IBM Announces Significant Changes

IBM Announces Significant Changes in Senior Executive Compensation Policies

ARMONK, N.Y. -- Feb. 24, 2004 -- IBM today announced a series of changes that further align the equity-based compensation of its senior executives with the interests of shareholders.

The changes were approved today by the Compensation Committee of the IBM board of directors.

One change will ensure that the company's senior executives benefit from outright, annual grants of stock options only after shareholders realize at least 10 percent growth in their investments.

In addition, IBM senior executives will be able to acquire market-priced stock options only if they first invest their own money.

The new policies, which apply to Chairman and Chief Executive Officer Samuel J. Palmisano and the top 300 IBM executives worldwide, will begin in 2004.

IBM said it believes it is the first major company, inside or outside the information technology industry, to set such requirements for equity-based executive compensation.

Details of the changes are as follows:

Premium-priced stock options: Effective immediately, IBM will only make outright, annual grants of stock options to senior executives with a strike price (the fixed price at which shares may be purchased in the future) that is 10 percent higher than the market price on the day the options are issued.

As a result, IBM executives will not realize any value from these so-called "out of the money" options until IBM's share price increases more than 10 percent from the date the options are issued and the options are vested.

"Buy first" market-priced options: The only way IBM senior executives will be able to acquire stock options at market prices is if they first purchase IBM shares of a corresponding value at the market price with their own money. This program will begin in 2005.

For example, in order for a senior executive to acquire market-priced stock options with a target value of $18,000, the executive must first invest a portion of his or her annual cash bonus to purchase $9,000 of IBM stock. The executive then must retain ownership of all of the purchased shares for at least three years in order not to forfeit the entire option grant.

While IBM senior executives already have minimum company stock ownership requirements, this unique, "buy first" policy further encourages executive ownership of the company -- long an important practice at IBM -- while ensuring they experience the same ups and downs of ownership as shareholders.

"IBM has a longstanding record of progressive, responsible corporate governance. The actions approved today by the Compensation Committee further strengthen the personal responsibility and accountability the company expects of its senior executives, and are consistent with IBM's core values," Mr. Palmisano said. "These innovative programs continue to balance our shareholders' interests with executive rewards, by requiring that IBM executives assume the same risks as our shareholders. The changes also ensure that IBM's leaders are compensated only when the performance we deliver first rewards our shareholders."

Senior executive compensation at IBM is based on company, business unit and individual performance. Equity in the company, such as stock options, is generally granted annually to most executives as part of their compensation and as a retention tool. Options are also granted annually to high-performing employees as a retention tool; that program will not be affected by these changes.

Option recipients must wait four years before earning the right to exercise 100 percent of an option grant. Options expire after 10 years.

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"GRIST Report: IBM Revamps Equity Compensation Program," Carol Silverman and Susan Eichen of the Washington Resource Group, March 1, 2004

New York Times article posted on Feb. 29, 2004

Mercury News article posted on Feb. 25, 2004