<PAGE>
 
                                                                   EXHIBIT 10.16


                                                                OCTOBER 14, 1998


                          TELCOM SEMICONDUCTOR, INC.

                         EXECUTIVE RETENTION AGREEMENT


This Executive Retention Agreement (the "Agreement") is made and entered into by
and between Phil Drayer (the "Executive") and Telcom Semiconductor, Inc., a
Delaware corporation (the "Company"), effective as of October 31, 1998.
 
1.   Term of Agreement.  This Agreement shall terminate upon the date that all
     -----------------                                                        
obligations of the parties hereto with respect to this Agreement have been
satisfied.

2.   At-Will Employment.  The Company and the Executive acknowledge that the
     ------------------                                                     
Executive's employment is and shall continue to be at-will, as defined under
applicable law.  If the Executive's employment terminates for any reason,
including (without limitation) any termination prior to a Change of Control, the
Executive shall not be entitled to any payments, benefits, damages, awards or
compensation other than as provided by this Agreement, or as may otherwise be
available in accordance with the Company's written executive plans or pursuant
to other written agreements with the Company.

3.   Severance Benefits.
     ------------------ 

     (a)   Severance Payments.  If the Executive's employment is terminated 
           ------------------ 
by the Company as the result of an Involuntary Termination, then, subject to
Executive's entering into the form of release with the Company attached hereto
as Exhibit A, the Executive shall receive from the Company a cash payment in an
   ---------                                                                   
amount equal to twelve (12) months of base salary or $250,000 which ever is
higher, less applicable withholding.

     (b)   Benefits.  In the event the Executive is entitled to severance
           --------                                                      
benefits pursuant to Section 3(a), then in addition to such severance benefits,
the Executive shall receive employee benefits coverage as provided to Executive
immediately prior to the Executive's termination (the "Company-Paid Coverage").
If such coverage included the Executive's dependents immediately prior to the
Executive's termination, such dependents shall also be covered to the extent
covered prior to the Executive's termination.  Company-Paid Coverage shall
continue until the earlier of (i) twelve (12) months following the notice date
for the Involuntary Termination, or (ii) the date the Executive becomes covered
under another employer's group health, dental or life insurance plan (to the
extent covered under such plans).  To the extent permissible under the Company's
insurance policies, the Executive's rights under the Consolidated Omnibus Budget
Reconciliation Act of 1985 (the "COBRA Period") shall begin at the end of such
twelve (12) month period 
<PAGE>
 
otherwise the COBRA Period shall begin on the date of Executive's termination of
employment with the Company.

     (c)   Timing of Severance Payments.  Any severance payment to which
           ----------------------------                                 
Executive is entitled under Section 3(a) shall be paid by the Company to the
Executive (or to the Executive's successors in interest, pursuant to Section
6(b)) in cash and in full, not later than fourteen (14) calendar days following
the date of termination of employment.

     (d)   Voluntary Resignation; Termination For Cause.  If the Executive
           --------------------------------------------                   
voluntarily terminates employment, or if the Executive is terminated for Cause,
at any time, then the Executive shall not be entitled to receive severance or
other benefits except for those (if any) as may then be established under the
Company's written employee plans or pursuant to other written agreements with
the Company.

     (e)   Death.  If the Executive's employment is terminated due to the death
           -----            
of the Executive, then the Executive shall not be entitled to receive severance
or other benefits except for those (if any) as may then be established under the
Company's written employee plans or pursuant to other written agreements with
the Company.

4.   Option Acceleration.  Upon a Change of Control (as defined in Section
     -------------------                                                  
5(b)), then, Executive shall vest in and be able to exercise any stock options
granted by Company to Executive [on or prior to October 31st , 1998] for all the
shares subject to the options, including shares which would not otherwise be
vested or exercisable.  In addition, upon a Change of Control, any Company
repurchase right shall lapse for shares of the Company's Common Stock owned by
Executive.  Except as otherwise provided herein, the terms and conditions of the
Company's stock option plan and the applicable stock option agreements and, if
applicable, restricted stock purchase agreements, between Executive and Company
shall remain in full force and effect.  [This Section 4 shall only apply to
options granted by the Company to Executive on or prior to October 31/st/ ,
1998.]

5.   Definition of Terms.  The following terms referred to in this Agreement
     -------------------                                                    
shall have the following meanings:

     (a)  Cause.  "Cause" shall mean (i) an act of personal dishonesty taken by
          -----                                                                
the Executive in connection with his responsibilities as an employee and
intended to result in substantial personal enrichment of the Executive, (ii)
Executive's conviction of a felony, (iii) Executive's habitual failure to attend
work for a period of at least two continuous weeks or (iv) Executive's use of
narcotics or illicit drugs where such use has a detrimental effect on his
performance with the Company.

     (b)  Change of Control.  "Change of Control" means the occurrence of any of
          -----------------                                                     
the following events:

          (i)    Any "person" (as such term is used in Sections 13(d) and 14(d)
of the Securities Exchange Act of 1934, as amended) becomes the "beneficial
owner" (as defined in
<PAGE>
 
Rule 13d-3 under said Exchange Act), directly or indirectly, of securities of
the Company representing fifty percent (50%) or more of the total voting power
represented by the Company's then outstanding voting securities;

               [(ii)  A change in the composition of the Board occurring within
a two-year period, as a result of which fewer than a majority of the directors
are Incumbent Directors. "Incumbent Directors" shall mean directors who either
(A) are directors of the Company as of the date hereof, or (B) are elected, or
nominated for election, to the Board with the affirmative votes of at least a
majority of the Incumbent Directors at the time of such election or nomination
(but shall not include an individual whose election or nomination is in
connection with an actual or threatened proxy contest relating to the election
of directors to the Company);]

               (iii)  The consummation of a merger or consolidation of the
Company with any other corporation, other than a merger or consolidation which
would result in the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity) at least fifty
percent (50%) of the total voting power represented by the voting securities of
the Company or such surviving entity outstanding immediately after such merger
or consolidation;

               (iv)   The consummation of the sale or disposition by the
Company of all or substantially all the Company's assets.

          (c)  Involuntary Termination.  "Involuntary Termination" shall mean
               -----------------------                                       
[(i) without the Executive's express written consent, a significant reduction of
the Executive's duties, position or responsibilities, or the removal of the
Executive from such position and responsibilities, unless the Executive is
provided with a comparable position (i.e., a position of equal or greater
organizational level, duties, authority, compensation and status); (ii) without
the Executive's express written consent, a substantial reduction, without good
business reasons, of the facilities and perquisites (including office space and
location) available to the Executive immediately prior to such reduction; (iii)
a reduction by the Company in the base compensation of the Executive as in
effect immediately prior to such reduction; (iv) a material reduction by the
Company in the kind or level of employee benefits to which the Executive is
entitled immediately prior to such reduction with the result that the
Executive's overall benefits package is significantly reduced; (v) without the
Executive's express written consent, the relocation of the Executive to a
facility or a location more than 25 miles from the Executive's then present
location;] (vi) any purported termination of the Executive by the Company which
is not effected for death, disability or for Cause, or any purported termination
for which the grounds relied upon are not valid; or (vii) the failure of the
Company to obtain the assumption of this Agreement by any successors in the
event of a change of control.

     6.   280G Limitation.  In the event that the severance and other benefits
          ---------------                                                     
provided for in this Agreement or otherwise payable to the Executive (i)
constitute "parachute payments" within the meaning of Section 280G of the
Internal Revenue Code of 1986, as amended (the "Code") and

                                      -3-
<PAGE>
 
(ii) but for this section, would be subject to the excise tax imposed by
Section 4999 of the Code, then the Executive's severance benefits under this
Agreement shall be payable either

          (a)  in full, or

          (b)  as to such lesser amount which would result in no portion of such
severance benefits being subject to excise tax under Section 4999 of the Code,
whichever of the foregoing amounts, taking into account the applicable federal,
state and local income taxes and the excise tax imposed by Section 4999, results
in the receipt by the Executive on an after-tax basis, of the greatest amount of
severance benefits under this Agreement, notwithstanding that all or some
portion of such severance benefits may be taxable under Section 4999 of the
Code.  Unless the Company and the Executive otherwise agree in writing, any
determination required under this section shall be made in writing by the
Company's independent public accountants (the "Accountants"), whose
determination shall be conclusive and binding upon the Executive and the Company
for all purposes.  For purposes of making the calculations required by this
Section, the Accountants may make reasonable assumptions and approximations
concerning applicable taxes and may rely on reasonable, good faith
interpretations concerning the application of Sections 280G and 4999 of the
Code.  The Company and the Executive shall furnish to the Accountants such
information and documents as the Accountants may reasonably request in order to
make a determination under this section.  The Company shall bear all costs the
Accountants may reasonably incur in connection with any calculations
contemplated by this section.

     7.   Successors.
          ---------- 

          (a)  Company's Successors.  Any successor to the Company (whether
               --------------------                                        
direct or indirect and whether by purchase, merger, consolidation, liquidation
or otherwise) to all or substantially all of the Company's business and/or
assets shall assume the obligations under this Agreement and agree expressly to
perform the obligations under this Agreement in the same manner and to the same
extent as the Company would be required to perform such obligations in the
absence of a succession.  For all purposes under this Agreement, the term
"Company" shall include any successor to the Company's business and/or assets
which executes and delivers the assumption agreement described in this Section
7(a) or which becomes bound by the terms of this Agreement by operation of law.

          (b)  Executive's Successors.  The terms of this Agreement and all
               ----------------------                                      
rights of the Executive hereunder shall inure to the benefit of, and be
enforceable by, the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees.

     8.   Notice.
          ------ 

          (a)  General.  Notices and all other communications contemplated by
               -------                                                       
this Agreement shall be in writing and shall be deemed to have been duly given
when personally 

                                      -4-
<PAGE>
 
delivered, when mailed by U.S. registered or certified mail, return receipt
requested and postage prepaid or when sent by Federal Express. In the case of
the Executive, notices shall be addressed to him at the home address which he
most recently communicated to the Company in writing. In the case of the
Company, notices shall be addressed to its corporate headquarters, and all
notices shall be directed to the attention of its Chief Executive Officer.

          (b)  Notice of Termination.  Any termination by the Company for Cause
               ---------------------                                           
or by the Executive as a result of a voluntary resignation shall be communicated
by a notice of termination to the other party hereto given in accordance with
Section 8(a) of this Agreement.  Such notice shall indicate the specific
termination provision in this Agreement relied upon (if any), shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination under the provision so indicated (if applicable), and shall specify
the termination date (which shall be not more than 30 days after the giving of
such notice).

     9.   Miscellaneous Provisions.
          ------------------------ 

          (a)  No Duty to Mitigate.  The Executive shall not be required to
               -------------------                                         
mitigate the amount of any payment contemplated by this Agreement, nor shall any
such payment be reduced by any earnings that the Executive may receive from any
other source.

          (b)  Waiver.  No provision of this Agreement shall be modified, waived
               ------                                                           
or discharged unless the modification, waiver or discharge is agreed to in
writing and signed by the Executive and by an authorized officer of the Company
(other than the Executive).  No waiver by either party of any breach of, or of
compliance with, any condition or provision of this Agreement by the other party
shall be considered a waiver of any other condition or provision or of the same
condition or provision at another time.

          (c)  Whole Agreement.  No agreements, representations or 
               ---------------
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement have been made or entered into by
either party with respect to the subject matter hereof. This Agreement and the
applicable stock option agreements, if any, between Company and Executive and
the Release and Notice of Participation in the Telcom Semiconductor, Inc.
Executive Retention Plan represent the entire understanding of the parties
hereto with respect to the subject matter hereof and supersedes all prior
arrangements and understandings regarding same.

          (d)  Choice of Law.  The validity, interpretation, construction and
               -------------                                                 
performance of this Agreement shall be governed by the internal substantive
laws, but not the choice of law rules, of the State of California.

          (e)  Severability.  The invalidity or unenforceability of any 
               ------------
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full force
and effect.

                                      -5-
<PAGE>
 
          (f)  Withholding.  All payments made pursuant to this Agreement will 
               ----------- 
be subject to withholding of applicable income and employment taxes.

                                      -6-
<PAGE>
 
          (g)  Counterparts.  This Agreement may be executed in counterparts,
               ------------                                                  
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.

          IN WITNESS WHEREOF, each of the parties has executed this Agreement,
in the case of the Company by its duly authorized officer, as of the day and
year set forth below.


COMPANY                       TELCOM SEMICONDUCTOR, INC.



                              By:___________________________________
 
                              Title:  Chief Executive Officer
                                      ------------------------------

                              ______________________________________
EXECUTIVE                     (Signature)
 
                              ______________________________________
                              (Print name)

                                      -7-
<PAGE>
 
                                   EXHIBIT A
                                   ---------


                               RELEASE OF CLAIMS

                          TELCOM SEMICONDUCTOR, INC.


     This Release of Claims (the "Agreement") is made by and between Telcom
Semiconductor, Inc. (the "Company") and PHIL DRAYER ("Executive").
     

                                R E C I T A L S

A.   Executive was employed by the Company.

B.   The Company and Executive have agreed that (i) Executive's employment
relationship with the Company shall terminate as of the date hereof, (ii)
Executive shall be provided with the benefits specified in the Amended and
Restated Executive Retention Agreement effective as of October 21, 1998 by and
between the Company and Executive (the "Executive Agreement") and (iii)
Executive shall release the Company from any claims arising from or related to
the employment relationship.

     NOW THEREFORE, in consideration of the mutual promises made herein and the
benefits provided pursuant to such promises, the Company and Executive
(collectively referred to as "the Parties") hereby agree as follows:

     1.   Resignation.  Executive hereby resigns from his or her employment with
          -----------                                                           
the Company as of [_________________], (the "Employment Termination Date").

     2.   Payment of Salary.  Executive acknowledges and represents that the
          -----------------                                                 
Company has paid all salary, wages, accrued vacation and any and all other
benefits due to Executive as of the Employment Termination Date.

     3.   Consideration.  As consideration for Executive entering into this
          -------------                                                    
Agreement, the Company agrees to provide Executive with the benefits provided
for pursuant to the Executive Agreement.  THE EXECUTIVE AGREEMENT IS ATTACHED TO
AND INCORPORATED BY REFERENCE INTO THIS AGREEMENT, AND THE PARTIES HERETO
EXPRESSLY AGREE TO ITS TERMS AND CONDITIONS.

     4.   Release of Claims.  Executive agrees that the foregoing consideration
          -----------------                                                    
represents settlement in full of all outstanding obligations owed to Executive
by the Company.  Executive, on behalf of Executive and his or her heirs,
executors and assigns, hereby fully and forever releases the Company and its
respective 

                                      -8-
<PAGE>
 
officers, directors, employees, investors, stockholders, administrators,
predecessor and successor corporations, and assigns, of and from any claim,
duty, obligation or cause of action relating to any matters of any kind, whether
presently known or unknown, suspected or unsuspected, that any of them may
possess arising from any omissions, acts or facts that have occurred up until
and including the effective date of this Agreement including, without
limitation,

          (a)  any and all claims relating to or arising from Executive's
employment relationship with the Company and the termination of that
relationship;

          (b)  any and all claims relating to, or arising from, Executive's
right to purchase, or actual purchase of shares of stock of the Company;

          (c)  any and all claims for wrongful discharge of employment; breach
of contract, both express and implied; breach of a covenant of good faith and
fair dealing, both express and implied; negligent or intentional infliction of
emotional distress; negligent or intentional misrepresentation; negligent or
intentional interference with contract or prospective economic advantage; and
defamation;

          (d)  any and all claims for violation of any federal, state or
municipal statute, including, but not limited to, Title VII of the Civil Rights
Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment
Act of 1967, the Americans with Disabilities Act of 1990, and the California
Fair Employment and Housing Act;

          (e)  any and all claims arising out of any other laws and regulations
relating to employment or employment discrimination;

          (f)  ANY RIGHTS HE OR SHE MAY HAVE UNDER THE AGE DISCRIMINATION IN
EMPLOYMENT ACT OF 1967 ("ADEA").  EXECUTIVE FURTHER ACKNOWLEDGES THAT HE OR SHE
HAS BEEN ADVISED BY THIS WRITING THAT (I) HE OR SHE SHOULD CONSULT WITH AN
ATTORNEY PRIOR TO EXECUTING THIS AGREEMENT; (II) HE OR SHE HAS AT LEAST TWENTY-
         -----                                                                
ONE (21) DAYS WITHIN WHICH TO CONSIDER THIS AGREEMENT; (III) HE OR SHE HAS AT
LEAST SEVEN (7) DAYS FOLLOWING THE EXECUTION OF THIS AGREEMENT BY THE PARTIES TO
REVOKE THE AGREEMENT; AND (IV) THIS AGREEMENT SHALL NOT BE EFFECTIVE UNTIL THE
REVOCATION PERIOD HAS EXPIRED; and

          (g)  any and all claims for attorneys' fees and costs.

The Company and Executive agree that the release set forth in this section shall
be and remain in effect in all respects as a complete general release as to the
matters released.  This release does not extend to any obligations incurred
under this Agreement.

     5.   Tax Consequences.  The Company makes no representations or warranties
          ----------------                                                     
with respect to the tax consequences of the payment of any sums to Executive
under the terms of this Agreement.  Executive agrees and understands that he or
she is responsible for payment, if any, of local, state and/or federal taxes on
the sums paid hereunder by the Company and any penalties or assessments thereon.

                                      -9-
<PAGE>
 
     6.   No Admission of Liability.  No action taken by the Parties hereto
          -------------------------                                        
either previously or in connection with this Agreement shall be deemed or
construed to be (a) an admission of the truth or falsity of any claims
heretofore made or (b) an acknowledgment or admission by either party of any
fault or liability whatsoever to the other party or to any third party.

     7.   Costs.  The Parties shall each bear their own costs, expert fees,
          -----                                                            
attorneys' fees and other fees incurred in connection with this Agreement.

     8.   Arbitration and Equitable Relief.
          -------------------------------- 

          (a)   The parties hereto agree that any dispute or controversy
arising out of, relating to, or in connection with this Agreement, or the
interpretation, validity, construction, performance, breach, or termination
thereof shall be settled by arbitration to be held in Santa Clara County,
California, in accordance with the National Rules for the Resolution of
Employment Disputes then in effect of the American Arbitration Association (the
"Rules").  The arbitrator may grant injunctions or other relief in such dispute
or controversy.  The decision of the arbitrator shall be final, conclusive and
binding on the parties to the arbitration.  Judgment may be entered on the
arbitrator's decision in any court having jurisdiction.

          (b)   The arbitrator shall apply California law to the merits of any
dispute or claim, without reference to rules of conflict of law.  The
arbitration proceedings shall be governed by federal arbitration law and by the
Rules, without reference to state arbitration law.  The parties hereto hereby
expressly consent to the personal jurisdiction of the state and federal courts
located in California for any action or proceeding arising from or relating to
this Agreement and/or relating to any arbitration in which the parties are
participants.

          (c)   THE PARTIES HERETO HAVE READ AND UNDERSTAND SECTION 8, WHICH
DISCUSSES ARBITRATION.  THE PARTIES HERETO UNDERSTAND THAT BY SIGNING THIS
AGREEMENT, THEY AGREE TO SUBMIT ANY FUTURE CLAIMS ARISING OUT OF, RELATING TO,
OR IN CONNECTION WITH THIS AGREEMENT, OR THE INTERPRETATION, VALIDITY,
CONSTRUCTION, PERFORMANCE, BREACH, OR TERMINATION THEREOF TO BINDING
ARBITRATION, AND THAT THIS ARBITRATION CLAUSE CONSTITUTES A WAIVER OF THEIR
RIGHT TO A JURY TRIAL AND RELATES TO THE RESOLUTION OF ALL DISPUTES RELATING TO
ALL ASPECTS OF THE EMPLOYER/EXECUTIVE RELATIONSHIP, INCLUDING BUT NOT LIMITED
TO, THE FOLLOWING CLAIMS:

                (i)   ANY AND ALL CLAIMS FOR WRONGFUL DISCHARGE OF EMPLOYMENT;
BREACH OF CONTRACT, BOTH EXPRESS AND IMPLIED; BREACH OF THE COVENANT OF GOOD
FAITH AND FAIR DEALING, BOTH EXPRESS AND IMPLIED; NEGLIGENT OR INTENTIONAL
INFLICTION OF EMOTIONAL DISTRESS; NEGLIGENT OR INTENTIONAL MISREPRESENTATION;
NEGLIGENT OR INTENTIONAL INTERFERENCE WITH CONTRACT OR PROSPECTIVE ECONOMIC
ADVANTAGE; AND DEFAMATION;

                                     -10-

<PAGE>
 
               (ii)   ANY AND ALL CLAIMS FOR VIOLATION OF ANY FEDERAL STATE OR
MUNICIPAL STATUTE, INCLUDING, BUT NOT LIMITED TO, TITLE VII OF THE CIVIL RIGHTS
ACT OF 1964, THE CIVIL RIGHTS ACT OF 1991, THE AGE DISCRIMINATION IN EMPLOYMENT
ACT OF 1967, THE AMERICANS WITH DISABILITIES ACT OF 1990, THE FAIR LABOR
STANDARDS ACT, THE CALIFORNIA FAIR EMPLOYMENT AND HOUSING ACT, AND LABOR CODE
SECTION 201, et seq;  AND

               (iii)  ANY AND ALL CLAIMS ARISING OUT OF ANY OTHER LAWS AND
REGULATIONS RELATING TO EMPLOYMENT OR EMPLOYMENT DISCRIMINATION.
 
     9.   Authority.  The Company represents and warrants that the undersigned
          ---------                                                           
has the authority to act on behalf of the Company and to bind the Company and
all who may claim through it to the terms and conditions of this Agreement.
Executive represents and warrants that he or she has the capacity to act on his
or her own behalf and on behalf of all who might claim through Executive to bind
them to the terms and conditions of this Agreement.

     10.  No Representations.  Each party represents that it has had the
          ------------------                                            
opportunity to consult with an attorney, and has carefully read and understands
the scope and effect of the provisions of this Agreement.  Neither party has
relied upon any representations or statements made by the other parties hereto
which are not specifically set forth in this Agreement.

     11.  Severability.  In the event that any provision hereof becomes or is
          ------------                                                       
declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision.

     12.  Entire Agreement.  This Agreement and the Executive Agreement
          ----------------                                             
represent the entire agreement and understanding between the Company and
Executive concerning Executive's separation from the Company, and supersedes and
replaces any and all prior agreements and understandings concerning Executive's
relationship with the Company and compensation from the Company.

     13.  No Oral Modification.  This Agreement may only be amended in writing
          --------------------                                                
signed by Executive and the President or Chief Executive Officer of the Company.

     14.  Effective Date.  This Agreement is effective seven days after it has
          --------------                                                      
been signed by both parties.

     15.  Counterparts.  This Agreement may be executed in counterparts, and
          ------------                                                      
each counterpart shall have the same force and effect as an original and shall
constitute an effective, binding agreement on the part of each of the
undersigned.

     16.  Voluntary Execution of Agreement.  This Agreement is executed
          --------------------------------                             
voluntarily and without any duress or undue influence on the part or behalf of
the Parties hereto, with the full intent of releasing all claims.  The Parties
acknowledge that:

                                     -11-
<PAGE>
 
          (a)  They have read this Agreement;

          (b)  They have been represented in the preparation, negotiation, and
execution of this Agreement by legal counsel of their own choice or that they
have voluntarily declined to seek such counsel;

          (c)  They understand the terms and consequences of this Agreement and
of the releases it contains;

          (d)  They are fully aware of the legal and binding effect of this
Agreement.

     IN WITNESS WHEREOF, the Parties have executed this Agreement on the
respective dates set forth below.

                                    TELCOM SEMICONDUCTOR, INC.


Dated:  [______]                    By:______________________________________
 
                                    Title:___________________________________

                                    EXECUTIVE


Dated:  [_______]                   _________________________________________
                                    (Signature)

 
                                    _________________________________________
                                    (Print name)

                                     -12-