UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No.  )

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MCDERMOTT INTERNATIONAL, INC.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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Dear Stockholder:

 

You are cordially invited to attend this year’s Annual Meeting of Stockholders of McDermott International, Inc., which will be held on Friday, May 9, 2008, at 757 N. Eldridge Parkway, Houston, Texas 77079, on the 14^th floor, commencing at 9:30 a.m. local time. The notice of annual meeting and proxy statement following this letter describe the matters to be acted on at the meeting.

 

If Computershare Trust Company, N.A., our transfer agent and registrar, holds your shares of record, we have enclosed a proxy card for your use. You may vote these shares by completing and returning the proxy card or, alternatively, calling a toll-free telephone number or using the Internet as described on the proxy card. If a broker or other nominee holds your shares in “street name,” your broker has enclosed a voting instruction form, which you should use to vote those shares. The voting instruction form indicates whether you have the option to vote those shares by telephone or by using the Internet.

 

Thank you for your support of our company.

 

Sincerely yours,

 

BRUCE W. WILKINSON

 

 

 

 

Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting of Stockholders to Be Held on May 9, 2008.

 

The proxy statement and annual report are available on the Internet at www.mcdermott.com/investorrelations at “Annual Report and Proxy” or “SEC Filings.”

 

The following information applicable to the Annual Meeting may be found in the proxy statement and accompanying proxy card:

 

McDERMOTT INTERNATIONAL, INC.

777 N. Eldridge Pkwy.
Houston, Texas 77079

 

 

Notice of 2008 Annual Meeting of Stockholders

 

 

The 2008 Annual Meeting of the Stockholders of McDermott International, Inc., a Panamanian corporation, will be held at 757 N. Eldridge Parkway, Houston, Texas 77079, on the 14^th floor, on Friday, May 9, 2008, at 9:30 a.m. local time, in order to:

 

(1)  elect three Class I Directors for a term of one year;

 

(2)  amend our Articles of Incorporation to change the period within which our Board of Directors may set a record date for a meeting of stockholders;

 

(3)  ratify our Audit Committee’s appointment of Deloitte & Touche LLP as our independent registered public accounting firm for the year ending December 31, 2008; and

 

(4)  transact such other business as may properly come before the meeting or any adjournment thereof.

 

If you were a stockholder as of the close of business on March 31, 2008, you are entitled to vote at the meeting and at any adjournment thereof.

 

Please indicate your vote as to the matters to be acted on at the meeting by following the instructions provided in the enclosed proxy card or voting instruction form, whether or not you plan on attending the meeting. If you plan to attend the meeting and wish to vote or change your vote there, please review the instructions set forth in the 2008 Proxy Statement under “Voting Information.”

 

We have enclosed a copy of our 2007 Annual Report to Stockholders with this notice and proxy statement.

 

By Order of the Board of Directors,

 

LIANE K. HINRICHS

Secretary

 

Dated: April 4, 2008

 

PROXY STATEMENT FOR 2008 ANNUAL MEETING OF STOCKHOLDERS

 

 

TABLE OF CONTENTS

 

 

We are mailing this proxy statement and accompanying proxy card to our stockholders beginning on April 4, 2008. Our Board of Directors is soliciting your proxy to vote your shares at our Annual Meeting to be held on May 9, 2008. We will bear all expenses incurred in connection with this proxy solicitation, which we expect to conduct primarily by mail. We have engaged The Proxy Advisory Group, LLC to assist in the solicitation for a fee that will not exceed $10,000, plus out-of-pocket expenses. In addition, our officers and regular employees may solicit your proxy by telephone, by facsimile transmission or in person, for which they will not be separately compensated. If your shares are held through a broker or other nominee (i.e., in “street name”), we have requested that your broker or nominee forward this proxy statement to you and obtain your voting instructions, for which we will reimburse them for reasonable out-of-pocket expenses. If your shares are held through the Thrift Plan for Employees of McDermott Incorporated and Participating Subsidiary and Affiliated Companies (the “McDermott Thrift Plan”), the trustee of that plan has sent you this proxy statement and a voting instruction form, which you can use to direct the trustee on how to vote your plan shares.

 

Our Board of Directors selected March 31, 2008 as the record date (the “Record Date”) for determining stockholders entitled to vote at the Annual Meeting. This means that if you were a registered stockholder with our transfer agent and registrar, Computershare Trust Company, N.A., on the Record Date, you may vote your shares on the matters to be considered by our stockholders at the Annual Meeting. If your shares were held in street name on that date, the broker or other nominee that was the record holder of your shares has the authority to vote them at the Annual Meeting. They have forwarded to you this proxy statement seeking your instructions on how you want your shares voted.

 

On the Record Date, 226,741,650 shares of our common stock were outstanding. Each outstanding share of common stock entitles its holder to one vote on each matter to be acted on at the meeting.

 

For shares held of record, you can vote your shares in person at the Annual Meeting or vote now by giving us your proxy. You may give us your proxy by completing the enclosed proxy card and returning it in the enclosed U.S. postage-prepaid envelope or by calling a toll-free telephone number or using the Internet as further described in the enclosed proxy card. In either case, telephone and Internet voting procedures have been designed to verify your identity through a personal identification or control number and to confirm that your voting instructions have been properly recorded. If you vote using either of these electronic means, you will save us return mail expense.

 

By giving us your proxy, you will be directing us on how to vote your shares at the meeting. Even if you plan on attending the meeting, we urge you to vote now by giving us your proxy. This will ensure that your vote is represented at the meeting. If you do attend the meeting, you can change your vote at that time, if you then desire to do so.

 

If your shares are held in street name, the broker or nominee that holds your shares has the authority to vote them, absent your approval, only as to matters for which they have discretionary authority under the applicable New York Stock Exchange rules. For all other matters, the broker or nominee that holds your shares will need to obtain your authorization to vote those shares and has enclosed a voting instruction form with this proxy statement. In either case, they will vote your shares as you direct on their voting instruction form. You can vote by completing the enclosed voting instruction form and returning it in the enclosed U.S. postage-prepaid envelope. If you want to vote your shares in person at the Annual Meeting, you must obtain a valid proxy from your broker or nominee. You should refer to the instructions provided in the enclosed voting instruction form for further information.

 

Additionally, the availability of telephone or Internet voting depends on the voting process used by the broker or nominee that holds your shares.

You may receive more than one proxy statement and proxy card or voting instruction form if your shares are held through more than one account (e.g., through different brokers or nominees). Each proxy card or voting instruction form only covers those shares of common stock held in the applicable account. If you hold shares in more than one account, you will have to provide voting instructions as to all your accounts to vote all your shares.

 

For shares held of record, you may change your vote by written notice to our Corporate Secretary, granting a new proxy or by voting in person at the Annual Meeting. Unless you attend the meeting and vote your shares in person, you should change your vote using the same method (by telephone, Internet or mail) that you first used to vote your shares. That way, the inspectors of election for the meeting will be able to verify your latest vote.

 

For shares held in street name, you should follow the instructions in the voting instruction form provided by your broker or nominee to change your vote. If you want to change your vote as to shares held in street name by voting in person at the Annual Meeting, you must obtain a valid proxy from the broker or nominee that holds those shares for you.

 

The Annual Meeting will be held only if a quorum exists. The presence at the meeting, in person or by proxy, of holders of a majority of our outstanding shares of common stock as of the Record Date will constitute a quorum. If you attend the meeting or vote your shares using the enclosed proxy card or voting instruction form (including any telephone or Internet voting procedures provided), your shares will be counted toward a quorum, even if you abstain from voting on a particular matter. Shares held by brokers and other nominees as to which they have not received voting instructions from the beneficial owners and lack the discretionary authority to vote on a particular matter are called “broker non-votes” and will count for quorum purposes.

 

We are asking you to vote on the following:

 

 

With the exception of the proposal to amend our Articles of Incorporation, each proposal, including the election of directors, requires the affirmative vote of a majority of the shares of our common stock present in person or represented by proxy at the Annual Meeting and entitled to vote on the matter. The proposal to amend our Articles of Incorporation requires the affirmative vote of a majority of the outstanding shares of our common stock entitled to vote on the matter. In the election of directors, you may vote “FOR” all director nominees or withhold your vote for any one or more of the director nominees. For each other proposal, you may vote “FOR” or “AGAINST” or abstain from voting. Because abstentions are counted for purposes of determining whether a quorum is present but are not affirmative votes for a proposal, they have the same effect as an “AGAINST” vote. Broker non-votes will have no effect on the vote on the election of directors or on the ratification of the independent registered public accounting firm. Broker non-votes will have the effect of a vote against the proposal to amend our Articles of Incorporation.

 

Our Corporate Governance Guidelines provide that, in an uncontested election of directors, the Board expects any incumbent director nominee who does not receive a “FOR” vote by a majority of shares present in person or by proxy and entitled to vote on the matter to promptly tender his or her resignation to the Governance Committee, subject to acceptance by our Board. Pursuant to our Corporate Governance Guidelines, the Governance Committee will make a recommendation to the Board with respect to the director nominee’s resignation and the Board will

consider the recommendation and take appropriate action within 120 days from the date of the certification of the election results.

 

If you submit a signed proxy card without specifying your vote, your shares will be voted “FOR” the election of all director nominees, the proposal to amend our Articles of Incorporation and the ratification of our Audit Committee’s appointment of Deloitte & Touche LLP as our independent registered public accounting firm for the year ending December 31, 2008. If you hold your shares in street name and you do not instruct your broker or nominee how to vote those shares, they may vote your shares as they decide as to matters for which they have discretionary authority under the applicable New York Stock Exchange rules. Your broker will be entitled to vote your shares in its discretion, absent instructions from you, on the election of directors, the proposal to amend our Articles of Incorporation and the ratification of the appointment of the independent registered public accounting firm.

 

We are not aware of any other matters that may be presented or acted on at the meeting. If you vote by signing and returning the enclosed proxy card or using the telephone or Internet voting procedures, the individuals named as proxies on the card may vote your shares, in their discretion, on any other matter requiring a stockholder vote that comes before the meeting.

 

All voted proxies and ballots will be handled to protect your voting privacy as a stockholder. Your vote will not be disclosed except:

 

 

Historically, our Board of Directors has been classified into three classes, with the term of office of one class expiring each year. In 2007, with the approval of our stockholders, we amended our Articles of Incorporation to phase out the classification of our Board by 2010. As a result, beginning at our 2008 Annual Meeting and continuing until our 2010 Annual Meeting, directors elected to a class by our stockholders will serve one-year terms. Beginning with the Annual Meeting in 2010, our Board will no longer be classified and all directors will be subject to annual election. Currently, our Board of Directors has ten members.

 

The term of office of our Class I directors — Roger A. Brown, Oliver D. Kingsley, Jr., and Bruce W. Wilkinson — will expire at this year’s Annual Meeting. On the nomination of our Board, Messrs. Brown, Kingsley and Wilkinson will stand for reelection as Class I directors at this year’s Annual Meeting for a term of one year.

 

Our By-Laws provide that (1) a person shall not be nominated for election or reelection to our Board of Directors if such person shall have attained the age of 72 prior to the date of election or re-election and (2) any director who attains the age of 72 during his or her term shall be deemed to have resigned and retired at the first Annual Meeting following his or her attainment of the age of 72. Pursuant to these requirements, Admiral Bruce DeMars, our Lead Director, will retire from our Board after 11 years of service, effective at this year’s Annual Meeting.

 

Unless otherwise directed, the persons named as proxies on the enclosed proxy card intend to vote “FOR” the election of the nominees. If any nominee should become unavailable for election, the shares will be voted for such substitute nominee as may be proposed by our Board of Directors. However, we are not aware of any circumstances that would prevent any of the nominees from serving. Set forth below under “Class II Directors” and “Class III Directors” are the names of our other directors who will continue to serve as directors after this year’s Annual Meeting. All directors have been previously elected by the stockholders.

 

Set forth below is certain information (ages are as of May 9, 2008) with respect to each nominee for election as a director and each director of our company who will continue to serve as a director after this year’s Annual Meeting.

 

 

Our Board recommends that stockholders vote “FOR” each of the nominees named above.

 

 

 

We maintain a corporate governance section on our website which contains copies of our principal governance documents. The corporate governance section may be found at www.mcdermott.com at “Corporate Governance — Board Committees” and “Corporate Governance — Governance Policies.” The corporate governance section contains the following documents, which are available in print to any stockholder who requests a copy in writing to McDermott International, Inc., Corporate Secretary’s Office, 777 N. Eldridge Pkwy., Houston, Texas 77079:

 

By-Laws
Corporate Governance Guidelines
Code of Ethics for CEO and Senior Financial Officers
Board of Directors Conflicts of Interest Policies and Procedures
Audit Committee Charter
Compensation Committee Charter
Finance Committee Charter
Governance Committee Charter

 

In addition, our Code of Business Conduct may be found on our website at www.mcdermott.com at “Corporate Governance — Code of Conduct” and is available in print to any stockholder who requests a copy in writing.

 

The New York Stock Exchange listing standards require our Board of Directors to be comprised of at least a majority of independent directors. For a director to be considered independent, the Board must determine that the director does not have any direct or indirect material relationship with us. To assist it in determining director independence, the Board has established categorical standards which conform to, or are more exacting than, the independence requirements in the New York Stock Exchange listing standards. These standards are contained in the Corporate Governance Guidelines found on our website at www.mcdermott.com under “Corporate Governance — Governance Policies.”

 

Based on these independence standards, our Board of Directors has affirmatively determined that the following directors are independent and meet our categorical standards:

 

 

Neither Mr. McWilliams nor Mr. Schievelbein has any relationship with McDermott, except as a director and stockholder. In determining the independence of Messrs. Bookout, Brown, Cambre, Goldman and Kingsley, and of Admiral DeMars, our Board considered ordinary course transactions between McDermott and other companies for which these directors are also members of the board of directors. With respect to Mr. Bookout, our Board also considered an unsolicited 2007 contribution by McDermott to a charitable organization for which Mr. Bookout’s spouse is a current director and an unsolicited 2005 contribution by McDermott to a charitable organization for which Mr. Bookout’s spouse formerly served as a director. In determining the independence of Mr. Howard, our Board considered unsolicited 2005-2007 contributions by McDermott to a charitable organization for which he serves as a member of the Board. The charitable contributions described above were in the usual course of our annual giving programs pursuant to which McDermott and our subsidiaries make donations to in excess of approximately 200 charitable organizations.

 

Stockholders or other interested persons may send written communications to the nonmanagement members of our Board, addressed to Board of Directors (independent members), c/o McDermott International, Inc., Corporate Secretary’s Office, 777 N. Eldridge Pkwy., Houston, Texas 77079. Information regarding this process is posted on our website at www.mcdermott.com under “Corporate Governance — Board Committees.”

 

In February 2008, our Board approved the designation of Mr. McWilliams as lead director, effective upon the retirement of Admiral DeMars at this year’s Annual Meeting. The Lead Director presides at all executive sessions of nonmanagement directors. In his absence, the remaining nonmanagement directors may appoint a presiding director by majority vote. The nonmanagement directors meet in executive session without management on a regular basis. Stockholders or other interested persons may send written communications to Mr. McWilliams, addressed to Mr. McWilliams, Lead Director, c/o McDermott International, Inc., Corporate Secretary’s Office, 777 N. Eldridge Pkwy., Houston, Texas 77079.

 

Board of Directors.  Our Board met seven times during 2007. All directors attended 75% or more of the meetings of the Board and of the committees on which they served during 2007. In addition, as reflected in our Corporate Governance Guidelines, we have adopted a policy that each member of our Board must make reasonable efforts to attend our Annual Meeting. All directors then serving on the Board attended our 2007 Annual Meeting.

 

Committees.  Our Board currently has, and appoints the members of, standing Audit, Compensation, Finance and Governance Committees. Each of the Board committees is comprised entirely of independent nonmanagement directors and has a written charter approved by the Board. The current charter for each committee is posted on our website at www.mcdermott.com under “Corporate Governance — Board Committees.” The current members of the committees are identified in the following table.

 

 

Audit Committee.  During the year ended December 31, 2007, the Audit Committee met five times. The Audit Committee’s role is financial oversight. Our management is responsible for preparing financial statements, and our independent registered public accounting firm is responsible for auditing those financial statements. The Audit Committee is not providing any expert or special assurance as to our financial statements or any professional certification as to the independent registered public accounting firm’s work.

 

The Audit Committee is directly responsible for the appointment, compensation, retention and oversight of McDermott’s independent registered public accounting firm. The committee, among other things, also reviews and discusses McDermott’s audited financial statements with management and the independent registered public accounting firm.

 

Our Board has determined that Messrs. McWilliams, Bookout and Goldman and Admiral DeMars each qualify as an “audit committee financial expert” within the definition established by the Securities and Exchange Commission (“SEC”). For more information on the backgrounds of these directors, see their biographical information under “Election of Directors” above.

 

Compensation Committee.  During the year ended December 31, 2007, the Compensation Committee met six times. The Compensation Committee has overall responsibility for our officer compensation plans, policies and programs, and has the authority to engage and terminate any compensation consultant or other advisors to assist the

committee in the discharge of its responsibilities. During 2007, the Compensation Committee conducted a search for a new compensation consultant. As a result of that process, the Compensation Committee selected and engaged Hewitt Associates LLC, or Hewitt, to assist the committee on compensation matters beginning October 1, 2007. Hewitt advises our Compensation Committee on all principal elements of our compensation programs, including market data and compensation analysis, and generally attends meetings of the committee and participates in executive sessions without members of management. Prior to October 2007 and in relation to 2007 compensation matters, our Compensation Committee engaged Compass Consulting & Benefits, Inc., which we refer to as Compass Consulting. Compass Consulting performed market analyses of executive compensation practices and consulted with our senior management in connection with making recommendations to our Compensation Committee as to the form and amount of executive compensation for 2007. Compass Consulting also attended applicable meetings of the Compensation Committee and regularly met with the committee in executive session without members of management present. Additionally, our Chief Executive Officer, Chief Financial Officer, Executive Vice President of Human Resources, Chief Administrative and Legal Officer and Vice President, General Counsel and Corporate Secretary regularly attend our Compensation Committee meetings. Please see the “Compensation Discussion and Analysis” section of this proxy statement for information about our 2007 executive officer compensation.

 

The Compensation Committee administers our Executive Incentive Compensation Plan, or EICP, under which it awards annual bonuses to our officers based upon the attainment of annual performance goals. The Compensation Committee establishes target EICP awards for each officer, expressed as a percentage of the officer’s base salary for that year, and financial goals applicable to EICP awards. The Compensation Committee authorized Mr. Wilkinson to establish individual goals for our executive officers applicable to EICP awards and each of Messrs. Deason, Fees, Kalman, Taff, Nesser and Sannino, in coordination with Mr. Wilkinson, to select such other officers and key employees to participate in the EICP and establish appropriate individual performance goals for them. Under our 2001 Directors and Officers Long-Term Incentive Plan, which we refer to as the 2001 D&O Plan, our Compensation Committee may delegate its duties to our Chief Executive Officer or other senior officers. Pursuant to this authority, our Compensation Committee has authorized our Vice President of Human Resources, together with our Chief Executive Officer, to approve awards up to 5,000 stock options and 1,000 shares of restricted stock or performance units under the 2001 D&O Plan to officers or employees (other than officers subject to the reporting provisions of Section 16 of the Securities Exchange Act of 1934, as amended) in connection with their initial employment or promotion within McDermott; provided that time does not permit the review and approval by the Compensation Committee at its next regularly scheduled meeting and that any grants awarded pursuant to this authorization are subject to ratification by the Compensation Committee at its next regularly scheduled meeting.

 

Finance Committee.  During the year ended December 31, 2007, the Finance Committee met six times. The Finance Committee has the overall responsibility of reviewing and overseeing financial policies and strategies, mergers, acquisitions and financings, liabilities and investment performance of our pension plans and the capital structures of McDermott and its subsidiaries. Generally, the Finance Committee has responsibility over such activities up to $50 million, and for such activities involving amounts above $50 million, the Finance Committee will review the activity and make a recommendation to the Board.

 

Governance Committee.  During the year ended December 31, 2007, the Governance Committee met seven times. This committee, in addition to other matters, recommends to our Board of Directors: (1) the qualifications, term limits and nomination and election procedures relating to our directors; (2) nominees for election to our Board of Directors; and (3) compensation of nonmanagement directors. This committee will consider individuals recommended by stockholders for nomination as directors in accordance with the procedures described under “Stockholders’ Proposals.” Our Governance Committee has primary oversight responsibility for our compliance and ethics program, excluding certain oversight responsibilities assigned to the Audit Committee. In conjunction with the Compensation Committee, the Governance Committee oversees the annual evaluation of our Chief Executive Officer.

 

In May 2007, at the request of the Chairman of the Governance Committee, Compass Consulting performed a market analysis of nonemployee director compensation among 2007 peer group companies (as identified in “Compensation Discussion and Analysis” below) and made recommendations regarding nonemployee director compensation to the Governance Committee. Based on those recommendations, the Governance Committee recommended no changes in the form and amounts of nonmanagement director compensation for 2007. Our

management is not substantively involved in Compass Consulting’s market analysis or recommendation regarding nonmanagement director compensation.

 

All members of our Compensation Committee are independent in accordance with the New York Stock Exchange listing standards. No member of the Compensation Committee (1) was, during the year ended December 31, 2007, or had previously been, an officer or employee of McDermott or its subsidiaries or (2) had any material interest in a transaction of McDermott or a business relationship with, or any indebtedness to, McDermott. No interlocking relationship existed during the year ended December 31, 2007 between any member of the Board of Directors or the Compensation Committee and an executive officer of McDermott.

 

Our Governance Committee has determined that a candidate for election to our Board of Directors must meet specific minimum qualifications. Each candidate must:

 

 

In addition, the Governance Committee also considers it desirable that candidates possess the following qualities or skills:

 

 

The Governance Committee solicits ideas for possible candidates from a number of sources — including members of the Board, our senior level executives and individuals personally known to the members of the Board.

 

Any stockholder may nominate one or more persons for election as one of our directors at an annual meeting of stockholders if the stockholder complies with the notice, information and consent provisions contained in our by-laws. See “Stockholders’ Proposals” in this proxy statement and our by-laws, which may be found on our website at www.mcdermott.com at “Corporate Governance — Governance Policies.”

 

The Governance Committee will consider candidates identified through the processes described above, and will evaluate each of them, including incumbents, based on the same criteria. The Governance Committee also takes into account the contributions of incumbent directors as Board members and the benefits to us arising from their experience on the Board. Although the Governance Committee will consider candidates identified by stockholders, the Governance Committee has sole discretion whether to recommend those candidates to the Board. None of the director nominees for the 2008 Annual Meeting are standing for election for the first time.

 

All share amounts and stock prices described in the tables and accompanying narrative regarding director compensation reflect our two-for-one stock split, effected in the form of a stock dividend, completed on September 10, 2007.

 

The table below summarizes the compensation paid by us to our nonemployee directors during the year ended December 31, 2007.

 

 

 

The compensation for nonemployee directors for 2007 was comprised of cash and equity compensation earned by directors in connection with their service as a director. The cash compensation consisted of retainers and meeting fees described in more detail below. The equity compensation consisted of stock option and restricted stock awards issued under our 1997 Director Stock Program, which we refer to as our 1997 Director Program, and our 2001 Directors and Officer Long-Term Incentive Plan, which we refer to as our 2001 D&O Plan, as described in more detail below. Employee directors do not receive any compensation for their service as directors.

 

Fees Earned or Paid in Cash.

 

Our current director compensation program became effective on May 4, 2006. Under this program, cash compensation for nonemployee directors consists of the following:

 

 

The chairs of Board committees and the Lead Director receive additional annual retainers as follows:

 

Stock and Option Awards.  In addition to the fees and benefits provided to our directors described above, we granted equity awards to our directors under the 1997 Director Program and the 2001 D&O Plan.

 

Under the 1997 Director Program, we grant stock option and restricted stock awards to our nonemployee directors as follows:

 

 

The options have an exercise price equal to the fair market value of our common stock (average of high and low trading price) on the date of grant, become fully exercisable six months after the date of grant, and remain exercisable for ten years after the date of grant. The shares of restricted stock generally lapse at the end of a director’s term and are subject to payment by the director of $1.00 per share (based on par value), transfer restrictions and forfeiture provisions.

 

By its terms, no award may be granted under the 1997 Director Program after June 5, 2007. As a result, we made our final grants of stock options and restricted stock under the 1997 Directors Stock Program in May 2007.

 

Under the 2001 D&O Plan, nonemployee directors may be granted stock option, restricted stock, performance unit, deferred stock unit and performance share awards, in such amounts and on such terms, as the Compensation Committee or the Board may determine from time to time. In 2007, all of our nonemployee directors received 2,354 shares of restricted stock with a value at the time of grant of $80,000 (calculated based on the average of the highest and lowest price of our common stock ($33.96) on the grant date). Under the terms of the award, the restricted stock vested immediately on the grant date.

 

The amounts reported in the “Stock Awards” and “Option Awards” columns represent the associated dollar amounts we recognized in 2007 for financial statement reporting purposes under Statement of Financial Accounting Standards (“SFAS”) No. 123R. Under SFAS No. 123R, the fair value of restricted stock and stock options is determined on the date of grant and is not remeasured. Grant date fair values are determined using the closing price of our common stock on the date of grant, for restricted stock, and an option-pricing model, for stock options. We use the Black-Scholes option-pricing model for measuring the fair value of stock options granted. The determination of the fair value of an award on the date of grant using an option-pricing model requires various assumptions, such as the expected life of the award and stock price volatility. For a discussion of the valuation assumptions, see Note 10 to our consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2007.

The following tables reflect the number of shares and grant date fair value, computed in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123R, covered by each restricted stock and stock option award granted to nonemployee directors in 2007 and the restricted stock and stock option awards each nonemployee director had outstanding as of December 31, 2007:

 

Stock and Option Awards Granted to Directors in 2007

 

 

Director Equity Awards Outstanding at 12/31/07

 

 

Set forth below is the age (as of May 9, 2008), the principal positions held with McDermott or our subsidiaries, and other business experience information for each of our current executive officers other than Bruce W. Wilkinson, who is our Chief Executive Officer and Chairman of the Board. For more information on Mr. Wilkinson, see his biographical information under “Election of Directors” above. Unless we otherwise specify, all positions described below are positions with McDermott International, Inc.

 

Dennis S. Baldwin, 46, has been Vice President and Chief Accounting Officer of McDermott since October 2007. Previously, he served as Chief Accounting Officer of Integrated Electrical Services, Inc,. a national electrical contracting company, from February 2007 to October 2007; as Vice President and Corporate Controller of Veritas DGC, Inc., a seismic company which provides geophysical services to the petroleum industry, from 2005 to 2007; and as Vice President and Corporate Controller of Universal Compression Holdings, Inc., a company providing gas compression services to the domestic and international gas industry, from 2002 to 2005.

 

Robert A. Deason, 62, has been Chief Executive Officer of our subsidiary J. Ray McDermott, S.A. since June 2007. Previously, he served as President and Chief Operating Officer of J. Ray McDermott, S.A. from March 2003 to June 2007. He was also Vice President, Operations of Fluor Corporation, an engineering, procurement, construction and maintenance services company, from March 1999 to January 2003; and Vice President, Project Management Production, Pipelines & Marine Services of Fluor Corporation from June 1997 to March 1999.

 

James R. Easter, 51, has been our Vice President, Corporate Development and Strategic Planning since March 2006. Previously, he was: Vice President, Finance and Treasurer from September 2002 to February 2006; Assistant Treasurer of McDermott from May 2002 to September 2002; Vice President in the Retail Energy Solutions Group of Reliant Resources, Inc., an electricity and energy services company, from December 2000 to May 2002; and was associated with Industrial Growth Partners LP, a private equity fund, from January 2000 to December 2000.

 

John A. Fees, 50, has been President and Chief Executive Officer of our subsidiary The Babcock & Wilcox Company since January 2007 and President and Chief Operating Officer of our subsidiary BWX Technologies, Inc. since September 2002. Previously, he served as President and General Manager of BWXT Services, Inc., a subsidiary of BWX Technologies, from September 1997 to November 2002.

 

Liane K. Hinrichs, 50, has been our Vice President, General Counsel and Corporate Secretary since January 2007. Previously, she served as our Corporate Secretary and Associate General Counsel, Corporate Compliance and Transactions from January 2006 to December 2006; as Associate General Counsel, Transactions, Corporate Compliance and Deputy Corporate Secretary from June 2004 to December 2005; as Assistant General Counsel, Corporate Secretary and Transactions from October 2001 to May 2004; and as Senior Counsel from May 1999 to September 2001. Prior to joining McDermott in 1999, she was a partner in a New Orleans law firm.

 

James C. Lewis, 52, has been our Vice President, Treasurer since March 2006. Previously, he was: Assistant Treasurer of McDermott from July 2003 to February 2006; Vice President, Structuring of Enron Corp., from December 2001 to July 2003 and Vice President, Structuring of Enron Global Markets, LLC, a subsidiary of Enron Corp., from September 2000 to December 2001.

 

John T. Nesser, III, 59, has been our Executive Vice President, Chief Administrative and Legal Officer since January 2007. Previously, he served as our Executive Vice President and General Counsel from January 2006 to January 2007; as Executive Vice President, General Counsel and Corporate Secretary from February 2001 to January 2006; as Senior Vice President, General Counsel and Corporate Secretary from January 2000 to February 2001; as Vice President and Associate General Counsel from June 1999 to January 2000; and as Associate General Counsel from October 1998 to June 1999. Previously, he served as a managing partner of Nesser, King & LeBlanc, a New Orleans law firm, which he co-founded in 1985.

 

Louis J. Sannino, 59, has been our Executive Vice President, Human Resources since January 2007. Previously, he served as our Executive Vice President, Human Resources, Health, Safety & Environmental from February 2005 to January 2007; as Senior Vice President, Human Resources, Health, Safety & Environmental from June 2004 to February 2005;as Senior Vice President, Human Resources and Corporate Compliance Officer from

October 2000 to June 2004; as Vice President, Human Resources from November 1998 to October 2000; and as Director, Human Resources from April 1989 to November 1998.

 

Michael S. Taff, 46, has been our Senior Vice President and Chief Financial Officer since April 2007. He served as our Vice President and Chief Accounting Officer from June 2005 to April 2007. Previously, Mr. Taff served as Vice President and Chief Financial Officer of HMT Inc., an engineering and construction company, from June 2004 to June 2005 and as Vice President and Corporate Controller of Philip Services Corporation, a provider of industrial, environmental, transportation and container services, from September 1994 to May 2004.

 

In addition, Francis S. Kalman, who served as our Executive Vice President and Chief Financial Officer from February 2002 to April 2007, retired from McDermott February 29, 2008. He served as our Executive Vice President immediately prior to his retirement.

 

The following Compensation Discussion and Analysis, or CD&A, provides information relevant to understanding the 2007 compensation of our executive officers identified in the Summary Compensation Table on page 27, whom we refer to as our Named Executives. The following discussion also contains statements regarding future individual and company performance targets and goals. These targets and goals are disclosed in the limited context of McDermott’s compensation programs and should not be understood to be statements of management’s expectations or estimates of results or other guidance. McDermott specifically cautions investors not to apply these statements to other contexts.

 

Compensation Philosophy and Objectives

 

Our compensation programs are based on our belief that our ability to attract, retain and motivate employees with the requisite skill and experience to develop, expand and execute sound business opportunities is essential to our success and the success of our shareholders. To that end, we design and implement compensation programs which generally seek to:

 

 

 

 

With these goals in mind, our Compensation Committee primarily focuses on annual total direct compensation in setting compensation for our Named Executives. Total direct compensation consists of three principal elements:

 

 

Our Compensation Committee targets total direct compensation for our Named Executives at or near the median for comparable positions in our market, and ties annual bonus and long-term compensation elements to individual, company and, where applicable, business unit performance goals designed to generate value for our shareholders. Depending on the level of performance attained, our Named Executives are capable of earning above or below median total direct compensation for similarly situated executives at comparable companies. As we discuss in more detail below, our Compensation Committee also administers several plans as part of our post-employment compensation arrangements designed to reward long-term service and performance.

 

Defining Market Compensation — Benchmarking

 

Our Compensation Committee principally relies on “benchmarking” — reviewing the compensation of our Named Executives relative to the compensation paid to similarly-situated executives at companies we consider to be our peers as well as industry specific survey data — to identify the median compensation paid by the markets in which we compete. Benchmarking is an important tool that provides our Compensation Committee a point of reference to ensure that our target compensation is competitive among companies with whom we compete for business and executive talent. While our Compensation Committee believes that benchmarking is the appropriate starting point for its annual compensation process, it is not the determinative factor for the amount of compensation ultimately paid. As further discussed throughout this CD&A, the Compensation Committee, with the assistance of its compensation consultant and in consultation with our management, tailors compensation opportunities around

performance goals that are not benchmarked but are designed to reward performance that generates shareholder value.

 

To ensure a representative sample of market compensation for 2007, we benchmarked against:

 

 

As a result of the limited nature of peer group data, our Compensation Committee utilized an executive compensation database of approximately 1,060 companies of all revenue sizes. To determine the appropriate comparator companies, we selected companies from the database with revenues similar to ours and, as applicable, our individual segments, depending on the Named Executive’s position.

 

Our Compensation Committee selected the peer group we used for 2007 compensation. The members of that peer group were selected in 2005 based on the joint recommendation of the Compensation Committee’s compensation consultant and our management, based on their business operations and sales volumes, market capitalizations, employment levels, and one or more lines of business that we believed were comparable to McDermott’s.

 

In October 2007, our Compensation Committee engaged a new compensation consultant, Hewitt Associates LLC, or Hewitt. With the assistance of Hewitt, management conducted a review of our peer group to ensure the appropriateness of its component companies. As an engineering and construction company focused on energy, we believe the appropriate group for comparison consists of other similarly situated engineering and construction companies. Based on that recommendation, our Compensation Committee selected a peer group, for use in connection with 2008 compensation decisions, using the following characteristics, which we believe better represents the market in which we operate:

 

 

The 2007 and 2008 peer groups are composed of the following companies:

 

PEER GROUP

 

 

For more information regarding our Compensation Committee’s consultant and the role of the consultant and executive management in executive compensation, see the discussion under the heading “Compensation Committee” on page 8.

Total Direct Compensation

 

Overview.  Total direct compensation is built around our philosophy of targeting market median compensation with incentive components that reflect positive, as well as negative, company and individual performance. While we do not set a target allocation among the total direct compensation elements, historically we have attempted to emphasize performance-based, “at-risk” incentive elements when setting total direct compensation. For 2007, that trend continued.

 

On average, about 70% of the 2007 target total direct compensation opportunity for our Named Executives (except Mr. Kalman) was attributable to annual bonus and long-term compensation. Payments under these elements were directly related to the attainment of specific operating income levels and, in the case of the annual bonus, individual performance goals, as further discussed below. The remainder of a Named Executive’s total direct compensation opportunity for 2007 was from base salary. On average, the 2007 mix of target total direct compensation elements for our Named Executives, excluding Mr. Kalman, looked like this:

 

2007 Named Executive Target Total Direct Compensation (Average, excluding Kalman)

 

 

Mr. Kalman, who had served as our Executive Vice President and Chief Financial Officer since February 2002, resigned as Chief Financial Officer in March 2007 and announced his intention to retire from McDermott in 2008. As a result, he did not receive any long-term compensation award in 2007. Without any long-term compensation, only about 39% of his 2007 target total direct compensation was attributable to “at-risk” incentive compensation, with the remaining 61% from base salary.

 

Relationship of Elements.  The determination of each element of total direct compensation (base salary, annual bonus and long-term compensation) is generally independent of the decisions regarding other elements, except to the extent annual bonus amounts or long-term compensation are expressed as percentages of base salary. However, when determining each element, the Compensation Committee considers the overall effect of each element on total direct compensation for a Named Executive relative to the median compensation of the market for similarly situated officers. Our Compensation Committee reserves the right to adjust the compensation of any individual element to ensure the reasonableness and/or competitiveness of the total direct compensation for a Named Executive. However, our Compensation Committee made no such adjustments to base salary, annual bonus or long-term compensation awarded to Named Executives in 2007.

 

Base Salary

 

Base salaries provide the foundation of our total direct compensation. Our Compensation Committee reviews base salaries annually and targets base salaries at or near the median base salary practices of our market. Our Compensation Committee maintains flexibility to deviate from market-median compensation for individual circumstances but generally does not consider the ratio of the Chief Executive Officer’s compensation to the other Named Executives.

 

In January 2007, Compass Consulting and Benefits, Inc., our Compensation Committee’s consultant at that time, provided the committee with an analysis of total direct compensation for each Named Executive based on the median compensation for similarly situated executives in our market, together with the separate recommendations of the consultant and our Chief Executive Officer with respect to the 2007 base salaries of the Named Executives.

After reviewing the recommendations and market survey information, our Compensation Committee set 2007 base salaries for the Named Executives (except Mr. Wilkinson) at or within 2% below the median salary indicated by our benchmark. At Mr. Wilkinson’s request, his 2007 salary was unchanged from 2006. As a result, his 2007 salary was about 27% below the median base salary indicated by our benchmark.

 

Annual Bonus

 

2007 Overview.  Our Executive Incentive Compensation Plan, which we refer to as the EICP, was most recently approved by our shareholders in 2006. The EICP is a cash bonus plan designed to motivate and reward our Named Executives and other key employees for their contributions to business goals and other factors that we believe drive our earnings and/or create shareholder value. The payment amount, if any, of an EICP award is determined based on: (1) the attainment of short-term financial goals; (2) the attainment of short-term individual goals; and (3) the exercise of the Compensation Committee’s discretionary authority. The EICP award is expressed as a percentage of the Named Executive’s base salary. For more information regarding the mechanics of the EICP and the 2007 award opportunities under the EICP, see the Grants of Plan-Based Awards table below on page 29 and the accompanying narrative disclosures under the heading “Estimated Possible Payouts Under Non-Equity Incentive Plan Awards.”

 

2007 EICP Changes.  Prior to 2007, each EICP award was weighted between the financial and individual goals, with 0-140% attributable to the attainment of financial goals and 0-30% attributable to the attainment of the individual goals. Our Compensation Committee also had the discretion to award up to an additional 30% of the target EICP award. Relative to the individual goals and discretionary components, our Compensation Committee considered the financial goals to be more objective and to more directly influence the creation of shareholder value. As a result, our Compensation Committee changed the weighting allocation among the components to give greater weight to the financial goals. For 2007, up to 170% of an EICP award was attributable to the attainment of the financial goals and up to 30% of an EICP award was attributable to the Named Executive’s performance relative to specific individual goals determined and evaluated by our Chief Executive Officer. Our Compensation Committee may increase or decrease an EICP award in its discretion. The maximum EICP award a Named Executive can earn is 200% of his target EICP award.

 

 

2007 EICP Target Awards.  For 2007, our Compensation Committee set the amount of target EICP awards for all Named Executives at or near the median annual incentive award targeted by our market for similarly situated executives. Specifically, the 2007 EICP target awards, as a percentage of base salary, for our Named Executives were all within +/- 8% of the median target percentages for annual cash incentive awards indicated by our benchmarking results.

 

2007 EICP Financial Goals.  Our Compensation Committee establishes three levels of financial goals for determining the threshold, target and maximum payment under an EICP award for financial performance. For the 2007 EICP awards, our Compensation Committee set financial goals based upon year-over-year increases in our consolidated and, where applicable, segment operating income. We consider operating income the optimal business measure to use for this purpose, because we believe it is the primary driver of net income, which we expect to drive our stock price. In comparison to net income, operating income is more directly influenced by the revenues generated and costs incurred as a result of management action, and is more readily attributable to our operating segments.

The consolidated and segment operating income goals for 2007 EICP were as follows:

 

 

 

 

In determining the specific levels of operating income, our Compensation Committee believes that the target and maximum goals should be set at levels that, if achieved, are likely to produce reasonable and above-average value for shareholders, respectively, but that also have reasonable probabilities of achievement, relative to the payout, so as to provide a meaningful incentive to employees. As recommended by management, our Compensation Committee set the 2007 target goal in February 2007 at management’s internal estimates of 2007 operating income and set the 2007 maximum goal at a “stretch” cumulative operating income level for 2007. We considered the attainment of the stretch goal to be significantly less probable than the target goal but, at twice the payout, it provided considerable additional incentive to encourage profitable growth. The target and maximum financial goals represented approximately 22% and 43% year-over-year increases from our 2006 consolidated operating income, respectively. Consistent with past practice, our Compensation Committee believed that no amount should be paid under an EICP award for financial performance if operating income results are below 85% of the target level. Accordingly, it set the 2007 threshold level financial goals at 85% of target.

 

For Named Executives affiliated with one of our segments (specifically, Messrs. Deason and Fees), the 2007 financial component, which is responsible for up to 170% of an EICP award, was allocated between consolidated and applicable segment operating income, with 0-120% attributable to the attainment of segment financial goals and 0-50% attributable to the attainment of the consolidated financial goals. For all other Named Executives, the 2007 financial component was based entirely on consolidated operating income.

 

2007 EICP Individual Goals.  The individual goals and target weighting for our Named Executives’ 2007 EICP awards were set as follows:

 

For Bruce W. Wilkinson, our Chief Executive Officer:

 

 

For Francis S. Kalman, our Executive Vice President and former Chief Financial Officer:

 

 

For Michael S. Taff, our Senior Vice President and Chief Financial Officer:

 

 

For Robert A. Deason, Chief Executive Officer of J. Ray McDermott, S.A.:

 

 

For John A. Fees, President and Chief Executive Officer of The Babcock & Wilcox Company:

 

 

For John T. Nesser III, our Executive Vice President, Chief Administrative and Legal Officer:

 

 

2007 EICP Payments.  In February 2008, our Chief Executive Officer presented our Compensation Committee with an assessment regarding the financial and individual performance goals applicable to each of the Named Executives, together with his recommendation for each Named Executive’s 2007 EICP award.

 

Financial Component Payment.  To determine the amount of the 2007 EICP award to be paid under the financial component, which constitutes 0-170% of the EICP award amount, the Compensation Committee considered McDermott’s 2007 GAAP consolidated and segment operating income in light of the established operating income goals. Because the levels of operating income attained exceeded the maximum financial goal for each Named Executive, our Compensation Committee accepted the recommendation of our Chief Executive Officer to pay each Named Executive 170% of their target award amount.

 

Individual Component Payment.  Our Compensation Committee also considered the Chief Executive Officer’s assessments of each Named Executive’s individual performance to determine the amount to be paid under the individual component, which constitutes 0-30% of the EICP award amount. Each of Mr. Deason and Mr. Kalman achieved the individual goals applicable to him. As a result, our Compensation Committee accepted our Chief Executive Officer’s recommendation to pay each of those Named Executives 30% of their target award amount. Messrs. Wilkinson, Fees, Nesser and Taff met or exceeded their individual goals, except with respect to one of their goals, which in each case, was only partially achieved. As a result of the individual goals achieved and in recognition of each officer’s contribution to the individual goal partially achieved, our Compensation Committee accepted the recommendation of our Chief Executive Officer to pay each of these Named Executives 20% of their target award amount under the individual component and an additional 5% under its discretionary authority.

The 2007 target and final EICP awards paid to each Named Executive are shown in the table below.

 

2007 EICP AWARDS SUMMARY

 

 

 

 

Long-Term Compensation

 

We believe that the interests of our shareholders are best served when a significant percentage of compensation is comprised of equity and other long-term incentives that appreciate in value contingent upon increases in the price of our common stock and other indicators that reflect improvements in business fundamentals. Therefore, our Compensation Committee includes equity and other long-term incentive awards as a significant part of a Named Executive’s total direct compensation.

 

Timing of Equity Grants.  Since 2005, our Compensation Committee has granted annual equity awards at its regularly scheduled committee meeting held in connection with our annual meeting of stockholders. To avoid timing equity grants ahead of the release of material nonpublic information, our Compensation Committee generally approves stock option and other equity awards effective as of the first day of the next open trading window, which is generally the third day following the filing of our annual report on Form 10-K or quarterly report on Form 10-Q with the Securities and Exchange Commission.

 

2007 Overview.  Similar to 2006, the long-term compensation element of total direct compensation consisted entirely of grants of performance shares, which vest three years from the date of grant in an amount between 0% and 150% of the target share amount depending on the level of our cumulative operating income for 2007, 2008 and 2009. Consistent with our compensation philosophy, our Compensation Committee structured the 2007 performance shares with variable vesting contingent on operating income to encourage and reward financial performance we expect to generate shareholder value. Additionally, our Compensation Committee believes that the three-year vesting condition provides an important retention component. The 2007 performance share grants accounted for between approximately 40% and 50% of the 2007 target total direct compensation of our Named Executives, excluding Mr. Kalman, who announced his intent to retire prior to the granting of the 2007 long-term compensation awards.

 

For more information regarding the 2007 performance shares, see the Grants of Plan-Based Awards table below on page 29 and the accompanying narrative disclosures under the heading “Estimated Future Payouts Under Equity Incentive Plan Awards.”

 

2007 Target Long-Term Compensation.  For 2007, the performance shares granted generally reflected the median value of annual stock awards to similarly situated executives in our market, with the exception of Mr. Wilkinson. At his request, the value of target performance shares granted to him was approximately 50% of the median value. The values of the target performance shares granted to the other Named Executives in 2007 were all within 2% of the median award value indicated by our market. The number of performance shares granted was determined by dividing the expected value of one performance share into the dollar value of the median award value of similarly situated executives in our market. The expected value of one performance share, based on valuation methodology provided by our survey data provider, was .7816 of the market value of one share of our common

stock. The fair market value of our common stock was $52 (on a pre-split basis) at the time the market analysis was prepared. As a result, target performance share awards were based on a performance share value of $40.64.

 

2007 Performance Targets for Long-Term Compensation.  The 2007 performance shares vest between 0% and 150% of the amount of shares initially granted relative to threshold, target and maximum levels of cumulative operating income obtained over the three years ending December 31, 2009. The vesting percentage between the threshold level (25%) and maximum (150%) of cumulative operating income is determined by linear interpolation.

 

On the recommendation by management, our Compensation Committee tied the cumulative operating income at the target and maximum vesting levels to 6% and 10% year-over-year increases in our operating income from assumed 2007 operating income levels. Our Compensation Committee used the 2007 EICP goal as the baseline operating income to determine the cumulative operating income goal for target vesting (100%). By structuring target vesting from target EICP, our Compensation Committee sought to complement and leverage consolidated operating income results that may be achieved as a result of our annual bonus element to Total Direct Compensation. To determine the cumulative operating income goal for maximum vesting (150%), our Compensation Committee assumed 2007 operating income at a level it expected to encourage consistent and profitable growth. By increasing operating income at 10% annually from that baseline, our Compensation Committee sought to drive the creation of significant shareholder value by setting the goal for maximum vesting at a level that was approximately 45% higher than the cumulative operating income goal for maximum vesting under our 2006 performance shares. Finally, as with our 2007 EICP awards, our Compensation Committee believes that no performance shares should vest for cumulative operating income below 85% of the target level. As a result, no portion of our 2007 performance share awards will vest if our cumulative operating income is below the threshold level for the three-year measurement period.

 

Perquisites

 

Perquisites are not factored into the total direct compensation of our Named Executives. We prefer to compensate our Named Executives using a mix of current, short-term and long-term compensation with an emphasis on performance, and do not believe that providing an executive perquisite program is consistent with our overall compensation philosophy. As a result, perquisites and other personal benefits are typically provided to Named Executives on an exception basis.

 

We own a fractional interest in two aircraft, which we acquired and use for business purposes and which we make available to our Named Executives for personal use upon the approval of our Chief Executive Officer. When we permit the personal use of aircraft by a Named Executive, we have a choice regarding the amount of income tax imputed to the executive officer for that use. Under current Internal Revenue Service rules, we may impute to the executive officer the actual cost incurred by us for the flight or an amount based on Standard Industry Fare Level (“SIFL”) rates set by the U.S. Department of Transportation. Imputing income based on SIFL rates usually results in less income tax liability to the executive officer but higher income taxes to us due to limitations on deducting aircraft expenses that exceed the income imputed to employees. To minimize our cost of permitting the personal use of the aircraft, we impute income for personal use of aircraft to our Named Executives based on the actual cost incurred by us for the flight, rather than the SIFL rates.

 

The amounts reported in the Summary Compensation Table on page 27 for perquisites represent the incremental cost — and not the total cost — of providing the benefit, without regard to the value of the benefit to the Named Executive. We compute incremental cost for personal use of aircraft on the actual cost incurred by us for the flight, including:

 

 

Since the two aircraft are used primarily for business travel, incremental costs generally exclude fixed costs such as the purchase price of our interests in the aircraft, aircraft management fees, depreciation, maintenance and

insurance. Our cost for flights using aircraft, whether business or personal, is not affected by the number of passengers. As a result, we do not assign any amount, other than the amount of any disallowed deduction, when computing incremental costs for the presence of guests accompanying a Named Executive on such flights. While we do not generally incur any additional cost, this travel may result in imputed income to the Named Executive and disallowed deductions on our income taxes. We provide the Named Executive with a tax gross-up for the imputed income when spousal attendance is related to the underlying business purpose of a particular flight.

 

Post-Employment Compensation

 

Retirement Plans

 

Overview.  We provide retirement benefits through a combination of qualified defined benefit pension plans, which we refer to as our Retirement Plans, and a qualified defined contribution 401(k) Plan, which we refer to as our Thrift Plan, for most of our regular employees, including our Named Executives. We sponsor the following four Retirement Plans:

 

 

In addition to the broad-based qualified plans described above, we sponsor unfunded, nonqualified or excess retirement plans. The excess plans cover a small group of highly compensated employees, including our Named Executives, whose ultimate benefit under the applicable Retirement Plan is reduced by Internal Revenue Code Sections 415(b) and 401(a)(17) limits. Benefits under the excess plans are paid from our general assets. See the Pension Benefit table on page 35 and accompanying narrative for more information regarding our Retirement Plans.

 

Recent Changes to Retirement Plans.  Over the past several years, we have reassessed our retirement plans due to the volatility, cost and complexity associated with defined benefit plans and evolving employee preferences. As a result, we have taken steps to shift away from traditional defined benefit plans and toward a defined contribution approach. In 2003, we closed the JRM Retirement Plan to new participants and froze benefit accruals for existing participants. In lieu of future defined benefit plan accruals under the JRM Retirement Plan, we amended our Thrift Plan to provide affected employees with an automatic cash contribution to their Thrift Plan account equal to 3% of the employee’s base pay, plus overtime pay, expatriate pay and commissions, which we refer to collectively as thriftable earnings. Mr. Deason had not satisfied the JRM Retirement Plan eligibility requirements at the time that plan was closed to new participants. Therefore, he does not participate in a Retirement Plan or an excess plan. In 2006, we closed the McDermott, B&W and BWXT Retirement Plans to new salaried participants and froze benefit accruals for existing salaried participants with less than five years of credited service as of March 31, 2006, subject to specific annual cost-of-living increases. In lieu of future defined benefit plan accruals under those plans, we further amended our Thrift Plan to provide an automatic cash contribution to the Thrift Plan accounts of affected employees and new hires in an amount between 3% and 8% of the employees’ thriftable earnings, based on their length of service. Both Mr. Taff and Mr. Kalman were affected by these changes. Mr. Taff does not participate in a Retirement Plan or an Excess Plan because he had not met the McDermott Retirement Plan eligibility requirements at the time that plan was closed to new participants. Mr. Kalman had less than five years of credited service as of March 31, 2006. Accordingly, his credited service and accrued benefit under the McDermott Retirement Plan were frozen as of that date, subject to annual cost-of-living increases. In 2007, we offered salaried participants in the McDermott, B&W and BWXT Retirement Plans with between five and ten years of credited service as of January 1, 2007 the one-time irrevocable choice between (1) continuing to accrue future benefits under the Retirement Plan or (2) freezing their Retirement Plan accrued benefit as of March 31, 2007, subject to annual cost-of-living increases, and receiving an automatic service-based cash contribution to their Thrift Plan account instead. Based on years of service, Messrs Wilkinson and Nesser were offered this choice. Mr. Wilkinson chose to have his McDermott Retirement Plan accrued benefit frozen. Therefore, his service after March 31, 2007 is not taken into account as

credited service under a Retirement Plan. Mr. Nesser chose to continue to accrue future benefits under the McDermott Retirement Plan, and he continues to be credited with service under that plan.

 

Supplemental Plans.  In 2005, as part of our philosophy to move away from defined benefit plans, our management recommended that the Board of Directors and the Compensation Committee terminate our then existing defined benefit supplemental executive retirement plan. In its place, our Board of Directors and Compensation Committee established a new supplemental executive retirement plan, which we refer to as the SERP, to help maintain the competitiveness of our post-employment compensation as compared to our market. The SERP is an unfunded, nonqualified plan that provides participants with benefits based upon the participant’s notional account balance at the time of retirement or termination. Annually, we credit a participant’s notional account with an amount equal to 5% of the participant’s base salary and annual bonus. The Compensation Committee has designated deemed mutual fund investments to serve as indices for the purpose of determining notional investment gains and losses to the participant’s account. Each participant allocates the annual notional contribution among the various deemed investments. SERP benefits are based on the participant’s vested notional account balance at the time of retirement or termination. Please see the Nonqualified Deferred Compensation table on page 37 and accompanying narrative for further information about the SERP and our contributions to our Named Executives’ accounts.

 

Employment and Severance Arrangements

 

Employment and Separation Agreements.  Except for change-in-control agreements, we do not currently have any employment or severance agreements with any of our Named Executives, other than Mr. Kalman. Our Compensation Committee believes it is appropriate in certain circumstances to enter into separation agreements with key officers. Under such agreements, the officer would be retained as a consultant for a limited period to assist us in the transition to his successor and other general matters as needed. In general, the officer would receive a pro-rated EICP award for the year the separation agreement commences, continued vesting in equity awards at the normal vesting schedule for the duration of the consulting period, and accelerated vesting of the unvested portion of his SERP account. In February 2008, we entered into a separation agreement with Mr. Kalman. In addition, in March 2008, the Governance Committee of our Board entered into a separate agreement with Mr. Kalman for specific consulting services to assist with our chief executive officer succession planning process. See the narrative following the Potential Payments upon Termination or Change in Control table on page 39 for more information regarding Mr. Kalman’s agreements.

 

Change-in-Control Agreements.  In our experience, change-in-control agreements for Named Executives are common within our industry, and our Board and Compensation Committee believe that providing these agreements to our Named Executives protects shareholders’ interests by helping to assure management continuity and focus through and beyond a change in control. In general, our change-in-control agreements provide a severance payment of two times the sum of the Named Executive’s base salary and target EICP award and provide an additional tax gross-up in the event of any excise tax liability. Based on a review of our peer group at the time our Compensation Committee adopted the change-in-control agreements, peer companies utilizing a change-in-control agreement generally provided severance payments of between two and three times the executive’s salary and bonus and tax gross-up for any excise tax imposed by federal income tax regulations on the payment. In addition, our Compensation Committee also considered federal income tax rules limiting our ability to deduct change-in-control payments that, in general, exceed 2.99 times an executive’s average W-2 income for the five years preceding the change-in-control. As a result, our Compensation Committee set the severance payment at the low end of our market in an effort to remain competitive among our peers while minimizing the potential for lost deductions related to change-in-control payments. Additionally, these agreements contain what is commonly referred to as a “double trigger,” that is, they provide benefits only upon an involuntary termination or constructive termination of the executive officer within one year following a change in control. Our Compensation Committee determined to use a double trigger feature to promote the achievement of the purpose for which these agreements were instituted — management continuity and focus following a change in control. See the Potential Payments Upon Termination or Change in Control table on page 39 and the accompanying narrative disclosures for more information regarding the change in control agreements with our Named Executives, as well as other plans and arrangements that have different trigger mechanisms that relate to a change in control.

Stock Ownership Guidelines

 

Overview.  To align the interests of directors, executive officers and shareholders, we believe our directors and executive officers should have a significant financial stake in McDermott. To further that goal, we adopted stock ownership guidelines effective January 1, 2006, requiring generally that our nonmanagement directors and our officers maintain a minimum ownership interest in McDermott. The amount required to be retained varies depending on the executive’s position. The guidelines require our Chief Executive Officer to own and retain a minimum of 100,000 shares of our common stock, and our other Named Executives to own and retain at least 35,000 shares. The guidelines require nonmanagement directors to own and retain a minimum of 6,000 shares of our common stock.

 

Directors and officers have five years from the effective date of the stock ownership guidelines or their initial election as a director/officer, whichever is later, to comply with the guidelines. Our Compensation Committee has discretion to waive or modify the stock ownership guidelines for directors and officers.

 

Compliance.  We assess our Named Executives’ compliance with these guidelines annually. When calculating stock ownership for purposes of these guidelines, we do not include any stock options, even if vested but unexercised. All of our Named Executives are in compliance with these guidelines. Additionally, we have considered these guidelines and believe that the minimum levels continue to be appropriate for our officers and directors.

 

We have reviewed and discussed the Compensation Discussion and Analysis with McDermott’s management and, based on our review and discussions, we recommended to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement.

 

THE COMPENSATION COMMITTEE

 

Ronald C. Cambre, Chairman
Roger A. Brown
Oliver D. Kingsley, Jr.
Thomas C. Schievelbein

 

All share amounts and stock prices described in the following tables and accompanying narratives reflect our two-for-one stock split, effected in the form of a stock dividend, completed on September 10, 2007.

 

The following table summarizes compensation of our Chief Executive Officer, our current and former Chief Financial Officer and our three highest paid executive officers who did not serve as our CEO and CFO during 2007, whom we refer to as our Named Executives, for the fiscal years ended December 31, 2006 and December 31, 2007. No compensation information for Mr. Taff is provided for 2006 because he became a Named Executive in 2007.

 

 

 

Stock and Option Awards.  The amounts reported in the “Stock Awards” and “Option Awards” columns represent the associated dollar amounts we recognized in 2006 and 2007 for financial statement reporting purposes under SFAS No. 123R. Under SFAS No. 123R, the fair value of equity-classified awards, such as restricted stock, performance shares and stock options, is determined on the date of grant and is not remeasured. Grant date fair values are determined using the closing price of our common stock on the date of grant, for restricted stock and performance shares, or an option-pricing model, for stock options. We use the Black-Scholes option-pricing model for measuring the fair value of stock options granted. The determination of the fair value of an award on the date of grant using an option-pricing model requires various assumptions, such as the expected life of the award and stock price volatility. For a discussion of the valuation assumptions, see Note 10 to our consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2007. For liability-classified awards, such as cash-settled deferred stock units, fair values are determined based on the closing price of our common stock at grant date and are remeasured based on the closing price of our common stock at the end of each reporting period through the date of settlement. See the “Grants of Plan Based Awards Table” for more information regarding the stock awards we granted in 2007.

 

Non-Equity Incentive Plan Compensation.  The amounts reported in the “Non-Equity Incentive Plan Compensation” column are attributable to the EICP award earned in fiscal years 2006 and 2007, but paid in 2007 and 2008, respectively.

 

Change in Pension Value and Nonqualified Deferred Compensation Earnings.  The amounts reported in the “Change in Pension Value and Nonqualified Deferred Compensation Earnings” column represent the change in actuarial present value of the accumulated benefit under defined benefit plans: at December 31, 2006, as compared to December 31, 2005, for fiscal year 2006; and at December 31, 2007, as compared to December 31, 2006, for fiscal year 2007.

All Other Compensation.  The amounts reported in the “All Other Compensation” column are attributable to the following:

 

All Other Compensation

 

 

Thrift Match and Service-Based Thrift Contribution.  For information regarding our Thrift Plan matching contributions and service-based Thrift Plan contributions, see “Compensation Discussion and Analysis — Retirement Plans” above.

 

Tax Gross-Ups.  The tax gross-ups reported under “All Other Compensation” are attributable to the following:

 

 

Perquisites.  Perquisites and other personal benefits received by a Named Executive are not included if their aggregate value does not exceed $10,000. For Messrs. Wilkinson and Kalman, the values of the perquisites and other personal benefits reported for 2006 are attributable to personal use of aircraft in which we have a minority equity interest, as follows:

 

 

We have provided the following Grants of Plan-Based Awards table to provide additional information about stock and option awards and equity and non-equity incentive plan awards granted to our Named Executives during the year ended December 31, 2007.

 

 

 

Estimated Possible Payouts Under Non-Equity Incentive Plan Awards

 

Our Compensation Committee administers the Executive Incentive Compensation Plan, a cash bonus incentive program, which we refer to as the EICP. The payment amount, if any, of an EICP award is determined based on: (1) the attainment of short-term financial goals; (2) the attainment of short-term individual goals; and (3) the exercise of the Compensation Committee’s discretionary authority. Each year, our Compensation Committee establishes financial goals and, with respect to our Chief Executive Officer, individual goals. Our Chief Executive Officer establishes individual goals for the other Named Executives.

 

The financial goals contain threshold, target and maximum performance levels which, if achieved, result in payments of 25%, 100% and 200% of the financial component, respectively. If the threshold financial goal is not achieved, no amount is paid on an EICP award under the financial component. For purposes of evaluating McDermott’s performance under the financial performance component, our Compensation Committee may adjust our results prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) for unusual, nonrecurring or other items in the Committee’s discretion. Payment is made on an EICP award under the individual component based on the attainment of the Named Executive’s individual goals as determined and evaluated by our Chief Executive Officer. In addition, our Compensation Committee may increase or decrease an EICP award in its discretion. The maximum EICP award a Named Executive can earn is 200% of his target EICP award.

 

The amounts shown reflect grants of 2007 EICP awards. In February 2007, our Compensation Committee established target EICP awards, expressed as a percentage of the Named Executive’s 2007 base salary. The amount shown in the “target” column represents the value of the target EICP award by multiplying the target percentage established for each Named Executive by the Named Executive’s 2007 base salary. For 2007, the target percentage of each Named Executive (except for Mr. Taff) was as follows: 100% for Mr. Wilkinson; 70% for Messrs. Deason and Fees; and 65% for Messrs. Kalman and Nesser. On April 1, 2007, Mr. Taff was promoted to Chief Financial Officer from Chief Accounting Officer. As a result, his 2007 EICP target amount represents the combined prorated target award of his EICP target as Chief Accounting Officer (45% of $300,000) and as Chief Financial Officer (55% of $400,000). The amount shown in the “maximum” column represents the maximum amount payable under the EICP, which is 200% of the target amount shown. The amount shown in the “threshold” column represents the amount payable under the EICP assuming the threshold level of the financial goals, but no individual goal, is attained and our Compensation Committee did not exercise any discretion over the EICP award. The financial goal represents 85% of the target EICP award. Attaining only the threshold level, or 25%, of the financial goal results in an EICP payment of 21.25% of the target EICP award. See “Compensation Discussion and Analysis — Annual Bonus” on page 19 for more information about the 2007 EICP awards and performance goals.

Estimated Future Payouts Under Equity Incentive Plan Awards

 

The amounts shown reflect grants of Performance Shares under our 2001 D&O Plan. Each grant represents a right to receive one share of McDermott common stock for each vested performance share. The amount of performance shares that vest will be determined on the third anniversary of the date of grant based on our cumulative operating income between January 1, 2007 and December 31, 2009. For purposes of evaluating McDermott’s cumulative operating income, our Compensation Committee may adjust our results prepared in accordance with GAAP for unusual, non-recurring or other items in the Committee’s discretion. The amounts shown in the “target” column represent the number of performance shares granted, which will vest under each grant if the target level of cumulative operating income is attained. The amounts shown in the “maximum” column represent the number of performance shares that will vest under each grant, which is 150% of the amount granted, if the maximum level of cumulative operating income is attained. The amounts shown in the “threshold” column represent the number of performance shares that will vest under each grant, which is 25% of the amount granted, if the minimum level of cumulative operating income is attained. No amount of performance shares will vest if the cumulative operating income achieved is less than the minimum performance level. See “Compensation Discussion and Analysis — Long-Term Compensation” on page 22 for more information regarding the 2007 Performance Shares and threshold, target and maximum operating income performance levels.

 

Grant Date Fair Value of Stock and Option Awards

 

The amounts included in the “Grant Date Fair Value of Stock and Option Awards” column represent the full grant date fair values of the equity awards computed in accordance with SFAS No. 123R. Under SFAS No. 123R, the fair value of equity awards, such as performance shares, is determined on the date of grant and is not remeasured. Grant date fair values are determined using the closing price of our common stock on the date of grant. For more information regarding the compensation expense related to 2007 performance shares and other awards, see Note 10 to our consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2007.

In addition, we have provided the following Outstanding Equity Awards at Fiscal Year-End table to summarize the equity awards we have made to our Named Executives which were outstanding as of December 31, 2007.