IBM Makes Sure Options Grants Give The Right Incentives To Execs

from the gotta-boost-the-stock-price dept

With all the controversy over stock option grants lately, IBM has made a somewhat surprising, but smart move in the direction of making their option grants more aligned with shareholders. Many companies give their employees options that have strike prices at or below current market prices. In fact, many companies even reprice their options when things go bad. They claim they need to do this to keep employees interested, but it sets a dreadful precedent. The purpose behind stock options is to give employees incentive to increase the value of the stock. Repricing shares means the company will fix things even if you fail. Regular shareholders certainly don't have the option of "repricing" the shares they bought, so it doesn't make sense that employees do get that right. IBM's latest move is to try to better align stock option grants with company goals. Thus, they've changed the procedure for granting options to top executives. Those shares will now have a strike price 10% above the market price. In other words, if the execs want their shares to be worth anything, the share price has to rise at least 10%. It's not a huge amount, but it puts things in the right direction. At the same time, the executives will have the opportunity to get market-priced options, but only if they invest their own money in an equal number of shares and hold onto them for three years. This is also smart. It makes sure that the executives really believe in buying the stock themselves, and by requiring them to hold the stock for three years gives them longer term incentives. This isn't a perfect plan, but it's a lot better than most plans out there. Hopefully, other companies will follow and improve upon this plan.
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  • identicon
    Mark, 25 Feb 2004 @ 9:38am

    stock options

    "The purpose behind stock options is to give employees incentive to increase the value of the stock. Repricing shares means the company will fix things even if you fail."

    That's a little over-simplified, isn't it? First, because it's hardly the efforts of employees that make stock prices rise and fall, compared to other forces like market fluctuations and the schemes (and sometime excesses) of the executives. And second because there's a second purpose to stock options: to get employees to stick around until they vest, rather than leaving for a better job (and taking their intellectual capital with them). You adjust option prices because you want a high-morale staff that's committed to the long term.

    I applaud IBM's efforts, because it's focused on executives (who do have the power to personally affect the company's stock in a significant way). My cynical expectation, though, is that if other companies adopt the plan, they'll adopt it for the rank-and-file, while top executives will have personal contracts that give them much more favorable prospects. And my dread is that the top execs at IBM will get their above-market options to pay off by initiating lay-offs, a common short-term strategy for getting a boost in the stock market that rewards executives and shareholders at the expense of the rank and file.

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