IBM Shifts Options Rules for Top Execs
By BRIAN BERGSTEIN
The Associated Press
Wednesday, February 25, 2004; 1:19 AM
In an unusual move, IBM Corp. is adding a wrinkle to stock option awards - executives can cash out only if the company's shares gain more than 10 percent.
IBM says the decision would make the technology giant's top 300 executives more accountable to investors. The change was approved at a board meeting Tuesday and was to take effect immediately.
"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."
© 2004 The Associated Press