Changes to Executive Compensation Programs for 2011

Historically, the base pay of our executive officers generally has been below the median of our peer group on average. Annual incentive cash targets were generally set at a higher competitive position so that total cash compensation would be generally at the 65th percentile of our peer group on average, assuming a 100% annual incentive cash multiplier for the EOIP. This approach was intended to put more pay "at risk" for our executive officers to create a more compelling incentive to achieve aggressive business goals. In 2010, two comprehensive reviews of our executive compensation philosophy and programs were conducted by external consultants. These reviews concluded that this highly leveraged cash compensation philosophy provided no clear benefit to the company while simultaneously creating a number of unnecessary complications. Additionally, both reports found that Intel's equity compensation programs for executive officers, while competitive in aggregate value, had over time become overly complex, with a myriad of terms and conditions, and extended equity vesting periods that were longer than those of our competitors, resulting in the participants discounting their value. The general conclusion was that these factors undermined the effectiveness of the entire executive compensation program. The Compensation Committee worked with Intel's management to make revisions in cash and equity compensation programs for 2011 to address the concerns highlighted in the studies.

Changes to Cash Programs

For 2011, the Compensation Committee implemented changes to executive officer cash pay with the objective of improving market competitiveness of base salary without altering the total cash compensation. To accomplish this goal, base salaries were increased, along with a corresponding decrease to annual incentive cash target amounts, such that total cash compensation does not change. Specifically, the competitive position for base salary was increased to the 50th percentile of our peer group, while the competitive position for total cash compensation remains at the 65th percentile. This reallocation of base salary and annual incentive cash was also generally consistent with 2011 compensation decisions for most of the company's other senior personnel.

The conversion rates under which we adjusted base salary and the annual incentive cash target were representative of the payouts over the last two years, which have resulted in an annual incentive cash target conversion factor of 133% and a semiannual incentive cash conversion factor of 8%, as detailed in the example below.

Current
Base
Salary at
25th
Percentile
($)
  Current
Annual
Incentive
Cash Payout
at 133%
($)
  Current
Semiannual
Incentive
Cash
Payout at
8% ($)
  Current
Total
Incentive
Cash Payout
($)
  New
Base
Salary
at 50th
Percentile
($)
  New
Annual
Incentive
Cash
Payout
at 133%
($)
  New
Semiannual
Incentive
Cash
Payout at
8% ($)
  New
Total
Incentive
Cash Payout
($)
                             
520,000   1,960,000   80,800   2,560,800   700,000   1,769,412   91,388   2,560,800

Changes to Equity Programs

In 2011, significant changes were made to the equity programs for executive officers to simplify and streamline the programs. We will no longer grant ELTSOP awards with vesting periods well beyond the competitive norm. Instead, we will grant each executive officer an annual award consisting of OSUs, RSUs, and stock options. For 2011, these grants were approximately 50% OSUs, 30% RSUs, and 20% stock options, based upon grant date fair value. Standardizing equity awards on one set of terms and conditions, and adopting more competitive vesting schedules are intended to improve the benefits of the program for participants without creating additional cost for stockholders. This simplification of the program is intended to result in better understanding and appreciation by participants.

OSU terms were revised for grants beginning in 2011; these revisions were based on our experience to date since OSUs were first introduced in 2009. The OSU program, which is now the largest portion of an executive officer's annual grant, will in 2011 compare Intel's three-year TSR with that of the 15 technology companies Intel uses to benchmark both pay and performance; the TSR of the S&P 100 will no longer be a factor in determining OSU payout, in order to more directly focus participants on Intel's performance relative to others in the technology industry. If Intel under-performs the peer group, the percentage at which the OSUs convert into shares will be reduced from 100%, at a rate of 2.5-to-1 (a 2.5 percentage-point reduction in units for each percentage point of under-performance), with a minimum percentage of 50%. If Intel outperforms the peer group, the percentage at which the OSUs convert to shares will be increased from 100% at a rate of five to one (a 5 percentage-point increase in units for each percentage point of over-performance), with a maximum percentage of 200%, in order to enhance both the downside and upside potential of this performance-based arrangement. OSUs continue to have a three-year performance period, and vest one month after the end of the performance period (37 months after grant). With these modifications, we believe that the program is better designed to motivate behavior consistent with long-term value creation without creating undue incentive to take unnecessary risk or focus on unsustainable short-term performance.

RSUs granted to the executive officers in 2011 will vest in quarterly increments over three years from the date of grant, as opposed to the previous vesting schedule for the ELTSOP RSU awards, which was 100% vesting on the fifth anniversary from the grant date. Quarterly vesting helps offset the three-year cliff vesting of the OSUs.

Stock options granted to executive officers in 2011 will vest in 25% increments annually over four years and have a term of seven years, as opposed to the previous vesting of the ELTSOP stock options, which cliff-vested at the end of five years and had a 10-year term. The grant price of the stock options continues to be set on a regularly scheduled grant date with no discount or premium.

© 2011 Intel Corporation