The exchange of previously granted, now "out-of-the-money" stock options for lower-priced options at the current market price. The actual exchange can be structured in different ways and ratios of old-to-new stock options. Companies that do this will face shareholder wrath and an earnings charge but believe it restores the employee retention value of stock options.
An option exchange can also be a form of repricing. For more on this topic, see the section about underwater stock options on this website.