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Intel replaces some stock options with grants

Stock options, long a tradition at Intel, will be partly phased out. Their replacement: restricted stock units and more cash.

Intel, one of the longtime Silicon Valley proponents for stock options, is phasing them out in favor of restricted stock grants.

Starting in 2006, Intel employees will receive much more of their equity compensation in restricted stock units (RSUs) rather than options. An RSU is a full share of Intel stock that can't be sold or exchanged until it is vested. Vesting takes place over a four-year period. When vested, the shares get converted to regular shares of Intel stock.

The chief advantage for employees is they do not have to worry as much about stock price fluctuation. They receive a set number of Intel shares over the course of four years. With stock options, they would receive the right to buy shares at a set price. Then if the stock price declines, the options lose value and could even become worthless.

On the downside, employees will get about a third fewer RSUs than they would have received in options, said Gaby Thompson, worldwide director of compensation and benefits.

All Intel employees get options now. In 2006, about half of the employees with get only RSUs. The other half will get a combination of RSUs and options. The higher an executive's rank, and the more that executive's performance can affect the company's stock price, the more options he or she will get, Thompson said.

Decades ago at Fairchild Semiconductor, Intel founders Robert Noyce and Gordon Moore became surprise millionaires through options, a form of compensation that was less familiar at the time. When starting Intel, they made stock options a key part of compensation packages.

The founders have asserted that stock options have been a crucial element in compensating employees. But Intel has had to fight politicians and its own shareholders over that assertion.

In May 2004, Intel stockholders voted on a resolution asking the company to expense stock options. Historically, companies have not counted stock option grants as an expense in the year they were granted, effectively making options an expense-free method for companies to compensate employees. Critics have said that this accounting nuance has simultaneously inflated executive compensation and diluted shareholder value.

Other companies, such as Microsoft, have already reduced options in place of restricted stock grants.

Thompson, however, said Intel's shift from options to RSUs had nothing to do with the company's fight over options. Instead, it came from a review of compensation policies.

Intel will also increase the cash compensation for certain employees. In the past, the company paid the market average. Starting in 2006, Intel will try to pay above the market average. Some positions are already above the market average, those that aren't, Thompson said, will get a salary bump above and beyond any increase related to job performance.