(FORTUNE Magazine) – Less than five weeks after Louis V. Gerstner Jr. took over as CEO of IBM, FORTUNE associate editor David Kirkpatrick corralled the former chairman of RJR Nabisco for an hourlong interview on the 40th floor of IBM's Manhattan offices. It was Gerstner's first extensive talk with a journalist since arriving at IBM. Gerstner, 51, discussed getting acquainted with the company, the advantages of its size, the specter of massive layoffs, and the parlous state of morale. While he was carefully noncommittal about the plan of his predecessor, John Akers, to split Big Blue into a dozen or more smaller companies -- the so- called Baby Blues -- his views on size and decentralization gave the impression that he might be backing away. He also revealed some extraordinary steps he is taking on stock options to keep still more IBM senior managers from being raided by competitors. Excerpts:

How have you been spending your time? The day I arrived I met with the senior management group. John Akers introduced me. I talked to them for 20 or 30 minutes. I said I want to sit down in the next couple of weeks with each of you and review your business. I want you to tell me what it is you do, who are your competitors and customers, what are your strengths and weaknesses, what are your short-term and long-term challenges? I have been doing that for the last month. I've been moving all over the company, mostly listening to people. I've met with all the product units. In many cases, after a meeting in the conference room we gather a whole bunch of people in the hallway, everybody from managers to support staff people, and they ask me questions. I have been reading a lot about the company. And I've been talking to a lot of outsiders. At night I get E-mail notes. They're tailing off now, but for the first couple of weeks they ran about 200, 250 a day. I take them home and read them. Most of them are from people suggesting things they think ought to be done. Many give me opinions on IBM's strengths and weaknesses.

What are the main themes? The No. 1 message is, ''Let's get the fix done quickly in the company.'' For reasons that are not clear to me, nor do I care to figure them out, the adjustment period that IBM has been going through in trying to deal with changes in its markets is now carrying into its second or third year. The longevity of that change is as dysfunctional as the seriousness of the change.

What are your aims? I'm beginning to develop a four-part strategy for the short term. First, get the company right-sized so we can say to customers, employees, and shareholders that we're not just salami slicing here. We're going to get that behind us. Second, we need to spend a whole lot more time with customers. Every one of the senior managers has a little assignment from me regarding customers. We're going to try to squeeze out whatever arrogance remains in the selling approach of IBM. And we're also going to start talking to our customers about what we think we can do to define for them the computing model of the Nineties, which right now nobody is providing. IBM used to be the company that did that. IBM could be the company to do it again. Third is to figure out the handful of big strategic issues we need to wrestle with and resolve. And the final priority is employee morale and incentives.

A year ago, John Akers described to me specific two-year financial goals for IBM -- return on shareholders' equity of 18%; return on assets of 8%; sales, general, and administrative expenses down to 23%; and $4 billion in free cash flow. Are you sticking to those goals? That's the first time I've heard them, so I'm not sticking to them. I haven't spent any time setting goals. I'm spending my time trying to understand our competitive position and how we're serving customers. Out of our competitive strategy will come the right set of financial objectives.

What kind of timetable do you have in mind? It's as soon as possible. It would not be believable that after 30 days somebody could lay out a timetable for changing a company of this size. Besides, I really do want to disabuse your readers of the concept that there's going to be this grand plan that's going to emerge from the new management at some point. It isn't going to happen. It's time for IBM to perform and then talk, instead of talk and then perform. We are going to be very, very parsimonious about talking, and we are going to be maniacal about doing what we want to do.

Has anything surprised you about IBM? While I was prepared for the size and complexity of this company, it still is underscored every day in all that I see and do. You go to Europe and realize that IBM Italy is the fifth-largest company in Italy. IBM France is one of the top dozen companies in France. You read about the new product introductions that IBM collectively announces each day and you begin to appreciate how big and strong and complex this company is.

Does perceiving that strength reduce your sense of crisis? I don't have a sense of crisis.

John Akers used that word two years ago. I have a sense of urgency that never changes, whether we're doing well or we're doing poorly. I think an institution should always have a sense of urgency. But by no means do I think this company is in crisis. I think there are strengths in this company that can't be duplicated by other companies. The question is, How do we build on those strengths and at the same time get rid of impediments and areas of weakness?

Are you taking any specific steps to change IBM's corporate culture? I'm almost not trying to understand IBM's culture. In a sense I may be disrespectful. Parts of that culture are very important, and I'm trying to reinforce those like crazy: a high degree of attention to the customer, sensitivity to the individual inside the company, dedication to quality. Those values have been part of cultures I've created elsewhere. But I'm not interested in the part of the culture that defines processes as opposed to values. I don't want anybody to tell me about the processes.

The word ''complacency'' is often used to describe IBM's culture. I haven't reached a conclusion about whether there is or isn't complacency. All I know is that we're going to figure out some things that have to get done and then we're going to do them very fast. Look, I refuse to say, ''Let's go back and decide all the things that are wrong with IBM. What did we do wrong?'' I have not uttered those words since I've been at IBM. I am not interested in our putting on a bunch of hair shirts.

IBM employees are worried about more layoffs. Some predictions are that 80,000 more will go. Others say everybody will take a 10% pay cut. Is either rumor accurate? A 10% pay cut is one of the dumber ideas in the world. It reminds me of when I was a child and I had three brothers. My mother was big on castor oil. If one of us got sick, he took two teaspoons. Giving everybody a 10% pay cut is like calling in the other three brothers and saying now we're all going to take a quarter of a teaspoon of castor oil. Well, no, the problem is that one of the children needed two teaspoons.

And layoffs? Given the uncertainty in parts of our company where we've gone through downsizing, there are all kinds of rumors. An environment full of anxiety is where rumors breed. I have no idea how many more people or how many more plants or how much more cost has to come out of the company. I've told my management team that's their job to figure out based on the economics of their business and how their best competitors perform. And that's a build-up-from- the-bottom exercise.

At the business unit level? Absolutely. To grab a number out of the air from the altitude of 60,000 feet at corporate and drop it down on the organization is antithetical to my management style. Everybody who runs a business or staff in this company is going to be responsible for creating shareholder value. And I'm not going to tell them how to get there.

It sounds like you advocate even more decentralization at IBM. I don't think getting the economics right in a business is necessarily the same thing as decentralization. There is a misconception that small is always more beautiful than big. Just fragmenting an organization does not create conditions sufficient for success. Given a black and white choice between centralization and decentralization, I am a dyed-in-the-wool decentralist. But I don't want to be forced into that binary choice. The job of corporate in IBM is to try to decentralize the responsibility to serve customers, to get as close to the customer as we can. Our second job is to figure out how to bring the power of the entire company to those decentralized units with a minimum of bureaucracy. I don't know yet what the balance should be between the two.

What are you doing to boost morale? The answer to morale is action. And the most important action is to get downsizing behind us. Beyond that, at the board meeting in Tampa ((on April 26)), we took a very unusual step, something I would probably never have done in different circumstances. We offered employees a chance to swap current stock options for new options. This doesn't include the top two dozen or so senior officers. Senior management lives with the options they've got.

How many other people have options? About 1,200. Competitors are coming after my high-talent people right now. We know it. Some of them have lists of our key people. They're being picked off. I wasn't here when the stock dropped from whatever to 45, but my job for the shareholders is to make it go the other way. I have to deal with what I've got, and what I've got is an employee group with absolutely no incentive to stay here because every one of their options is under water. The new program is very unusual. I know of no other like it. You do not get a 1-for-1 swap. On average, you've got to turn in 2 1/2 old options to get one new one. You've got to turn in ten of the oldest options to get one new one. And these options have different vesting schedules from typical IBM options. You must stay two years before any of them vest and four years for them to vest completely. In other words, I'm putting handcuffs on you to be part of the new team. Also, the stock must increase 50% from Friday, April 23 ((when it averaged $47.88)), and stay there for 30 days before the options become vested. The shareholders have to see some significant uptick in price before you get any vesting.

Is there a time limit? Well, the options last ten years. I suspect that most of the management won't be here unless that uptick happens by then.

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