PayPal is cutting about 325 jobs as part of a major reorganization by its new president, David Marcus, designed to regain an innovative edge and head off rising competition.

PayPal, the online payment pioneer owned by eBay Inc , said on Monday the full-time jobs would be eliminated as it combines nine product-development groups into one. The company is also cutting about 120 contractors.

EBay announced a $15 million pre-tax restructuring charge, to be recorded in its fourth quarter, related to the job reductions.

PayPal, which started in the late 1990s as a scrappy Silicon Valley start-up, had almost 13,000 employees earlier this year.

"In a large company, at some point you reach the law of diminishing returns when more people means slower," said Marcus, who used to run mobile payments start-up Zong, which PayPal acquired last year.

"You have a lot of duplication of roles with nine product groups merging into one," he said.

Wall Street considers PayPal the crown jewel of eBay because it is growing fast and profit margins are expanding. But in Silicon Valley, PayPal is considered a slow, bureaucratic behemoth - a reputation that has made it difficult for the company to attract and retain smart software engineers and designers.

PayPal needs such talent more than ever because a slew of payments start-ups, including Square, Stripe and Dwolla, are developing rival services and products that are beginning to catch on with merchants and consumers.

"PayPal has been on a very strong growth trajectory, but it's facing a period of disruption ahead," said Kevin Hartz, chief executive of ticketing start-up Eventbrite.

"We just haven't seen a lot of innovation that's needed for them to continue their leadership," added Hartz, who was an early investor in PayPal and owns a small stake in Square now.

Marcus said he is reorganizing PayPal to help engineers and designers develop new products and services more quickly, to keep up with new rivals.

Marcus has organized demonstrations of rival services at PayPal headquarters in San Jose, California, and screen shots of competing products line the corridors.

"It's important to face the reality of the situation," Marcus said. "In some cases, we don't have better products and we have to do something about it."

In the past, it took PayPal six to nine months to develop and launch a product, partly because there was a long application process to assemble the required teams of employees.

After products were released, engineers and developers moved on to other projects. That meant any problems with new products took a long time to update and fix, Marcus said.

Marcus' new approach involves giving smaller groups of engineers and designers the freedom to coalesce quickly and release early versions of products that will be tested with a small sub-set of PayPal users and updated quickly, he said.

Hill Ferguson, PayPal's new head of global product, and Chief Technology Officer James Barrese oversee the new, single-product development group.

"We had multiple different product teams coming to me with their ideas and requests, which was crazy," Barrese said. "We brought that all together and can make much swifter decisions. Hill and I sit in a room and decide to do something and it's done."

The company launched PayPal Here, a credit card processing service for small merchants that competes with Square, earlier this year. The product was initially developed by a group that consisted of one product developer, two engineers and two designers.

"We are using that model for how we work going forward," Ferguson said.

PayPal is now assembling a small team of engineers and designers to change the company's core online checkout service, Ferguson and Marcus said.

Hartz said customers who pay for tickets through Eventbrite using PayPal are "jolted" over to PayPal's website to complete the transaction. That can reduce "conversion," or the percentage of customers who complete purchases, he said.

Marcus said PayPal will be working to fix such issues.

"We want to do what's right for merchants and customers. Neither want to be re-directed when they pay," he said.

(Reporting By Alistair Barr; editing by John Wallace)