IBM Revises Options Plan; Authorizes Buyback

Updated from 12:12 p.m. EST

In a novel shift, IBM (IBM) said Tuesday that its board has adopted a new options policy that increases the incentive for top executives to try to boost IBM's stock price.

Starting immediately, IBM will only issue "out-of-the-money" stock options with a strike price 10% higher than the market price on the day the options are issued. A strike price is the fixed price at which shares may be purchased in the future.

The shift means executives won't realize any gains from the options until the share price rises at least 10% from the date of the grant (and after the options are vested).

Also, starting in 2005, IBM senior executives will be able to acquire options at market prices only if they first buy shares of corresponding value with their annual cash bonus and then hold those shares for three years. That would be the only exception to the new policy of issuing options at 10% above market rates.

The options policy changes will affect only the top-ranking 300 IBM executives. Most executives receive stock options grants every year as part of their compensation.

The company said the changes won't affect a separate program in which the highest-performing employees receive annual options grants.

Also Tuesday, IBM said its board has authorized a $4 billion expenditure to buy back its common shares. The company said it will buy back its stock in the open market or in private transactions from time to time, depending on market conditions.

The dollar value of the latest authorization is comparable to buybacks in previous years. In calendar year 2003, IBM spent $4.4 billion on share repurchases. It spent $4.2 billion on share buybacks in 2002 and $5.3 billion in 2001.

Share buybacks effectively help to increase earnings per share by reducing the number of outstanding shares, while offsetting the dilution that results from the issuance of stock options.

In recent trading, IBM was up 76 cents, or 0.8%, to $96.72.

>To order reprints of this article, click here: Reprints