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Redback tells execs to swap pay for stock

In an effort to trim costs, the high-speed equipment maker is requiring vice presidents and senior vice presidents to take a temporary pay cut in exchange for stock options.

Redback Networks has required some executives to take a 10 percent to 25 percent temporary pay cut in exchange for stock options. It's also allowing employees to trade in some existing options for new ones that presumably will be worth more money.

The maker of high-speed Internet gear and fiber-optic equipment for metropolitan networks reported a $37 million loss in its most recent quarter, slightly less than analysts had expected, but reflecting a continued slump in spending by its phone carrier customers.

The salary-reduction program, detailed in a filing with the Securities and Exchange Commission, will be effective between Aug. 16 and March 31 and will apply to "its executives and certain other employees who elect to participate."

The number of options given out will be determined by dividing the reduction in salary by two-thirds of Redback's stock price on the day of the grant. The option exercise price will be one-third of that market price.

The program is mandatory for the company's 22 vice presidents and senior vice presidents, a spokeswoman said. It was open to around 800 eligible employees; seventy-eight people signed up for it on their own accord.

The employees' salaries will return to their previous levels in March, the spokeswoman said. The program is expected to save the company $400,000 per quarter over the next two-and-a-half quarters, she said.

"The reason that we looked into this program had a lot to do with future participation into the company's upside rather than savings. If we were looking to reduce costs we would have enforced it and could have done what other companies are doing, with forced cutbacks and four-day work weeks," said Chief Financial Officer Dennis Wolf, who is also a senior vice president.

Other tech companies such as Hewlett-Packard have used salary cuts to trim costs. HP's salary cuts drew fire after the company laid off employees.

Redback said it expects to record deferred stock compensation equal to the difference between the exercise price and the fair-market value on the grant date, amortized as an expense over the vesting period.

Separately, Redback announced that it was authorizing an option-exchange program, allowing employees to cancel options granted before Aug. 1, 2001 that have an exercise price greater than $6.50 per share. In return, employees will receive new grants of nonqualified stock options with a five-year term.

Options with an exercise price between $6.50 and $40 per share will be exchanged one for one; options with an exercise price between $40.01 and $80 per share will be exchanged one for five; and options with an exercise price greater than $80 will be exchanged one for 10.

Option-exchange programs have become popular with companies as a motivational tool for employees whose options are "underwater," that is, the exercise price is higher than the value of the stock.

Redback said that if all its employees participate, around 24 million existing options would be replaced with approximately 16 million options.

As much as 85 percent of employee options at Redback are underwater, estimated C.E. Unterberg Towbin analyst Martin Pyykkonen, "with the only exceptions being those from Redback's pre-IPO stage and employees who came over from the acquisition of Siara Systems last year."

He added that Redback should be in a position to name a new Chief Executive "sometime in the next several weeks." Former Chief Executive Vivek Ragavan left in May.