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

Directors who are not IBM executives had been getting options for 4,000 shares plus a $100,000 retainer - at least 60 percent of which had to be used to purchase 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 percent 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, since all 12 non-executive board members already invest 100 percent of their pay in IBM stock.

The change does not apply to the lone IBM executive on the board, CEO 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 percent a year until 2015. That award accounted for 1.7 percent of all options the company doled out last year.

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 percent above the market price - meaning the grants would be worthless unless the company significantly increased its value.

With options already decreasing in the company, Bukovinsky said it made sense to apply it to the board.

"We think it's a sound principle of governance," he said. "Less reliance on stock options is conducive to encouraging longer-term strategic decisions."

Paul Hodgson, a senior research associate at The Corporate Library, a shareholder watchdog group, said IBM's latest decision appeared neither beneficial nor harmful for governance, since the company is still ensuring that board members double as shareholders.

IBM is not alone in moving away from paying directors with options. Hodgson said the practice is declining because stock options now must be expensed in financial reports and because the still-broiling backdating scandal has tarnished options' standing as a "trustworthy compensation device."