IBM to Cut off Stock Option Grants to Directors

December 21, 2006 ( - IBM Corp. announced in a Securities and Exchange Commission filing it will stop stock option grants to its board of directors while doubling directors' cash pay effective January 1.

The Associated Press reports that IBM says the move is intended to improve governance practices. “Less reliance on stock options is conducive to encouraging longer-term strategic decisions,” said IBM spokesman John Bukovinsky, according to the news report.

Paul Hodgson, a senior research associate at The Corporate Library, a shareholder watchdog group, told the AP that IBM’s decision appeared neither beneficial nor harmful for governance, since the company is still ensuring that board members double as shareholders. Companies have been moving away from the use of stock options following the Financial Accounting Standards Board’s requirement that options now be expensed in financial reports (See Stock Option Use Continues Decline ) and due to the ongoing options backdating scandal (See Corporate Carnage Continues in Stock Options Scandal with Monster Firing ).

Directors who are not IBM executives had been getting options for 4,000 shares plus a $100,000 retainer – at least 60% of which had to be used to purchase IBM stock on the open market, the AP said. IBM said it will now instead pay them $200,000 a year with the same 60% investment rule. The company also requires board members’ personal equity in IBM to equal five times their annual cash pay within five years of becoming directors.

Bukovinsky said the decision was part of the technology company’s overall reduction of equity-based compensation. The change does not apply to the IBM executive on the board, Chairman and CEO Samuel Palmisano.