IBM will end option grants to its directors

IBM Corp. is cutting off stock option grants to its directors but doubling their cash pay, calling the move an improvement in its governance practices.

The decision, disclosed in a Securities and Exchange Commission filing Wednesday, takes effect Jan. 1.

Directors who were 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 buy IBM stock on the open market.

Now IBM will stop giving those directors options and instead pay them $200,000 a year. The same 60% investment rule will apply, though the technology company also requires that within five years of becoming directors, board members’ personal equity in IBM equal five times their annual cash pay.

IBM spokesman John Bukovinsky said ending options shouldn’t make it hard for directors to achieve that five-year proviso because all 12 nonexecutive board members already invest 100% of their pay in IBM stock.

The change does not apply to the lone IBM executive on the board, Chief Executive and Chairman Samuel Palmisano. Options account for a sizable portion of his pay -- he was granted 230,000 in 2005, which would be worth $11 million if IBM stock appreciates an average of 5% a year until 2015.

Bukovinsky said Armonk, N.Y.-based IBM decided to end options for directors as part of the company’s overall reduction of equity-based compensation. In 2004 IBM began doling out many options for its top 300 executives at 10% above the market price -- meaning the grants would be worthless unless the company significantly increased its value.

IBM shares closed unchanged at $96.