Intel Corp is seeking permission from its shareholders to exchange worthless employee stock options, a controversial move that the world's biggest chip maker says is needed to retain critical staff.

Under the plan, which is open to all employees excluding senior executives, Intel would exchange underwater stock options -- whose exercise prices are above the current stock price -- for ones carrying carry a lower exercise price.

While the move might offer incentive to hard-working employees, it could face opposition from some shareholders who are not being similarly compensated. Other technology companies that have taken similar actions include Google Inc, eBay Inc and Advanced Micro Devices Inc.

Still, having cut some 20,000 jobs since 2006, Intel said it cannot afford to lose staff crucial to certain projects.

Many of our employees are engineers, scientists, and other specialists who are working on important multiyear research and development projects or have skills that they have developed over the years and would be difficult to replace, Intel said in a filing of its proxy statement with the U.S. Securities and Exchange Commission on Monday.

Intel also said it planned to freeze top executive salaries and reduce contributions to its employee retirement savings plan and employee stock purchase plans -- which together should lead to significant cost savings in 2009.

99 PCT EMPLOYEE OPTIONS UNDERWATER

Companies often offer stock options to employees as a way to motivate and retain staff. But the options lose value when the market price of the underlying stock falls below the exercise price, which pushes them underwater.

Intel said 87 percent of its nearly 84,000 employees are holding options, and that essentially all of those options -- 99 percent -- are underwater.

The company seeks to exchange options with an exercise price above the stock's 52-week high for a lesser number of new options that have about the same fair value as those surrendered. The plan should be cost-neutral since Intel had accounted for the cost of the options when they were granted.

Intel said it would determine the price of the new options at a later date and that they would be equal to the market value of an Intel share on the date they are granted.

The options would be subject to a four-year vesting schedule and seven-year contractual life, Intel said.

Shareholders are expected to vote on the proposal on May 20.

Intel shares rose 2.1 percent to $14.96 in pre-market trading on Monday. The stock is down more than 40 percent from a 52-week high of $25.29 last May.

(Reporting by Franklin Paul and Clare Baldwin; Editing by Lisa Von Ahn and Tiffany Wu)

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