make them more accountable to investors.
Executives at IBM Corp. will have a new string attached to their stock options--they can cash out only if the company's shares rise more than 10 percent, in an unusual move announced Tuesday by Big Blue.

IBM executives said the decision, approved at a board meeting and set to take effect immediately, would make the company's top 300 executives more accountable to investors.

"We believe this is clearly a statement about good governance," said Randy MacDonald, IBM's senior vice president for human resources. "We think it's an obvious connection to let shareholders get some upside before we take the upside."

The rule means an option's "strike" price--the price at which stock can be bought at a certain point in the future--will be set 10 percent above the market price on the day the options are granted.

For IBM executives to still get market-priced options, they must spend part of their cash bonus on buying IBM stock at the same price, and hold it for at least three years. That part of the plan will begin next year.

The new rules do not apply to the rest of the 85,000 IBM employees who get options or restricted stock. The technology giant has 315,000 employees overall.

Corporate compensation experts said the changes, taken together, were unusual and admirable, especially in light of the revelations in recent years that some companies' executives used stock options to amass stunning fortunes.

"It tells you IBM is awake and paying attention to the environment," said Alan Johnson, managing director of Johnson Associates, a New York-based compensation consulting firm.

Johnson noted that the restriction isn't huge because the options last for 10 years--plenty of time for a stock to rise 10 percent.

"That's putting the bar about two inches over the floor," Johnson said. "But it's a good gesture. It's a baby step in the right direction."

Stock options fell out of favor in many companies as they became worthless in the market downturn following dot-com fervor. Still other critics believe the cost of issuing options often is not properly disclosed to investors.

Some companies, such as Microsoft Corp., have abandoned options altogether, instead opting to sell stock directly to employees.

And as early as next year, the Financial Accounting Standards Board is expected to require companies to begin accounting for stock options as a business expense, though a formula for doing so has yet to emerge.

MacDonald would not say whether IBM definitely would keep its option program if the expense rules are enacted.

But one compensation expert, Brian Foley of Brian Foley & Co. Inc. in White Plains, N.Y., said that because of IBM's iconic role in business, the new plan amounted to a big endorsement of options.

"This now signals that it may not be it for options," Foley said. "As far as Big Blue is concerned, options have a significant place at the table."

IBM's board also authorized the technology giant to buy $4 billion of its common stock in the open market. IBM spokesman John Bukovinsky noted that the company buys back stock "all the time" and said the new move shouldn't be seen as "a barometer of anything."

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