NOTE >14 > STOCK-BASED COMPENSATION

Stock Option Plans
Options to purchase common stock of the Company have been granted to employees under various plans at prices equal to the fair market value of the stock on the dates the options were granted. Generally, options vest over a three- or four-year period and become exercisable either in equal, annual installments over the vesting period, or at the end of the vesting period. Options generally expire in 10 or 12 years.

Additionally, certain options were granted in 1997 and 1999 with performance-based features that required the Company's share price to reach specified targets at three- and five-year intervals from the grant date to be earned. In February 1999, the Company extended the period of time allowed to meet the specified targets for the 1997 grants by one year. The Company had 1.1 million, 1.2 million, and 1.4 million performance-based options outstanding at the end of 1999, 1998 and 1997, respectively. Subject to the satisfaction of the performance-based features, these performance-based options vest 50% in year six, 25% in year seven and 25% in year eight from the time of grant. The Company did not recognize compensation expense in 1999, 1998 or 1997 related to these options because the exercise price exceeded the Company share price at each year end.

The Company measures compensation cost under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and no compensation cost has been recognized for its fixed stock option plans. In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following assumptions were used during the respective years to estimate the fair value of options granted:

Had compensation cost for the Company's stock option plans been determined using the fair value method under SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:

Changes in stock options are as follows:

The following table summarizes information about stock options outstanding at January 1, 2000:

Associate Stock Purchase Plan
On May 8, 1997, the shareholders approved the Company's Associate Stock Ownership Plan ("ASOP"). The ASOP allows eligible employees the right to elect to use up to 10% of their eligible compensation to purchase Sears common stock on a quarterly basis at the lower of 85% of the fair market value at the beginning or end of each calendar quarter. The maximum number of shares of Sears common stock available under the ASOP is 10 million. The first purchase period began January 1, 1998. There were 0.6 million shares issued under the ASOP in 1998 and 0.7 million shares issued in 1999.

  Annual Report 1999