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

Under the plan, Intel would exchange employees' underwater stock options -- whose exercise prices are above the current stock price -- for new options at current market prices. The offer would be open to all employees excluding senior executives.

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

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 said the plan should be cost-neutral since it had accounted for the cost of the options when they were granted. Under the plan, options with an exercise price above Intel's 52-week high will be swapped for a lesser number of new options that have about the same fair value as those surrendered.

Chairman Craig Barrett told Reuters he anticipates Intel shareholders will see the big picture, and the value of retaining key employees, particularly in troubled economic times.

I don't think there'll be shareholder backlash, he said in an interview on the sidelines of a panel on wireless technology's role in health care in Washington D.C.

Intel shares rose almost 6 percent on Monday, riding a bullish wave in broader markets.

So far, shareholders do not appear to be troubled by the plan, since they have more important strategic concerns including the status of microprocessor demand and the health of the personal computer market, according to Stifel Nicolaus analyst Cody Acree.

As far as the lists of concerns, the stock option re-pricing falls fairly far down the list, he said.

99 PCT UNDERWATER

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

In 2008, Intel Chief Executive Paul Otellini earned $12.1 million in total compensation, including $4.8 million in cash.

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.

Motorola is also going to ask shareholders to approve a repricing of its employee equity awards, according to a regulatory filing on Monday.

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

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 May 20.

Intel shares rose 87 cents to close at $15.52 on Nasdaq. As of Friday, the stock was down more than 40 percent from a 52-week high of $25.29 last May.

(Additional reporting by Clare Baldwin in San Francisco and Kim Dixon in Washington; Editing by Lisa Von Ahn, Tiffany Wu, Tim Dobbyn, Richard Chang)

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