Compensation Discussion and Analysis
The following Compensation Discussion and Analysis, or CD&A, provides information relevant to understanding the 20092011 compensation of our executive officers identified in the Summary Compensation Table, whom we refer to as our Named Executives.Executives (we refer to our Named Executives other than Mr. Nesser, who retired in 2011, as our “Continuing 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 our compensation programs and should not be understood to be statements of management’s expectations or estimates of results or other guidance. We caution investors not to apply these statements toin other contexts.
TheIn 2011, the Compensation Committee continued its commitment to targeting reasonable and competitive total direct compensation for our Named Executives, in 2009, with a significant and increased portion of that compensation being performance-based. Specifically,Accordingly, our compensation programs provide competitive opportunities, but the earning of most of those opportunities is dependent upon achievement of performance goals and/or stock price performance. Our compensation programs are based on our belief that our ability to attract, retain and motivate qualified employees to develop, expand and execute sound business opportunities is essential to the success of our company. The Compensation Committee, with the assistance of its compensation consultant, has designed and administered compensation programs with the participation of our management in light of this philosophy. These programs generally seek to provide compensation that:
incentivizes and rewards short- and long-term performance, continuity of service and individual contributions; and
promotes retention of well-qualified executives, while aligning the interests of our executives with those of our stockholders.
Reflecting these compensation objectives, compensation arrangements in 2011 for our Continuing Named Executives (other than Mr. Robert A. Deason):resulted in:
target total direct compensation within approximately 15% of the median compensation for officers in comparable positions
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| | • | 2009in our market, with the exception of Mr. Johnson, whose target total direct compensation was within 10%-15% ofset slightly above market due to his demonstrated leadership following the median compensation of officers in comparable positions in our market;Spin-off; |
| • | |
performance-based compensation accounting for over 60% of target long-term incentive compensation for 2009 was performance-based; and
| • | performance-based compensation accounted for over 55% of 2009 target total direct compensation. |
Mr. Deason announced his intention to retire as the President and Chief Executive Officer of our subsidiary, J. Ray McDermott, S.A., or J. Ray. In lieu of long-term incentive compensation, Mr. Deason received a restricted stock grant to retain him as J. Ray’s principal executive officer through December 31, 2009. Without any performance-based equity in 2009, only 20% of his target total direct compensation, was performance-based. on average, as compared to 46% in 2010; and
performance-based compensation accounting for 75% of target long-term incentive compensation, as compared to 50% in 2010.
As a result, Mr. Deason’s compensation differs from the other Named Executives and, unless otherwise stated in this CD&A, the compensation analysis provided for Named Executives as a group excludes Mr. Deason.
Theprior years, our Compensation Committee
believescontinued to believe that a significant portion of a Named Executive’s compensation should be performance-based, designed to promote and reward the achievement of short- and longer-term
financial objectives that are expected to drive
shareholderstockholder value.
Performance-based compensation for 2011 reflected a balance among the goals of driving operational performance and pursuing long-term stock appreciation. With
this beliefthese goals in mind,
the Compensation Committeewe continued to
tieutilize our established approaches of tying annual
and long-term incentive compensationincentives to operating income
in 2009. However,and granting stock options as a component of long-term incentives, while implementing some adjustments. Among the
Compensation Committee incorporatedadjustments was the inclusion of return on invested capital as a financial performance component of annual incentives. We also resumed granting performance shares, which may vest based upon McDermott’s total shareholder return relative to
select peer companiesits peers. The Compensation Committee had decided not to utilize performance shares as an
additional performance metric in 2009element of long-term incentive compensation
in 2010, in anticipation of the spin-off of The Babcock & Wilcox Company to
help align executive compensation with shareholder return. As a result ofour stockholders ( the “Spin-off”), which was completed on July 30, 2010. In using the performance metrics
useddescribed above and
the emphasis onemphasizing longer-term performance incentives
for the 2011 compensation program, the Compensation Committee believes that our compensation practices help to create
shareholderstockholder value without encouraging executives to take unnecessary and excessive risks to earn incentive compensation.
See “CorporateThe significant 2011 adjustments to the performance-based elements of total direct compensation are reflected below:
Annual Incentive: The 70% financial performance component of the annual
| | incentive for 2011 was 70% based on operating income and 30% based on return on invested capital (“ROIC”). The Compensation Committee believes that ROIC is an appropriate financial measure to use for compensation purposes in addition to operating income because it is an indicator of McDermott’s capital efficiency and productivity. ROIC incentivizes the efficient management of assets and aligns management’s interests with those of our stockholders by measuring stockholder value creation and/or erosion when compared to the cost of capital. |
Long-Term Incentives: In 2011, our Compensation Committee increased the percentage of performance-based compensation in our long-term incentive awards for Continuing Named Executives by 50% over 2010. Specifically, performance-based compensation was increased by our Compensation Committee from 50% of long-term incentive compensation for Continuing Named Executives in 2010 to 75% of long-term incentive compensation for Continuing Named Executives in 2011. Additionally, in 2011 our Compensation Committee resumed the use of performance shares, in addition to awards of restricted stock units and stock options. Long-term incentives for Continuing Named Executives in 2011 were comprised 50% of performance shares, 25% of restricted stock units and 25% of stock options, resulting in 75% of long-term incentives being performance-based. The 2011 performance shares may be paid out based upon McDermott’s relative total shareholder return in comparison to its peers over three-, four- and five-year periods. The Compensation Committee believes the performance shares are an appropriate element of incentive compensation in that they align management’s interests with those of our stockholders by focusing on long-term stockholder return.
McDermott’s financial performance in 2011 included:
Consolidated revenue of $3.4 billion, as compared to $2.4 billion for 2010;
Consolidated operating income of $250.7 million, as compared to $314.9 million for 2010; and
Operationally, in 2011 McDermott:
Achieved backlog of $3.88 billion as of December 31, 2011;
Achieved substantial growth in the Asia Pacific segment, as reflected by increases of over 115% in both revenue and operating income in the segment as compared to 2010;
Amended/refinanced its credit facility to extend the scheduled maturity date, provide additional liquidity, obtain additional flexibility under covenants and reduce fees; and
Established a joint venture entity which we co-own with two Brazilian companies, which joint venture plans to bid to provide engineering, procurement and construction services to the oil and gas industry offshore Brazil.
Under McDermott’s 2011 compensation program,
None of the Continuing Named Executives were awarded bonuses under the 2011 EICP. Based on McDermott’s 2011 financial results, the Continuing Named Executives were eligible to earn approximately 18% of their respective 2011 target EICP compensation, subject to the assessment of their respective individual goals. Upon the recommendation of Mr. Johnson based on the 2011 financial results, the Compensation Committee, in the exercise of its discretion, determined that, although the Continuing Named Executives and other participants in the EICP were eligible to earn approximately 18% of their target EICP compensation, 0% would be awarded in light of the financial results. Instead, as recommended by Mr. Johnson, the Compensation Committee determined that the bonus amounts that otherwise would have been payable should effectively be returned to the shareholders in the form of additional operating income. In making this recommendation and decision, respectively, Mr. Johnson and the Compensation Committee considered the increase in 2011
| | revenues of approximately 43%, together with the decrease in 2011 operating income by approximately 20%, from 2010 levels, the continued performance issues in the Atlantic segment and issues relating to several projects in other segments. |
In making its decision not to award bonuses for 2011 under the EICP, the Compensation Committee noted that Mr. Johnson had achieved the individual performance component, based on the Governance Committee’s assessment of Mr. Johnson’s individual performance against stated goals, and each of Messrs. Elders, Carlson and McCormack and Ms. Hinrichs had achieved their respective individual performance components based on Mr. Johnson’s assessment of their respective individual
performance achievements against stated goals, with the exception of the financial performance goal and safety goal for Mr. McCormack.
As of December 31, 2011, (1) the estimated payout as a percent of target for the performance shares granted in 2011 was 0%, and (2) the share price of our common stock had not exceeded the strike price of the stock options granted in 2011, although as noted below, the estimated payout and share price may change during the term of the performance shares and stock options.
The following table summarizes the 2011 performance-based compensation opportunities for each of our Continuing Named Executives as compared to the realizable value of such opportunities as of December 31, 2011:
2011 Performance-Based Compensation Opportunity vs. Realizable Value as of December 31, 2011
| | | | | | | | | | | | | | | | |
| | | EICP(1) | | | Performance
Shares(2)(3) | | | Stock
Options(2)(3) | | | Total | |
S. M. Johnson | | | | | | | | | | | | | | | | |
2011 Opportunity | | $ | 942,603 | | | $ | 2,382,132 | | | $ | 944,089 | | | $ | 4,268,824 | |
2011 Realizable Value | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
P. L. Elders | | | | | | | | | | | | | | | | |
2011 Opportunity | | $ | 336,911 | | | $ | 595,438 | | | $ | 236,000 | | | $ | 1,168,349 | |
2011 Realizable Value | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
G. L. Carlson | | | | | | | | | | | | | | | | |
2011 Opportunity | | $ | 199,233 | | | $ | 238,175 | | | $ | 94,406 | | | $ | 531,814 | |
2011 Realizable Value | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
L. K. Hinrichs | | | | | | | | | | | | | | | | |
2011 Opportunity | | $ | 261,381 | | | $ | 535,894 | | | $ | 212,421 | | | $ | 1,009,696 | |
2011 Realizable Value | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
J. T. McCormack | | | | | | | | | | | | | | | | |
2011 Opportunity | | $ | 274,549 | | | $ | 634,020 | | | $ | 253,847 | | | $ | 1,162,416 | |
2011 Realizable Value | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| (1) | 2011 Opportunity Values for EICP are disclosed at the Continuing Named Executives’ target EICP award. The 2011 Opportunity Value provided for Mr. McCormack reflects his target EICP award following his promotion to Executive Vice President, Chief Operating Officer. |
| (2) | 2011 Opportunity Values for performance shares and stock options are disclosed at the grant date fair value of the respective awards. |
| (3) | The 2011 Realizable Values shown above are measured as of December 31, 2011. However, the amount of the performance shares granted in 2011 that ultimately vest, if any, will be determined by reference to our total shareholder return over three-, four- and five-year periods. See “Long-Term Incentive Compensation — Analysis of 2011 Equity Grants.” The vesting of any of these performance shares would impact the future Realizable Value of these performance share awards. In addition, an increase in our stock price compared to our stock price at December 31, 2011 may impact the future Realizable Value of the stock option awards granted in 2011. |
Over the past two years, McDermott has also adopted certain compensation and governance policies and practices, as summarized below:
Change in control agreements that: (1) 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; (2) do not provide for excise tax gross-ups, thereby eliminating the gross-up provisions in prior agreements; and (3) require the applicable officer’s execution of a release prior to payment of certain benefits.
Revised stock ownership guidelines that require our officers at the level of vice president or above and nonemployee directors to retain a dollar value of McDermott stock based on a multiple of their respective base salaries or annual retainers.
A clawback policy under which McDermott would seek to recover any incentive-based award granted to any executive officer as required by the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act or any other “clawback” provision required by law or the listing standards of the New York Stock Exchange; and prohibition of directors, officers and employees from engaging in “short sales” or trading in puts, calls or other options on McDermott’s common stock, and prohibition from engaging in hedging transactions and from holding McDermott shares in a margin account or pledging McDermott shares as collateral for a loan.
Impact of 2011 Say on Pay Vote on Executive Compensation
In approving the 2012 compensation of the Continuing Named Executives, the Compensation Committee reviewed the vote on the say-on-pay proposal at the 2011 annual general meeting of stockholders. Approximately 99% of the votes cast on the say-on-pay proposal at that meeting were voted in favor of the proposal. The Compensation Committee believes this affirms stockholders’ support of the Company’s approach to executive compensation. Accordingly, the Compensation Committee did not adopt any specific changes based on the vote. The Compensation Committee will continue to consider the outcome of the Company’s
say-on-pay votes when making future compensation decisions for the named executive officers. The Compensation Committee expects to continue to hold the advisory vote to approve named executive officer compensation every year.
Role of Compensation Committee, Compensation Consultant and Management
Compensation Committee. The Compensation Committee has primary responsibility for determining and approving, on an annual basis, the compensation of our CEO and other executive officers. The Compensation Committee receives information and advice from its compensation consultant as well as from our human resources department and management to assist in compensation determinations.
Compensation Consultant. Our Compensation Committee selected and engaged Pay Governance LLC, or “Pay Governance,” to serve as the consultant to the Compensation Committee on executive and director compensation matters in November 2010, and Pay Governance has been serving in that capacity since that time. Pay Governance provides advice and analysis to the Compensation Committee on the design, structure and level of executive and director compensation, and, when requested by the Compensation Committee, attends meetings of the Compensation Committee and participates in executive sessions without members of management present. Pay Governance reports directly to the Compensation Committee, and the Committee reviews, on an annual basis, Pay Governance’s performance and provides Pay Governance with direct feedback on its performance. Pay Governance also attends meetings of the Governance Committee with respect to nonemployee director compensation.
In 2011, Pay Governance did not perform any services for McDermott other than as described above.
Role of CEO and Management. While the Compensation Committee has the responsibility to approve and monitor all compensation for our executive officers, management plays an important role in determining executive compensation. Management, at the request of the Compensation Committee, recommends financial goals and works with Pay Governance to analyze competitive market data and to recommend compensation levels for our executive officers. Our Chief Executive Officer, Mr. Johnson, likewise assists the Compensation Committee by providing his evaluation of the performance of our other executive officers and recommending compensation for those officers.
Overview of Compensation Elements
The following table summarizes the principal elements of our compensation program for our Named Executives, which we collectively refer to as “total direct compensation.”
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| Compensation Element | | Objective | | Key Features |
Annual Base Salary | | To provide a fixed level of compensation that helps attract and retain executives | | • Salary level recognizes an executive officer’s experience, skill and performance, with the goal of being market competitive based on the officer’s role and responsibilities within the organization. • Adjustments may be made based on individual performance, inflation, pay relative to market and internal equity considerations. • This element is paid in cash. |
Annual Incentive | | To motivate and reward the achievement of short-term company performance | | • The Compensation Committee establishes an annual incentive bonus opportunity for each Named Executive at the beginning of the year. • The annual incentive aligns the Named Executives’ interests with McDermott’s short-term corporate strategies, and correlates pay with the achievement of short-term company goals. • To qualify for a payout, McDermott must achieve a predetermined performance threshold. Actual payouts to Named Executives are based on a combination of financial and individual performance factors, as well as other individual contributions throughout the year. • This element is paid in cash. |
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Long-Term Incentives | | To motivate and reward the achievement of long-term company performance (typically three or more years), align executives’ interests with those of our stockholders and retain executives | | • Long-term awards for our Named Executives in 2011 consisted of 50% performance shares, 25% stock options and 25% restricted stock units. Performance Shares • Structured to be paid out in shares of McDermott common stock at the end of three-, four- and five-year performance periods to the extent applicable performance goals are met. • Performance goals are based on total stockholder return over the applicable performance period relative to McDermott’s peer group. Performance shares pay out at target if these goals are met, below target or not at all if the goals are not met, and above target if the goals are exceeded, up to 200% of the target award. • Intended to align the Named Executives’ interests with those of our stockholders with a focus on long-term results. Stock Options • Structured to vest in one-third increments on the first, second and third anniversaries of the grant date. • Intended to strengthen the relationship between the long-term value of our stock price and the potential financial gain for our Named Executives, as the value of each stock option is realized on exercise only if our stock price increases from the date of grant. Restricted Stock Units • Structured to be paid out in shares of McDermott common stock in one-third increments on the first, second and third anniversaries of the grant date. • Intended to encourage retention of the Named Executives as the restricted stock units vest based on continued employment with McDermott. |
Defining Market Range Compensation — BoardBenchmarking
To identify median compensation for each element of Directorstotal direct compensation, the Compensation Committee relies on “benchmarking.” This involves reviewing the compensation of our Named Executives relative to the compensation paid to similarly situated executives at companies we consider our peers. As a result, the annual base salary, target annual incentive compensation and Itstarget long-term incentive compensation as a whole for each of the Named Executives is benchmarked. However, the specific performance metrics and performance levels used within elements of annual and long-term compensation are designed for the principal purpose of supporting our strategic and financial goals and/or driving the creation of stockholder value, and, as a result, are not generally benchmarked.
Following the engagement of Pay Governance as the Compensation Committee’s consultant in November 2010, Pay Governance reviewed the peer group the Compensation Committee uses for benchmarking at the Compensation Committee’s request and recommended revisions to the component companies. These suggested revisions were discussed and adopted by the Compensation Committee with some further revisions. At the direction of the Compensation Committee, Pay Governance compiled market data from two groups, the Proxy Peer Group and the Survey Group, as discussed below.
Proxy Peer Group. Pay Governance utilized market data based on a set of 18 comparator companies (the “Proxy Peer Group”), identified through a screen of companies with business and financial parity to McDermott. The component companies of the Proxy Peer Group are included on page 42 of this CD&A. The Proxy Peer Group was used as the primary reference point for the Named Executives, with the exception of Mr. Carlson, due to the lack of proxy information on his position. With the exception of market data provided in connection with Mr. McCormack’s promotion to Executive Vice President, Chief Operating Officer (“EVP, COO”), market data from the Proxy Peer Group represented 2009 compensation, as reported in 2010 proxy statements for the fiscal year ended 2009, and is not size-adjusted. The market data provided from the Proxy Peer Group in connection with Mr. McCormack’s promotion to EVP, COO represented 2010 compensation, as reported in 2011 proxy statements for the fiscal year ended 2010.
Survey Peer Group. Pay Governance also utilized market data based on a set of 99 companies in similar industries which participate in Towers Watson surveys (the “Survey Peer Group”). The Survey Peer Group is intended to provide a reference point for pay levels within similar industries. Aside from screening companies on the basis of their industry classifications, no further refinements or judgments were applied in the identification of companies within the sample. The component companies of the Survey Peer Group are included on page 42 of this CD&A. The Survey Peer Group was used as a secondary reference for the Named Executives, with the exception of Mr. Carlson, for whom it was used as a primary reference. Market data from the Survey Peer Group represents 2010 compensation as reported to the survey and, when possible, size adjusted. Corporate positions, including that of Mr. Carlson, were evaluated based on both expected 2011 revenues of $3.4 billion and a longer-term objective of $5 billion in annual revenues, and business unit positions were evaluated based on their respective profit and loss levels.
In this CD&A references to “market” or “our market” are references to the compensation of executives at companies within the Proxy Peer Group for each Named Executive with the exception of Mr. Carlson, and the Survey Peer Group for Mr. Carlson.
Target Total Direct Compensation
The Compensation Committee seeks to provide reasonable and competitive compensation. As a result, it targets the elements of total direct compensation for our Named Executives generally within approximately 15% of the median compensation of our market for comparable positions. Throughout this CD&A, we refer to compensation that is within approximately 15% of market median as “market range” compensation.
The Compensation Committee may set elements of total direct compensation above or below the market range to account for a Named Executive’s performance and experience, internal equity and other factors or situations that are not typically captured by looking at standard market data and practices and that the Compensation Committee deems relevant to the appropriateness and/or competitiveness of a Named Executive’s compensation.
When making decisions regarding individual compensation elements, the Compensation Commit-
tee also considers the effect on the Named Executive’s target total direct compensation and target total cash-based compensation (annual base salary and annual incentives), as applicable. Our Compensation Committee’s goal is to establish target compensation for each element that, when combined, create a target total direct compensation award for each Named Executive that is reasonable and competitive and supports the Company’s compensation philosophy and objectives.
2011 Overview. The 2011 target total direct compensation for each of our Named Executives was within the market range of target total direct compensation, except for Mr. Johnson and Mr. Nesser. The target total direct compensation for
Mr. Johnson was set above market range due to Mr. Johnson’s demonstrated leadership as Chief Executive Officer following the Spin-off. The target total direct compensation for Mr. Nesser was set below market range due to no long-term incentives being provided to him in advance of his anticipated retirement.
The chart below shows the 2011 target total direct compensation by element for each Named Executive. Because the amount of compensation actually paid through the compensation elements that are performance-based is not fixed at the outset, Named Executives may earn compensation above or below the market range for similarly situated executives in our market.
2011 Target Total Direct Compensation Summary
| | | | | | | | | | | | | | |
| Named Executive | | Annual Base Salary | | | Annual
Incentive(1) (% of Salary) | | Long-Term Incentive(2) | | | Target Total
Direct
Compensation as
Percent of
Market(3) | | Percent
Performance-
Based(4) |
S. M. Johnson | | $ | 950,000 | | | 100% | | $ | 4,000,000 | | | 117% | | 67% |
P. L. Elders | | $ | 485,000 | | | 70% | | $ | 1,000,000 | | | 86% | | 60% |
G. L. Carlson | | $ | 336,000 | | | 60% | | $ | 416,720 | | | 112% | | 54% |
L. K. Hinrichs | | $ | 440,000 | | | 60% | | $ | 931,767 | | | 103% | | 59% |
J. T. McCormack(5) | | | | | | | | | | | | | | |
EVP, COO | | $ | 500,000 | | | 70% | | $ | 1,125,000 | | | 73% | | 59% |
SVP, Operations | | $ | 400,000 | | | 50% | | $ | 465,000 | | | 106% | | 51% |
J. T. Nesser | | $ | 512,508 | | | 70% | | | — | | | 83% | | 41% |
Average Mix of Compensation Elements(6) | | | 22% | | | 17% | | | 61% | | | N/A | | 60% |
| (1) | When making decisions as to the elements of a Named Executive’s total direct compensation, the Compensation Committee considers the dollar value of annual incentive compensation but typically awards this element as percentages of annual base salary. This is primarily because our market generally targets annual incentive on a percentage-of-salary basis. |
| (2) | The values provided in this column are the target values of long-term incentives approved by the Compensation Committee. For more information on the grant date fair values of long-term incentives, see the “Grants of Plan-Based Awards” table under “Compensation of Executive Officers” below. |
| (3) | Market = Median annual base salary, based on the benchmark applicable to the executive. 100% represents median compensation. |
| (4) | With the exception of Mr. Nesser, performance-based compensation consists of a Named Executive’s annual incentive and 75% of the target value of long-term incentives, representing that portion of long-term incentive compensation attributable to performance shares and stock options. For Mr. Nesser, performance-based compensation consists only of Mr. Nesser’s annual incentive, as he was not granted long-term incentive compensation in 2011 in anticipation of his retirement by year-end 2011. |
| (5) | In connection with Mr. McCormack’s promotion to EVP, COO on June 30, 2011, Mr. McCormack’s annual base salary and annual incentive compensation target were increased. Additionally, Mr. McCormack received a supplemental long-term incentive award with a target value of $660,000, which, when combined with the long-term incentive award of $465,000 granted to him in March 2011, resulted in total long-term incentives of $1,125,000. |
| (6) | The values provided for the average mix of compensation elements do not include Mr. McCormack’s target compensation pertaining to his former position or Mr. Nesser’s target compensation. |
While the Compensation Committee does not set a specific target allocation among the elements of total direct compensation, it believes that a significant portion of a Named Executive’s total direct compensation should be performance-based. As shown above, excluding Mr. McCormack’s target compensation from his former position and Mr. Nesser’s target compensation, on average, performance-based compensation accounted for approximately 60% of a Named Executive’s 2011 target total direct compensation and 75% of his or her long-term incentive compensation, representing that portion of long-term incentive compensation attributable to performance shares and stock options.
Annual Base Salary
The 2011 base salaries for our Named Executives, which reflect increases that became effective as of April 1, 2011, were as follows:
| | | | | | | | |
| Named Executive | | 2011 Annual Base Salary | | | Percent
Increase | | Percent of
Market(1) |
S. M. Johnson | | $ | 950,000 | | | 3.26% | | 106% |
P.L. Elders | | $ | 485,000 | | | 3.19% | | 105% |
G. L. Carlson | | $ | 336,000 | | | 5.00% | | 105% |
L. K. Hinrichs | | $ | 440,000 | | | 4.19% | | 114% |
J. T. McCormack | | | | | | | | |
EVP, COO | | $ | 500,000 | | | N/A | | 81% |
SVP, Operations | | $ | 400,000 | | | 3.09% | | 110% |
J. T. Nesser | | $ | 512,508 | | | 0.00% | | 100% |
| (1) | Market = Median annual base salary, based on the benchmark applicable to the executive. 100% represents median compensation. |
When considering base salaries effective April 1, 2011, the Compensation Committee sought to set salaries within the market range. Accordingly, the Compensation Committee set annual base salaries within market range for each Named Executive, with year-over-year increases ranging from 0-5%.
In May 2011, in consideration of the market compensation analysis and recommendation provided by Pay Governance in connection with Mr. McCormack’s June 30, 2011 promotion to EVP, COO, the Compensation Committee increased Mr. McCormack’s base salary to $500,000 effective June 30, 2011. The Compensation Committee approved this slightly below market salary based on Mr. McCormack’s relative experience with his new
position and in light of internal pay equity considerations.
Annual Incentive Compensation
2011 Overview and Target Compensation. The Compensation Committee administers our annual incentive compensation program under our Executive Incentive Compensation Plan (the “EICP”).
The EICP is a cash incentive 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 promote creation of stockholder value.
The target 2011 EICP compensation for our Named Executives was as follows:
| | | | |
| Named Executive | | Target EICP
(% of annual
base salary) | | Percent of
Market(1) |
S. M. Johnson | | 100% | | 102% |
P. L. Elders | | 70% | | 87% |
G. L. Carlson | | 60% | | 121% |
L. K. Hinrichs | | 60% | | 85% |
J. T. McCormack(2) | | | | |
EVP, COO | | 70% | | 71% |
SVP, Operations | | 50% | | 113% |
J. T. Nesser | | 70% | | 67% |
| (1) | Market = Median target annual incentive compensation, based on the benchmark applicable to the executive. 100% represents median compensation. |
| (2) | Mr. McCormack’s target EICP was prorated based on his length of service at his current and former positions. |
The 2011 target EICP for Messrs. Johnson, Elders and Nesser remained unchanged from their respective 2010 targets. Mr. Carlson’s and Ms. Hinrichs’ respective targets were each increased to 60% of annual base salary earned for 2011. This resulted in an above-market target for Mr. Carlson; however, the Compensation Committee deemed this target appropriate based on internal pay equity considerations. Mr. McCormack’s 2011 target EICP was increased to 50% of annual base salary earned when the targets were set by the Compensation Committee in February 2011 based on internal pay equity considerations. The target was then increased to 70% in connection with his promotion to EVP, COO in June 2011 to bring his target EICP award closer to market range for his new position and based on internal pay equity considerations.
2011 EICP Performance Goals. Traditionally, EICP compensation has consisted of a financial performance component and an individual performance component. To continue to drive performance of McDermott’s operations, the 2011 EICP target compensation for officers, including the Named Executives, was also set utilizing financial and individual performance components. Generally, the 2011 target EICP was split between financial and individual components as follows:
70% of target EICP was attributable to financial performance, of which 70% was attributable to operating income and 30% was attributable to return on invested capital; and
30% of target EICP was attributable to individual performance.
Financial performance is the largest factor in determining EICP compensation, because the Compensation Committee generally considers it to be more objective and to more directly influence the creation of stockholder value, as compared to individual performance. Individual performance, however, serves as an important metric to help promote the achievement of strategic goals that may not be measured in an annual financial metric. To reward significant individual contributions, the Compensation Committee maintained the individual component for 2011 at 30% of target EICP for 2011. However, to maintain the emphasis on financial performance, payment of EICP compensation (including for individual performance) required the attainment of the threshold level of operating income financial performance. The maximum EICP compensation a Named Executive could earn in 2011 was a multiple of 2x target EICP. For all Named Executives, the Compensation Committee had the discretion to decrease an EICP payment.
As a result, for each Named Executive the EICP payment amount was principally determined based on: (1) the attainment of annual financial goals; and (2) the attainment of annual individual goals, as displayed below:
2011 Financial Performance Goals. Historically, the financial goals for the EICP consisted of operating income levels related to McDermott and/or business unit operating income relevant to each Named Executive. The Compensation Committee considers operating income an appropriate financial measure to use for compensation purposes because it is the primary driver of net income, which the Compensation Committee expects to drive our stock price. In comparison to net income, however, operating income is more directly influenced by the revenues generated and costs incurred as a result of management action. In 2011, operating income comprised 70% of the financial performance component of a Named Executive’s target EICP award.
In 2011, the Compensation Committee added return on invested capital, or ROIC, as an additional financial performance metric under the EICP. The Compensation Committee considers ROIC an appropriate financial measure to use for compensation purposes because it is an indicator of McDermott’s capital efficiency and productivity. ROIC also incentivizes the management of assets, and aligns management’s interest with those of our stockholders by measuring stockholder value creation and/or erosion when compared to the cost of capital. ROIC comprised 30% of the financial performance component of a Named Executive’s target EICP award for 2011.
The Compensation Committee established three primary levels of operating income and ROIC goals, which together would determine the threshold, target and maximum amounts that would be paid under the financial performance component of the EICP. In establishing the target level, the Compensation Committee considered management’s internal estimates of operating income and ROIC, discussed those estimates with Mr. Johnson, and then set the target level and threshold and maximum levels as a percentage of the target level. The Compensation Committee designs incentive compensation to drive target level performance and does not believe that compensation should be earned for performance substantially below that level. As a result, no EICP compensation would be earned (including for individual performance) unless the threshold level of operating income financial performance was attained, irrespective of the level of ROIC attained. The Compensation Committee believes that Named
Executives should be rewarded for superior financial performance. It therefore establishes a maximum level performance goal to incentivize higher performance, but caps the payout to maximize returns to stockholders for performance above the maximum payout level.
For other levels of operating income and ROIC between threshold and maximum, the percentage paid would be determined by linear interpolation using the two neighboring pre-established performance levels and payout as a multiple of target award. No payment would have been earned under the EICP for 2011 if operating income results had been below the threshold level, notwithstanding the ROIC performance level.
A Named Executive would have been eligible to earn the following amounts under the 2011 EICP based on attaining the following levels of operating income and ROIC:
2011 EICP Payout Matrix
| | | | | | | | | | | | | | |
| | | Performance
Goal | | Consolidated
Operating
Income (in millions) | | Payout(1) (as a multiple
of target
EICP award) | | | | Performance
Goal | | Consolidated
ROIC | | Payout(2) (as a multiple of
target EICP
award) |
| | >120% | | >$420 | | 2.00 | | | | >120% | | >16.7% | | 2.00 |
Maximum | | 120% | | $420 | | 2.00 | | | | 120% | | 16.7% | | 2.00 |
| | 110% | | $385 | | 1.50 | | | | 110% | | 15.3% | | 1.50 |
Target | | 100% | | $350 | | 1.00 | | | | 100% | | 13.9% | | 1.00 |
| | 90% | | $315 | | 0.75 | | | | 97% | | 13.4% | | 0.75 |
| | 80% | | $280 | | 0.50 | | | | 93% | | 12.9% | | 0.50 |
Threshold | | 70% | | $256 | | 0.25 | | | | 90% | | 12.4% | | 0.25 |
| | < 70% | | <$245 | | 0.00 | | | | <90% | | <12.4% | | 0.00 |
| (1) | The Payout for consolidated operating income is a multiple of target EICP award with respect to the 70% portion of financial performance goals attributable to operating income. |
| (2) | The Payout for consolidated ROIC is a multiple of target EICP award with respect to the 30% portion of financial goals attributable to ROIC. |
2011 Individual Performance Goals. Individual goals established for each Named Executive were tailored to the individual’s position and focused on supporting strategic initiatives and achieving common goals. Mr. Johnson’s individual goals were established by the Compensation Committee. Each Named Executive, with the exception of Messrs. Johnson and
Nesser, proposed their respective individual goals, which were approved by Mr. Johnson. No individual goals were established for Mr. Nesser in light of his anticipated retirement by year-end 2011. The individual goals for our Continuing Named Executives’ 2011 EICP compensation are set forth in the table on the following page.
| | |
Stephen M. Johnson: | | • Lead the Company and set a philosophy that is well understood, widely supported, consistently applied and effectively implemented; • Establish a clearly-articulated and executable strategy for the Company which conserves cash and leverages capital expenditures in a conservative manner; • Establish appropriate annual and long-term financial objectives; ensure that appropriate systems are maintained to protect assets and maintain effective control of operations; • Develop, attract, retain, motivate and supervise an effective top management team capable of achieving objectives; provide for executive management succession planning; • Serve as the chief spokesperson for the Company, communicating effectively with shareholders and stakeholders; • Work closely with the Board of Directors to keep them fully informed on all important aspects of the Company; make timely recommendations for Board action and respond to suggestions and directives from the Board and its committees; • Achieve specific safety goals and objectives and promote safe work practices as the highest operational priority; and • Assure that all operations and business dealings are conducted with the utmost compliance with applicable laws and regulations and the highest level of ethical behavior is exhibited by the Company. |
| | |
Perry L. Elders: | | • Convert the capital allocation, management reporting, revenue pipeline and estimating methodology from project initiatives into recurring processes; • Build a high performing finance team, including succession and development planning as well as implement development plans including changing duties of certain individuals; • Form a capital team to oversee and manage the capital allocation and authorization process as well as identify and evaluate sources of capital; • Assess and optimize cash investments; • Establish balance sheet forecasts, improve annual budget process, establish operating unit level invested capital calculations to drive ROIC reporting; and • Assist the CEO and executive management with developing a new culture within the Company. |
| | |
Gary L. Carlson: | | • Design and implement a global employee classification scheme; • Deploy talent development and succession planning program to the project organization including discrete, measurable, and time sensitive candidate development plans; • Design and implement a global career development and performance management program; • Close the Third Country National pension plan to new participants and freeze benefit accruals thereunder, and establish a new defined contribution plan for non-U.S. expatriates; • Design a comprehensive mobilization program revision road map; and • Establish a comprehensive information technology plan and governance model, and complete the 2011 information technology initiatives on time and within budget. |
| | |
Liane K. Hinrichs: | | • Lead the legal group through post Spin-off reorganization; • Work with the Board of Directors and management to continue enhancements to the ERM program; and • Lead the review, analysis and response to any significant changes in compliance requirements. |
| | |
John T. McCormack: | | • Achieve specific safety goals and objectives; • Achieve specific levels of financial performance with respect to operating income, return on invested capital and new bookings; • Provide for executive management succession planning; and • Improve communications among the Chief Executive Officer, Chief Operating Officer, McDermott operations personnel and customers. |
2011 Annual Incentive Compensation Payments. The 2011 target and final EICP compensation amounts for each Named Executive are shown in the table below.
2011 EICP Payment Summary
| | | | | | |
| Named Executive | | 2011 EICP
Target
% of Salary | | Final
2011 Annual
Incentive | |
S. M. Johnson | | 100% | | $ | 0 | |
P. L. Elders | | 70% | | $ | 0 | |
G. L. Carlson | | 60% | | $ | 0 | |
L. K. Hinrichs | | 60% | | $ | 0 | |
J. T. McCormack(1) | | | | | | |
EVP, COO | | 70% | | | | |
SVP, Operations | | 50% | | $ | 0 | |
J. T. Nesser | | 70% | | $ | 206,408 | |
| (1) | Mr. McCormack’s target EICP was prorated based on his length of service at his current and former positions. |
Analysis of 2011 EICP Payments. In February 2012, the Compensation Committee considered (1) McDermott’s 2011 consolidated operating income and ROIC; (2) Mr. Johnson’s self-assessment of his individual performance relative to his individual goals; (3) the nonemployee directors’ assessment of the individual performance of Mr. Johnson; and (4) Mr. Johnson’s recommendation of each other Continuing Named Executive’s 2011 EICP compensation based on his assessment of the financial and individual performance applicable to each of those Continuing Named Executives.
In order to determine whether the financial goals were attained, the Compensation Committee utilized McDermott’s consolidated operating income, which was slightly above the threshold level of $245.0 million, and consolidated ROIC of 8%, which was below the threshold level of 12.4%. The consolidated ROIC percentage was derived by dividing (1) the sum of income from continuing operations before noncontrolling interest less net income attributable to noncontrolling interest by (2) the average net assets during 2011, which was calculated by subtracting current liabilities from total assets. The consolidated operating income of $250.7 million resulted in a notional payout level of approximately 26% with respect to the 70% portion of the financial performance goals attributable to operating income, and the consolidated ROIC of 8% resulted in a notional payout of 0.00% with respect to the 30% portion of
financial performance goals attributable to consolidated ROIC. The combined operating income and ROIC performance resulted in eligibility of the participants in the EICP to earn approximately 18% of their target EICP compensation, subject to the assessment of their individual goals.
The Continuing Named Executives. None of the Continuing Named Executives were awarded bonuses under the 2011 EICP. Based on McDermott’s 2011 financial results, the Continuing Named Executives were eligible to earn approximately 18% of their respective 2011 target EICP compensation, subject to the assessment of their respective individual goals. Upon the recommendation of Mr. Johnson based on the 2011 financial results, the Compensation Committee, in the exercise of its discretion, determined that, although the Continuing Named Executives and other participants in the EICP were eligible to earn approximately 18% of their target EICP compensation, 0% would be awarded in light of the financial results. Instead, as recommended by Mr. Johnson, the Compensation Committee determined that the bonus amounts that otherwise would have been payable should effectively be returned to the shareholders in the form of additional operating income, resulting in the reported consolidated operating income of $250.7 million. In making this recommendation and decision, respectively, Mr. Johnson and the Compensation Committee considered the increase in 2011 revenues of approximately 43%, together with the decrease in 2011 operating income by approximately 20%, from 2010 levels, the continued performance issues in the Atlantic region and issues relating to several projects in other regions.
In making its decision not to award bonuses for 2011 under the EICP, the Compensation Committee noted that Mr. Johnson had achieved the individual performance component, based on the Governance Committee’s assessment of Mr. Johnson’s individual performance against stated goals, and each of Messrs. Elders, Carlson and McCormack and Ms. Hinrichs had achieved their respective individual performance components based on Mr. Johnson’s assessment of their respective individual performance achievements against stated goals, with the exception of the financial performance goal and a safety goal for Mr. McCormack.
Mr. Nesser. Pursuant to the terms of Mr. Nesser’s separation agreement entered into in connection with his retirement, Mr. Nesser was paid
his prorated 2011 EICP compensation in August 2011. Per the terms of his separation agreement, Mr. Nesser was paid a cash payment equal to his target bonus under the EICP times a fraction, the numerator of which was the number of days elapsed in the year in which the retirement took place and the denominator of which was 365. Mr. Nesser received a prorated target bonus of $206,408, based on his partial year service. For more information regarding Mr. Nesser’s separation agreement, see “Employment and Severance Arrangements — Employment and Separation Agreements” below.
Long-Term Incentive Compensation
The Compensation Committee”Committee believes that the interests of our stockholders are best served when a significant percentage of executive compensation is comprised of equity and other long-term incentives that appreciate in value contingent upon increases in the value of our common stock and other performance measures that reflect improvements in McDermott’s business fundamentals. Therefore, long-term incentive compensation represents the single largest element of our Named Executives’ total direct compensation.
Analysis of 2011 Equity Grants.
Mix of 2011 Equity. In 2011, the Compensation Committee allocated long-term incentive compensation to officers, including the Continuing Named Executives, as follows:
25% non-qualified stock options; and
25% restricted stock units.
To strengthen its commitment to performance-based compensation, the Compensation Committee resumed using performance shares in 2011. The Compensation Committee believes the granting of total shareholder return (“TSR”) performance shares is an appropriate element of incentive compensation, in that TSR performance shares align the Continuing Named Executives’ interests with those of our stockholders, with a focus on long-term results. The amount of performance shares that vest, if any, is scheduled to initially be determined at the end of three calendar years (including 2011) based on McDermott’s TSR relative to the Proxy Peer Group during the same period, with subsequent measurements of TSR relative to the Proxy Peer Group at the end of four and five calendar years (including 2011). The total percentage of performance shares which
will vest, if any, may range in amount between 0% and 200% of the number of shares granted, depending on McDermott’s TSR relative to the Proxy Peer Group over the applicable measurement periods. As of December 31, 2011, the estimated payout as a percentage of target for the performance shares granted in 2011 was 0% due to the Company’s share price performance versus the Proxy Peer Group.
As in 2009 and 2010, in 2011 the Compensation Committee continued to use stock options, which reward and drive performance based on absolute stock price improvement. The stock options generally vest in one-third increments on the first, second and third anniversaries of the grant date and have an option term of seven years. As of December 31, 2011, the price of the Company’s shares had not exceeded the strike price of the stock options granted in 2011.
Similarly, as in 2008, 2009 and 2010, the Compensation Committee awarded restricted stock units to the Continuing Named Executives, although such restricted stock units represented a smaller percentage of the Continuing Named Executive’s long-term incentive compensation than in the recent past. Restricted stock units are intended to promote the retention of employees, including the Continuing Named Executives, and generally vest in one-third increments on the first, second and third anniversaries of the grant date.
In 2011 our Compensation Committee adopted a clawback policy under which McDermott would seek to recover any incentive-based award granted to any executive officer as required by the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act or any other “clawback” provision required by law or the listing standards of the New York Stock Exchange. Each grant made to the Continuing Named Executives in 2011 was subject to this clawback policy.
Additionally, and consistent with our recent past practice, our grant agreements for awards made in 2011 contained a forfeiture provision. In 2011, this provision provided that in the event that, while the grantee is employed by McDermott or performing services on behalf of McDermott under any consulting agreement, the grantee is convicted of a misdemeanor involving fraud, dishonesty or moral turpitude or a felony, or the grantee engages in conduct that adversely affects or, in the sole judgment of the Compensation Committee, may reasonably be expected to adversely affect, the business reputation
or economic interests of the Company, then all rights and benefits awarded under the respective agreements are immediately forfeited, terminated and withdrawn.
For more information regarding the relationship between2011 performance shares, stock options and restricted stock units, see the “Grants of Plan-Based Awards” table under “Compensation of Executive Officers” below.
Value of 2011 Long-Term Incentive Compensation. The 2011 target long-term incentive compensation for our Named Executives was as follows:
| | | | | | |
| Named Executive(1) | | Target LTI
Value | | | Percent of
Market(2) |
S. M. Johnson | | $ | 4,000,000 | | | 125% |
P. L. Elders | | $ | 1,000,000 | | | 79% |
G. L. Carlson | | $ | 416,720 | | | 114% |
L. K. Hinrichs | | $ | 931,767 | | | 105% |
J. T. McCormack(3) EVP, COO SVP, Operations | | $
$ | 1,125,000
465,000 |
| | 81%
100% |
| (1) | No long-term incentive award was granted to Mr. Nesser in 2011 in light of his anticipated retirement by year-end 2011. |
| (2) | Market = Median target long-term incentives based on the benchmark applicable to the executive. 100% represents median compensation. |
| (3) | The target LTI value shown in connection with Mr. McCormack’s promotion to EVP, COO reflects his March 2011 LTI award in addition to a supplemental award in the amount of $660,000 in connection with his promotion. Percent of market reflected for Mr. McCormack’s current position is the percent of market based upon a combination of Mr. McCormack’s target LTI award values from his former and current positions. |
When considering the target values of long-term incentive to be provided to the Continuing Named Executives, the Compensation Committee sought to set target values within the market range. Accordingly, each Continuing Named Executive’s target long-term incentive value was within market range, with the exception of Messrs. Johnson and Elders and Mr. McCormack’s target long-term incentive value associated with his promotion to EVP, COO in June 2011. When granted, the value of Mr. Johnson’s long-term incentive compensation practices and risks.was above market range in order to further compensate Mr. Johnson for his performance following the Spin-off, while continuing to incentivize him based on the long-term performance of McDermott. The value of Mr. Elders’ long-term incentive compensation was below market
range; however, combined with the other components of compensation for 2011, his target total direct compensation was within market range. The performance-basedvalue of Mr. McCormack’s long-term incentive compensation that paid outfollowing his promotion to EVP, COO was also set below market range in 2009 also reflectedlight of the Compensation Committee’s commitmentview that a newly promoted Chief Operating Officer should receive competitive compensation, although not necessarily equal to pay for performance. McDermott’s cumulative operating incomethe compensation of over $1.8 billiona more experienced officer in a similar position.
As of December 31, 2011, (1) the estimated payout as a percent of target for the three-yearperformance shares granted in 2011 was 0%, and (2) the share price of our common stock had not exceeded the strike price of the stock options granted in 2011. However, the amount of performance shares granted in 2011 that ultimately vest, if any, will be determined by reference to our total shareholder return over three-, four- and five-year periods. The vesting of these performance shares would impact the future realizable value of these performance shares. In addition, an increase in our stock price compared to our stock price at December 31, 2011 may impact the future realizable value of the stock options granted in 2011.
Sizing Long-Term Incentive Compensation. The Compensation Committee generally determines the size of equity-based grants as a dollar value, rather than granting a targeted number of shares. The number of restricted stock units, performance shares and stock options granted can be expressed through the following formula:
target value of target long-term incentive($)/FMV($).
The fair market value of one restricted stock unit was computed based on the full fair market value of McDermott’s common stock based on the closing price of our common stock on the New York Stock Exchange on the date of grant. The fair market value of one performance share was determined by Pay Governance using a Monte Carlo valuation model and the fair market value of an option to acquire one share of our common stock was determined by Pay Governance using a Black-Scholes model. Both of these valuation models consider the full fair market value of our common stock on the date of grant in conjunction with other valuation inputs. Full fair market value may differ from grant date fair value dependent on the analysis performed under Accounting Standards Codification Topic 718.
For example, for the long-term incentive compensation granted to the Continuing Named Executives in March 2011, the fair market value of our common stock as of the date the grants were determined (based on the closing price of our common stock on the New York Stock Exchange) was $25.64, compared to the value of $35.38 for each performance share and the value of $10.19 for an option to acquire one share of our common stock. Because the long-term incentive compensation grants vest over three years, the number of shares calculated was rounded to the nearest multiple of three.
Timing of Equity Grants. To avoid timing equity grants ahead of the release of material non-public information, the Compensation Committee generally grants stock option and other equity awards effective as of the first day of the next open trading window following the meeting at which the grants are approved, which is generally the third NYSE trading day following the filing of our annual report on Form 10-K or quarterly report on Form 10-Q with the SEC. This practice was followed for all long-term incentive compensation grants to Continuing Named Executives in 2011.
Perquisites
We provide a limited number of perquisites and other personal benefits to our Named Executives. In 2011 our Compensation Committee adopted a perquisite allowance for certain officers, including our Named Executives, in the amount of $20,000. The perquisite allowance was provided in order to cover company-required physicals, financial planning and non-company-required spousal travel.
Additionally, and consistent with our past practice, we may reimburse Named Executives for the travel expenses of a guest accompanying a Named Executive, including the provision of a gross-up for any imputed income, but only when the presence of that guest is related to the underlying business purpose of the trip. We also provide our Named Executives with a tax gross-up on any relocation-related expense reimbursements that may be subject to tax.
Retirement Plans
Thrift Plan. We provide retirement benefits for most of our U.S. employees, including our Named Executives, through sponsorship of the McDermott Thrift Plan, a qualified defined contribution 401(k) plan, which we refer to as our “Thrift Plan.”
Retirement and Excess Plans. Some of our longer-term U.S. employees, including Mr. Nesser and Ms. Hinrichs, are entitled to retirement benefits under the McDermott (U.S.) Retirement Plan, the qualified defined benefit pension plan we sponsor, which we refer to as our “Retirement Plan.” The Retirement Plan has been closed to new participants since 2006, and benefit accruals under the Retirement Plan were frozen altogether in 2010.
We also sponsor an unfunded, nonqualified excess retirement plan, which we refer to as our “Excess Plan.” The Excess Plan covers a small group of highly compensated employees, including Mr. Nesser and Ms. Hinrichs, whose ultimate benefits under the Retirement Plan are reduced by Internal Revenue Code limits on the amount of benefits which may be provided under qualified plans and the amount of compensation which may be taken into account in computing benefits under qualified plans. Benefits under the Excess Plan are paid from our general assets. As is the case with the Retirement Plan, benefits under the Excess Plan have been frozen since 2010, and no further benefits are accruing to Ms. Hinrichs or Mr. Nesser under the Excess Plan.
Messrs. Johnson, Elders, and Carlson do not participate in the Retirement Plan or the Excess Plan because their employment with McDermott commenced after new participation in the Retirement Plan was closed. Mr. McCormack does not participate in the Retirement Plan or the Excess Plan because he had not met the applicable eligibility requirements at the time the Retirement Plan was closed to new participants.
See the “Pension Benefits” table under “Compensation of Executive Officers” below for more information regarding the Retirement Plan and the Excess Plan.
Deferred Compensation Plan. The Deferred Compensation Plan is a defined contribution supplemental executive retirement plan established by our Board and the Compensation Committee to help maintain the competitiveness of our post-employment compensation as compared to our market. The Deferred Compensation Plan is an unfunded, nonqualified plan that provides participants with benefits based on the participant’s notional account balance at the time of retirement or termination. Under the Deferred Compensation Plan, on an annual basis the Compensation Committee has the discretion to credit a specified participant’s notional account
with an amount equal to a percentage of the participant’s prior-year base salary and annual bonus paid in the prior year. We refer to such credit as a “Company Contribution.” In 2011, Messrs. Johnson, McCormack and Nesser and Ms. Hinrichs each were participants in the Deferred Compensation Plan and received a Company Contribution in an amount equal to 5% of their respective prior-year base salaries and annual bonuses paid in the prior year. Messrs. Elders and Carlson were also participants and received (1) a Company Contribution in an amount equal to 5% of their respective prior-year base salary paid, and (2) a discretionary contribution equal in value to 5% of their respective target bonuses for 2010 and the value of their respective prior-year target base salaries they would have earned for the period January 1, 2010 through their respective hire dates.
The Compensation Committee has designated deemed mutual fund investments to serve as indices for the purpose of determining notional investment gains and losses to each participant’s account for any Company Contribution or participant elected deferrals. Each participant allocates any Company Contributions and deferrals among the various deemed investments. Deferred Compensation Plan 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 and accompanying narrative below for more information about the Deferred Compensation Plan and Company Contributions to our Named Executives’ Deferred Compensation Plan accounts.
Employment and Severance Arrangements
Employment and Separation Agreements. Except for change-in-control agreements described below, we do not currently have any employment or severance agreements with any of our Continuing Named Executives.
In connection with Mr. Nesser’s retirement, a subsidiary of McDermott entered into a Separation Agreement with Mr. Nesser. Under the terms of the Separation Agreement, Mr. Nesser was entitled to receive various payments and benefits under a Restructuring Transaction Retention Agreement entered into between Mr. Nesser and a subsidiary of McDermott in connection with the Spin-off. These payments and benefits included: (1) a cash payment of two times the sum of Mr. Nesser’s annual base salary and target EICP award; (2) a prorated target EICP award; (3) a cash payment equal to two years
of medical benefits; (4) earned but unused vacation; and (5) full vesting of Mr. Nesser’s outstanding equity awards granted in 2008 and 2009. In addition to those benefits, under the Separation Agreement, Mr. Nesser is treated as if he had continued to be an employee of McDermott for purposes of the vesting of an award of restricted stock units and stock options, which were granted to Mr. Nesser in 2010 and remained unvested as of the date of his Separation Agreement, in accordance with the vesting schedule of those awards.
Additionally, under the Separation Agreement, Mr. Nesser provided general consulting and advisory services to McDermott for a period of six months following his retirement. In consideration of those services, Mr. Nesser received $25,000 per month, as well as reimbursement of reasonable expenses incurred by Mr. Nesser in rendering those services. See “Potential Payments Upon Termination or Change in Control” below for more information on the payments made to and benefits received by Mr. Nesser under his Separation Agreement.
Change-in-Control Agreements. In our experience, change-in-control agreements for certain executive officers are common within our industry, and our Board and Compensation Committee believe that providing these agreements to our Named Executives protects stockholders’ interests by helping to assure management continuity and focus through and beyond a change in control. Accordingly, the Compensation Committee has offered change-in-control agreements to key senior executives since 2005. Our change-in-control agreements generally provide a cash severance payment of two (2.99 for Mr. Johnson) times the sum of the Named Executive’s annual base salary and target EICP and a pro-rated bonus payment under the EICP. In addition, each such officer would become fully vested in any outstanding and unvested equity-based awards and his or her respective account balance in our Deferred Compensation Plan.
Our change-in-control 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. In addition, the change-in-control agreements: (1) do not provide for excise tax gross-ups; (2) require the applicable officer’s execution of a release prior to payment of certain benefits; and (3) provide for the potential reduction in payments to an applicable officer in order to avoid excise taxes.
Because he is no longer employed by McDermott, Mr. Nesser no longer has a change-in-control agreement with McDermott. See the “Potential Payments Upon Termination or Change in Control” table under “Compensation of Executive Officers” below and the accompanying disclosures for more information regarding the change-in-control agreements with our Continuing Named Executives, as well as other plans and arrangements that have different trigger mechanisms that relate to a change in control.
Other Compensation Policies
Stock Ownership Guidelines. To assist with the alignment of the interests of directors, executive officers and stockholders, we believe our directors and officers should have a significant financial stake in McDermott. To further that goal, we have adopted stock ownership guidelines in 2005, as amended effective August 9, 2010 and November 9, 2011, requiring generally that our nonemployee directors and our officers at the level of vice president or above maintain a minimum ownership interest in McDermott. The stock ownership requirements are as follows:
Chief Executive Officer — five times annual base salary;
Executive Officers directly reporting to the Chief Executive Officer — three times annual base salary;
Other Elected Vice Presidents — two times annual base salary; and
Nonemployee Directors — five times annual Board member retainer.
Directors and officers have five years from the effective date of the amended stock ownership guidelines, their initial election as a director/officer, or a change in position which increases the expected ownership level, whichever is later, to comply with
the guidelines. The Governance Committee reviews each director’s and officer’s progress towards the requirements of the stock ownership guidelines annually, and may waive or modify the stock ownership guidelines for directors and officers in the Governance Committee’s sole discretion.
Derivatives Trading and Hedging. McDermott’s Insider Trading Policy prohibits all directors, officers and employees, including our Continuing Named Executives, from engaging in “short sales” or trading in puts, calls or other options on McDermott’s common stock. Additionally, directors, officers and employees are prohibited from engaging in hedging transactions, and from holding McDermott shares in a margin account or pledging McDermott shares as collateral for a loan.
Clawback Policy. Our Compensation Committee has adopted a clawback policy under which McDermott would seek to recover any incentive-based award granted to any executive officer as required by the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act or any other “clawback” provision required by law or the listing standards of the New York Stock Exchange.
Additionally, consistent with our recent practice, our grant agreements for awards made in 2011 contain a forfeiture provision. In 2011, this provision provided that in the event that, while the grantee is employed by McDermott or performing services on behalf of McDermott under any consulting agreement, the grantee is convicted of a misdemeanor involving fraud, dishonesty or moral turpitude or a felony, or the grantee engages in conduct that adversely affects or, in the sole judgment of the Compensation Committee, may reasonably be expected to adversely affect, the business reputation or economic interests of the Company, then all rights and benefits awarded under the respective agreements are immediately forfeited, terminated and withdrawn.
2011 PEER GROUPS
| | | | |
| Proxy Peer Group: | | | | |
| | |
Baker Hughes Incorporated | | FMC Technologies, Inc. | | National Oilwell Varco, Inc. |
Cal Dive International, Inc. | | Global Industries Ltd. 1 | | Noble Corporation |
Cameron International Corporation | | Halliburton Company | | Oceaneering International, Inc. |
Chicago Bridge & Iron Company | | Helix Energy Solutions Group, Inc. | | Oil States International, Inc. |
Dresser-Rand Group, Inc. | | Jacobs Engineering Group, Inc. | | Shaw Group, Inc. |
Foster Wheeler AG | | KBR, Inc. | | Tidewater Inc. |
| | |
| Survey Peer Group: | | | | |
Ameron International Corporation | | Fluor Corporation | | Owens Corning |
Anadarko Petroleum Corporation | | The Goodyear Tire & Rubber Company | | Owens-Illinois, Inc. |
A.O. Smith Corporation | | Graco Inc. | | Parker Hannifin Corporation |
Ball Corporation | | Greif, Inc. | | Parsons Corporation |
Barnes Group, Inc. | | HD Supply, Inc. | | Pittsburgh Corning Corporation |
Beam, Inc. | | Herman Miller, Inc. | | Polymer Group, Inc. |
Bemis Company, Inc. | | Hess Corporation | | PolyOne Corporation |
BG US Services | | HNTB Corporation | | PulteGroup, Inc. |
Bovis Lend Lease International Ltd. | | Holcim Ltd. | | Saudi Arabian Oil Co. |
BP p.l.c. | | Hunt Consolidated, Inc. | | SCA Americas, Inc. |
Brady Corporation | | Husky Injection Molding Systems Ltd. | | Schlumberger Limited |
Building Materials Corporation of America | | Illinois Tool Works Inc. | | Sealed Air Corp. |
Calgon Carbon Corporation | | Ingersoll Rand plc | | Shell Oil Company |
Cameron International Corporation | | ION Geophysical Corporation | | Simpson Manufacturing Company, Inc. |
Caterpillar Inc. | | Irving Oil Commercial G.P. | | Sonoco Products Co. |
Cemex Internacional S.A de C.V. | | ITT Corporation | | Spectra Energy Corp |
Chevron Corporation | | Jacobs Engineering Group, Inc. | | SPX Corporation |
CH2M Hill Companies, Ltd. | | KBR, Inc. | | Stantec Inc. |
Cimarex Energy Co. | | Key Energy Services, Inc. | | Sunoco, Inc. |
Connell Limited Partnership | | Koch Industries, Inc. | | Swagelok Company |
ConocoPhillips | | Lafarge North America Inc. | | Terex Corporation |
Cooper Industries plc | | L.B. Foster Company | | Tesoro Corporation |
Corning Incorporated | | Magellan Midstream Partners, L.P. | | Textron Inc. |
DCP Midstream LLC | | MAG Industrial Automation Systems LLC | | Thermadyne Industries, Inc. |
Deere & Company | | The Manitowoc Company, Inc. | | Thomas & Betts Corporation |
Devon Energy Corporation | | Marathon Oil Corporation | | 3M Company |
Donaldson Company, Inc. | | Matthews International Corporation | | The Timken Company |
Eaton Corporation | | MeadWestvaco Corporation | | The Toro Company |
EMCOR Group, Inc. | | Milacron LLC | | Trinity Industries, Inc. |
Exterran Holdings, Inc. | | Mine Safety Appliances Company | | Unifi, Inc. |
Exxon Mobil Corporation | | Murphy Oil Corporation | | USG Corporation |
Ferrovial, S.A. | | MWH Global, Inc. | | Valero Energy Corporation |
Flowserve Corporation | | Occidental Petroleum Corporation | | Watts Water Technologies, Inc. |
1 Global Industries Ltd. was acquired by Technip S.A. in December 2011.
COMPENSATION COMMITTEE REPORT
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
Thomas C. Schievelbein, Chairman
Roger A. Brown
Mary L. Shafer-Malicki
David A. Trice
COMPENSATIONOF EXECUTIVE OFFICERS
The following table summarizes the prior three years’ compensation of our Chief Executive Officer, our Chief Financial Officer, our three highest paid executive officers who did not serve as our CEO and CFO during 2011 and were employed by McDermott as of December 31, 2011, and Mr. Nesser, who would have been one of our three highest paid executive officers but for the fact that he was not employed by McDermott as of December 31, 2011. We refer to these persons as our Named Executives. No compensation information is provided for Mr. Elders for 2009 because he joined our company in 2010, and no information is provided for Mr. Carlson or Ms. Hinrichs for 2009 because they did not become Named Executives until 2010 or for Mr. McCormack for 2009 or 2010 because he did not become a Named Executive until 2011.
SUMMARY COMPENSATION TABLE
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Name and Principal
Position | | Year | | | Salary | | | Bonus | | | Stock Awards(1) | | | Option Awards(1) | | | Non-Equity Incentive Plan Compensation(2) | | | Change in Pension Value and Nonqualified Deferred Compensation Earnings(3) | | | All Other Compensation(4) | | | Total | |
| | | | | | | | | |
S.M. Johnson President and Chief Executive Officer | | | 2011 | | | $ | 942,500 | | | $ | 0 | | | $ | 3,382,092 | | | $ | 944,089 | | | $ | 0 | | | | N/A | | | $ | 132,099 | | | $ | 5,400,780 | |
| | | 2010 | | | $ | 827,083 | | | $ | 0 | | | $ | 2,672,142 | | | $ | 865,313 | | | $ | 1,218,863 | | | | N/A | | | $ | 163,683 | | | $ | 5,747,084 | |
| | | 2009 | | | $ | 562,500 | | | $ | 0 | | | $ | 2,664,402 | | | $ | 1,435,394 | | | $ | 1,131,563 | | | | N/A | | | $ | 83,929 | | | $ | 5,877,788 | |
| | | | | | | | | |
P.L. Elders | | | 2011 | | | $ | 481,250 | | | $ | 0 | | | $ | 845,428 | | | $ | 236,000 | | | $ | 0 | | | | N/A | | | $ | 76,763 | | | $ | 1,639,441 | |
Senior Vice President and Chief Financial Officer | | | 2010 | | | $ | 315,114 | | | $ | 0 | | | $ | 517,021 | | | $ | 396,788 | | | $ | 398,146 | | | | N/A | | | $ | 14,059 | | | $ | 1,641,128 | |
| | | 2009 | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | |
| | | | | | | | | |
G.L. Carlson Senior Vice President and Chief Administration Officer | | | 2011 | | | $ | 332,000 | | | $ | 0 | | | $ | 354,863 | | | $ | 94,406 | | | $ | 0 | | | | N/A | | | $ | 120,619 | | | $ | 901,888 | |
| | | 2010 | | | $ | 243,333 | | | $ | 0 | | | $ | 527,051 | | | $ | 165,771 | | | $ | 334,400 | | | | N/A | | | $ | 106,850 | | | $ | 1,377,405 | |
| | | 2009 | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | |
| | | | | | | | | |
L.K. Hinrichs Senior Vice President, General Counsel and Corporate Secretary | | | 2011 | | | $ | 435,575 | | | $ | 0 | | | $ | 792,653 | | | $ | 212,421 | | | $ | 0 | | | $ | 76,760 | | | $ | 77,550 | | | $ | 1,594,959 | |
| | | 2010 | | | $ | 419,225 | | | $ | 0 | | | $ | 1,054,526 | | | $ | 276,912 | | | $ | 317,673 | | | $ | 121,620 | | | $ | 37,286 | | | $ | 2,227,242 | |
| | | 2009 | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | |
| | | | | | | | | |
J.T. McCormack Executive Vice President, Chief Operating Officer | | | 2011 | | | $ | 447,381 | | | $ | 0 | | | $ | 915,194 | | | $ | 253,847 | | | $ | 0 | | | | N/A | | | $ | 70,870 | | | $ | 1,687,292 | |
| | | 2010 | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | |
| | | 2009 | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | |
| | | | | | | | | |
J.T. Nesser Former Executive Vice President, Chief Operating Officer | | | 2011 | | | $ | 296,828 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 206,408 | | | $ | 163,357 | | | $ | 2,034,893 | | | $ | 2,701,486 | |
| | | 2010 | | | $ | 509,381 | | | $ | 0 | | | $ | 1,196,240 | | | $ | 224,998 | | | $ | 609,729 | | | $ | 160,951 | | | $ | 43,383 | | | $ | 2,744,682 | |
| | | 2009 | | | $ | 500,000 | | | $ | 0 | | | $ | 418,899 | | | $ | 235,945 | | | $ | 595,000 | | | $ | 155,330 | | | $ | 93,156 | | | $ | 1,998,330 | |
| (1) | The amounts reported in this column represent the aggregate grant date fair value of stock awards or option awards, as applicable, granted to each Named Executive and computed in accordance with FASB ASC Topic 718. See the “Grants of Plan-Based Awards” table for more information regarding the stock awards and option awards we granted in 2011. |
| (2) | The amounts reported in this column are attributable to the annual incentive awards earned in fiscal years 2009, 2010 and 2011, but paid in 2010, 2011 and 2012, respectively. The amount reported for Mr. Nesser is his 2011 target EICP award, prorated to take into account his length of service in 2011. See the “Grants of Plan-Based Awards” table for more information regarding the annual incentive awards earned in 2011. |
| (3) | The amounts reported in this column represent the changes in actuarial present values of the accumulated benefits under defined benefit plans, determined by comparing the prior completed fiscal year end amount to the covered fiscal year end amount. |
| (4) | The amounts reported in this column for 2011 are attributable to the following: |
All Other Compensation
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Deferred Compensation Plan Contribution(A) | | | Thrift Match(B) | | | Service-Based
Thrift
Contribution(B) | | | Perquisites(C) | | | Tax
Gross-Ups(D) | | | Other(E) | |
S. M. Johnson | | $ | 97,932 | | | $ | 6,817 | | | $ | 7,350 | | | $ | 20,000 | | | | — | | | | — | |
P. L. Elders | | $ | 39,950 | | | $ | 7,350 | | | $ | 7,350 | | | $ | 20,000 | | | | — | | | $ | 2,113 | |
G. L. Carlson | | $ | 24,800 | | | $ | 6,030 | | | $ | 7,350 | | | $ | 68,606 | | | $ | 11,720 | | | $ | 2,113 | |
L. K. Hinrichs | | $ | 43,511 | | | $ | 6,689 | | | $ | 7,350 | | | $ | 20,000 | | | | — | | | | — | |
J. T. McCormack | | $ | 36,170 | | | $ | 7,350 | | | $ | 7,350 | | | $ | 20,000 | | | | — | | | | — | |
J. T. Nesser | | $ | 55,219 | | | $ | 6,608 | | | $ | 7,350 | | | $ | 21,525 | | | | — | | | $ | 1,944,191 | |
| (A) | The amounts reported in this column are attributable to contributions made by McDermott under the Deferred Compensation Plan. |
| (B) | The amounts reported in these columns are attributable to contributions made under our defined contribution plan, which we refer to as our Thrift Plan. |
| (C) | The amounts reported in this column are attributable to a lump-sum perquisite allowance in the amount of $20,000 received by certain officers of McDermott in 2011, including each of the Named Executives. With the exception of an executive physical required by McDermott, the perquisite allowance was permitted to be used for any purpose determined by the recipient. Additionally, the amount reported for Mr. Carlson includes $48,606 attributable to the costs of providing him relocation assistance in connection with his move from Colorado to Texas. The amount reported for Mr. Nesser includes a gift in connection with his retirement from McDermott. |
| (D) | The amount reported in this column for Mr. Carlson is attributable to tax gross-ups associated with income imputed to him as a result of amounts we paid to Mr. Carlson by reason of expenses he incurred in connection with his relocation. |
| (E) | The amounts reported in this column for Messrs. Elders and Carlson are attributable to the cost to McDermott for the Named Executive’s spouse to accompany the Named Executive, at McDermott’s request, to attend the 2011 Annual Meeting of Stockholders in Panama City, Panama. The amount reported in this column for Mr. Nesser is attributable to: (1) payments made pursuant to Mr. Nesser’s Separation Agreement consisting of (a) a cash severance payment in the amount of $1,742,527, (b) two times the full annual cost of coverage for medical, dental and vision benefits in the amount of $35,127, (c) unused vacation for 2011 in the amount of $39,424 and (d) consulting fees in the amount of $125,000; and (2) the cost to McDermott for Mr. Nesser’s spouse to accompany him, at McDermott’s request, to attend the 2011 Annual Meeting of Stockholders in Panama City, Panama in the amount of $2,113. For more information regarding Mr. Nesser’s Separation Agreement, see “Compensation Discussion and Analysis — Employment and Severance Arrangements — Employment and Separation Agreements” above. |
GRANTSOF PLAN-BASED AWARDS
The following Grants of Plan-Based Awards table provides additional information about stock awards and equity and non-equity incentive plan awards we granted to our Named Executives during the year ended December 31, 2011.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Name | | Grant Date | | | Committee
Action
Date | | | Estimated Possible Payouts Under
Non-Equity Incentive Plan Awards(1) | | Estimated Future Payouts Under
Equity Incentive Plan Awards(2) | | All Other Stock
Awards:
Number of
Shares of Stock or Units(3) | | All Other
Option
Awards:
Number of
Securities
Underlying
Options(4) | | Exercise
or Base
Price of
Option
Awards | | Grant Date
Fair Value
of Stock and
Option
Awards(5) | |
| | | | Threshold | | Target | | Maximum | | Threshold
(#) | | Target (#) | | Maximum
(#) | | | | |
S.M. Johnson | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
EICP | | | 02/28/11 | | | | 02/28/11 | | | $115,469 | | $942,603 | | $1,885,205 | | — | | — | | — | | — | | — | | — | | | — | |
PShares | | | 03/04/11 | | | | 02/28/11 | | | — | | — | | — | | 28,265 | | 56,529 | | 113,058 | | — | | — | | — | | $ | 2,382,132 | |
RSUs | | | 03/04/11 | | | | 02/28/11 | | | — | | — | | — | | — | | — | | — | | 39,000 | | — | | — | | $ | 999,960 | |
Stock Options | | | 03/04/11 | | | | 02/28/11 | | | — | | — | | — | | — | | — | | — | | — | | 98,133 | | $25.64 | | $ | 944,089 | |
| | | | | | | | | | | | |
P.L. Elders | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
EICP | | | 02/28/11 | | | | 02/28/11 | | | $41,272 | | $336,911 | | $673,822 | | — | | — | | — | | — | | — | | — | | | — | |
PShares | | | 03/04/11 | | | | 02/28/11 | | | — | | — | | — | | 7,065 | | 14,130 | | 28,260 | | — | | — | | — | | $ | 595,438 | |
RSUs | | | 03/04/11 | | | | 02/28/11 | | | — | | — | | — | | — | | — | | — | | 9,750 | | — | | — | | $ | 249,990 | |
Stock Options | | | 03/04/11 | | | | 02/28/11 | | | — | | — | | — | | — | | — | | — | | — | | 24,531 | | $25.64 | | $ | 236,000 | |
| | | | | | | | | | | | |
G.L. Carlson | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
EICP | | | 02/28/11 | | | | 02/28/11 | | | $24,406 | | $199,233 | | $398,466 | | — | | — | | — | | — | | — | | — | | | — | |
PShares | | | 03/04/11 | | | | 02/28/11 | | | — | | — | | — | | 2,826 | | 5,652 | | 11,304 | | — | | — | | — | | $ | 238,175 | |
RSUs | | | 03/04/11 | | | | 02/28/11 | | | — | | — | | — | | — | | — | | — | | 4,551 | | — | | — | | $ | 116,688 | |
Stock Options | | | 03/04/11 | | | | 02/28/11 | | | — | | — | | — | | — | | — | | — | | — | | 9,813 | | $25.64 | | $ | 94,406 | |
| | | | | | | | | | | | |
L.K. Hinrichs | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
EICP | | | 02/28/11 | | | | 02/28/11 | | | $32,019 | | $261,381 | | $522,763 | | — | | — | | — | | — | | — | | — | | | — | |
PShares | | | 03/04/11 | | | | 02/28/11 | | | — | | — | | — | | 6,359 | | 12,717 | | 25,434 | | — | | — | | — | | $ | 535,894 | |
RSUs | | | 03/04/11 | | | | 02/28/11 | | | — | | — | | — | | — | | — | | — | | 10,014 | | — | | — | | $ | 256,759 | |
Stock Options | | | 03/04/11 | | | | 02/28/11 | | | — | | — | | — | | — | | — | | — | | — | | 22,080 | | $25.64 | | $ | 212,421 | |
| | | | | | | | | | | | |
J.T. McCormack | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
EICP | | | 02/28/11 | | | | 02/28/11 | | | $33,632 | | $274,549 | | $549,098 | | — | | — | | — | | — | | — | | — | | | — | |
PShares | | | 03/04/11 | | | | 02/28/11 | | | — | | — | | — | | 3,285 | | 6,570 | | 13,140 | | — | | — | | — | | $ | 276,860 | |
RSUs | | | 03/04/11 | | | | 02/28/11 | | | — | | — | | — | | — | | — | | — | | 4,533 | | — | | — | | $ | 116,226 | |
Stock Options | | | 03/04/11 | | | | 02/28/11 | | | — | | — | | — | | — | | — | | — | | — | | 11,406 | | $25.64 | | $ | 109,731 | |
PShares | | | 05/13/11 | | | | 05/06/11 | | | — | | — | | — | | 5,637 | | 11,274 | | 22,548 | | — | | — | | — | | $ | 357,160 | |
RSUs | | | 05/13/11 | | | | 05/06/11 | | | — | | — | | — | | — | | — | | — | | 8,058 | | — | | — | | $ | 164,947 | |
Stock Options | | | 05/13/11 | | | | 05/06/11 | | | — | | — | | — | | — | | — | | — | | — | | 18,312 | | $20.47 | | $ | 144,115 | |
| | | | | | | | | | | | |
J.T. Nesser | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
EICP | | | 02/28/11 | | | | 02/28/11 | | | $43,948 | | $358,756 | | $717,511 | | — | | — | | — | | — | | — | | — | | | — | |
| (1) | This column reflects the threshold, target and maximum payout opportunities under the Executive Incentive Compensation Plan, or EICP. For 2011, the EICP awards were based 70% on the attainment of financial goals and 30% on the attainment of individual goals. The 70% financial component was based 70% on consolidated operating income and 30% on consolidated return on invested capital. 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. The threshold payout amount provided was determined based on achieving the consolidated operating income threshold (or 12.25% of the target amounts shown), which, if not achieved, would result in no amounts being paid on an EICP award. |
| On February 28, 2011, our Compensation Committee established target EICP awards expressed as a percentage of the Named Executive’s 2011 annual base salary earned, as follows: Mr. Johnson — 100%, Mr. Elders — 70%, Mr. Carlson — 60%, Ms. Hinrichs — 60%, Mr. McCormack — 50% and Mr. Nesser — 70%. With the exception of Mr. McCormack, the target amounts shown were computed according to the following formula: Target % * [(2010 base salary * 90/365) + (2011 base salary * 275/365)]. In connection with Mr. McCormack’s June 30, 2011 promotion to EVP, COO, on May 6, 2011 our Compensation Committee approved an increase in target EICP award for Mr. McCormack from 50% to 70% effective and for the period beginning June 30, 2011. Accordingly, the amount shown in Mr. McCormack’s target column reflects his target EICP award under his former and current positions, prorated based on the length of service in each position. The target amount shown for Mr. McCormack was computed according to the following formula: SVP Target % * [(2010 base salary * 90/365) + (2011 SVP base salary * 90/365)] + EVP, COO Target % * (2011 EVP, COO base salary * 185/365). The actual EICP payouts for the Named Executives for 2011 are provided in the Summary Compensation Table in the “Non-Equity Incentive Plan Compensation” column. |
| (2) | This column reflects the target, threshold and maximum payout opportunities of grants of performance shares under the 2009 LTIP. Each grant represents the right to receive one share of McDermott common stock for each vested performance share. The amount of performance shares that vest, if any, is scheduled to initially be determined on December 31, 2013 based on our total shareholder return relative to the Proxy Peer Group during the same period, with subsequent measurements of total shareholder return relative to the Proxy Peer Group on December 31, 2014 and December 31, 2015. The amounts shown in the “threshold” column represent the number of performance shares that will vest, which is 50% of the amount granted, and the amounts shown in the “maximum” column represent the number of performance shares that will vest, which is 200% of the amount granted, based on our total shareholder return relative to the Proxy Peer Group. The maximum number of performance shares which will vest based on performance through December 31, 2013 is 150% of the amount granted if our total shareholder return ranks in the 75th percentile or higher relative to the Proxy Peer Group. A maximum of 200% of the amount of performance shares granted may vest based on performance through December 31, 2014 and 2015, less any amount previously vested. The following table provides the measurement periods, total shareholder return percentile rank and corresponding vesting percentage of the amount of performance shares granted: |
| | | | |
|
| Measurement Period | | Total Shareholder Return
Percentile Rank | | Vesting Percentage of
Performance Shares Granted |
36 Months Ending December 31, 2013 | | ³90th Percentile 75th Percentile 50th Percentile 25th Percentile < 25th Percentile | | 150% 150% 100% 50% 0% |
48 Months Ending December 31, 2014 | | ³90th Percentile 75th Percentile 50th Percentile 25th Percentile < 25th Percentile | | 200%* 150%* 100%* 50%* 0%* |
60 Months Ending December 31, 2015 | | ³90th Percentile 75th Percentile 50th Percentile 25th Percentile < 25th Percentile | | 200%* 150%* 100%* 50%* 0%* |
|
| *Less | any amounts vested through prior measurement periods. |
| (3) | This column reflects grants of restricted stock units under the 2009 LTIP. Each restricted stock unit represents the right to receive one share of McDermott common stock and is generally scheduled to vest in one-third increments on the first, second and third anniversaries of the date of grant. Upon vesting, the restricted stock units are converted into shares of McDermott common stock. |
| (4) | This column reflects grants of stock options under the 2009 LTIP. Each grant represents the right to purchase at the exercise price shares of McDermott common stock over a period of seven years. The stock options are generally scheduled to vest and become exercisable in one-third increments on the first, second and third anniversaries of the date of grant. |
| (5) | This column reflects the full grant date fair values of the equity awards computed in accordance with FASB ASC Topic 718. Grant date fair values are determined using the closing price of our common stock on the date of grant for restricted stock units, a Monte Carlo simulation model for performance shares, and the Black-Scholes option pricing model for stock options. The Monte Carlo simulation model for performance shares and the Black-Scholes option pricing model for stock options each requires various assumptions, including but not limited to the expected life of the award and stock return and stock price volatility. For more information regarding the compensation expense related to 2011 awards, and a discussion of valuation assumptions utilized in performance share and option pricing, see Note 8 to our consolidated financial statements included in our annual report on form 10-K for the year ended December 31, 2011. |
OUTSTANDING EQUITY AWARDSAT FISCAL YEAR-END
The following Outstanding Equity Awards at Fiscal Year-End table summarizes the largest amountequity awards we have made to our Named Executives which were outstanding as of operatingDecember 31, 2011.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Option Awards(1) | | | Stock Awards | |
| Name | | Grant
Date | | | Number of
Securities
Underlying
Unexercised
Options Exercisable | | | Number of
Securities
Underlying
Unexercised
Options
Unexercisable | | | Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options | | Option Exercise
Price | | | Option
Expiration
Date | | | Number of
Shares or
Units of
Stock
That Have
Not
Vested(2) | | | Market
Value of
Shares or
Units of
Stock
That
Have Not
Vested(4) | | | Equity
Incentive
Plan Awards:
Number of
Unearned
Shares, Units or
Other Rights That
Have Not Vested(5) | | | Equity
Incentive
Plan Awards:
Market or Payout
Value of
Unearned
Shares, Units or
Other Rights That
Have Not Vested(4) | |
S.M. Johnson | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock Options | | | 05/14/09 | | | | 170,496 | | | | 85,248 | | | — | | $ | 9.36 | | | | 05/14/16 | | | | | | | | | | | | | | | | | |
Stock Options | | | 03/04/10 | | | | 47,199 | | | | 94,398 | | | — | | $ | 13.09 | | | | 03/04/17 | | | | | | | | | | | | | | | | | |
Stock Options | | | 03/04/11 | | | | — | | | | 98,133 | | | — | | $ | 25.64 | | | | 03/04/18 | | | | | | | | | | | | | | | | | |
RSU | | | 05/14/09 | | | | | | | | | | | | | | | | | | | | | | 60,075 | | | $ | 691,463 | | | | — | | | | — | |
RSU(3) | | | 05/14/09 | | | | | | | | | | | | | | | | | | | | | | 104,302 | | | $ | 1,200,516 | | | | — | | | | — | |
RSU | | | 03/04/10 | | | | | | | | | | | | | | | | | | | | | | 63,663 | | | $ | 732,761 | | | | — | | | | ��� | |
RSU | | | 03/04/11 | | | | | | | | | | | | | | | | | | | | | | 39,000 | | | $ | 448,890 | | | | — | | | | — | |
Performance Shares | | | 03/04/11 | | | | | | | | | | | | | | | | | | | | | | — | | | | — | | | | 28,265 | | | $ | 325,330 | |
P.L. Elders | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock Options | | | 05/13/10 | | | | 20,097 | | | | 40,195 | | | — | | $ | 13.37 | | | | 05/13/17 | | | | | | | | | | | | | | | | | |
Stock Options | | | 03/04/11 | | | | — | | | | 24,531 | | | — | | $ | 25.64 | | | | 03/04/18 | | | | | | | | | | | | | | | | | |
RSU | | | 05/13/10 | | | | | | | | | | | | | | | | | | | | | | 25,774 | | | $ | 296,659 | | | | — | | | | — | |
RSU | | | 03/04/11 | | | | | | | | | | | | | | | | | | | | | | 9,750 | | | $ | 112,223 | | | | — | | | | — | |
Performance Shares | | | 03/04/11 | | | | | | | | | | | | | | | | | | | | | | — | | | | — | | | | 7,065 | | | $ | 81,318 | |
G.L. Carlson | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock Options | | | 05/13/10 | | | | 8,396 | | | | 16,793 | | | — | | $ | 13.37 | | | | 03/29/17 | | | | | | | | | | | | | | | | | |
Stock Options | | | 03/04/11 | | | | — | | | | 9,813 | | | — | | $ | 25.64 | | | | 03/04/18 | | | | | | | | | | | | | | | | | |
RSU | | | 05/13/10 | | | | | | | | | | | | | | | | | | | | | | 26,274 | | | $ | 302,414 | | | | — | | | | — | |
RSU | | | 03/04/11 | | | | | | | | | | | | | | | | | | | | | | 4,551 | | | $ | 52,382 | | | | — | | | | — | |
Performance Shares | | | | | | | | | | | | | | | | | | | | | | | | | — | | | | — | | | | 2,826 | | | $ | 32,527 | |
L.K. Hinrichs | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock Options | | | 03/05/09 | | | | — | | | | 27,203 | | | — | | $ | 5.64 | | | | 03/05/16 | | | | | | | | | | | | | | | | | |
Stock Options | | | 03/04/10 | | | | 15,104 | | | | 30,209 | | | — | | $ | 13.09 | | | | 03/04/17 | | | | | | | | | | | | | | | | | |
Stock Options | | | 03/04/11 | | | | — | | | | 22,080 | | | — | | $ | 25.64 | | | | 03/04/18 | | | | | | | | | | | | | | | | | |
RSU | | | 03/05/09 | | | | | | | | | | | | | | | | | | | | | | 19,169 | | | $ | 220,635 | | | | — | | | | — | |
RSU(3) | | | 03/05/09 | | | | | | | | | | | | | | | | | | | | | | 33,283 | | | $ | 383,087 | | | | — | | | | — | |
RSU | | | 03/04/10 | | | | | | | | | | | | | | | | | | | | | | 20,371 | | | $ | 234,470 | | | | — | | | | — | |
RSU | | | 03/04/11 | | | | | | | | | | | | | | | | | | | | | | 10,014 | | | $ | 115,261 | | | | — | | | | — | |
Performance Shares | | | 03/04/11 | | | | | | | | | | | | | | | | | | | | | | — | | | | — | | | | 6,359 | | | $ | 73,192 | |
J.T. McCormack | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock Options | | | 03/05/09 | | | | — | | | | 14,155 | | | — | | $ | 5.64 | | | | 03/05/16 | | | | | | | | | | | | | | | | | |
Stock Options | | | 03/04/10 | | �� | | 8,518 | | | | 17,037 | | | — | | $ | 13.09 | | | | 03/04/17 | | | | | | | | | | | | | | | | | |
Stock Options | | | 03/04/11 | | | | — | | | | 11,406 | | | — | | $ | 25.64 | | | | 03/04/18 | | | | | | | | | | | | | | | | | |
Stock Options | | | 05/13/11 | | | | — | | | | 18,312 | | | — | | $ | 20.47 | | | | 05/13/18 | | | | | | | | | | | | | | | | | |
RSU | | | 03/05/09 | | | | | | | | | | | | | | | | | | | | | | 9,974 | | | $ | 114,800 | | | | — | | | | — | |
RSU(3) | | | 03/05/09 | | | | | | | | | | | | | | | | | | | | | | 17,316 | | | $ | 199,307 | | | | — | | | | — | |
RSU | | | 03/04/10 | | | | | | | | | | | | | | | | | | | | | | 11,490 | | | $ | 132,250 | | | | — | | | | — | |
RSU | | | 03/04/11 | | | | | | | | | | | | | | | | | | | | | | 4,533 | | | $ | 52,175 | | | | — | | | | — | |
Performance Shares | | | 03/04/11 | | | | | | | | | | | | | | | | | | | | | | — | | | | — | | | | 3,285 | | | $ | 37,810 | |
RSU | | | 05/13/11 | | | | | | | | | | | | | | | | | | | | | | 8,058 | | | $ | 92,748 | | | | — | | | | — | |
Performance Shares | | | 05/13/11 | | | | | | | | | | | | | | | | | | | | | | — | | | | — | | | | 5,637 | | | $ | 64,882 | |
J.T. Nesser | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock Options | | | 03/05/09 | | | | 45,172 | | | | — | | | — | | $ | 5.64 | | | | 03/05/16 | | | | | | | | | | | | | | | | | |
Stock Options | | | 03/04/10 | | | | 12,273 | | | | 24,545 | | | — | | $ | 13.09 | | | | 03/04/17 | | | | | | | | | | | | | | | | | |
RSU | | | 03/04/10 | | | | | | | | | | | | | | | | | | | | | | 16,184 | | | $ | 186,278 | | | | — | | | | — | |
| (1) | The awards in this column represent grants of stock options, which generally become exercisable in accordance with the following vesting schedule: |
| | |
| Grant Date | | Vesting Schedule: |
03/05/09 | | 1/3 per year on first, second and third anniversaries of grant date |
05/14/09 | | 1/3 per year on first, second and third anniversaries of grant date |
03/04/10 | | 1/3 per year on first, second and third anniversaries of grant date |
05/13/10 | | Mr. Elders: 1/3 per year on first, second and third anniversaries of grant date |
05/13/10 | | Mr. Carlson: 1/3 per year on March 29, 2011, 2012 and 2013 (the first, second and third anniversaries of Mr. Carlson’s hire date) |
03/04/11 | | 1/3 per year on first, second and third anniversaries of grant date |
05/13/11 | | 1/3 per year on first, second and third anniversaries of grant date |
| (2) | The awards in this column represent grants of restricted stock units, which, with the exception of those grants of restricted stock units discussed in Note (3) below, generally vest in accordance with the following vesting schedule: |
| | |
| Grant Date | | Vesting Schedule: |
03/05/09 | | 1/3 per year on first, second and third anniversaries of grant date |
05/14/09 | | 1/3 per year on first, second and third anniversaries of grant date |
03/04/10 | | 1/3 per year on first, second and third anniversaries of grant date |
05/13/10 | | Mr. Elders: 1/3 per year on first, second and third anniversaries of grant date |
05/13/10 | | Mr. Carlson: 1/3 per year on March 29, 2011, 2012 and 2013 (the first, second and third anniversaries of Mr. Carlson’s hire date) |
03/04/11 | | 1/3 per year on first, second and third anniversaries of grant date |
05/13/11 | | 1/3 per year on first, second and third anniversaries of grant date |
| (3) | The grant of restricted stock units was converted from an original grant of performance shares in connection with the Spin-off and generally vests 100% on the third anniversary of the grant date. |
| (4) | Market values in these columns are based on the closing price of our common stock as reported on the New York Stock Exchange as of December 30, 2011 ($11.51). |
| (5) | The awards in this column represent grants of performance shares, which generally may vest on the third, fourth and/or fifth anniversaries of the grant date based on the attainment of performance levels as of December 31, 2013, 2014 and 2015. The number and value of performance shares reported is based on achieving threshold performance as of the December 31, 2013 measurement date. |
OPTION EXERCISESAND STOCK VESTED
The following Option Exercises and Stock Vested table provides information about the value realized by our Named Executives on exercises of option awards and vesting of stock awards during the year ended December 31, 2011.
| | | | | | | | | | | | | | | | |
| | | Option Awards(1) | | | Stock Awards(2) | |
| Name | | Shares Acquired on Exercise (#) | | | Value Realized on Exercise | | | Shares Acquired on Vesting (#) | | | Value Realized on Vesting | |
S. M. Johnson | | | 0 | | | | N/A | | | | 205,316 | | | $ | 4,333,356 | |
P. L. Elders | | | 0 | | | | N/A | | | | 12,887 | | | $ | 263,797 | |
G. L. Carlson | | | 0 | | | | N/A | | | | 13,137 | | | $ | 327,374 | |
L. K. Hinrichs | | | 27,202 | | | $ | 526,200 | | | | 119,901 | | | $ | 2,679,780 | |
J. T. McCormack | | | 14,154 | | | $ | 273,959 | | | | 29,822 | | | $ | 762,999 | |
J. T. Nesser | | | 0 | | | | N/A | | | | 85,423 | | | $ | 2,036,053 | |
| (1) | Each stock option exercise reported was effected as a simultaneous exercise and sale. The value realized on exercise was calculated based on the difference between the exercise prices of the stock options and the prices at which the shares were sold. |
| (2) | The number of shares acquired on vesting reported represents the aggregate number of shares that vested during 2011 in connection with awards of restricted stock and restricted stock units. The value realized on vesting was calculated based on the fair market value of the underlying shares on the vesting date. The following table sets forth the amounts of shares attributable to restricted stock and restricted stock units for each Named Executive and the value realized on vesting of each respective type of award, as well as the number of shares withheld by McDermott to satisfy the minimum statutory withholding tax due upon vesting: |
| | | | | | | | | | | | | | | | | | | | |
| | | Restricted Stock | | | Restricted Stock Units | | | | |
| Name | | Shares
Acquired
on Vesting (#) | | | Value Realized
on Vesting | | | Shares
Acquired
on Vesting (#) | | | Value Realized
on Vesting | | | Shares Acquired by McDermott
on Vesting of Stock Awards (#) | |
S. M. Johnson | | | 113,412 | | | $ | 2,287,520 | | | | 91,904 | | | $ | 2,045,836 | | | | 71,653 | |
P. L. Elders | | | 0 | | | | N/A | | | | 12,887 | | | $ | 263,797 | | | | 3,408 | |
G. L. Carlson | | | 0 | | | | N/A | | | | 13,137 | | | $ | 327,374 | | | | 3,474 | |
L. K. Hinrichs | | | 62,231 | | | $ | 1,204,301 | | | | 57,670 | | | $ | 1,475,479 | | | | 39,842 | |
J. T. McCormack | | | 1,196 | | | $ | 30,354 | | | | 28,626 | | | $ | 732,645 | | | | 7,957 | |
J. T. Nesser | | | 8,405 | | | $ | 192,972 | | | | 77,018 | | | $ | 1,843,081 | | | | 27,253 | |
PENSION BENEFITS
The following Pension Benefits table shows the present value of accumulated benefits payable to each of our Named Executives under the qualified defined benefit pension plan (referred to as the Retirement Plan) and nonqualified pension plan (referred to as the Excess Plan) that we sponsor.
| | | | | | | | | | | | | | |
| Name | | Plan Name | | Number of
Years Credited
Service | | | Present Value of
Accumulated Benefit(1) | | | Payments
During 2011 | |
S. M. Johnson | | N/A | | | N/A | | | | N/A | | | | N/A | |
| | N/A | | | N/A | | | | N/A | | | | N/A | |
P. L. Elders | | N/A | | | N/A | | | | N/A | | | | N/A | |
| | N/A | | | N/A | | | | N/A | | | | N/A | |
G. L. Carlson | | N/A | | | N/A | | | | N/A | | | | N/A | |
| | N/A | | | N/A | | | | N/A | | | | N/A | |
L. K. Hinrichs | | McDermott Retirement Plan | | | 11.167 | | | $ | 369,359 | | | $ | 0 | |
| | McDermott Excess Plan | | | 11.167 | | | $ | 154,621 | | | $ | 0 | |
J. T. McCormack | | N/A | | | N/A | | | | N/A | | | | N/A | |
| | N/A | | | N/A | | | | N/A | | | | N/A | |
J. T. Nesser | | McDermott Retirement Plan | | | 11.75 | | | $ | 468,199 | | | $ | 0 | |
| | McDermott Excess Plan | | | 11.75 | | | $ | 527,248 | | | $ | 0
| |
| (1) | The present value of accumulated benefits reflected above is based on a 4.8% discount rate and the IRS static table for valuation years beginning in 2012. |
Overview of Qualified Plan. The Retirement Plan is funded by a trust and covers eligible employees of McDermott and its subsidiaries, as described below in the section entitled “Participation and Eligibility.” Nonresident alien employees who do not earn income in any three-year period sincethe United States and temporary resident alien employees are not eligible to participate in the Retirement Plan. In reviewing pension benefits payable to our Named Executives, it is important to note:
Of the Named Executives, only Ms. Hinrichs and Mr. Nesser participate in the Retirement Plan; and
As of 2006, all new participation in the Retirement Plan was closed, and benefit accruals under the Retirement Plan were frozen for all participants, including Ms. Hinrichs and Mr. Nesser, as of June 30, 2010.
For more information on our retirement plans, see “Compensation Discussion and Analysis — Retirement Plans.”
Participation and Eligibility. The Retirement Plan includes provisions related to eligibility, participation and benefit formulas for employees who were employed by McDermott’s subsidiary J. Ray
McDermott Holdings, LLC and other designated affiliates thereof (collectively, the “JRM Coverage Group”), as well as for employees who were employed by McDermott Incorporated (now known as McDermott Investments, LLC) (collectively, the “MI Coverage Group”) and certain former salaried employees of a subsidiary of The Babcock & Wilcox Company who transferred to employment with McDermott Incorporated (collectively, “Former B&W Coverage Group”).
Generally, employees of participating employers who met a one-year service requirement were eligible to participate in the Retirement Plan, subject to the following:
For the MI Coverage Group (which includes Ms. Hinrichs and Mr. Nesser):
New participation in the Retirement Plan was acquiredclosed effective April 1, 2006.
For participants with less than five years of service as of March 31, 2006 — Benefit accruals under the Retirement Plan were frozen as of that date, but cost-of-living increases continued to be paid, as discussed further below. Affected employees received service- based employer cash contributions to their Thrift Plan accounts. On June 30,
| | 2010, the provision of the cost-of-living increase under the Retirement Plan was terminated, and, for affected participants, the Thrift Plan service-based contribution was replaced by a cash contribution equal to 3% of base pay, plus overtime pay, expatriate pay and commissions, which we refer to collectively as “thriftable earnings.” |
For participants with more than five but less than ten years of service as of January 1, 2007 (which includes Mr. Nesser and Ms. Hinrichs) — A one-time irrevocable choice was offered to (1) continue benefit accruals under the Retirement Plan, or (2) freeze benefit accruals as of March 31, 2007, subject to annual cost-of-living increases, and receive instead service-based employer cash contributions to their Thrift Plan accounts. As of June 30, 2010, benefit accruals under the Retirement Plan were frozen altogether, and in lieu of any service-based cash contributions, affected participants now receive a cash contribution to their Thrift Plan accounts equal to 3% of thriftable earnings.
With respect to the cost-of-living increase, frozen accrued benefits of affected employees increased annually in line with increases in the Consumer Price Index, up to a maximum of 8% and a minimum of 1%, for each year the employee remained employed. As of June 30, 2010, the provision of the cost-of-living increase under the Retirement Plan was terminated, and the accrued benefits under the Retirement Plan were frozen altogether.
For the JRM Coverage Group (which includes Mr. McCormack), new participation was closed and benefit accruals were frozen effective April 1, 2003, with no cost-of-living allowance. Mr. McCormack did not meet the Plan’s one-year service requirement for eligibility to participate in the Retirement Plan prior to the participation closure for the JRM Coverage Group.
No Named Executives are included in the Former B&W Coverage Group.
Benefits. Mr. Nesser and Ms. Hinrichs are the only Named Executives entitled to benefits under the Retirement Plan. Their benefits are calculated as follows: 1.2% of final average monthly compensation as of June 30, 2010 up to the Social Security limit times credited service up to 35 years, plus 1.65% of final average monthly compensation as of June 30, 2010 in excess of the Social Security limit times credited service up to 35 years. Final average monthly compensation excludes bonuses and commissions.
Retirement and Early Retirement. Under the Retirement Plan, normal retirement is age 65. The normal form of payment is a single-life annuity or a 50% joint and survivor annuity, depending on the employee’s marital status when payments are scheduled to begin. Early retirement eligibility and benefits under the Retirement Plan depend on the employee’s date of hire and age.
For employees hired on or after April 1, 1998 (including Mr. Nesser and Ms. Hinrichs):
an employee is eligible for early retirement after completing at least 15 years of credited service and attaining the age of 55; and
early retirement benefits are based on the same formula as normal retirement, but the pension benefit is generally reduced 0.4% for each month that benefits commence before age 62.
Ms. Hinrichs has not accrued enough credited service to be eligible for early retirement under the Retirement Plan. At Mr. Nesser’s resignation from employment with McDermott on July 29, 2011, he had not accrued enough credited service to be eligible for early retirement under the Retirement Plan.
Overview of Nonqualified Plan. To the extent benefits payable under the Retirement Plan are limited by Section 415(b) or 401(a)(17) of the Internal Revenue Code, pension benefits will be paid directly by the applicable subsidiary of McDermott under the terms of the unfunded excess benefit plan maintained by McDermott (referred to as the “Excess Plan”). Effective January 1, 2006, the Excess Plan was amended to limit the annual bonus payments taken into account in 1978.calculating the Excess Plan benefits to the lesser of the actual bonus paid or 25% of the prior
year’s base salary. Furthermore, because benefits entitlement under the Excess Plan and the Retirement Plan are linked, benefits under the Excess Plan have been frozen since 2006 when benefit accruals under the Retirement Plan were frozen.
Mr. Nesser and Ms. Hinrichs each participate in the Excess Plan. Based on Mr. Nesser’s age and accrued service at his resignation from employment, he will not be entitled to commence benefit payments under the Excess Plan until normal retirement under the Retirement Plan.
NONQUALIFIED DEFERRED COMPENSATION
The following Nonqualified Deferred Compensation table summarizes our Named Executives’ compensation under the McDermott International, Inc. Director and Executive Deferred Compensation Plan (the “Deferred Compensation Plan”). The compensation shown in this table is entirely attributable to the Deferred Compensation Plan.
The Deferred Compensation Plan is an unfunded, defined contribution retirement plan for directors and officers of McDermott and its subsidiaries selected to participate by our Compensation Committee. Benefits under the Deferred Compensa-
tion Plan are based on (1) the participant’s deferral account, which is comprised of the notional account balance reflecting any executive contributions of deferred compensation, and (2) the participant’s vested percentage in his or her company account, which is comprised of the notional account balance reflecting any company contributions. A participant is at all times 100% vested in his or her deferral account. A participant generally vests in his or her company account 20% each year, subject to accelerated vesting for death, disability and termination without cause or termination within 24 months following a change in control.
| | | | | | | | | | | | | | | | | | | | |
| Name | | Executive
Contributions in
2011(1) | | | Company
Contributions in
2011(2) | | | Aggregate
Earnings
in 2011(3) | | | Aggregate
Withdrawals/ Distributions | | | Aggregate
Balance
at 12/31/11(4) | |
S. M. Johnson | | $ | 0 | | | $ | 97,932 | | | ($ | 9,651 | ) | | $ | 0 | | | $ | 164,908 | |
P. L. Elders | | $ | 0 | | | $ | 39,950 | | | $ | 796 | | | $ | 0 | | | $ | 40,746 | |
G. L. Carlson | | $ | 0 | | | $ | 24,800 | | | ($ | 286 | ) | | $ | 0 | | | $ | 24,514 | |
L. K. Hinrichs | | $ | 0 | | | $ | 43,511 | | | $ | 0.00 | | | $ | 0 | | | $ | 134,570 | |
J. T. McCormack | | $ | 0 | | | $ | 36,170 | | | $ | 1,383 | | | $ | 0 | | | $ | 37,553 | |
J. T. Nesser | | $ | 0 | | | $ | 55,219 | | | ($ | 34,873 | ) | | $ | 0 | | | $ | 766,375 | |
| (1) | In November 2010, our Compensation Committee approved the deferral of eligible executives’ compensation beginning January 1, 2011. Under the terms of our Deferred Compensation Plan, an eligible executive may defer up to 50% of his or her annual salary and/or up to 100% of any bonus earned in any year. |
| (2) | We make annual contributions to specified participants’ notional accounts equal to a percentage of the participant’s prior-year compensation. Under the terms of the Deferred Compensation Plan, the contribution percentage does not need to be the same for each participant. Additionally, our Compensation Committee may make a discretionary contribution to a participant’s account at any time. With the exception of Messrs. Elders and Carlson, for 2011, our contributions on behalf of Named Executives who were participants equaled 5% of the respective Named Executives’ base salaries and annual incentive compensation awards paid in 2010. Messrs. Elders and Carlson received a Company Contribution in an amount equal to 5% of their respective prior-year base salary paid. In addition, Messrs. Elders and Carlson received a discretionary contribution equal in value to 5% of their respective target bonus for 2010 and the value of their respective prior-year target base salaries they would have earned for the period January 1, 2010 through their respective hire dates. All of our 2011 contributions are included in the Summary Compensation Table above as “All Other Compensation.” |
| (3) | The amounts reported in this column represent hypothetical accrued gains or losses during 2011 on each Named Executive’s account. The accounts are “participant-directed,” in that each participant personally directs the investment of contributions made on his or her behalf. As a result, any accrued gains or losses are attributable to the performance of the Named Executive’s notional mutual fund investments. No amount of the earnings shown is reported as compensation in the Summary Compensation Table. |
| (4) | The amounts reported in this column consist of contributions made by McDermott and hypothetical accrued gains or losses as of December 31, 2011. The balances shown include contributions from previous years which have been reported as compensation to the Named Executives in the Summary Compensation Table for those years — to the extent a Named Executive was included in the Summary Compensation Table during those years. The amounts of such contributions previously included in the Summary Compensation Table and years reported are as follows: Mr. Johnson received a contribution from McDermott of $69,375 in 2010; Ms. Hinrichs received a contribution from McDermott of $29,549 in 2010; and Mr. Nesser received contributions from McDermott of $36,806, $55,104 and $44,926 in 2010, 2009 and 2008, respectively. |
As of December 31, 2011, Messrs. Johnson, Elders, Carlson and McCormack are 20% vested in their respective Deferred Compensation Plan balances shown as a result our Named Executives earned payments atof becoming participants in the maximum level under performance shares granted in 2006 and whichDeferred Compensation Plan during 2011. Mr. Nesser is 100% vested in 2009. Mosthis Deferred Compensation Plan balance shown.
In May 2009, our Compensation Committee amended the Deferred Compensation Plan to vest Deferred Compensation Plan balances that were unvested as of December 31, 2008 (including future gains and losses thereon). Amounts allocated on or after January 1, 2009 vest pursuant to the participant’s vested percentage, based on years of participation. Accordingly, Ms. Hinrichs is 84.38% vested in her Deferred Compensation Plan balance shown.
POTENTIAL PAYMENTS UPON TERMINATIONOR CHANGEIN CONTROL
The following tables show potential payments to certain of our Named Executives under existing contracts, agreements, plans or arrangements, whether written or unwritten, for various scenarios under which a payment would be due (assuming each is applicable) involving a change in control or termination of employment of each of our Named Executives, assuming a December 31, 2011 termination date and, where applicable, using the closing price of our common stock of $11.51 (as reported on the New York Stock Exchange) as of December 30, 2011. These tables do not reflect amounts that would be payable to the Named Executives pursuant to benefits or awards that are already vested.
The amounts reported in the below tables for stock options, restricted stock units and performance shares represent the value of unvested and accelerated shares or units, as applicable, calculated by:
for stock options: multiplying the number of accelerated options by the difference between the exercise price and $11.51 (the closing price of our common stock on December 30, 2011, as reported on the New York Stock Exchange); and
for restricted stock units and performance shares: multiplying the number of accelerated shares or units by $11.51 (the closing price of our common stock on December 30, 2011, as reported on the New York Stock Exchange).
Mr. Nesser retired from McDermott on July 29, 2011. In connection with his retirement, a subsidiary of McDermott entered into a Separation Agreement with Mr. Nesser. Under the terms of the Separation Agreement, Mr. Nesser was entitled to receive the payments and benefits detailed in Section 1 of the Restructuring Transaction Retention Agreement entered into between Mr. Nesser and a subsidiary of McDermott in connection with the Spin-off. These payments and benefits included: (1) a cash severance payment in the amount of $1,742,527, (2) payment of his 2011 target EICP award, prorated to take into account his length of service in 2011, in the amount of $206,408, (3) two times the full annual cost of coverage for medical, dental and vision benefits in the amount of $35,127, (4) unused vacation for 2011 in the amount of $39,424, (5) the value of unvested and accelerated stock options in the amount of $328,174, and (6) the value of unvested and accelerated restricted stock and restricted stock units in the amount of $547,034. Pursuant to the terms of his Separation Agreement, Mr. Nesser will also continue to vest in 24,545 stock options and 16,553 restricted stock units as if he had remained employed by McDermott through March 4, 2013. The value of the stock options and restricted stock units, less a number of restricted stock units that were also eligibleforfeited in connection with the payment of certain taxes, will be determined on March 4, 2012 and March 4, 2013. In addition, Mr. Nesser received $25,000 per month for the performance of consulting services as set forth in his Separation Agreement. As of December 31, 2011, Mr. Nesser had received $125,000 for the provision of these consulting services.
Estimated Value of Benefits to earnBe Received Upon Termination Due to Death or Disability
The following table shows the maximum payoutvalue of payments and other benefits due the Continuing Named Executives assuming their death or disability as of December 31, 2011.
| | | | | | | | | | | | | | | | | | | | |
| | | S.M. Johnson | | | P.L. Elders | | | G.L. Carlson | | | L.K. Hinrichs | | | J.T. McCormack | |
Severance Payments | | | — | | | | — | | | | — | | | | — | | | | — | |
EICP | | | — | | | | — | | | | — | | | | — | | | | — | |
Deferred Compensation Plan(1) | | $ | 131,926 | | | $ | 32,597 | | | $ | 19,611 | | | $ | 21,020 | | | $ | 30,042 | |
Stock Options(2) (unvested and accelerated) | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
Restricted Stock Units(3) (unvested and accelerated) | | $ | 3,073,630 | | | $ | 408,881 | | | $ | 354,796 | | | $ | 953,454 | | | $ | 591,280 | |
Performance Shares(4) (unvested) | | $ | 650,649 | | | $ | 162,636 | | | $ | 65,055 | | | $ | 146,373 | | | $ | 205,384 | |
Total | | $ | 3,856,205 | | | $ | 604,114 | | | $ | 439,462 | | | $ | 1,120,847 | | | $ | 826,706 | |
| (1) | The amounts reported represent 80% of Messrs. Johnson’s, Elders’, Carlson’s, and McCormack’s and 15.62% of Ms. Hinrichs’ respective Deferred Compensation Plan balance as of December 31, 2011 that would become vested on death or disability. |
| (2) | Under the terms of the stock option awards outstanding for each of the Continuing Named Executives as of December 31, 2011, all unvested option awards would become vested and exercisable on death or disability. Due to the exercise price of the stock options outstanding and the closing price of our common stock on December 30, 2011, the aggregate value of stock options that would become vested and exercisable on death or disability for all Continuing Named Executives would be $0. |
| (3) | Under the terms of the restricted stock unit awards outstanding for each of the Continuing Named Executives as of December 31, 2011, all unvested restricted stock unit awards would become vested and exercisable on death or disability. |
| (4) | Under the terms of the performance share awards outstanding for each of the Continuing Named Executives as of December 31, 2011, 100% of the initial performance shares granted would vest on the third, fourth and fifth anniversary of the grant date on death or disability. The number of performance shares that would vest is the number of performance shares that would have vested based on actual performance had the Continuing Named Executive remained employed with McDermott until the third, fourth and fifth anniversaries of the grant date. Accordingly, each Continuing Named Executive may vest in a number of performance shares ranging from 0% — 200% of the initial performance shares granted, depending on McDermott’s total shareholder return relative to its peers during the applicable measurement periods. The amounts reported assume a total of 100% of the initial performance shares granted will vest during the applicable measurement periods, valued at the closing price of McDermott stock as reported on the NYSE on December 30, 2011, although the actual value of such performance shares that may vest on the third, fourth and fifth anniversary of the date of grant could be $0 for each Continuing Named Executive and up to $1,301,298 for Mr. Johnson, $325,273 for Mr. Elders, $130,109 for Mr. Carlson, $292,745 for Ms. Hinrichs, and $410,769 for Mr. McCormack, in each case representing a total of 200% of the initial performance shares granted. Additionally, the value of McDermott stock could be greater or less than the amount used to value the performance shares for this table. |
Estimated Value of Benefits to Be Received Upon Change in Control
We have change-in-control agreements with various officers, including each of our Continuing Named Executives. Generally, under our annual incentive compensation programthese agreements, if a Continuing Named Executive is terminated within one year following a change in control either (1) by the company for any reason other than cause or death or disability, or (2) by the Continuing Named Executive for good reason, McDermott is required to pay the Continuing Named Executive a severance payment based on the Continuing Named Executives’ salary and a severance payment based on the Continuing Named Executives’ target EICP percentage. In addition to these payments, the Continuing Named Executive would be entitled to various accrued benefits earned through the date of termination, such as earned but unpaid salary, earned but unused vacation and reimbursements.
Under these agreements, a “change in control” generally occurs on the occurrence of any of the following:
a person becomes the beneficial owner of 30% or more of the combined voting power of McDermott’s then outstanding voting stock unless such acquisition is made directly from McDermott in a transaction approved by a majority of McDermott’s incumbent directors;
individuals who are incumbent directors cease for any reason to constitute a majority of McDermott’s board;
completion of a merger or consolidation of McDermott with another company or an acquisition by McDermott or its subsidiaries, unless immediately following such merger, consolidation or acquisition: (1) all or substantially all of the individuals or entities that were the beneficial owners of outstanding McDermott voting securities immediately before such merger, consolidation or acquisition beneficially own at least 50% of the then outstanding shares of voting stock of the parent corporation resulting from the merger, consolidation or acquisition in the same relative proportions as their ownership immediately before such merger, consolidation or acquisition; (2) if such merger, consolidation or acquisition
| | involves the issuance or payment by McDermott of consideration to another entity or its stockholders, the total fair market value of such consideration plus the principal amount of the consolidated long-term debt of the entity or business being acquired, does not exceed 50% of the sum of the fair market value of the outstanding McDermott voting stock plus the principal amount of the Company’s consolidated long-term debt; (3) no person beneficially owns 30% or more of the then outstanding shares of the voting stock of the parent company resulting from such merger, consolidation or acquisition; and (4) a majority of the members of the board of directors of the parent corporation resulting from such merger, consolidation or acquisition were incumbent directors of McDermott immediately before such merger, consolidation or acquisition; |
completion of the sale or disposition of 50% or more of the assets of McDermott and its subsidiaries on a consolidated operating incomebasis, unless immediately following such sale or disposition: (1) the individuals and entities that were beneficial owners of $546.5 millionoutstanding McDermott voting stock immediately before such sale or disposition beneficially own at least 50% of the then outstanding shares of voting stock of McDermott and of the entity that acquires the largest portion of such assets, and (2) a majority of the members of the McDermott Board (if it continues to exist) and the board of directors of the entity that acquires the largest portion of such assets were incumbent directors of McDermott immediately before the completion of such sale or disposition; or
any other set of circumstances is deemed by the Board in its sole discretion to constitute a change in control.
The change-in-control agreements do not provide for 2009. excise tax gross-ups. They do, however, provide for the potential reduction in payments to the applicable officer in order to avoid excise taxes.
The following table shows the estimated value of payments and other benefits due the Continuing Named Executives assuming a change in control and termination as of December 31, 2011.
| | | | | | | | | | | | | | | | | | | | |
| | | S.M. Johnson | | | P.L. Elders | | | G.L. Carlson | | | L.K. Hinrichs | | | J.T. McCormack | |
Salary-Based Severance Payment(1) | | $ | 5,658,882 | | | $ | 1,643,822 | | | $ | 1,070,466 | | | $ | 1,402,763 | | | $ | 1,549,098 | |
EICP-Based Severance Payment(2) | | $ | 950,000 | | | $ | 339,500 | | | $ | 201,600 | | | $ | 264,000 | | | $ | 350,000 | |
Deferred Compensation Plan(3) | | $ | 131,926 | | | $ | 32,597 | | | $ | 19,611 | | | $ | 21,020 | | | $ | 30,042 | |
Stock Options(4) (unvested and accelerated) | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
Restricted Stock Units(4) (unvested and accelerated) | | $ | 3,073,630 | | | $ | 408,881 | | | $ | 354,796 | | | $ | 953,454 | | | $ | 591,280 | |
Performance Shares(4) (unvested and accelerated) | | $ | 650,649 | | | $ | 162,636 | | | $ | 65,055 | | | $ | 146,373 | | | $ | 205,384 | |
Total | | $ | 10,465,087 | | | $ | 2,587,436 | | | $ | 1,711,528 | | | $ | 2,787,610 | | | $ | 2,725,804 | |
| (1) | The salary-based severance payment made to each Continuing Named Executive, with the exception of Mr. Johnson, in connection with a change in control would be a cash payment equal to 200% of the sum of his or her annual base salary prior to termination and his or her EICP target award applicable to the year in which the termination occurs. The severance payment made to Mr. Johnson in connection with a change in control would be a cash payment equal to 299% of the sum of his annual base salary prior to termination and his EICP target award applicable to the year in which the termination occurs. |
For a hypothetical termination as of December 31, 2011, the salary-based severance payment under a change in control would have been calculated based on the following base salary and target EICP awards. See “Grants of Plan-Based Awards” above for more information on the calculation of target EICP awards.
| | | | | | | | |
| | |
| | |
| Continuing Named Executive | | Annual Base Salary | | | Target EICP Award | |
S. M. Johnson | | $ | 950,000 | | | $ | 942,603 | |
P. L. Elders | | $ | 485,000 | | | $ | 336,911 | |
G. L. Carlson | | $ | 336,000 | | | $ | 199,233 | |
L. K. Hinrichs | | $ | 440,000 | | | $ | 261,381 | |
J. T. McCormack | | $ | 500,000 | | | $ | 274,549 | |
| | |
| | |
| (2) | Each Continuing Named Executive could receive up to two EICP-based severance payments in connection with a change in control depending on the timing of the termination relative to the payment of an EICP award, as follows: |
If an EICP award for the year prior to termination is paid to other EICP participants after the date of the Continuing Named Executive’s termination, the Continuing Named Executive would be entitled to a cash payment equal to the product of the Continuing Named Executive’s target EICP percentage (or, if greater, the actual amount of the bonus determined under the EICP for the year prior to termination) and the Continuing Named Executive’s annual base salary for the applicable period. No such payment would have been due a Continuing Named Executive on a December 31, 2011 termination, because the 2010 EICP awards had already been paid prior to the Continuing Named Executive’s termination date.
The Continuing Named Executive would be entitled to a prorated EICP payment based upon the Continuing Named Executive’s target EICP percentage for the year in which the termination occurs and the number of days in which the Continuing Named Executive was employed with us during that year. Based on a hypothetical December 31, 2011 termination, each Continuing Named Executive would have been entitled to an EICP payment equal to 100% of his or her 2011 target EICP percentage times annual base salary, calculated based on the following base salary and target EICP percentage:
| | | | | | | | |
| | |
| Continuing Named Executive | | Annual
Base Salary | | | Target EICP
Percentage | |
S. M. Johnson | | $ | 950,000 | | | | 100 | % |
P. L. Elders | | $ | 485,000 | | | | 70 | % |
G. L. Carlson | | $ | 336,000 | | | | 60 | % |
L. K. Hinrichs | | $ | 440,000 | | | | 60 | % |
J. T. McCormack | | $ | 500,000 | | | | 70 | % |
| | |
| | |
| (3) | The amounts reported represent 80% of Messrs. Johnson’s, Elders’, Carlson’s and McCormack’s and 15.62% of Ms. Hinrichs’ respective Deferred Compensation Plan balance as of December 31, 2011 that would become vested in connection with a termination of employment following a change in control. Under the Deferred Compensation Plan, a “change in control” generally occurs if: |
a person (other than a McDermott employee benefit plan or a corporation owned by McDermott stockholders in substantially the same proportion as the ownership of McDermott voting shares) is or becomes the beneficial owner of 30% or more of the combined voting power of McDermott’s then outstanding voting stock;
during any period of two consecutive years, individuals who at the beginning of such period constitute McDermott’s Board of Directors, and any new director whose election or nomination by McDermott’s Board was approved by at least two-thirds of the directors of McDermott’s Board then still in office who either were directors at the beginning of the period or whose election or nomination was previously approved, cease to constitute a majority of McDermott’s Board;
a merger or consolidation of McDermott, with any other corporation or entity has been completed, other than a merger or consolidation which results in the outstanding McDermott voting securities immediately prior to such merger or consolidation continuing to represent at least 50% of the combined voting power of the voting securities of McDermott or the surviving entity outstanding immediately after such merger or consolidation;
McDermott’s stockholders approve (1) a plan of complete liquidation of McDermott; or (2) an agreement for the sale or disposition by McDermott of all or substantially all of McDermott’s assets; or
within one year following the completion of a merger or consolidation transaction involving McDermott, (1) individuals who, at the time of execution and delivery of definitive agreements completing such transaction constituted the Board, cease for any reason (excluding death, disability or voluntary resignation) to constitute a majority of the Board; or (2) either individual, who at the first execution and delivery of definitive agreements completing the transaction, served as Chief Executive Officer or Chief Financial Officer does not, for any reason (excluding death, disability or voluntary resignation), serve as the Chief Executive Officer or Chief Financial Officer, as applicable, of McDermott, or if McDermott does not continue as a registrant with a class of equity securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934, as amended, as the Chief Executive Officer or Chief Financial Officer, as applicable, of a corporation or other entity that is (A) a registrant with a class of equity securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934, as amended, and (B) the surviving entity in such transaction or a parent entity of the surviving entity or McDermott following the completion of such transaction; provided, however, that a Change in Control would not be deemed to have occurred pursuant to this clause in the case of a merger or consolidation which results in the voting securities of McDermott outstanding immediately prior to the completion of the transaction continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 55% of the combined voting power of the voting securities of the McDermott or the surviving entity outstanding immediately after such merger or consolidation.
| (4) | Under the terms of the stock option and restricted stock unit awards outstanding, all unvested stock options would become vested and exercisable and all unvested restricted stock units would become vested on a change in control, regardless of whether there is a subsequent termination of employment. Due to the exercise price of the stock options outstanding for our Continuing Named Executives and the closing price of our common stock on December 30, 2011, the aggregate value of stock options that would become vested and exercisable on a change in control, regardless of whether there is a subsequent termination of employment, would be $0. Under the terms of the performance share awards outstanding, the greater of (1) 100% of the initial performance shares granted, or (2) the vested percentage of initial performance shares determined in accordance with the grant agreement would become vested on a change in control, regardless of whether there is a subsequent termination of employment. Under our 2001 D&O Plan and 2009 LTIP, a “change in control” generally occurs under the same circumstances described above with respect to our Deferred Compensation Plan, except that the 2001 D&O Plan and the 2009 LTIP do not include, as a change in control event, the event described in the last bullet in note (3) above. |
ADVISORY VOTETO APPROVE NAMED EXECUTIVE OFFICER COMPENSATION
(ITEM 2)
As designedrequired by Section 14A(a)(1) of the Exchange Act, we are providing our stockholders with an advisory vote to approve named executive officer compensation.
The Compensation Committee has overall responsibility for our compensation plans, policies and programs with respect to the Named Executives. Additional information regarding the Compensation Committee individual performance wasand its role is described under “Compensation Discussion and Analysis” and the differentiator among Named Executive’s annual incentive compensation payouts for 2009.
In April 2009, Mr. Stephen M. Johnson joined McDermott as our Presidentrelated tables and Chief Operating Officer. On January 1, 2010, he succeeded Mr. Deason as President and Chief Executive Officer of J. Ray. Because the transition occurred on January 1, 2010 compensation information relating to Mr. Johnson as reported in this Proxy Statement and discussed in this CD&A relates solely to his role as President and Chief Operating Officer of McDermott.
25
Overview of Compensation Programs
and Objectives
Philosophy and Objectives.narrative disclosures. Our compensation programs are based on our belief that our ability to attract, retain and motivate qualified employees to develop, expand and execute sound business opportunities is essential to the success of our company. To that end, the Compensation Committee, with the assistance of its compensation consultant, designs and administers compensation programs with the participation of our management. These programs generally seek to provide compensation that:
incentivizes and rewards short- and long-term performance, continuity of service and individual contributions; and
promotes retention of well-qualified executives, while aligning the interests of our executives with those of our stockholders.
We believe our compensation programs motivate and retain the Continuing Named Executives, while allowing for appropriate levels of business risk through some of the following features:
| | |
| | • | incentivizes and rewards short- and long-term performance, continuity of service and individual contributions; and |
| | • | promotes retention of well-qualified executives, while aligning the interests of our executives with those of our shareholders. |
Compensation Consultant. Hewitt Associates LLC, or Hewitt, has served as the consultant to the Compensation Committee on executive and director compensation since October 2007, and served in that capacity during 2009. During 2009, Hewitt advised the Compensation Committee on all principal elements of our compensation programs and attended meetings of the Compensation Committee and participated in executive sessions without members of management present. In 2009, Hewitt provided advice and analysis on the design, structure and level of executive and director compensation. It also provided the Governance Committee and the Board advice and analysis regarding nonmanagement director compensation. In connection with Hewitt’s services to the Compensation Committee, in 2009 Hewitt sought and received input from our executive management on various matters and worked with our executive management to formalize proposals for the Compensation Committee. In 2009, Hewitt did not perform any other services for McDermott, other than assisting our management in preparing the performance graph included in our annual report onForm 10-K. Hewitt had been providing that service to management for several years prior to serving as the Compensation Committee’s consultant, and the fees for that service amounted to less than $2,000 in 2009. On February 1, 2010, Hewitt spun-off its executive compensation business into a separate company known as Meridian Compensation Partners LLC. Since the spin-off, Meridian, rather than Hewitt, has been advising the Compensation Committee on the matters described above.
Elements. With the objectives outlined above in mind, the Compensation Committee approves annual compensation for Named Executives principally consisting of the following three elements:
| | |
| • | annual base salary; |
| • | annual incentives; and |
| • | long-term incentives. |
Collectively, we refer to these elements as the “total direct compensation” of a Named Executive.
Annual base salary provides a fixed level of compensation that helps attract and retain highly qualified executives. Annual incentive and long-term incentive compensation are the principal performance-based components of a Named Executive’s compensation. The annual incentive element is cash-based compensation generally designed to incentivize a Named Executive to achieve performance goals relative to the then-current fiscal year. Long-term incentives are generally equity-based and are designed to retain and closely align the interests of Named Executives with our shareholders. Similar to annual incentives, performance-based long-term incentive compensation is designed to promote the achievement of performance goals, only over a longer period — typically of three or more years.
As we discuss in more detail below, the Compensation Committee also administers several plans as part of our post-employment compensation arrangements designed to reward long-term service and performance.
Target Total Direct Compensation. The Compensation Committee seeks to provide reasonable and competitive compensation. As a result, it targetsReasonable Compensation Programs — Using the elements of total direct compensation for our Named Executives generally within 10%-15% of the median compensation of our market for comparable positions. Throughout this CD&A, we refer to compensation that is within 10%-15% of market median as “market range” compensation.
The Compensation Committee may set elements of total direct compensation above or below the market range to account for a Named Executive’s performance and experience, and other factors or situations that are not typically captured by looking at standard market data and practices and that the Compensation Committee deems relevant to the appropriatenessand/or competitiveness of a Named Executive’s compensation.
26
When making decisions regarding individual compensation elements, the Compensation Committee also considers the effect on the Named Executive’s target total direct compensation and target total cash-based compensation (annual base salary and annual incentives), as applicable. The Compensation Committee’s goal is to establish target compensation for each element it considers appropriate to support the compensation objectives that, when combined, create a target total direct compensation award for each Named Executive that is reasonable and competitive.
Defining Market Range Compensation — Benchmarking. To identify median compensation, the Compensation Committee relies on “benchmarking” — reviewing the compensation of our Named Executives relative to the compensation paid to similarly situated executives at companies we consider our peers. Performance goals used within elements of total direct compensation are designed for the principal purpose of supporting our strategic and financial goalsand/or driving the creation of shareholder value, and, as a result, are not generally benchmarked.
At the request of the Compensation Committee, Hewitt conducted a market compensation analysis and provided advice regarding the median compensation of the three elements of total direct compensation for our officers, including the Named Executives. Using survey data from its proprietary compensation database (adjusted by Hewitt to 2009), Hewitt collected information from companies generally reflecting the size, scope and complexity of the business and executive talent at McDermott. To account for the size of our operations relative to peer companies, Hewitt used regression analysis to adjust the market information on peer companies based on revenue. To account for the diversity of geography and industry among our operations, Hewitt analyzed information from two principal peer groups, the J. Ray/Corporate Group and the Babcock & Wilcox Group. In this CD&A references to “market” or “our market” are references to the compensation of companies within the J. Ray/Corporate Group or Babcock & Wilcox Group, as applicable.
J. Ray/Corporate Group. With assistance from our management, Hewitt compiled this group as the primary benchmark for our executives at our corporate and Offshore Oil and Gas Construction segments, both of which are headquartered in Houston, Texas. The group consists of 44 companies with operations in engineering, construction, government operationsand/or energy. The component companies of this group include:
| | | | |
Alliant Techsystems Inc.
Ameron International Corp.
Anadarko Petroleum Corp.
Baker Hughes, Inc.
BJ Services Company
Cameron International, Inc.
Chesapeake Energy Corporation
Chicago Bridge & Iron Company N.V.
Cooper Industries Plc
Curtiss-Wright Corporation
Devon Energy Corporation
Dover Corporation
Eaton Corporation
El Paso Corporation
ESCO Technologies Inc. | | Flowserve Corporation
FMC Technologies, Inc.
Foster Wheeler AG
General Dynamics Corporation
Granite Construction Incorporated
Halliburton Company
Honeywell International, Inc.
Hubbell Inc.
Illinois Tool Works Inc.
Ingersoll-Rand
ITT Corp.
Joy Global Inc.
KBR, Inc.
Lockheed Martin Corporation
Martin Marietta Materials, Inc. | | Noble Corporation
Northrop Grumman Corporation
Pioneer Natural Resources Company
Raytheon Company
Rockwell Collins, Inc.
The Shaw Group Inc.
The Williams Companies, Inc.
Terex Corporation
Textron Inc.
Thomas & Betts Corporation
USG Corporation
Valmont Industries, Inc.
Vulcan Materials Company
Walter Industries, Inc. |
27
Babcock & Wilcox Group. With assistance from our management, Hewitt compiled this group as the primary benchmark for our executives at our Power Generation Systems and Government Operations segments. The group is largely a subset of the J.Ray/Corporate Group and consists of approximately 31 engineering, constructionand/or governments operations companies that are more specifically representative of our Power Generation Systems and Government Operations segments. The component companies within this group include:
| | | | |
Ameron International Corp.
Chicago Bridge & Iron Company N.V.
Cooper Industries Plc
Curtiss-Wright Corporation
Dover Corporation
Eaton Corporation
ESCO Technologies Inc.
Flowserve Corporation
Foster Wheeler AG
General Dynamics Corporation
Granite Construction Incorporated | | Honeywell International, Inc.
Hubbell Inc.
Illinois Tool Works Inc.
Ingersoll-Rand
ITT Corporation
Joy Global Inc.
Lockheed Martin Corporation
Martin Marietta Materials, Inc.
Northrop Grumman Corporation
Raytheon Company | | Rockwell Collins, Inc.
The Shaw Group Inc.
Terex Corporation
Textron, Inc.
Thomas & Betts Corporation
USG Corporation
Valmont Industries, Inc.
Vulcan Materials Company
Walter Industries Inc.
Washington Group International, Inc. |
In addition to these peer groups, Hewitt supplements the market data with other publicly available compensation information related to companies in a peer group identified by management and Hewitt in October 2007, which we refer to as the “Custom Peer Group.” The Custom Peer Group consists of nine similarly situated engineering and construction companies and is the same group we use in the performance graph included in our annual report onForm 10-K. The Custom Peer Group is comprised of the following companies: Cal Dive International, Inc.; Chicago Bridge & Iron Company N.V.; Fluor Corporation; Foster Wheeler AG.; Jacobs Engineering Group, Inc.; KBR, Inc.; Oceaneering International, Inc.; The Shaw Group Inc.; and URS Corporation. Compensation information for Custom Peer Group companies was based on information reported by those companies in publicly available Securities and Exchange Commission filings. The information available was largely limited to the five highest paid positions at the company and generally based on 2007 compensation. As a result, the Compensation Committee relied on theJ.Ray/Corporate Group and the Babcock & Wilcox Group as the primary benchmarks to determine the market range of 2009 compensation for our Named Executives.
Total Direct Compensation
2009 Overview. The 2009 target total direct compensation for each of our Named Executives was within the market range of target total direct compensation, except for Mr. Deason. His target 2009 total direct compensation was slightly below the market range, primarily as a result of his 2009 long-term incentive compensation, which is discussed in more detail below.
The chart below shows the 2009 target total direct compensation by element for each Named Executive. Because some compensation elements are performance-based, Named Executives are capable of earning compensation above or below the market range for similarly situated executives in our market.
28
2009 Target Total Direct Compensation Summary
| | | | | | | | | | | | | |
| | | | | Annual
| | Long-Term
|
| | | | | Incentive*
| | Incentive*
|
| Named Executive | | Annual Base Salary | | (% of Salary) | | (% of Salary) |
| J.A. Fees | | $ | 900,000 | | | | 100 | % | | | 705 | % |
| M.S. Taff | | $ | 505,000 | | | | 70 | % | | | 348 | % |
| B.C. Bethards | | $ | 526,200 | | | | 70 | % | | | 286 | % |
| S.M. Johnson | | $ | 750,000 | | | | 85 | % | | | 400 | % |
| R.A. Deason | | $ | 555,000 | | | | 70 | % | | | 180 | %** |
| |
* | When making decisions as to the elements of a Named Executive’s total direct compensation, the Compensation Committee considersseeks to provide compensation opportunities for employees targeted at or near the dollar valuemedian compensation of comparable positions in our market. As a result, we believe the total direct compensation of executive officer employees provides a reasonable and appropriate mix of cash and equity, annual and longer-term incentives, and performance metrics. |
| • | | Emphasize Long-Term Incentive Over Annual Incentive Compensation — Long-term incentive compensation typically makes up a larger percentage of an executive officer employee’s total direct compen- |
| | sation than annual incentive compensation. Incentive compensation helps drive performance and align the interests of those employees with those of stockholders. In addition, tying a significant portion of an employee’s total direct compensation to long-term incentive compensation, butincentives (which typically awards these elementsvest over a period of three or more years) helps to promote longer-term perspectives regarding our company’s performance. |
| • | | Clawback Policy — The Compensation Committee has adopted a policy under which McDermott shall seek to recover any incentive-based award granted to any executive officer as percentagesrequired by the provisions of annual base salary. This is primarily because our market generally targets these elements on athe Dodd-Frank Wall Street Reform and Consumer Protection Act or any other “clawback” provision required by law or the listing standards of the New York Stock Exchange. |
| • | | percentage-of-salary basis. See ‘‘— Long-Term Incentive Compensation Subject to Forfeiture— AnalysisThe Compensation Committee may terminate any outstanding stock award if the recipient, while employed by McDermott or performing services on behalf of 2009 Equity Grants” below forMcDermott under any consulting agreement: (1) is convicted of a discussionmisdemeanor involving fraud, dishonesty or moral turpitude or a felony; or (2) engages in conduct that adversely affects or, in the sole judgment of how equity grants are valued.the Compensation Committee, may reasonably be expected to adversely affect, our business reputation or economic interests.
|
| |
** • | | Linear and Capped Incentive Compensation Payouts — The value shownCompensation Committee establishes financial performance goals which are used to plot a linear payout formula for Mr. Deason’s long-termannual incentive compensation, eliminating payout “cliffs” between the established performance goals. The maximum payout for the annual incentive compensation is attributable entirelycapped at 200% of target. |
| • | | Use of Multiple and Appropriate Performance Metrics — Utilizing diversified performance measures helps prevent compensation opportunities from being overly weighted toward the performance |
| | result of a single measure. In general, our incentive programs are historically based on a mix of financial and individual goals. In recent years our primary financial performance metric has been operating income. Compared to his retentionother financial metrics, operating income is a measure of the profitability of our business which helps drive accountability at our operating segments thereby reducing risks related to incentive compensation by putting the focus on quality of revenues not quantity. Additionally, commencing in 2011, the Compensation Committee utilized total shareholder return and return on invested capital as additional performance measures. |
| • | | Stock Ownership Guidelines — Our executive officers and directors are subject to share ownership guidelines which also helps promote longer-term perspectives and align the interests of our executive officers and directors with those of our stockholders. In 2010, we increased the stock award. See “— Total Direct Compensation — Long-Term Compensation — Valueownership requirements for both our executive officers and nonemployee directors to further emphasize this alignment of 2009 Long-Term Incentive Compensation” below for a discussion of Mr. Deason’s award.interests. |
While the Compensation Committee does not set a specific target allocation among the elements of total directReflecting these compensation it believes that a significant portion of aobjectives, compensation arrangements in 2011 for our Continuing Named Executive’s total direct compensation should be performance-based. On average, performance-based compensation accounted for approximately 56% of a Named Executive’s 2009 Executives resulted in:
target total direct compensation andwithin approximately 15% of the median compensation for officers in comparable positions in our market, with the exception of Mr. Johnson, whose target total direct compensation was set slightly above market due to his demonstrated leadership following the Spin-off;
performance-based compensation accounting for over 60% of his long-term incentive compensation. The average 2009 mix of target total direct compensation, elements for our Named Executives was as follows:
Annual Base Salary
2009 Base Salaries. In January 2009, the Compensation Committee was provided with (1) the recommendation of our Chief Executive Officer as to 2009 base salaries for our Named Executives (other than the Chief Executive Officer), (2) Hewitt’s analysis of market compensation (as adjusted by Hewitt to January 2009) and (3) tally sheets showing the 2008 compensation and benefits of our Named Executives. Hewitt’s market analysis compared the recommended base salary and the target total direct compensation of each officer (assuming 2009 salary recommendations were approved) to the median compensation of the applicable market.
The 2009 base salaries for our Named Executives were as follows:
2009 Annual Base Salaries
| | | | | | | | | |
| | | 2009 Annual
| | Percent of
|
| Named Executive | | Base Salary | | Market(1) |
|
| |
| J.A. Fees | | $ | 900,000 | | | | 78 | % |
| M.S. Taff | | $ | 505,000 | | | | 88 | % |
| B.C. Bethards | | $ | 526,200 | | | | 100 | % |
| S.M. Johnson | | $ | 750,000 | | | | 102 | % |
| R.A. Deason | | $ | 555,000 | | | | 107 | % |
| | |
(1) | | Market = 50th percentile of annual base salary, based on the benchmark applicable to the executive. |
In response to market data and the slowdown in global economic conditions that began in 2008, the Compensation Committee sought to limit increases in 2009 base salaries for our officers, including our Named Executives, to an average, increase of 3-4%, with limited exceptions based on individual circumstances, in line with the median increase among companies in our market. Mr. Bethards’ base salary did not
29
change because he received a substantial increase in October 2008 in connection with his promotion and the Compensation Committee believed his salary was appropriate relative to the market. As to Mr. Deason, the Compensation Committee increased his base salary for 2009 slightly less than the market-level increases and set it at a level that was within market range for his position. Finally, Messrs. Fees and Taff, whose base salaries were both substantially below market in 2008, each received an above-average increase in base salary to more closely align their respective base salaries with the market-median base salaries for their positions.
Annual Incentive Compensation
2009 Overview. The Compensation Committee administers our annual incentive compensation program under our Executive Incentive Compensation Plan, which we refer to as the EICP.
The EICP is a cash incentive 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 earningsand/or create shareholder value. EICP compensation consists of a financial performance component and an individual performance component. The 2009 target EICP was split between these two components as follows:
| | |
| • | 70% of target EICP was attributable to financial performance; and |
|
| • | 30% of target EICP was attributable to individual performance. |
Financial performance is the largest factor in determining EICP compensation because the Compensation Committee generally considers it to be more objective and to more directly influence the creation of shareholder value, as compared to individual performance. Individual performance, however, serves as an important metric to help promote the achievement of strategic, non-financial goals. To reward significant individual contributions, the Compensation Committee increased the representation of the individual component from 15% to 30% of target EICP46% in 2010; and
performance-based compensation, accounting for 2009, as compared to 2008. However, to maintain the emphasis on financial performance, financial performance determined the amount eligible to be paid under EICP compensation (irrespective of the level of individual performance attained). For example, if target financial performance was attained, then a Named Executive would be eligible to receive up to a target payout under the financial component and individual component. No EICP compensation would be earned (including for individual performance) unless the threshold level of financial performance was attained and the maximum EICP compensation a Named Executive could earn in 2009 was 200% of target EICP.
As a result, the EICP payment amount was principally determined based on: (1) the attainment of annual financial goals (which represented up to 140% of EICP compensation); and (2) the attainment of annual individual goals (which represented up to 60% of EICP compensation). The Compensation Committee had the discretion to decrease an EICP payment. For more information regarding the EICP and the 2009 EICP grants, see the immediately following discussion and the Grants of Plan-Based Awards table under “Compensation of Executive Officers” below.
Target 2009 EICP. The target 2009 EICP compensation for our Named Executives was as follows:
2009 Target EICP
| | | | | | | | | |
| | | Target EICP
| | Percent of
|
| Named Executive | | (% of annual base salary) | | Market(1) |
|
| |
| J.A. Fees | | | 100 | % | | | 85 | % |
| M.S. Taff | | | 70 | % | | | 89 | % |
| B.C. Bethards | | | 70 | % | | | 86 | % |
| S.M. Johnson | | | 85 | % | | | 96 | % |
| R.A. Deason | | | 70 | % | | | 86 | % |
| | |
(1) | | Market = 50th percentile of target annual incentive compensation, based on the benchmark applicable to the executive. |
No changes were made to 2009 target EICP from the 2008 targets, except for Mr. Taff whose 2008 EICP was 55%. The Compensation Committee set 2009 target EICP for Messrs. Bethards, Deason and Taff at the same level for internal equity reasons.
2009 EICP Financial Goals. The financial goals for 2009 EICP consisted of a mix of McDermott, B&W and J. Ray operating income. Generally, EICP financial goals were based: (1) entirely on our consolidated operating income for McDermott officers, such as Messrs. Fees, Johnson and Taff; and (2) on a mix of our consolidated operating income and, as applicable, J. Ray or B&W operating income for segment chief executive officers, such as Messrs. Bethards and Deason. Although Messrs. Bethards and Deason are primarily responsible for directing only their respective segment operations, as executive officers of McDermott the Compensation Committee believes
30
that a portion of their annual incentive compensation should be based on consolidated financial results as well. As a result, of the 140% that could be earned under the EICP for financial performance, approximately 100% was attributable to segment operating income and 40% to consolidated operating income for these two Named Executives. The following charts illustrate the mix of consolidated and segment operating income goals for 2009 EICP compensation.
The Compensation Committee considers operating income an appropriate financial measure to use for compensation purposes, because it is the primary driver of net income, which the Compensation Committee expects to drive our stock price. In comparison to net income, however, 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 2009 EICP compensation were as follows:
2009 EICP Financial Goals
| | | | | | | | | | |
| | Threshold
| | Target (Min)
| | Target
| | Target (Max)
| | Maximum
|
| | (70% of Target) | | (95% of Target) | | (100%) | | (105% of Target) | | (120% of Target) |
|
|
The Babcock & Wilcox Company
• Power Generation Systems
• Government Operations
| | $191.7 million | | $260.2 million | | $273.9 million | | $287.6 million | | $328.7 million |
J. Ray McDermott, S.A.
• Offshore Oil & Gas Construction
| | $98.0 million | | $133.0 million | | $140.0 million | | $147.0 million | | $168.0 million |
McDermott International, Inc.
• Consolidated(1)
| | $241.9 million | | $328.2 million | | $345.5 million | | $362.8 million | | $414.6 million |
| | |
(1) | | Consolidated operating income levels equal the sum of the segment operating income less an amount for unallocated corporate operating expenses. |
Historically, the Compensation Committee established three levels of operating income goals. These levels would determine the threshold, target and maximum amounts that would be paid under the financial component of the EICP, with target level being based on management’s internal estimates of operating income and threshold and maximum levels set as a percentage of the target level. The Compensation Committee designs incentive compensation to drive target level performance and does not believe that compensation should be earned for performance substantially below that level. As a result, no EICP compensation would be earned (including for individual performance) unless a threshold level of financial performance was attained. The Compensation Committee believes that Named Executives should be rewarded for superior financial performance. It therefore establishes a maximum level performance goal to incentivize higher performance, but caps the payout to maximize returns to shareholders for performance above the maximum payout level, thereby reducing the risk related to incentive compensation.
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The performance range between the threshold level and the maximum level was relatively narrow prior to 2009. For instance in 2008, the operating income goals ranged between 75% of target operating income at the threshold level and 108% of target operating income at the maximum level. With operating income goals set within a range of 33% determining a payout range of 200%, relatively small changes in performance results produced large variations in EICP payouts.
For 2009, the Compensation Committee sought to increase the performance range between threshold and maximum level goals, making the maximum payment more difficult relative to target and reducing the minimum performance required to be attained before any EICP compensation would be earned. In addition, the Compensation Committee established a range for target comprised of three separate operating income goals. The intended effect of these changes was to reduce the significance of the impact of minor variations in financial results, thereby reducing the risk related to the EICP.
The Compensation Committee considered a number of performance goals recommended by management, including threshold level goals as low as 50% of target operating income and maximum level goals as high as 150% of target operating income. With the advice of Hewitt, the Compensation Committee set the threshold level operating income goal at 70% of target and the maximum level operating income goal at 120% of target. The operating income goals at the target level ranged from 95% of the target goal to 105% of the target goal.
A Named Executive would have been eligible to earn the following amounts under the 2009 EICP based on attaining the following levels of operating income:
| | |
| • | 25% of target EICP at threshold level operating income; |
|
| • | 92.5% of target EICP at target (Min) level operating income; |
|
| • | 100% of target EICP at target level operating income; |
|
| • | 107.5% of target EICP at target (Max) level operating income; and |
|
| • | 200% of target EICP at maximum level operating income. |
The percentage that would be paid between threshold and maximum is interpolated based on the levels of operating income established by the Compensation Committee. No payment would have been earned under the EICP for 2009 if operating income results had been below the threshold level.
The following graph shows the effect that the 2009 EICP changes had on the relative payouts, compared to 2008 EICP:
2009 EICP Individual Goals. As discussed under “— 2009 Overview” above, each Named Executive could earn from 0-60% of his 2009 target EICP based on the attainment of individual goals. Individual goals established for each Named Executive were tailored to the individual’s position and focused on supporting strategic initiatives and achieving common goals.
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The individual goals and their respective weightings for our Named Executives’ 2009 EICP compensation are set forth in the table below. The Compensation Committee established the individual goals for Mr. Fees. Except for the safety goals which were established by the Compensation Committee, Mr. Fees established the individual goals for the remaining Named Executives.
| | |
John A. Fees: | | • achieve specific levels of company-wide health, safety and environmental performance averages (0-30%); and |
| | • positive assessment by the Governance Committee of the Board regarding six categories: leadership, strategic planning, financial results, succession planning, communications and Board relations. (0-30%). |
Michael S. Taff: | | • achieve specific levels of company-wide health, safety and environmental performance averages (0-20%); |
| | • develop and implement plan to address the credit facility that matures in 2010 (0-20%); and |
| | • develop strategic multi-year plan regarding information technology (0-20%). |
Brandon C. Bethards: | | • achieve specific levels of health, safety and environmental performance averages at our Power Generation Systems and Government Operations segments (0-20%); |
| | • successfully manage the completion of the initial phase of a strategic global financial implementation project as it relates B&W entities (0-20%); and |
| | • achieve successful integration of a specified acquisition as defined by the integration plan milestones (0-20%). |
Stephen M. Johnson: | | • achieve specific levels of company-wide health, safety and environmental performance averages (0-15%); |
| | • achieve specific reductions in SG&A at operating units(0-15%);
|
| | • implement plan to improve predictability of forecasting at operating units (0-15%); and |
| | • improve project execution at the operating units (0-15%). |
Robert A. Deason: | | • achieve specific levels of health, safety and environmental performance averages at our Offshore Oil and Gas Construction segment (0-15%); |
| | • implement a comprehensive strategic contracting control plan (0-15%); |
| | • implement plan to cut non-productive expenses (0-15%); and |
| | • develop human resource management plan for our Offshore Oil and Gas Construction segment (0-15%). |
|
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2009 Annual Incentive Compensation Payments. The 2009 target and final EICP compensation amounts for each Named Executive are shown in the table below.
2009 EICP Payment Summary
| | | | | | | | | | | | | | | | | | | | | |
Named
| | 2009 EICP Target | | Goals Attained | | Total 2009 |
| Executive | | % of Salary | | Amount | | Financial | | Individual | | Annual Incentive |
| | | | | | | | | | | | | | | | | | | | | |
| J.A. Fees | | | 100 | % | | $ | 900,000 | | | | 140 | % | | | 45 | % | | $ | 1,665,000 | |
| M.S. Taff | | | 70 | % | | $ | 353,500 | | | | 140 | % | | | 60 | % | | $ | 707,000 | |
| B.C. Bethards | | | 70 | % | | $ | 368,340 | | | | 137.5 | % | | | 42.5 | % | | $ | 663,012 | |
| S.M. Johnson | | | 85 | % | | $ | 637,500 | | | | 140 | % | | | 37.5 | % | | $ | 1,131,563 | |
| R.A. Deason | | | 70 | % | | $ | 388,500 | | | | 140 | % | | | 60 | % | | $ | 777,000 | |
Analysis of 2009 EICP Payments. In February 2010, the Compensation Committee considered (1) our 2009 consolidated and segment operating income in light of established performance goals, (2) the Governance Committee’s assessment of the individual performance of Mr. Fees, (3) Mr. Fees’ self-assessment of his individual performance relative to his individual goals and (4) Mr. Fees’ recommendation of each Named Executive’s 2009 EICP compensation based on his assessment of the financial and individual performance applicable to each of the Named Executives
As discussed above, financial performance accounted for 70% of each Named Executive’s 2009 target EICP or, depending on the performance achieved, 0-140% of the final EICP amount, and determined the amount each Named Executive would be eligible to earn under the 2009 EICP. McDermott and JRM, earning approximately $546.5 million and $317.0 million of operating income, respectively, for 2009, both exceeded the maximum level performance goal. In 2009, B&W produced adjusted operating income of approximately $325.7 million, which exceeded the target level performance goal but not the maximum level. B&W’s 2009 operating income included expense relating to the mPowertm modular nuclear reactor initiative. Relative to annual incentive compensation, the mPowertm initiative is longer-term in nature and to avoid adversely impacting Named Executive’s EICP compensation for strategic investments, approximately $13 million of the mPowertm expenses were excluded from B&W operating income for purposes of calculating 2009 EICP payments. Individual performance accounted for 30% of each Named Executive’s 2009 target EICP, or, depending on the level of individual and financial performance, 0-60% of the final EICP amount.
Mr. Fees. Based on McDermott’s 2009 financial results, Mr. Fees was eligible to earn 200% of his 2009 target EICP compensation. As a result of McDermott’s operating income, he earned 140% of his 2009 target EICP under the financial performance component. Based on the positive assessment of the Governance Committee and the achievement of consolidated safety goals, Mr. Fees met or exceeded his individual goals. However, as a result of the operational challenges that reduced other Named Executives’ 2009 EICP compensation, as well as the Compensation Committee’s view that the leader of the Company has both the responsibility as well as the accountability for all aspects of the Company’s performance, the Compensation Committee exercised its discretion under the EICP and reduced Mr. Fees’ individual performance component payout from 60% to 45%. As a result, Mr. Fees earned 185% of his 2009 target EICP, or $1,665,000. Mr. Fees feels strongly about the critical nature of leadership and leading by example. Since two of Named Executives received reductions in their EICP payouts, he agreed with the decision on his 2009 EICP compensation.
Mr. Taff. Based on McDermott’s 2009 financial results, Mr. Taff was eligible to earn 200% of his 2009 target EICP compensation. As a result of McDermott’s operating income, he earned 140% of his 2009 target EICP under the financial performance component. Mr. Taff met or exceeded his individual goals, resulting in Mr. Taff earning 60% of his 2009 target EICP under the individual performance component. As a result, Mr. Taff earned 200% of his 2009 target EICP, or $707,000.
Mr. Bethards. Mr. Bethards’ financial goals were attributable to McDermott and B&W operating income. As a result of B&W’s 2009 adjusted financial results and McDermott’s financial results, Mr. Bethards was eligible to earn 196% of his 2009 target EICP compensation. Based solely on the financial results, he earned 137.5% of his 2009 target EICP under the financial performance component.
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Mr. Bethards met or exceeded all of his individual goals except with respect to two goals (safety and integration of a subsidiary acquired by B&W), which in each case were only partially achieved. Based on the relative weighting of his individual goals, Mr. Bethards earned 42.5% of his 2009 target EICP under the individual performance component. As a result, Mr. Bethards earned 180% of his 2009 target EICP, or $663,012.
Mr. Johnson. Based on McDermott’s 2009 financial results, Mr. Johnson was eligible to earn 200% of his 2009 target EICP compensation. As a result of McDermott’s operating income, he earned 140% of his 2009 target EICP under the financial performance component. Mr. Johnson met or exceeded all of his individual goals except with respect to two goals (reduced SG&A expenses, which was partially met, and forecasting improvement). Based on the relative weighting of his individual goals, Mr. Johnson earned 37.5% of his 2009 target EICP under the individual performance component. As a result, Mr. Johnson earned 177.5% of his 2009 target EICP, or $1,131,563.
Mr. Deason. Based on JRM’s 2009 financial results, Mr. Deason was eligible to earn 200% of his 2009 target EICP compensation. As a result of JRM’s operating income, he earned 140% of his 2009 target EICP under the financial performance component. Mr. Deason met or exceeded his individual goals, resulting in Mr. Deason earning 60% of his 2009 target EICP under the individual performance component. As a result, Mr. Deason earned 200% of his 2009 target EICP, or $777,000.
Long-Term Incentive Compensation
The Compensation Committee believes 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 value of our common stock and other performance measures that reflect improvements in McDermott’s business fundamentals. Therefore, long-term incentive compensation represents the single largest element of our Named Executives’ total direct compensation.
Analysis of 2009 Equity Grants.
Mix of 2009 Equity. In 2006 and 2007, the long-term incentive compensation of our officers, including the Named Executives, consisted entirely of performance shares. These performance shares generally provided for vesting three years from the date of grant in an amount between 0% and 150% of the number of shares granted, depending on the level of cumulative consolidated operating income achieved during the vesting period. In 2008, the Compensation Committee, with the advice of Hewitt, incorporated time-vested restricted stock into long-term incentive compensation, to promote retention. However, performance shares still constituted 75% of our officer’s long-term incentive compensation for 2008. As a result, at the time the Compensation Committee considered 2009 long-term incentive compensation, performance shares dominated the outstanding long-term incentive compensation of Named Executives.
In addition, Hewitt’s market analysis of long-term incentive compensation indicated that many companies were reexamining their long-term incentive mix. Specifically, Hewitt noted that more companies were using stock options for rewarding performance based on absolute stock price improvement, restricted stock for retention and performance-based stock to encourage a focus on financial or operational drivers.
As a result, our Chief Executive Officer recommended changing the mix and allocation of equity award types used in connection with 2009 long-term incentive compensation. With the advice of Hewitt and to maintain the competitiveness of Named Executive’s compensation, the Compensation Committee approved the use of a mix of performance shares, restricted stock units and stock options in 2009 for Named Executives. To drive performance, the Compensation Committee determined to issue at least a majority of long-term incentive compensation in the form of performance-based compensation. For 2009, the performance-based long-term compensation consisted of performance shares and stock options. The Compensation Committee allocated 2009 target long-term incentive compensation, as follows:
| | |
| • | 20% performance shares; |
| • | 40% stock options; and |
| • | 40% restricted stock units. |
Similar to prior years, the 2009 performance shares generally vest three years from the date of grant. However, the Compensation Committee made two principal changes in the 2009 performance shares. First, to be consistent with annual incentive compensation, the 2009 performance shares vest in an amount between 0% and 200% of the target shares granted. Second, the Compensation Committee added the concept of relative shareholder return as a performance condition, in addition to operating income. The
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Compensation Committee continues to believe that operating income is an appropriate financial metric for use in both annual and long-term incentive compensation because of its potential to drive stock price and accountability at operating segments; however, in 2008 we witnessed a disconnect in performance results. With approximately $570 million of operating income, McDermott produced its second highest level of operating income since The Babcock & Wilcox Company was acquired by McDermott in 1978, although the price of its stock declined. To tie performance shares more directly with shareholder return, the 2009 performance shares will vest (1) one-half based on the level of cumulative operating income attained over the three-year period ending December 31, 2011 and (2) one-half based on the total shareholder return of our stock relative to the Custom Peer Group over the same period.
On the recommendation of management and with the advice of Hewitt, the Compensation Committee set cumulative operating income for the target and maximum vesting levels at amounts that represent 6% and 10% annual growth from the target operating income goal used in connection with 2009 annual incentive compensation. Consistent with annual incentive compensation, no performance shares will vest based on operating income if the performance results are below 70% of the target three-year cumulative operating income goal. In addition, the performance shares that vest based on shareholder return will vest as follows:
| | |
| • | 25% will vest if our total shareholder return is at the 25th percentile (threshold level) relative to the total shareholder return of the Custom Peer Group; |
|
| • | 100% will vest if our total shareholder return is at the 50th percentile (target level) relative to the total shareholder return of the Custom Peer Group; and |
|
| • | 200% will vest if our total shareholder return is at the 100th percentile (maximum level) relative to the total shareholder return of the Custom Peer Group. |
The percentage that would vest between threshold, target and maximum levels is interpolated based on those performance levels. However, regardless of percentile, 200% would vest if our total shareholder return for the three-year period ranks either first or second relative to the total shareholder return of the Custom Peer Group over the same period. No performance shares would vest based on shareholder return if our total shareholder return relative to the Custom Peer Group falls below the 25% threshold performance level.
For more information regarding the 2009 performance shares, restricted stock units and stock options, see the Grants of Plan-Based Awards table under “Compensation of Executive Officers” below and disclosures under “Compensation of Executive Officers — Estimated Future Payouts Under Equity Incentive Plan Awards.”
Value of 2009 Long-Term Incentive Compensation. The 2009 target long-term incentive compensation for our Named Executives was as follows:
2009 Target Long-Term Incentive
| | | | | | | | | |
| | | Target LTI
| | |
| | | (% of annual base
| | Percent of
|
| Named Executive | | salary) | | Market(1) |
| J.A. Fees | | | 705 | % | | | 113 | % |
| M.S. Taff | | | 348 | % | | | 125 | % |
| B.C. Bethards | | | 286 | % | | | 100 | % |
| S.M. Johnson | | | 400 | % | | | 100 | % |
| R.A. Deason(2) | | | 180 | % | | | 64 | % |
| | |
(1) | | Market = 50th percentile of target long-term incentives based on the benchmark applicable to the executive. |
|
(2) | | As more fully discussed below, Mr. Deason’s 2009 equity grant was not long-term in nature. However, because it was equity-based, it is included in the discussion of long-term incentive compensation for comparative purposes. |
As a result of market conditions in 2008, the value of Named Executives’ outstanding long-term incentive compensation dropped considerably. In February 2009, the expected value of the long-term incentive compensation granted between 2006 and 2008 was approximately 35% of the target grant date value. For certain officers, including two Named Executives (Messrs. Fees and Taff), the expected value of their outstanding long-term incentive compensation was even lower due to the particular mix of their respective equity following recent promotions within McDermott. The Compensation Committee was concerned that long-term incentive compensation would not effectively promote their intended purpose at values substantially below target. The Compensation Committee therefore increased the target 2009 long-term incentive compensation of Mr. Fees and Mr. Taff by 13% and 9%, respectively, over the amount initially recommended to be granted in 2009. As a result,
36
Mr. Taff’s target 2009 long-term incentive compensation exceeded the market range; however, his total direct compensation was within the market range.
Finally, as a result of Mr. Deason’s intention to retire, the Compensation Committee did not grant him a long-term incentive award for 2009. However, to retain Mr. Deason through 2009, he received a retention grant of 100,000 restricted stock units that vested on his continued employment through December 31, 2009. The number of restricted stock units was based on (1) the value of one-third of the market median long-term incentive compensation applicable to Mr. Deason and (2) an additional amount calculated, on the recommendation of Hewitt, based on Mr. Deason’s 2009 annual base salary and target annual incentive compensation, prorated for his then-remaining 2009 service term.
Sizing Long-Term Incentive Compensation. The Compensation Committee generally determines the size of equity-based grants as a percentage of a Named Executive’s annual base salary, rather than granting a targeted number of shares. The number of performance shares, restricted stock units and stock options granted can be expressed through the following formula:
value of target long-term incentive($)/FMV($).
The dollar value of the target equity award for each Named Executive was derived by multiplying the Named Executive’s target percentage by his 2009 base salary. The fair market value of one performance share, restricted stock unit and stock option was determined by Hewitt near the time of grant and generally reflected a discount from the market price of our common stock as a result of the vesting conditions and restrictions on transfer. Hewitt used a Black Scholes model to value stock options. For the long-term incentive compensation granted in February 2009, the fair market value of our common stock as of the date the grants were calculated (based on the closing price of our common stock on the New York Stock Exchange) was $13.21, compared to the discounted value50% in 2010.
McDermott’s financial performance in 2011 included:
Consolidated revenue of $10.52 for one performance share, $12.177 for one restricted stock unit and $8.581 for an option to acquire one share of our common stock. Because the long-term incentive compensation grants vest over three years, the number of shares calculated were rounded down to the nearest multiple of three. To illustrate, consider the 120,603 performance shares granted to our Chief Executive Officer in 2009. The dollar value of Mr. Fees’ target 2009 long-term incentive compensation was $6,344,000 ($900,000 base salary multiplied by 705% target long-term incentive). Performance shares accounted for 20% of his target long-term incentive compensation granted in 2009, or $1,268,800. At a fair market value of $10.52/share, 20% of Mr. Fees target long-term compensation grant amounted to 120,608 shares, or, rounded down to the nearest multiple of three, 120,603 performance shares.
Timing of Equity Grants. To avoid timing equity grants ahead of the release of material nonpublic information, the Compensation Committee generally approves stock option and other equity awards effective as of the first day of the next open trading window following the meeting at which the grants are approved, which is generally the third day following the filing of our annual report onForm 10-K or quarterly report onForm 10-Q with the Securities and Exchange Commission. This practice was followed for all long-term incentive compensation grants to Named Executives in 2009.
Perquisites
Perquisites are not factored into the determination of the total direct compensation of our Named Executives, because they are typically provided to Named Executives on an exception basis.
We own a fractional interest in three aircraft through an aircraft management company, which we use for business purposes and make available to our Named Executives for limited personal use. When we permit the personal use of aircraft by a Named Executive, we have a choice regarding the amount of income 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 in an amount that results in the least amount of tax burden for McDermott.
As required by applicable Securities and Exchange Commission rules, we calculate compensation in respect of personal use of corporate aircraft based on our “incremental cost.” We compute
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incremental cost for personal use of aircraft based on the actual cost incurred by us for the flight, including:
| | |
| • | the cost of fuel; |
|
| • | a usage charge equal to the hourly rate charged by our flight operator multiplied by the flight time; |
|
| • | “dead head” costs, if applicable, of flying aircraft without passengers to and from locations; and |
|
| • | the dollar amount of increased income taxes we incur as a result of disallowed deductions under IRS rules. |
Since the 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, 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 will reimburse the Named Executive for the travel expenses of a guest accompanying a Named Executive, including the provision of agross-up for any imputed income, when the presence of that guest is related to the underlying business purpose of the trip. We also provide our Named Executives with a taxgross-up for income incurred in connection with a relocation with McDermott or one of our affiliated companies.
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 U.S. employees, including our Named Executives. We sponsor the following four Retirement Plans:
| | |
| • | the McDermott Retirement Plan for the benefit of employees of McDermott Incorporated; |
|
| • | the JRM Retirement Plan for the benefit of U.S. employees of our Offshore Oil and Gas Construction segment; |
|
| • | the Government Operations Retirement Plan for the benefit of employees of our Government Operations segment; and |
|
| • | the Commercial Operations Retirement Plan for the benefit of U.S. employees of our Power Generation Systems segment. |
In addition to the broad-based qualified plans described above, we sponsor unfunded, nonqualified excess retirement plans. The excess plans cover a small group of highly compensated employees, including Mr. Fees and Mr. Bethards, whose ultimate benefits under the applicable Retirement Plan are reduced by Internal Revenue Code limits on the amount of benefits which may be provided under qualified plans, and on the amount of compensation which may be taken into account in computing benefits under qualified plans. Benefits under the excess plans are paid from our general assets. See the Pension Benefit table under “Compensation of Executive Officers” below 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, Commercial Operations and Government Operations 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 annualcost-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
38
to the Thrift Plan accounts of affected employees and new hires in an amount between 3% and 8% of the employee’s thriftable earnings, based on their length of service. Mr. Taff was 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. In 2007, we offered salaried participants in the McDermott, Commercial Operations and Government Operations Retirement Plans with between five and 10 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 annualcost-of-living increases, and receiving an automatic service-based cash contribution to their Thrift Plan account instead. Mr. Johnson’s employment with McDermott commenced after these changes and, as a result, he does not participate in a Retirement Plan or an excess plan.
Supplemental Plans. In 2005, as part of our determination to move away from defined benefit plans, our management recommended that the Board of Directors and the Compensation Committee terminate our then-existing non-qualified defined benefit supplemental executive retirement plan. In its place, our Board of Directors and Compensation Committee established a new defined contribution supplemental executive retirement plan, which we refer to as the “SERP,” to help maintain the competitiveness of our post-employment compensation$3.4 billion, as compared to our market. The SERP is an unfunded, nonqualified plan that provides participants with benefits based on the participant’s notional account balance at the time$2.4 billion for 2010;
Consolidated operating income of retirement or termination. Annually, we credit a participant’s notional account with an amount equal$250.7 million, as compared to 5%$314.9 million for 2010; and
Consolidated ROIC of the participant’s prior-year base salary and annual bonus paid8%.
Operationally, in the prior year. The Compensation Committee has designated deemed mutual fund investments to serve as indices for the purpose2011 McDermott also:
Achieved backlog of determining notional investment gains and losses to each 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. In order to take advantage of grandfathering provisions in Internal Revenue Code Section 457A, in 2009, the Compensation Committee amended the SERP to vest each participant’s account$3.88 billion as of December 31, 2008. Of2011;
Achieved substantial growth in our Asia Pacific segment, as reflected by increases of over 115% in both revenue and operating income in the segment as compared to 2010;
Amended/refinanced our credit facility to extend the scheduled maturity date, provide additional liquidity, obtain improved covenants and reduce fees; and
Established a joint venture entity which we co-own with two Brazilian companies, which joint venture plans to bid to provide engineering, procurement and construction (“EPC”) services to the oil and gas industry offshore Brazil.
Under McDermott’s 2011 compensation program,
None of the Continuing Named Executives with a SERP account balance aswere awarded bonuses under the 2011 EICP. Based on McDermott’s 2011 financial results, the Continuing Named Executives were eligible to earn approximately 18% of their respective 2011 target EICP compensation, subject to the endassessment of 2008, only Mr. Taff’s account was not fully vested. Attheir respective individual goals. Upon the time of the amendment, Mr. Taff was 80% vested in his SERP balance. As a resultrecommendation of Mr. Johnson’s employment commencing April 1, 2009, he did not have a SERP balance and was therefore unaffected by this amendment. Please seeJohnson based on the Nonqualified Deferred Compensation table on page 53 and accompanying narrative for more information about the SERP and our contributions to our Named Executives’ SERP accounts.
Employment and Severance Arrangements
Employment and Separation Agreements. Except forchange-in-control agreements and retention agreements, we do not currently have any employment or severance agreements with any of our Named Executives.
Change-in-Control Agreements. In our experience,change-in-control agreements for named executive officers 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. Accordingly,2011 financial results, the Compensation Committee, has offeredchange-in-control agreements to key senior executives, includingin the exercise of its discretion, determined that, although the Continuing Named Executives since 2005. Ourchange-in-control agreements generally provide a cash severance paymentand other participants in the EICP were eligible to earn approximately 18% of two (2.99 for Mr. Fees) times the sumtheir target EICP compensation, 0% would be awarded in light of the Named Executive’s annual base salary and target EICP, a cash payment equal to two years of medical benefits and an additional taxgross-up in the event of any excise tax liability.financial results. Instead, as recommended by Mr. Johnson, received achange-in-control agreement coincident with his commencement of employment in April 2009. At that time, it was not our intention to provide for an excise taxgross-up payment in connection with any newchange-in-control agreements and, as a result, Mr. Johnson’s agreement does not contain such a taxgross-up provision.
Additionally, ourchange-in-control 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. See the Potential Payments Upon Termination or Change in Control table under “Compensation of Executive Officers” below and the accompanying disclosures for more information regarding thechange-in-control agreements with our Named Executives, as well as other plans and
39
arrangements that have different trigger mechanisms that relate to a change in control.
Retention Agreements. On December 7, 2009, we announced plans to spin off B&W into an independent, publicly traded company. In connection with that announcement, and to ensure retention of key employees and executives through the completion of the separation of B&W from McDermott, on December 10, 2009, we entered into retention agreements with 17 key members of management, including our Named Executives, other than Mr. Deason who had already announced his intention to retire.
Generally, the retention agreements provide either a retention or severance payment to the Named Executives in connection with the proposed separation. The retention agreements generally provide a retention payment in the form of a restricted stock grant made near the time of the separation, that would vest one year following the separation, equal to 100% (149.5% in the case of Mr. Fees) of the sum of the Named Executive’s annual base salary plus target annual incentive. That amount represented one-half of the severance payment that otherwise would be provided under each Named Executive’s retention agreement in the event of a qualifying termination, and discussed below. With respect to Mr. Taff, one-third of his retention payment will be payable in cash on the effective date of the separation, in recognition of his agreement to serve as the Chief Financial Officer of B&W following the separation.
Although the proposed separation would not constitute a change in control for purposes of theChange-in-Control Agreements or other Company compensation plans, the Compensation Committee determined that the needbonus amounts that otherwise would have been payable should effectively be returned to maintain continuity of management and personnel that exists under a change in control scenario equally existed in connection with the planned separation of B&W. As a result, the retention agreements provide for severance payments that would generally be the same as the severance payments that would be made in connection with a qualifying termination on or following a change in control (other than taxgross-ups). Accordingly, the retention agreements provide for a cash severance payment of two (2.99 for Mr. Fees) times the sum of the Named Executive’s annual base salary and target EICP, prorated target annual incentive compensation and a cash payment equal to two years of medical benefits as well as the full vesting of outstanding long-term incentive grants and SERP balance. The only payment provided for under the retention agreement not otherwise payable in a change in control is the potential early vesting of the Named Executive’s Thrift Plan account. Under the terms of the Thrift Plan, unvested balances would become vestedshareholders in the event a participant is involuntarily terminated in connection with a reduction in force. Because involuntary terminations for reasons other than cause in connection with the proposed separation generally would be considered to be associated with a reduction in force,form of additional operating income. In making this recommendation and decision, respectively, Mr. Johnson and the Compensation Committee determinedconsidered the increase in 2011
| | revenues of approximately 43%, together with the decrease in 2011 operating income by approximately 20% from 2010 levels, the continued performance issues in the Atlantic segment and issues relating to several projects in other segments. |
In making its decision not to addaward bonuses for 2011 under the vesting of Thrift Plan accounts toEICP, the severance benefits to avoid any ambiguity onCompensation Committee noted that point. The Thrift Plan normally vests after three years of service. As a result of his commencement of employment in 2009, Mr. Johnson ishad achieved the only Named Executive to which this benefit may be applicable.
Mr. Fees’ retention agreement also contains restrictions on his ability to compete with McDermott (including both B&W and J. Ray), or solicit our employees, for two years following the termination of his employment.
See the Potential Payments Upon Termination or Change in Control table under “Compensation of Executive Officers — Retention Agreements” below and the accompanying disclosures for more information regarding the retention agreements with our Named Executives.
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 dependingindividual performance component, based on the executive’s position. The guidelines require our Chief Executive Officer to ownGovernance Committee’s assessment of Mr. Johnson’s individual performance against stated goals, and retaineach of Messrs. Elders, Carlson and McCormack and Ms. Hinrichs had achieved their respective
individual performance components based on Mr. Johnson’s assessment of their respective individual performance achievements against stated goals, with the exception of the financial performance goal and a minimumsafety goal for Mr. McCormack.
As of 100,000December 31, 2011, (1) the estimated payout as a percent of target for the performance shares granted in 2011 was 0%, and (2) the share price 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 fromhad not exceeded the effective datestrike price of the stock ownership guidelines or their initial electionoptions granted in 2011, although as a director/officer, whichever is later, to comply withnoted below, the guidelines. The Compensation Committee has discretion to waive or modifyestimated payout and share price may change during the term of the performance shares and stock ownership guidelines for directors and officers.options.
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The following table summarizes the 2011 performance-based compensation opportunities for each of our Continuing Named Executives as compared to the realizable value of such opportunities as of December 31, 2011:2011 Performance-Based Compensation Opportunity vs. Realizable Value as of December 31, 2011
| | | | | | | | | | | | | | | | |
| | | EICP(1) | | | Performance
Shares(2)(3) | | | Stock
Options(2)(3) | | | Total | |
S. M. Johnson | | | | | | | | | | | | | | | | |
2011 Opportunity | | $ | 942,603 | | | $ | 2,382,132 | | | $ | 944,089 | | | $ | 4,268,824 | |
2011 Realizable Value | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
P. L. Elders | | | | | | | | | | | | | | | | |
2011 Opportunity | | $ | 336,911 | | | $ | 595,438 | | | $ | 236,000 | | | $ | 1,168,349 | |
2011 Realizable Value | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
G. L. Carlson | | | | | | | | | | | | | | | | |
2011 Opportunity | | $ | 199,233 | | | $ | 238,175 | | | $ | 94,406 | | | $ | 531,814 | |
2011 Realizable Value | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
L. K. Hinrichs | | | | | | | | | | | | | | | | |
2011 Opportunity | | $ | 261,381 | | | $ | 535,894 | | | $ | 212,421 | | | $ | 1,009,696 | |
2011 Realizable Value | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
J. T. McCormack | | | | | | | | | | | | | | | | |
2011 Opportunity | | $ | 274,549 | | | $ | 634,020 | | | $ | 253,847 | | | $ | 1,162,416 | |
2011 Realizable Value | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| (1) | 2011 Opportunity Values for EICP are disclosed at the Continuing Named Executives’ target EICP award. The 2011 Opportunity Value provided for Mr. McCormack reflects his target EICP award following his promotion to EVP, COO. |
| (2) | 2011 Opportunity Values for performance shares and stock options are disclosed at the grant date fair value of the respective awards. |
| (3) | The 2011 Realizable Values shown above are measured as of December 31, 2011. However, the amount of the performance shares granted in 2011 that ultimately vest, if any, will be determined by reference to our total shareholder return over three-, four- and five-year periods. See “Long-Term Incentive Compensation — Analysis of 2011 Equity Grants.” The vesting of any of these performance shares would impact the future Realizable Value of these performance share awards. In addition, an increase in our stock price compared to our stock price at December 31, 2011 may impact the future Realizable Value of the stock option awards granted in 2011. |
Compensation Committee Report
We have reviewed andFor the reasons discussed above, the Board of Directors unanimously recommends that stockholders vote FOR the following resolution:
“RESOLVED, that the compensation paid to the Named Executives, as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, withcompensation tables and
accompanying narrative discussion in McDermott’s management and, based on our review and discussions, we recommendedproxy statement relating to its 2012 annual meeting of stockholders is hereby APPROVED.”
While the resolution is non-binding, the Board thatof Directors plans to consider the Compensation Discussion and Analysis be included in this Proxy Statement.
THE COMPENSATION COMMITTEE
Thomas C. Schievelbein, Chairman
Roger A. Brown
Oliver D. Kingsley, Jr.
David A. Trice
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Compensation of Executive Officers
The following table summarizes the prior three years’ compensation of our current Chief Executive Officer, our Chief Financial Officer and our three highest paid executive officers who did not serve as our CEO and CFO during 2009. We refer to these persons as our Named Executives. No compensation information is provided for Mr. Johnson for 2007 or 2008 because he joined our company in 2009.
Summary Compensation Table
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Change in
| | | | |
| | | | | | | | | | | | | | | Pension
| | | | |
| | | | | | | | | | | | | | | Value and
| | | | |
| | | | | | | | | | | | | | | Nonqualified
| | | | |
| | | | | | | | | | | | | Non-Equity
| | Deferred
| | | | |
| | | | | | | | | Stock
| | Option
| | Incentive Plan
| | Compensation
| | All Other
| | |
| Name and Principal Position | | Year | | Salary | | Bonus(1) | | Awards(2) | | Awards(3) | | Compensation(4) | | Earnings(5) | | Compensation(6) | | Total |
| J.A. Fees | | | 2009 | | | $ | 900,000 | | | $ | 0 | | | $ | 3,543,276 | | | $ | 1,995,846 | | | $ | 1,665,000 | | | $ | 399,782 | | | $ | 111,407 | | | $ | 8,615,311 | |
| Chief Executive Officer | | | 2008 | | | $ | 592,500 | | | $ | 270,223 | | | $ | 6,835,450 | | | $ | 0 | | | $ | 570,803 | | | $ | 143,028 | | | $ | 148,310 | | | $ | 8,560,314 | |
| | | | 2007 | | | $ | 515,000 | | | $ | 0 | | | $ | 1,431,212 | | | $ | 0 | | | $ | 702,975 | | | $ | 333,153 | | | $ | 57,679 | | | $ | 3,040,019 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| M.S. Taff | | | 2009 | | | $ | 505,000 | | | $ | 0 | | | $ | 980,544 | | | $ | 552,314 | | | $ | 707,000 | | | | N/A | | | $ | 59,315 | | | $ | 2,804,173 | |
| Senior Vice President & | | | 2008 | | | $ | 440,000 | | | $ | 110,000 | | | $ | 1,671,638 | | | $ | 0 | | | $ | 141,207 | | | | N/A | | | $ | 45,757 | | | $ | 2,408,602 | |
| Chief Financial Officer | | | 2007 | | | $ | 374,999 | | | $ | 0 | | | $ | 742,610 | | | $ | 0 | | | $ | 387,563 | | | | N/A | | | $ | 34,211 | | | $ | 1,539,383 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| B.C. Bethards | | | 2009 | | | $ | 526,200 | | | $ | 0 | | | $ | 840,544 | | | $ | 473,450 | | | $ | 663,012 | | | $ | 305,160 | | | $ | 65,693 | | | $ | 2,874,059 | |
| President & Chief | | | 2008 | | | $ | 438,675 | | | $ | 10,000 | | | $ | 1,207,512 | | | $ | 0 | | | $ | 509,298 | | | $ | 158,014 | | | $ | 54,831 | | | $ | 2,378,330 | |
| Executive Officer, B&W | | | 2007 | | | $ | 390,000 | | | $ | 0 | | | $ | 999,148 | | | $ | 0 | | | $ | 460,278 | | | $ | 186,071 | | | $ | 43,249 | | | $ | 2,078,746 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| S.M. Johnson | | | 2009 | | | $ | 562,500 | | | $ | 0 | | | $ | 2,664,402 | | | $ | 1,435,394 | | | $ | 1,131,563 | | | | N/A | | | $ | 83,929 | | | $ | 5,877,788 | |
| President & Chief | | | 2008 | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | |
| Executive Officer, J. Ray | | | 2007 | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| R.A. Deason | | | 2009 | | | $ | 555,000 | | | $ | 0 | | | $ | 1,077,000 | | | $ | 0 | | | $ | 777,000 | | | | N/A | | | $ | 124,847 | | | $ | 2,533,847 | |
| Former President & Chief | | | 2008 | | | $ | 540,000 | | | $ | 0 | | | $ | 1,847,489 | | | $ | 0 | | | $ | 0 | | | | N/A | | | $ | 117,077 | | | $ | 2,504,566 | |
| Executive Officer, J. Ray | | | 2007 | | | $ | 485,000 | | | $ | 0 | | | $ | 1,242,184 | | | $ | 0 | | | $ | 679,000 | | | | N/A | | | $ | 59,375 | | | $ | 2,465,559 | |
| |
(1) | See “Bonus” below for a discussion of the amounts included in this column. |
(2) | See “Stock Awards” below for a discussion of the amounts included in this column. |
(3) | See “Option Awards” below for a discussion of the amounts included in this column. |
(4) | See “Non-Equity Incentive Plan Compensation” below for a discussion of the amounts included in this column. |
(5) | See “Change in Pension Value and Nonqualified Deferred Compensation Earnings” below for a discussion of the amounts included in this column. |
(6) | See “All Other Compensation” below for a discussion of the amounts included in this column. |
Bonus. The amounts reported in the “Bonus” column are attributable to discretionary bonus awards.
Stock Awards. The amounts reported in the “Stock Awards” column represents the aggregate grant date fair value of stock awards granted in 2009 and computed in accordance with FASB ASC Topic 718. The amounts previously reported for 2007 and 2008 have been recomputed under the same standard in accordance with SEC rules. Under FASB ASC Topic 718, the fair valueoutcome of the stock awards 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, restricted stock units and performance shares. The grant date fair value of performance shares included in the stock awards is based on target-level performance, which we determined was the probable outcome of performance conditions at the time of grant. Assuming the maximum performance levels were probable, the aggregate grant date fair values of the stock awards would be as follows:
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Grant Date Fair Value Assuming
Maximum Performance
| | | | | | | |
| | | | | Grant Date Fair
|
| | | | | Value Assuming
|
| | | | | Maximum
|
| Name | | Year | | Performance Level |
| J.A. Fees | | | 2009 | | | $4,842,171 |
| | | | 2008 | | | $9,511,135 |
| | | | 2007 | | | $2,146,818 |
| M.S. Taff | | | 2009 | | | $1,339,993 |
| | | | 2008 | | | $2,326,078 |
| | | | 2007 | | | $1,113,915 |
| | | | | | | |
| B.C. Bethards | | | 2009 | | | $1,148,685 |
| | | | 2008 | | | $1,580,801 |
| | | | 2007 | | | $1,498,722 |
| | | | | | | |
| S.M. Johnson | | | 2009 | | | $3,641,126 |
| | | | 2008 | | | N/A |
| | | | 2007 | | | N/A |
| R.A. Deason | | | 2009 | | | N/A |
| | | | 2008 | | | $2,570,636 |
| | | | 2007 | | | $1,863,276 |
See the “Grants of Plan-Based Awards” table for more information regarding the stock awards we granted in 2009.
Option Awards. The amounts reported in the “Option Awards” column represent the aggregate grant date fair value of all option awards granted in 2009 computed in accordance with FASB ASC Topic 718. Under FASB ASC Topic 718, the fair value of stock options is determined on the date of grant using an option-pricing model and is not remeasured. We use a Black-Scholes option-pricing model for measuring the fair value of stock options. 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 9 to our consolidated financial statements included in our annual report onForm 10-K for the year ended December 31, 2009.
See the “Grants of Plan-Based Awards” table for more information regarding the option awards we granted in 2009.
Non-Equity Incentive Plan Compensation. The amounts reported in the “Non-Equity Incentive Plan Compensation” column are attributable to the annual incentive awards earned in fiscal years 2007, 2008 and 2009, but paid in 2008, 2009 and 2010, respectively. See the “Grants of Plan-Based Awards” table for more information regarding the annual incentive awards earned in 2009.
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 changes in actuarial present values of the accumulated benefits under defined benefit plans, determined by comparing the prior completed fiscal year end amount to the covered fiscal year end amount.
All Other Compensation. The amounts reported for 2009 in the “All Other Compensation” column are attributable to the following:
All Other Compensation
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Service-Based
| | | | |
| | | | | | | Thrift
| | | | |
| | | SERP Contribution | | Thrift Match | | Contribution | | Tax Gross-Ups | | Perquisites |
| J.A. Fees | | $ | 64,774 | | | $ | 7,350 | | | | — | | | $ | 11,501 | | | $ | 27,782 | |
| | | | | | | | | | | | | | | | | | | | | |
| M.S. Taff | | $ | 41,378 | | | $ | 7,358 | | | $ | 7,358 | | | $ | 3,221 | | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
| B.C. Bethards | | $ | 44,948 | | | $ | 4,906 | | | | — | | | $ | 1,144 | | | $ | 14,695 | |
| | | | | | | | | | | | | | | | | | | | | |
| S.M. Johnson | | | — | | | $ | 6,342 | | | $ | 7,280 | | | $ | 17,111 | | | $ | 53,196 | |
| | | | | | | | | | | | | | | | | | | | | |
| R.A. Deason | | $ | 60,950 | | | $ | 4,968 | | | $ | 7,353 | | | $ | 18,620 | | | $ | 32,956 | |
SERP. See the “Nonqualified Deferred Compensation” table for more information regarding the SERP contributions made in 2009.
Thrift Match and Service-Based Thrift Contribution. We refer to our defined contribution plan as our Thrift Plan. For information regarding our Thrift Plan matching contributions and service-based Thrift Plan contributions, see “Compensation Discussion and Analysis — Post-employment Compensation — Retirement Plans” above.
43
TaxGross-Ups. The taxgross-ups reported for 2009 under “All Other Compensation” are attributable to the following:
| |
• | Mr. Fees: Mr. Fees received taxgross-ups associated with income imputed to him as a result of his relocation from Virginia to Texas, following his appointment as Chief Executive Officer of McDermott. |
|
• | Mr. Taff: Mr. Taff received taxgross-ups associated with income imputed to him as a result of his spouse accompanying him on business travel. |
|
• | Mr. Bethards: Mr. Bethards received taxgross-ups associated with income imputed to him as a result of his spouse accompanying him on business travel and as a result of a gift received at a management meeting. |
|
• | Mr. Johnson: Mr. Johnson received taxgross-ups associated with income imputed to him as a result of his relocation from Idaho to Texas, following his appointment as Chief Operating Officer of McDermott. |
|
• | Mr. Deason: Mr. Deason received taxgross-ups associated with income imputed to him as a result of his spouse accompanying him on business travel. |
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. Fees, Bethards, Deason and Johnson, the values of the perquisites and other personal benefits reported for 2009 are as follows:
| |
• | Mr. Fees: $22,577 is attributable to the costs of providing him relocation assistance in connection with his move from Virginia to Texas. The remainder is attributable to the cost of club dues, the costs resulting from his spouse accompanying him on business travel and the cost of promotional merchandise in connection with a board of directors meeting. |
|
• | Mr. Bethards: $12,474 is attributable to the costs of providing him relocation assistance in connection with his move from Ohio to Virginia following his appointment as Chief Executive Officer of B&W. The remainder is attributable to the cost of club dues and the cost of promotional merchandise in connection with a board of directors meeting. |
|
• | Mr. Johnson: $52,936 is attributable to the costs of providing him relocation assistance in connection with his move from Idaho to Texas. The remainder is attributable to the cost of promotional merchandise in connection with a board of directors meeting. |
|
• | Mr. Deason: $32,696 is attributable to the costs resulting from his spouse accompanying him on business travel. The remainder is attributable to the cost of promotional merchandise in connection with a board of directors meeting. |
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Grants of Plan-Based Awards
The following Grants of Plan-Based Awards table provides additional information about stock awards and equity and non-equity incentive plan awards granted to our Named Executives during the year ended December 31, 2009.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | All Other
| | | All Other
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Stock
| | | Option
| | | | | | | |
| | | | | | | | | Estimated Possible Payouts Under
| | | Estimated Future Payouts Under
| | | Awards:
| | | Awards:
| | | Exercise
| | | Grant Date
| |
| | | | | | | | | Non-Equity Incentive Plan Awards
| | | Equity Incentive Plan Awards
| | | Number of
| | | Number of
| | | or Base
| | | Fair Value
| |
| | | | | | Committee
| | | (1) | | | (2) | | | Shares of
| | | Securities
| | | Price of
| | | of Stock and
| |
| | | | | | Action
| | | | | | | | | | | | Threshold
| | | Target
| | | Maximum
| | | Stock
| | | Underlying
| | | Option
| | | Option
| |
Name | | Grant Date | | | Date | | | Threshold | | | Target | | | Maximum | | | (#) | | | (#) | | | (#) | | | or Units(3) | | | Options(4) | | | Awards | | | Awards(5) | |
J.A. Fees | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 02/26/09 | | | | 02/26/09 | | | $ | 157,500 | | | $ | 900,000 | | | $ | 1,800,000 | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | |
| | | | 03/05/09 | | | | 02/26/09 | | | | | | | | | | | | | | | | 30,150 | | | | 120,603 | | | | 241,206 | | | | — | | | | — | | | | — | | | $ | 1,298,894 | |
| | | | 03/05/09 | | | | 02/26/09 | | | | | | | | | | | | | | | | — | | | | — | | | | — | | | | 208,392 | | | | — | | | | — | | | $ | 2,244,382 | |
| | | | 03/05/09 | | | | 02/26/09 | | | | | | | | | | | | | | | | — | | | | — | | | | — | | | | — | | | | 295,716 | | | $ | 10.93 | | | $ | 1,995,846 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
M.S. Taff | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 02/26/09 | | | | 02/26/09 | | | $ | 61,863 | | | $ | 353,500 | | | $ | 707,000 | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | |
| | | | 03/05/09 | | | | 02/26/09 | | | | | | | | | | | | | | | | 8,343 | | | | 33,375 | | | | 66,750 | | | | — | | | | — | | | | — | | | $ | 359,449 | |
| | | | 03/05/09 | | | | 02/26/09 | | | | | | | | | | | | | | | | — | | | | — | | | | — | | | | 57,669 | | | | — | | | | — | | | $ | 621,095 | |
| | | | 03/05/09 | | | | 02/26/09 | | | | | | | | | | | | | | | | — | | | | — | | | | — | | | | — | | | | 81,834 | | | $ | 10.93 | | | $ | 552,314 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
B.C. Bethards | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 02/26/09 | | | | 02/26/09 | | | $ | 64,460 | | | $ | 368,340 | | | $ | 736,680 | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | |
| | | | 03/05/09 | | | | 02/26/09 | | | | | | | | | | | | | | | | 7,152 | | | | 28,611 | | | | 57,222 | | | | — | | | | — | | | | — | | | $ | 308,140 | |
| | | | 03/05/09 | | | | 02/26/09 | | | | | | | | | | | | | | | | — | | | | — | | | | — | | | | 49,434 | | | | — | | | | — | | | $ | 532,404 | |
| | | | 03/05/09 | | | | 02/26/09 | | | | | | | | | | | | | | | | — | | | | — | | | | — | | | | — | | | | 70,149 | | | $ | 10.93 | | | $ | 473,450 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
S.M. Johnson | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 05/07/09 | | | | 05/07/09 | | | $ | 111,563 | | | $ | 637,500 | | | $ | 1,275,000 | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | |
| | | | 05/14/09 | | | | 05/07/09 | | | | | | | | | | | | | | | | 13,453 | | | | 53,814 | | | | 107,628 | | | | — | | | | — | | | | — | | | $ | 976,724 | |
| | | | 05/14/09 | | | | 05/07/09 | | | | | | | | | | | | | | | | — | | | | — | | | | — | | | | 92,985 | | | | — | | | | — | | | $ | 1,687,678 | |
| | | | 05/14/09 | | | | 05/07/09 | | | | | | | | | | | | | | | | — | | | | — | | | | — | | | | — | | | | 131,949 | | | $ | 18.15 | | | $ | 1,435,394 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
R.A. Deason | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 02/26/09 | | | | 02/26/09 | | | $ | 67,988 | | | $ | 388,500 | | | $ | 777,000 | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | |
| | | | 03/05/09 | | | | 02/26/09 | | | | | | | | | | | | | | | | — | | | | — | | | | — | | | | 100,000 | | | | — | | | | — | | | $ | 1,077,000 | |
| |
(1) | See “Estimated Possible Payouts Under Non-Equity Incentive Plan Awards” below for a discussion of the amounts included in this column. |
(2) | See “Estimated Future Payouts Under Equity Incentive Plan Awards” below for a discussion of the amounts included in this column. |
(3) | See “All Other Stock Awards” below for a discussion of the amounts included in this column. |
(4) | See “All Other Option Awards” below for a discussion of the amounts included in this column. |
(5) | See “Grant Date Fair Value of Stock and Option Awards” below for a discussion of the amounts included in this column. |
Estimated Possible Payouts Under Non-Equity Incentive Plan Awards
Our Compensation Committee administers the Executive Incentive Compensation Plan, an annual cash 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
45
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 or, with respect to our Chief Executive Officer, by our Governance Committee. In addition, our Compensation Committee may 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 2009 EICP awards. Our Compensation Committee established target EICP awards expressed as a percentage of the Named Executive’s 2009 base salary. The amount shown in the “target” column represents the value of the target EICP award determined by multiplying the target percentage established for each Named Executive by the Named Executive’s 2009 base salary. For 2009, the target percentage of base salary for each Named Executive was as follows: 100% for Mr. Fees, 70% for Mr. Taff, 70% for Mr. Bethards, 85% for Mr. Johnson and 70% for Mr. Deason. 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 70% of the target EICP award. Attaining only the threshold level, or 25%, of the financial goal results in an EICP payment of 17.50% of the target EICP award. See “Compensation Discussion and Analysis — Annual Incentive Compensation” above for more information about the 2009 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, with the exception of grants made to Mr. Johnson, which were made under the 2009 LTIP, which was approved by stockholders on May 8, 2009. 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, if any, is scheduled to be determined on the third anniversary of the date of grant based (1) one-half on our cumulative operating income between January 1, 2009 and December 31, 2011, and (2) one-half on our total shareholder return relative to the Custom Peer Group described in “Compensation Discussion and Analysis — Overview of Compensation Programs and Objectives — Defining Market Range Compensation — Benchmarking” during the same period. 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 if both the target level of cumulative operating income is attained and our total shareholder return ranks in the 50th percentile relative to the Custom Peer Group. The amounts shown in the “maximum” column represent the number of performance shares that will vest, which is 200% of the amount granted, if both the maximum level of cumulative operating income is attained and our total shareholder return ranks first or second in total shareholder return relative to the Custom Peer Group. The amounts shown in the “threshold” column represent the number of performance shares that will vest, which is 25% of the amount granted, if both the minimum level of cumulative operating income is attained and our total shareholder return ranks in the 25th percentile relative to the Custom Peer Group. No amount of performance shares will vest if the cumulative operating income achieved is less than the minimum performance level and our total shareholder return ranks in less than the 25th percentile relative to the Custom Peer Group. See “Compensation Discussion and Analysis — Long-Term Incentive Compensation” above for more information regarding the 2009 performance shares.
All Other Stock Awards
The amounts shown reflect grants of restricted stock units under our 2001 D&O Plan, with the exception of the grant to Mr. Johnson, which was made under the 2009 LTIP. Each restricted stock unit represents the right to receive one share of McDermott common stock and are generally scheduled to vest in one-third increments on the first, second and third anniversaries of the date of grant. Upon vesting, the restricted stock units are converted into shares of McDermott common stock. See “Compensation Discussion and Analysis — Long-Term Incentive Compensation” above for more information regarding the 2009 restricted stock units.
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All Other Option Awards
The amounts shown reflect grants of stock options under our 2001 D&O Plan, with the exception of the grant to Mr. Johnson, which was made under the 2009 LTIP. Each grant represents the right to purchase at the exercise price shares of McDermott common stock over a period of seven years. The stock options are generally scheduled to vest and become exercisable in one-third increments on the first, second and third anniversaries of the date of grant. See “Compensation Discussion and Analysis — Long-Term Incentive Compensation” above for more information regarding the 2009 stock options.
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 FASB ASC Topic 718. Under FASB ASC Topic 718, the fair value of equity awards 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, restricted stock units and performance shares, and an option-pricing model for stock options. We use a 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 more information regarding thevote when making future compensation expense related to 2009 awards, and a discussion of valuation assumptions utilized in option pricing, see Note 9 to our consolidated financial statements included in our annual report onForm 10-K for the year ended December 31, 2009.
47decisions.
Outstanding Equity Awards at Fiscal Year-End
The following Outstanding Equity Awards at Fiscal Year-End table summarizes the equity awards we have made to our Named Executives which were outstanding as of December 31, 2009.
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| | |
| | | | | | | | Option Awards (1) | | | | Stock Awards (2) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Equity
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Incentive
| |
| | | | | | | | | | | | | | Equity
| | | | | | | | | | | | | | | | Equity
| | | Plan Awards:
| |
| | | | | | | | | | | | | | Incentive
| | | | | | | | | | | | | | | | Incentive
| | | Market or
| |
| | | | | | | | | | | | | | Plan
| | | | | | | | | | | | | | | | Plan Awards:
| | | Payout Value
| |
| | | | | | | | | | | | | | Awards:
| | | | | | | | | | | | | | | | Number of
| | | of Unearned
| |
| | | | | | | | Number of
| | | Number of
| | | Number of
| | | | | | | | | | Number of
| | | | | | Unearned
| | | Shares, Units
| |
| | | | | | | | Securities
| | | Securities
| | | Securities
| | | | | | | | | | Shares or
| | | Market Value of
| | | Shares, Units
| | | or Other
| |
| | | | | | | | Underlying
| | | Underlying
| | | Underlying
| | | | | | | | | | Units of
| | | Shares or Units of
| | | or Other
| | | Rights That
| |
| | | | | | | | Unexercised
| | | Unexercised
| | | Unexercised
| | | Option
| | | Option
| | | | Stock That
| | | Stock That Have
| | | Rights That
| | | Have Not
| |
| | | | | | | | Options
| | | Options
| | | Unearned
| | | Exercise
| | | Expiration
| | | | Have Not
| | | Not Vested
| | | Have Not
| | | Vested
| |
| Name | | | Grant Date | | | | Exercisable | | | Unexercisable | | | Options | | | Price | | | Date | | | | Vested | | | (3) | | | Vested | | | (3) | |
J.A. Fees | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock Options | | | | 03/05/09 | | | | | — | | | | 295,716 | | | | — | | | $ | 10.9300 | | | | 03/05/16 | | | | | | | | | | | | | | | | | | |
| DSU | | | | 05/12/05 | | | | | | | | | | | | | | | | | | | | | | | | | | 9,150 | | | $ | 219,692 | | | | | | | | | |
| Performance Shares | | | | 05/10/07 | | | | | | | | | | | | | | | | | | | | | | | | | | 63,600 | | | $ | 1,527,036 | | | | | | | | | |
| Restricted Stock | | | | 03/03/08 | | | | | | | | | | | | | | | | | | | | | | | | | | 6,160 | | | $ | 147,902 | | | | | | | | | |
| Performance Shares | | | | 03/03/08 | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | | — | | | | 8,327 | | | $ | 199,931 | |
| Restricted Stock | | | | 10/01/08 | | | | | | | | | | | | | | | | | | | | | | | | | | 26,720 | | | $ | 641,547 | | | | — | | | | — | |
| Performance Shares | | | | 10/01/08 | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | | — | | | | 36,135 | | | $ | 867,601 | |
| RSU | | | | 03/05/09 | | | | | | | | | | | | | | | | | | | | | | | | | | 208,392 | | | $ | 5,003,492 | | | | — | | | | — | |
| Performance Shares | | | | 03/05/09 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 241,206 | | | $ | 5,791,356 | |
M.S. Taff | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock Options | | | | 06/08/05 | | | | | 23,000 | | | | — | | | | | | | $ | 7.1933 | | | | 06/08/15 | | | | | | | | | | | | | | | | | | |
| Stock Options | | | | 03/05/09 | | | | | — | | | | 81,834 | | | | — | | | $ | 10.9300 | | | | 03/05/16 | | | | | | | | | | | | | | | | | | |
| DSU | | | | 06/08/05 | | | | | | | | | | | | | | | | | | | | | | | | | | 4,500 | | | $ | 108,045 | | | | | | | | | |
| Performance Shares | | | | 05/10/07 | | | | | | | | | | | | | | | | | | | | | | | | | | 33,000 | | | $ | 792,330 | | | | | | | | | |
| Restricted Stock | | | | 03/03/08 | | | | | | | | | | | | | | | | | | | | | | | | | | 4,593 | | | $ | 110,278 | | | | | | | | | |
| Performance Shares | | | | 03/03/08 | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | | — | | | | 6,215 | | | $ | 149,222 | |
| RSU | | | | 03/05/09 | | | | | | | | | | | | | | | | | | | | | | | | | | 57,669 | | | $ | 1,384,633 | | | | — | | | | — | |
| Performance Shares | | | | 03/05/09 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 66,750 | | | $ | 1,602,668 | |
B.C. Bethards | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock Options | | | | 03/05/09 | | | | | — | | | | 70,149 | | | | — | | | $ | 10.9300 | | | | 03/05/16 | | | | | | | | | | | | | | | | | | |
| Performance Shares | | | | 05/10/07 | | | | | | | | | | | | | | | | | | | | | | | | | | 44,400 | | | $ | 1,066,044 | | | | | | | | | |
| Restricted Stock | | | | 03/03/08 | | | | | | | | | | | | | | | | | | | | | | | | | | 2,620 | | | $ | 62,906 | | | | | | | | | |
| Performance Shares | | | | 03/03/08 | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | | — | | | | 3,545 | | | $ | 85,115 | |
| Restricted Stock | | | | 11/10/08 | | | | | | | | | | | | | | | | | | | | | | | | | | 17,333 | | | $ | 416,165 | | | | — | | | | — | |
| RSU | | | | 03/05/09 | | | | | | | | | | | | | | | | | | | | | | | | | | 49,434 | | | $ | 1,186,910 | | | | — | | | | — | |
| Performance Shares | | | | 03/05/09 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 57,222 | | | $ | 1,373,900 | |
S.M. Johnson | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock Options | | | | 05/14/09 | | | | | — | | | | 131,949 | | | | — | | | $ | 18.1500 | | | | 05/14/16 | | | | | | | | | | | | | | | | | | |
| RSU | | | | 05/14/09 | | | | | | | | | | | | | | | | | | | | | | | | | | 92,985 | | | $ | 2,232,570 | | | | | | | | | |
| Performance Shares | | | | 05/14/09 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 107,628 | | | $ | 2,584,148 | |
R.A. Deason | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock Options | | | | 05/12/05 | | | | | 30,540 | | | | — | | | | — | | | $ | 6.7267 | | | | 05/12/15 | | | | | | | | | | | | | | | | | | |
| DSU | | | | 05/12/05 | | | | | | | | | | | | | | | | | | | | | | | | | | 8,226 | | | $ | 197,506 | | | | | | | | | |
| Performance Shares | | | | 05/10/07 | | | | | | | | | | | | | | | | | | | | | | | | | | 55,200 | | | $ | 1,325,352 | | | | | | | | | |
| Restricted Stock | | | | 03/03/08 | | | | | | | | | | | | | | | | | | | | | | | | | | 5,080 | | | $ | 121,971 | | | | | | | | | |
| Performance Shares | | | | 03/03/08 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 6,867 | | | $ | 164,877 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
(1) | | See “Option Awards” below for a discussion of the amounts reported in this column including the vesting dates of unexercisable option awards. |
|
(2) | | See “Stock Awards” below for a discussion of the amounts reported in this column including the vesting dates of outstanding stock awards. |
|
(3) | | Market values in these columns are based on the closing price of our common stock as of December 31, 2009 ($24.01), as reported on the New York Stock Exchange. |
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Option Awards. Information presented in the “Option Awards” columns relates to options to purchase shares of our common stock held by our Named Executives as of December 31, 2009. All unexercisable options generally vest in three equal installments on the first, second and third anniversaries of the grant date, as follows:
| | |
Grant Date | | One-third of Grant Vests on: |
|
|
03/05/09 | | March 5, 2010, 2011 and 2012 |
05/14/09 | | May 14, 2010, 2011 and 2012 |
Stock Awards. Information presented in the Stock Awards columns relates to awards of restricted stock, restricted stock units, deferred stock units and performance shares held by our Named Executives as of December 31, 2009. The awards reported in the “Equity Incentive Plan Awards” columns consist entirely of stock awards subject to performance-based conditions as of December 31, 2009. The awards reported in the “Number of Shares or Units of Stock that have not Vested” column reflect stock awards subject to service-based vesting, including performance shares whose performance conditions have been satisfied as of December 31, 2009.
Restricted Stock Awards. Shares of restricted stock are generally scheduled to vest in one-third increments on the first, second and third anniversaries of the grant date. The vesting schedule of the restricted stock outstanding as of December 31, 2009 is as follows:
| | |
Grant Date | | One-third of Grant Vests on: |
|
|
03/03/08 | | March 3, 2010 and 2011 |
10/01/08 | | October 1, 2010 and 2011 |
11/10/08 | | November 10, 2010 and 2011 |
Restricted Stock Units. Restricted stock units represent the right to receive one share of our common stock for each vested restricted stock unit. Restricted stock units outstanding as of December 31, 2009 are generally scheduled to vest in one-third increments on the first, second and third anniversaries of the grant date, as follows:
| | |
Grant Date | | One-third of Grant Vests on: |
|
|
03/05/09 | | March 5, 2010, 2011 and 2012 |
05/14/09 | | May 14, 2010, 2011 and 2012 |
Deferred Stock Units. Deferred stock units are settled in cash in an amount equal to the number of vested units multiplied by the average of the highest and lowest price of our common stock on the date of vesting. Deferred stock units are generally scheduled to vest in five equal installments on each anniversary of the date of grant. The vesting schedule of the deferred stock units outstanding as of December 31, 2009 is as follows:
| | |
Grant Date | | One-fifth of Grant Vests on: |
|
|
05/12/05 | | May 12, 2010 |
06/08/05 | | June 8, 2010 |
Performance Shares. Performance shares represent the right to receive one share of our common stock for each performance share that vests. The number of performance shares that vest depends on the attainment of specified performance goals. The number and value of performance shares reported is based on achieving threshold performance levels, unless the previous year’s performance level exceeds threshold, in which case the number and value of performance shares reported is based on attaining the next higher performance level. The number and value of the 2007 performance shares reported are based on attaining the maximum performance level, or 150% of the performance shares granted. The number and value of the 2008 performance shares reported are based on attaining the threshold performance level, or 25% of the performance shares granted. The number and value of the 2009 performance shares reported are based on attaining the maximum performance level, or 200% of the performance shares granted. See the “Grants of Plan-Based Awards” table for more information about performance shares. Performance shares are generally scheduled to vest on the third anniversary of the date of grant, as follows:
| | |
Grant Date | | Vests per Attainment of Performance Levels on: |
|
|
05/10/07 | | May 10, 2010 |
03/03/08 | | March 3, 2011 |
10/01/08 | | October 1, 2011 |
03/05/09 | | March 5, 2012 |
05/14/09 | | May 14, 2012 |
49
Option Exercises and Stock Vested
The following Option Exercises and Stock Vested table provides additional information about the value realized by our Named Executives on exercises of option awards and vesting of stock awards during the year ended December 31, 2009.
| | | | | | | | | | | | | | | | | |
| | | Option Awards | | Stock Awards |
| | | |
| | | Shares
| | | | Shares
| | |
| | | Acquired
| | Value Realized
| | Acquired
| | Value Realized
|
| Name | | on Exercise (#) | | on Exercise | | on Vesting (#) | | on Vesting |
| J.A. Fees | | | 0 | | | | N/A | | | | 120,090 | | | $ | 2,458,148.70 | |
| M.S. Taff | | | 0 | | | | N/A | | | | 31,547 | | | $ | 567,563.97 | |
| B.C. Bethards | | | 0 | | | | N/A | | | | 32,477 | | | $ | 631,050.07 | |
| S.M. Johnson | | | 0 | | | | N/A | | | | 0 | | | | N/A | |
| R.A. Deason | | | 0 | | | | N/A | | | | 164,766 | | | $ | 3,576,229.68 | |
Option Awards. No stock option awards were exercised by any Named Executive during the year ended December 31, 2009.
Stock Awards. For each Named Executive, the number of shares acquired on vesting reported in the Option Exercises and Stock Vested table represents the aggregate number of shares that vested during 2009 in connection with awards of performance shares, restricted stock, restricted stock unitsand/or deferred stock units. The awards of deferred stock units reflected in this table are payable entirely in cash. As a result, no shares of stock were actually acquired upon the vesting of these deferred stock units. See the “Outstanding Equity Awards at Fiscal Year-End” table for more information on the settlement of deferred stock unit awards. The following table sets forth the amount of shares attributable to performance shares, restricted stock, restricted stock units and deferred stock units, for each Named Executive:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Performance Shares | | Restricted Stock | | Restricted Stock Units | | Deferred Stock Units |
| | | | | |
| | | Number of
| | | | Number of
| | | | Number of
| | | | Number of
| | |
| | | Shares
| | Value
| | Shares
| | Value
| | Shares
| | Value
| | Shares
| | Value
|
| | | Acquired on
| | Realized
| | Acquired
| | Realized
| | Acquired
| | Realized
| | Acquired
| | Realized
|
| Name | | Vesting | | on Vesting | | on Vesting | | on Vesting | | on Vesting | | on Vesting | | on Vesting | | on Vesting |
| J.A. Fees | | | 94,500 | | | $ | 1,919,655 | | | | 16,440 | | | $ | 363,454 | | | | 0 | | | | N/A | | | | 9,150 | | | $ | 175,040 | |
| M.S. Taff | | | 24,750 | | | $ | 447,728 | | | | 2,297 | | | $ | 22,614 | | | | 0 | | | | N/A | | | | 4,500 | | | $ | 97,223 | |
| B.C. Bethards | | | 22,500 | | | $ | 407,025 | | | | 9,977 | | | $ | 224,025 | | | | 0 | | | | N/A | | | | 0 | | | | N/A | |
| S.M. Johnson | | | 0 | | | | N/A | | | | 0 | | | | N/A | | | | 0 | | | | N/A | | | | 0 | | | | N/A | |
| R.A. Deason | | | 54,000 | | | $ | 976,860 | | | | 2,540 | | | $ | 25,006 | | | | 100,000 | | | $ | 2,417,000 | | | | 8,226 | | | $ | 157,363 | |
The number of shares acquired in connection with the vesting of performance shares, restricted stock awards and restricted stock units includes 39,418, 7,298, 11,160 and 51,416 shares withheld by us at the election of Messrs. Fees, Taff, Bethards and Deason, respectively, to satisfy the minimum statutory withholding tax due upon vesting. For more information on the withholding of shares to cover taxes due upon vesting, see the “Certain Relationships and Related Transactions” section of this proxy statement.
50
Pension Benefits
The following Pension Benefits table shows the present value of accumulated benefits payable to each of our Named Executives under our qualified and nonqualified pension plans.
| | | | | | | | | |
| | | | | | | Present Value
| | Payments
|
| | | | | Number of Years
| | of Accumulated
| | During
|
| Name | | Plan Name | | Credited Service | | Benefit | | 2009 |
| J.A. Fees | | McDermott Qualified Retirement Plan | | 30.583 | | $1,165,113 | | $0 |
| | | McDermott Excess Plan | | 30.583 | | $2,900,748 | | $0 |
| M.S. Taff | | N/A | | N/A | | N/A | | N/A |
| | | N/A | | N/A | | N/A | | N/A |
| B.C. Bethards | | B&W Governmental Operations Qualified Retirement Plan | | 36.00 | | $1,148,331 | | $0 |
| | | B&W Governmental Operations Excess Plan | | 36.00 | | $1,307,901 | | $0 |
| S.M. Johnson | | N/A | | N/A | | N/A | | N/A |
| | | N/A | | N/A | | N/A | | N/A |
| R.A. Deason | | N/A | | N/A | | N/A | | N/A |
| | | N/A | | N/A | | N/A | | N/A |
Overview of Qualified Plans. We maintain retirement plans that are funded by trusts and cover certain eligible regular full-time employees of McDermott and its subsidiaries, described below in the section entitled “Participation and Eligibility,” except certain nonresident alien employees who are not citizens of a European Community country or who do not earn income in the United States, Canada or the United Kingdom.
| | |
| • | Mr. Fees participates in the Retirement Plan for Employees of McDermott Incorporated and Participating Subsidiary and Affiliated Companies (the “McDermott Qualified Retirement Plan”) for the benefit of the eligible employees of McDermott Incorporated and specific subsidiaries; |
|
| • | Mr. Bethards participates in the Retirement Plan for Employees of Babcock & Wilcox Government Operations (the “B&W Government Operations Qualified Retirement Plan”) for the benefit of the eligible employees of B&W and our Governmental Operations segment; and |
|
| • | Due to their respective employment dates, Messrs. Taff, Johnson and Deason do not participate in our defined benefit plans. For more information on our retirement plans, see “Compensation Discussion and Analysis — Post-employment Compensation — Retirement Plans.” |
Participation and Eligibility. Generally, employees over the age of 21 years, who were hired before April 1, 2005, are eligible to participate in the McDermott Qualified Retirement Plan or B&W Governmental Operations Qualified Retirement Plan.
| | |
| • | For participants with less than five years of service as of March 31, 2006 — Benefit accruals were frozen as of that date. Affected employees now receive annual service-based company cash contributions to their Thrift Plan account. |
|
| • | For participants with more than five but less than ten years of service as of January 1, 2007 — If a participant made an election to do so, benefit accruals were frozen as of March 31, 2007, with the electing participants now receiving annual service-based company cash contributions to their Thrift Plan accounts. |
|
| • | Frozen accrued benefits of affected employees under these plans will increase annually in line with increases in the Consumer Price Index, up to a maximum of 8% and a minimum of 1%, for each year the employee remains employed. For further discussion on the service-based company cash contributions under the Thrift Plan, see “Compensation Discussion and Analysis — Post-employment Compensation — Retirement Plans.” |
51
Benefits. Benefits under these plans are calculated as follows:
| | |
| • | For participating employees originally hired by our Power Generation Systems or Government Operations segment (“Tenured Employees”) before April 1, 1998 — benefits are based on years of credited service and final average cash compensation (including bonuses and commissions). |
The present value of accumulated benefits reflected in the Pension Benefit Table above is based on a 6.00% discount rate and the 1994 Group Annuity Mortality Table projected to 2005.
Retirement and Early Retirement. Under each of these plans, normal retirement is age 65. The normal form of payment is a single-life annuity or a 50% joint and survivor annuity, depending on the employee’s marital status when payments are scheduled to begin. Early retirement eligibility and benefits under these plans depend on the employee’s date of hire. Mr. Fees and Mr. Bethards are each currently eligible for early retirement.
For Tenured Employees hired before April 1, 1998 (which includes Messrs. Fees and Bethards):
| | |
| • | an employee is eligible for early retirement if the employee has completed at least 15 years of credited service and attained the age of 50; and |
|
| • | early retirement benefits are based on the same formula as normal retirement, but the pension benefit is unreduced if the sum of the employee’s age and years of service equals 75 or greater at the date benefits commence; otherwise the pension benefit is reduced 4% for each “point” less than 75. |
For employees hired on or after April 1, 1998:
| | |
| • | an employee is eligible for early retirement after completing at least 15 years of credited service and attaining the age of 55; and |
|
| • | early retirement benefits are based on the same formula as normal retirement, but the pension benefit is generally reduced 0.4% for each month that benefits commence before age 62. |
Overview of Nonqualified Plans. To the extent benefits payable under these qualified plans are limited by Section 415(b) or 401(a)(17) of the Internal Revenue Code, pension benefits will be paid directly by our applicable subsidiaries under the terms of unfunded excess benefit plans (the “Excess Plans”) maintained by them. Effective January 1, 2006, the Excess Plans were amended to limit the annual bonus payments taken into account in calculating the Tenured Employees’ Excess Plan benefits to the lesser of the actual bonus paid or 25% of the prior year’s base salary.
| | |
| • | Mr. Fees participates in the Restoration of Retirement Income Plan for Certain Participants in the Retirement Plan for Employees of McDermott Incorporated; and |
|
| • | Mr. Bethards participates in the Restoration of Retirement Income Plan for Certain Participants in the Retirement Plan for Employees of Babcock & Wilcox Governmental Operations. |
52
Nonqualified Deferred Compensation
The following Nonqualified Deferred Compensation table summarizes our Named Executives’ compensation under our nonqualified supplemental retirement plan. The compensation shown in this table is entirely attributable to the McDermott International, Inc. New Supplemental Employee Retirement Plan, or SERP, established January 1, 2005.
| | | | | | | | | | | |
| | | Executive
| | Registrant
| | Aggregate
| | Aggregate
| | Aggregate
|
| | | Contributions in
| | Contributions in
| | Earnings
| | Withdrawals/
| | Balance
|
| Name | | 2009 | | 2009 | | in 2009 | | Distributions | | at 12/31/09 |
| J.A. Fees | | $0 | | $64,774.00 | | $45,581.95 | | $0 | | $285,682.42 |
| M.S. Taff | | $0 | | $41,378.00 | | $34,000.95 | | $0 | | $139,978.13 |
| B.C. Bethards | | $0 | | $44,948.00 | | $51,718.71 | | $0 | | $446,531.52 |
| S.M. Johnson(1) | | N/A | | N/A | | N/A | | N/A | | N/A |
| R.A. Deason | | $0 | | $60,950.00 | | $69,928.57 | | $0 | | $335,127.93 |
| | |
(1) | | No information is provided for Mr. Johnson because he is not a participant in the SERP. |
Our SERP is an unfunded, defined contribution retirement plan for officers of McDermott and our operating segments selected to participate by our Compensation Committee. Benefits under the SERP are based on the participating officer’s vested percentage in his notional account balance at the time of retirement or termination. An officer generally vests in his SERP account 20% each year, subject to accelerated vesting for death, disability and termination without cause or termination within 24 months following a change in control.
Executive Contributions in 2009. Employee contributions are not permitted under our SERP.
Registrant Contributions in 2009. We make annual contributions to participating employees’ notional accounts equal to a percentage of the employee’s prior-year compensation. Under the terms of the SERP, the contribution percentage does not need to be the same for each participant. Additionally, our Compensation Committee may make a discretionary contribution to a participant’s account at any time.
For 2009, our contributions equaled 5% of the Named Executives’ base salaries and annual incentive compensation awards paid in 2008. No discretionary contributions were made in 2009. All our 2009 contributions are included in the Summary Compensation Table above as “All Other Compensation.”
Aggregate Earnings in 2009. The amount reported in this table as earnings represents hypothetical accrued gains during 2009 on each Named Executive’s account. The accounts are “participant-directed” in that each participating officer personally directs the investment of contributions made on his behalf. As a result, any accrued gains or losses are attributable to the performance of the Named Executive’s notional mutual fund investments.
No amount of the earnings shown is reported as compensation in the Summary Compensation Table.
Aggregate Balance at12/31/09. The balance of a participating officer’s account consists of contributions made by us and hypothetical accrued gains or losses. The balances shown represent the accumulated account values (including gains and losses) for each Named Executive as of December 31, 2009.
The balances shown include contributions from previous years which have been reported as compensation to the Named Executives in the Summary Compensation Table for those years — to the extent a Named Executive was included in the Summary Compensation Table during those years. The amounts and years reported are as follows:
| | | | | | | | | |
| | | | | Amount
|
| Named Executive | | Year | | Reported |
| J.A. Fees | | | 2008 | | | $ | 54,155.00 | |
| | | | 2007 | | | $ | 48,311.00 | |
| M.S. Taff | | | 2008 | | | $ | 31,125.00 | |
| | | | 2007 | | | $ | 20,705.85 | |
| B.C. Bethards | | | 2008 | | | $ | 31,042.00 | |
| | | | 2007 | | | | N/A | |
| R.A. Deason | | | 2008 | | | $ | 51,400.00 | |
| | | | 2007 | | | $ | 46,651.25 | |
53
In May 2009, our Compensation Committee amended the SERP to vest SERP balances unvested on December 31, 2008 (including future gains and losses thereon). Amounts allocated on or after January 1, 2009 vest pursuant to the participant’s vested percentage based upon years of service. Accordingly, as of January 1, 2010, each Named Executive who participates in the SERP is 100% vested in his SERP balance shown, except Mr. Taff, who did not begin participating in our SERP until 2006. He is 92.19% vested in his SERP balance shown (100% vested in amounts allocated to his SERP account as of December 31, 2008 and 80% vested in amounts allocated to his account during 2009).
54
Potential Payments Upon Termination or Change in Control
The following tables show potential payments to our Named Executives under existing contracts, agreements, plans or arrangements, whether written or unwritten, for various scenarios under which a payment would be due (assuming each is applicable) involving a change in control or termination of employment of each of our Named Executives, assuming a December 31, 2009 termination date and, where applicable, using the closing price of our common stock of $24.01 (as reported on the New York Stock Exchange) as of December 31, 2009. These tables do not reflect amounts that would be payable to the Named Executives pursuant to benefits or awards that are already vested.
The amounts reported in the below tables for stock options, restricted stock, restricted stock units, deferred stock units and performance shares represent the value of unvested and accelerated shares or units, as applicable, calculated by:
| | |
| • | for stock options: multiplying the number of accelerated options by the difference between the exercise price and $24.01 (the closing price of our common stock on December 31, 2009, as reported on the New York Stock Exchange); |
|
| • | for restricted stock, restricted stock units and performance shares: multiplying the number of accelerated shares or units by $24.01 (the closing price of our common stock on December 31, 2009, as reported on the New York Stock Exchange); and |
|
| • | for deferred stock units (which represent a right to receive a cash payment equal to the product of the number of vested units and the average of the highest and lowest sales price of our common stock on the vesting date): multiplying the number of accelerated units by $24.17 (the average price of the highest and lowest price of our common stock on December 31, 2009, as reported on the New York Stock Exchange). |
Estimated Value of Benefits to Be Received Upon Termination under the Restructuring Transaction Retention Agreements
The following table shows the estimated value of payments and other benefits due the Named Executives assuming termination under the Restructuring Transaction Retention Agreements, which we refer to as the Retention Agreements, as of December 31, 2009.
| | | | | | | | | | | | | | | | | | | | | |
| | | J.A. Fees | | M.S. Taff | | B.C. Bethards | | S.M. Johnson | | R.A. Deason |
| Severance Payments | | $ | 5,382,000.00 | | | $ | 1,717,000.00 | | | $ | 1,789,080.00 | | | $ | 2,775,000.00 | | | $ | 42,692.31 | |
| EICP | | $ | 900,000.00 | | | $ | 353,500.00 | | | $ | 368,340.00 | | | $ | 637,500.00 | | | | — | |
| Supplemental Executive Retirement Plan (SERP) | | | — | | | $ | 10,934.53 | | | | — | | | | — | | | | — | |
| Benefits | | $ | 26,781.12 | | | $ | 35,837.50 | | | $ | 21,738.24 | | | $ | 8,230.80 | | | | — | |
| Thrift Plan | | | — | | | | — | | | | — | | | $ | 16,398.89 | | | | — | |
| Stock Options (unvested and accelerated) | | $ | 3,867,965.28 | | | $ | 1,070,388.72 | | | $ | 917,548.92 | | | $ | 773,221.14 | | | | — | |
| Restricted Stock (unvested and accelerated) | | $ | 789,448.80 | | | $ | 110,277.93 | | | $ | 479,071.53 | | | | — | | | | — | |
| Restricted Stock Units (unvested and accelerated) | | $ | 5,003,491.92 | | | $ | 1,384,632.69 | | | $ | 1,186,910.34 | | | $ | 2,232,569.85 | | | | — | |
| Deferred Stock Units (unvested and accelerated) | | | — | | | | — | | | | — | | | | — | | | | — | |
| Performance Shares (unvested and accelerated) | | $ | 7,165,856.53 | | | $ | 1,398,222.35 | | | $ | 1,027,411.91 | | | $ | 1,292,074.14 | | | | — | |
TaxGross-Up | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 23,135,543.65 | | | $ | 6,080,793.72 | | | $ | 5,790,100.94 | | | $ | 7,734,994.82 | | | $ | 42,692.31 | |
This table assumes the Named Executive was terminated on December 31, 2009 in connection with the proposed spin-off of B&W, as announced on December 7, 2009. In contemplation of the proposed spin-off, on December 10, 2009, we entered into Retention Agreements with certain key members of our management, including each of our Named Executives (with the exception of Mr. Deason, who had previously announced his retirement). The Retention Agreements provide either a retention or severance payment to these employees in connection with the disposition of all or substantially all of the stock or assets of B&W or J. Ray McDermott, S.A. (whether by a spin-off, sale or otherwise), which we have referred to as a “restructuring transaction” in the Retention Agreements. In the event the applicable employee is terminated prior to the first anniversary of the effective date of the restructuring transaction, either (1) by the employer company for any reason other than cause or disability or (2) by the employee for good reason, the
55
employer company is required to pay the Named Executive a cash severance payment, an EICP payment, 200% of the annual cost of coverage for medical, dental and vision benefits, and an amount equal to the unvested portion of the Named Executive’s Thrift Plan account. The Named Executive will also receive accelerated vesting with respect to his outstanding equity awards. In the event the restructuring transaction turns out to be a sale, if the Named Executive is subject to an excise tax, then he may be entitled to receive a taxgross-up to the extent provided by the terms of hischange-in-control agreement. For more information, see “Estimated Value of Benefits to be Received Upon Change in Control” below.
Under the Retention Agreements, “cause” is defined as:
| | |
| • | the willful and continued failure of the employee to perform substantially the employee’s duties (occasioned by reason other than physical or mental illness or disability of the employee) after a written demand for substantial performance is delivered to the employee by the Compensation Committee of the Board or the Chief Executive Officer which specifically identifies the manner in which the Compensation Committee of the Board or the Chief Executive Officer believes that the employee has not substantially performed his or her duties, after which the employee will have 30 days to defend or remedy such failure to substantially perform his or her duties; |
|
| • | the willful engaging by employee in illegal conduct or gross misconduct which is materially and demonstrably injurious to the employer; or |
|
| • | the conviction of the employee with no further possibility of appeal, or plea ofnolo contendereby the employee to, any felony or crime of falsehood. |
Severance Payment. The severance payment that may be made to each Named Executive in connection with his termination of employment following a restructuring transaction is a cash payment equal to 200% (299% in the case of Mr. Fees) of the sum of his annual base salary prior to termination and his EICP target award applicable to the year in which the termination occurs. For a hypothetical termination as of December 31, 2009, the severance payment under a restructuring transaction would have been calculated in the same manner as a severance payment under a change in control. For more information, see “Estimated Value of Benefits to be Received Upon Change in Control — Severance Payment.” Severance payments under a restructuring transaction are in lieu of any payment under any severance policy generally applicable to the salaried employees of McDermott.
Because of his previously mentioned retirement, Mr. Deason did not enter into a Retention Agreement. However Mr. Deason would be due a severance payment in the event he was involuntarily terminated without cause. Under our Severance Plan for Employees of McDermott Incorporated and Participating Subsidiary and Affiliated Companies, full-time employees of McDermott and participating subsidiaries are entitled to receive a severance benefit in the event their employment is terminated because of the elimination of a previously required position or previously required service, or due to the consolidation of departments, abandonment of plants or offices, or technological change or declining business activities, where such termination is intended to be permanent. The amount of severance benefit is determined based on the length of service and the employee’s base salary. In general, an eligible employee is entitled to a severance benefit of one half week of base salary for each year of service, subject to a maximum of 14 weeks of pay.
EICP Payment. The EICP Payment that may be made to each Named Executive in connection with his termination of employment following a restructuring transaction is calculated in the same manner as an EICP Payment under a change in control. For more information, see “Estimated Value of Benefits to be Received Upon Change in Control — EICP Payment” below.
Benefits. The amounts reported represent two times the full annual cost of coverage for medical, dental and vision benefits provided to the Named Executive and the Named Executive’s covered dependents for the year ended December 31, 2009.
Thrift Plan. The amounts reported represent the unvested portion of the Named Executive’s Thrift Plan account balance as of December 31, 2009.
Equity Awards. The amounts reported for stock options, restricted stock, restricted stock units and performance shares represent the value of unvested and accelerated shares or units, as applicable, for the 2008 and 2009 grants of such awards. The amounts reported for the 2008 and 2009 performance share grants represent the value of such grants calculated as to the initial grant of the shares.
56
AUDIT COMMITTEE REPORT
Estimated Value of Benefits to Be Received Upon Normal Retirement
The following table shows the estimated value of payments and other benefits due the Named Executives assuming their retirement as of December 31, 2009. This table does not reflect amounts that would be payable to the Named Executives pursuant to benefits or awards that are already vested; for example, pension benefits. See the “Pension Benefits” table above for more information on pension benefits.
| | | | | | | | | | | | | | | | | | | | | |
| | | J.A. Fees | | M.S. Taff | | B.C. Bethards | | S.M. Johnson | | R.A. Deason |
| Severance Payments | | | — | | | | — | | | | — | | | | — | | | | — | |
| EICP | | | — | | | | — | | | | — | | | | — | | | | — | |
| Supplemental Executive Retirement Plan (SERP) | | | — | | | | — | | | | — | | | | — | | | | — | |
| Stock Options (unvested and accelerated) | | | — | | | | — | | | | — | | | | — | | | | — | |
| Restricted Stock (unvested and accelerated) | | | — | | | | — | | | $ | 119,767.88 | | | | — | | | | — | |
| Restricted Stock Units (unvested and accelerated) | | | — | | | | — | | | | — | | | | — | | | | — | |
| Deferred Stock Units (unvested and accelerated) | | | — | | | | — | | | | — | | | | — | | | | — | |
| Performance Shares (unvested and accelerated) | | | — | | | | — | | | $ | 467,700.39 | | | | — | | | | — | |
TaxGross-Up | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 0.00 | | | $ | 0.00 | | | $ | 587,468.27 | | | $ | 0.00 | | | $ | 0.00 | |
SERP. Under the terms of the SERP, participants are eligible for retirement upon attaining age 65. None of the Named Executives are eligible for retirement under the terms of the SERP.
Equity Awards. Generally, the terms of our stock and option award grants define retirement as a voluntary termination of employment after attaining age 60 and completing 10 years of service with McDermott. Under this definition, the only Named Executive eligible for retirement as of a December 31, 2009 is Mr. Bethards. The outstanding grants of restricted stock, restricted stock units and performance shares and the unvested grants of stock options provide for accelerated vesting of a percentage of the Named Executive’s outstanding shares and units if his retirement date is on or after the first anniversary of the grant date, and a greater percentage of accelerated vesting if his retirement date is on or after the second anniversary of the grant date. The amounts shown for performance shares are based on the number of shares initially granted. The number of shares that will ultimately vest may be more or less than the initial grant, based upon the performance level attained. The outstanding grants of deferred stock units vest 100% upon termination due to normal retirement under a funded or unfunded retirement plan of McDermott or any subsidiary. None of the Named Executives are eligible for accelerated vesting of deferred stock units.
57
Estimated Value of Benefits to Be Received Upon Termination Due to Death or Disability
The following table shows the value of payments and other benefits due the Named Executives assuming their death or disability as of December 31, 2009.
| | | | | | | | | | | | | | | | | | | | | |
| | | J.A. Fees | | | M.S. Taff | | | B.C. Bethards | | | S.M. Johnson | | | R.A. Deason | |
| Severance Payments | | | — | | | | — | | | | — | | | | — | | | | — | |
| EICP | | | — | | | | — | | | | — | | | | — | | | | — | |
| Supplemental Executive Retirement Plan (SERP) | | | — | | | $ | 10,934.53 | | | | — | | | | — | | | | — | |
| Stock Options (unvested and accelerated) | | $ | 3,867,965.28 | | | $ | 1,070,388.72 | | | $ | 917,548.92 | | | $ | 773,221.14 | | | | — | |
| Restricted Stock (unvested and accelerated) | | $ | 789,448.80 | | | $ | 110,277.93 | | | $ | 479,071.53 | | | | — | | | $ | 121,970.80 | |
| Restricted Stock Units (unvested and accelerated) | | $ | 5,003,491.92 | | | $ | 1,384,632.69 | | | $ | 1,186,910.34 | | | $ | 2,232,569.85 | | | | — | |
| Deferred Stock Units (unvested and accelerated) | | $ | 221,155.50 | | | $ | 108,765.00 | | | | — | | | | — | | | $ | 198,822.42 | |
| Performance Shares (unvested and accelerated) | | $ | 8,183,880.53 | | | $ | 1,926,442.35 | | | $ | 1,738,107.91 | | | $ | 1,292,074.14 | | | $ | 1,543,122.70 | |
| TaxGross-Up | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 18,065,942.03 | | | $ | 4,611,441.22 | | | $ | 4,321,638.70 | | | $ | 4,297,865.13 | | | $ | 1,863,915.92 | |
SERP. The amount reported represents Mr. Taff’s SERP balance as of December 31, 2009 that becomes vested on death and disability. All other Named Executives, with the exception of Mr. Johnson, were 100% vested in their SERP balance as of December 31, 2009. Mr. Johnson does not participate in the SERP.
Equity Awards. Under the terms of the awards outstanding for each Named Executive as of December 31, 2009, all unvested stock awards become vested and all unvested option awards become vested and exercisable on death or disability.
58
Estimated Value of Benefits to Be Received Upon Change in Control
The following table shows the estimated value of payments and other benefits due the Named Executives assuming a change in control and termination as of December 31, 2009.
| | | | | | | | | | | | | | | | | | | | | |
| | | J.A. Fees | | | M.S. Taff | | | B.C. Bethards | | | S.M. Johnson | | | R.A. Deason | |
| Severance Payments | | $ | 5,382,000.00 | | | $ | 1,717,000.00 | | | $ | 1,789,080.00 | | | $ | 2,775,000.00 | | | $ | 1,887,000.00 | |
| EICP | | $ | 900,000.00 | | | $ | 353,500.00 | | | $ | 368,340.00 | | | $ | 637,500.00 | | | $ | 388,500.00 | |
| Supplemental Executive Retirement Plan (SERP) | | | — | | | $ | 10,934.53 | | | | — | | | | N/A | | | | — | |
| Benefits | | $ | 26,781.12 | | | $ | 35,837.50 | | | $ | 21,738.24 | | | $ | 8,230.80 | | | $ | 26,728.98 | |
| Stock Options (unvested and accelerated) | | $ | 3,867,965.28 | | | $ | 1,070,388.72 | | | $ | 917,548.92 | | | $ | 773,221.14 | | | | — | |
| Restricted Stock (unvested and accelerated) | | $ | 789,448.80 | | | $ | 110,277.93 | | | $ | 479,071.53 | | | | — | | | $ | 121,970.80 | |
| Restricted Stock Units (unvested and accelerated) | | $ | 5,003,491.92 | | | $ | 1,384,632.69 | | | $ | 1,186,910.34 | | | $ | 2,232,569.85 | | | | — | |
| Deferred Stock Units (unvested and accelerated) | | $ | 221,155.50 | | | $ | 108,765.00 | | | | — �� | | | | — | | | $ | 198,822.42 | |
| Performance Shares (unvested and accelerated) | | $ | 13,323,773.26 | | | $ | 2,991,886.10 | | | $ | 2,780,406.02 | | | $ | 2,584,148.28 | | | $ | 1,984,906.70 | |
TaxGross-Up | | $ | 7,357,321.56 | | | $ | 2,002,180.42 | | | $ | 2,164,376.03 | | | | N/A | | | $ | 0.00 | |
| |
Total | | $ | 36,871,937.44 | | | $ | 9,785,402.89 | | | $ | 9,707,471.08 | | | $ | 9,010,670.07 | | | $ | 4,607,928.90 | |
We havechange-in-control agreements with various officers, including each of our Named Executives. Generally, under these agreements, if a Named Executive is terminated within one year following a change in control either (1) by the company for any reason other than cause or death or disability; or (2) by the Named Executive for good reason, the company is required to pay the Named Executive a cash severance payment, an EICP payment and, if applicable, a taxgross-up payment. In addition to these payments, the Named Executive would be entitled to various accrued benefits earned through the date of termination, such as earned but unpaid salary, earned but unused vacation and reimbursements.
Under these agreements, a “change in control” occurs if:
| | |
| • | a person (other than a McDermott employee benefit plan or a corporation owned by McDermott stockholders in substantially the same proportion as their ownership of McDermott voting shares) becomes the beneficial owner of 30% or more of the combined voting power of McDermott’s then outstanding voting stock; |
|
| • | during any period of two consecutive years, individuals who at the beginning of such period constitute McDermott’s Board of Directors, and any new director whose election or nomination by McDermott’s Board was approved by at least two-thirds of the directors of McDermott’s Board then still in office who either were directors at the beginning of the period or whose election or nomination was previously approved, cease to constitute a majority of McDermott’s Board; |
|
| • | McDermott’s stockholders approve: (1) a merger or consolidation of McDermott with another company, other than a merger or consolidation which would result in McDermott’s voting securities outstanding immediately prior thereto continuing to represent at least 50% of the voting stock of McDermott or such surviving entity outstanding immediately after such merger or consolidation; (2) a plan of complete liquidation of McDermott; or (3) an agreement for the sale or disposition by McDermott of all or substantially all of McDermott’s assets; or |
|
| • | any other set of circumstances is deemed by the Board in its sole discretion to constitute a change in control. |
Severance Payment. The severance payment made to each Named Executive, with the exception of Mr. Fees, in connection with a change in control is a cash payment equal to 200% of the sum of his annual base salary prior to termination and his EICP target award applicable to the year in which the termination occurs. The severance payment made to Mr. Fees in connection with a change in control is a cash payment equal to 299% of the sum of his annual base salary
59
prior to termination and his EICP target award applicable to the year in which the termination occurs. For a hypothetical termination as of December 31, 2009, the severance payment under a change in control would have been calculated based on the following base salary and target EICP awards:
| | |
| • | Mr. Fees: $900,000 base salary and $900,000 target EICP (100% of $900,000); |
|
| • | Mr. Taff: $505,000 base salary and $353,500 target EICP (70% of $505,000); |
|
| • | Mr. Bethards: $526,200 base salary and $368,340 target EICP (70% of $526,200); |
|
| • | Mr. Johnson: $750,000 base salary and $637,500 target EICP (85% of $750,000); and |
|
| • | Mr. Deason: $555,000 base salary and $388,500 target EICP (70% of $555,000). |
EICP Payment. The EICP is an annual cash-based performance incentive plan under which payments are made in the year following the year in which performance is measured. For example, 2009 EICP awards are paid in 2010 for performance achieved during 2009. As a result, depending on the timing of the termination relative to the payment of an EICP award, a Named Executive could receive up to two EICP payments in connection with a change in control, as follows:
| | |
| • | If an EICP award for the year prior to termination is paid to other EICP participants after the date of the Named Executive’s termination, the Named Executive would be entitled to a cash payment equal to the product of the Named Executive’s EICP target percentage and the Named Executive’s annual base salary for the applicable period. No such payment would have been due a Named Executive on a December 31, 2009 termination, because the 2008 EICP awards had already been paid prior to the Named Executive’s termination date. |
| | |
| • | The Named Executive would be entitled to a prorated EICP payment based upon the Named Executive’s target award for the year in which the termination occurs and the number of days in which the executive was employed with us during that year. Based on a hypothetical December 31, 2009 termination, each Named Executive would have been entitled to an EICP payment equal to 100% of his 2009 target EICP. See the schedule of target EICP amounts for each Named Executive under “Severance Payment” above. |
SERP. The amount reported represents Mr. Taff’s SERP balance as of December 31, 2009 that would become vested in connection with a termination of employment following a change in control. As discussed under “Compensation Discussion and Analysis — Post-employment Compensation — Retirement Plans — Supplemental Plans,” Mr. Taff was 100% vested in amounts allocated to his account as of December 31, 2008 and was 80% vested in amounts allocated to his account during 2009. The amount shown would be due to Mr. Taff if he is terminated without cause within one year after a change in control. All other Named Executives, with the exception of Mr. Johnson, are 100% vested in their SERP balance. Mr. Johnson does not participate in the SERP. Under the SERP, a “change in control” occurs under the same circumstances described above with respect to our change in control agreements.
Benefits. The amounts reported represent two times the full annual cost of coverage for medical, dental and vision benefits provided to the Named Executive and the Named Executive’s covered dependents for the year ended December 31, 2009.
TaxGross-Up. If any payment is subject to the excise tax imposed by section 4999 of the Internal Revenue Code of 1986, as amended, we would reimburse the affected Named Executive for all excise taxes imposed under section 4999 and any income and excise taxes that are payable as a result of such reimbursement. The calculation of thesection 4999 gross-up amount in the above table is based upon a section 4999 excise tax rate of 20%, a 35% federal income tax rate, a 1.45% Medicare tax rate and a state income tax rate of 7.75% for Mr. Bethards. Based on the amounts reported, Mr. Deason would not have an excise tax liability. Mr. Johnson’s change in control agreement does not contain a taxgross-up provision.
Equity Awards. Under the terms of the awards outstanding, all unvested restricted stock, restricted stock units and deferred stock units would become vested on a change in control, regardless of whether there is a subsequent termination of employment. All unvested stock options would become vested and exercisable on a change in control, regardless of whether there is a subsequent termination of employment. Performance shares are subject to accelerated vesting on a change in control, regardless of whether there is a subsequent termination of employment. Under our 2001 D&O Plan and 2009 LTIP, a “change in control” occurs under the same circumstances described above with respect to ourchange-in-control agreements.
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Security Ownership of Directors and Executive Officers
The following table sets forth the number of shares of our common stock beneficially owned as of March 1, 2010 by each director or nominee as a director, and each Named Executive and all our directors and executive officers as a group, including shares that those persons have the right to acquire within 60 days on the vesting of restricted stock units or the exercise of stock options.
| | | | |
| | Shares
| |
| | Beneficially
| |
Name | | Owned | |
Brandon C. Bethards (1) | | | 87,667 | |
John F. Bookout III (2) | | | 27,046 | |
Roger A. Brown (3) | | | 46,226 | |
Ronald C. Cambre (4) | | | 29,690 | |
Robert A. Deason (5) | | | 211,902 | |
John A. Fees (6) | | | 373,722 | |
Robert W. Goldman (7) | | | 21,596 | |
Stephen G. Hanks | | | 6,335 | |
Stephen M. Johnson (8) | | | 18,849 | |
Oliver D. Kingsley, Jr. (9) | | | 40,676 | |
D. Bradley McWilliams (10) | | | 60,566 | |
Adm. Richard W. Mies | | | 7,842 | |
Thomas C. Schievelbein (11) | | | 57,891 | |
Michael S. Taff (12) | | | 97,439 | |
David A. Trice | | | 6,060 | |
All directors and executive officers as a group (21 persons) (13) | | | 1,655,781 | |
| | |
(1) | | Shares owned by Mr. Bethards include 23,383 shares of common stock that he may acquire on the exercise of stock options, as described above, 19,953 restricted shares of common stock as to which he has sole voting power but no dispositive power, 16,478 shares of common stock that he will acquire on the vesting of restricted stock units, as described above, and 416 shares of common stock held in the McDermott Thrift Plan. |
|
(2) | | Shares owned by Mr. Bookout include 3,150 shares of common stock that he may acquire on the exercise of stock options, as described above, and 1,350 restricted shares of common stock as to which he has sole voting power but no dispositive power. |
|
(3) | | Shares owned by Mr. Brown include 19,650 shares of common stock that he may acquire on the exercise of stock options, as described above. |
|
(4) | | Shares owned by Mr. Cambre include 1,350 restricted shares of common stock as to which he has sole voting power but no dispositive power. |
|
(5) | | Shares owned by Mr. Deason include 30,540 shares of common stock that he may acquire on the exercise of stock options, as described above, 5,080 restricted shares of common stock as to which he has sole voting power but no dispositive power and 568 shares of common stock held in the McDermott Thrift Plan. |
|
(6) | | Shares owned by Mr. Fees include 98,572 shares of common stock that he may acquire on the exercise of stock options, as described above, 32,880 restricted shares of common stock as to which he has sole voting power but no dispositive power, 69,464 shares of common stock that he will acquire on the vesting of restricted stock units, as described above, and 17,690 shares of common stock held in the McDermott Thrift Plan. |
|
(7) | | Shares owned by Mr. Goldman include 4,950 shares of common stock that he may acquire on the exercise of stock options, as described above, and 1,350 restricted shares of common stock as to which he has sole voting power but no dispositive power. |
|
(8) | | Shares owned by Mr. Johnson include 449 shares of common stock held in the McDermott Thrift Plan. |
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| | |
(9) | | Shares owned by Mr. Kingsley include 19,950 shares of common stock that he may acquire on the exercise of stock options, as described above. |
|
(10) | | Shares owned by Mr. McWilliams include 37,876 shares of common stock that he may acquire on the exercise of stock options, as described above. |
|
(11) | | Shares owned by Mr. Schievelbein include 37,426 shares of common stock that he may acquire on the exercise of stock options, as described above. |
|
(12) | | Shares owned by Mr. Taff include 50,278 shares of common stock that he may acquire on the exercise of stock options, as described above, 4,593 restricted shares of common stock as to which he has sole voting power but no dispositive power, 19,223 shares of common stock that he will acquire on the vesting of restricted stock units, as described above, and 1,596 shares of common stock held in the McDermott Thrift Plan. |
|
(13) | | Shares owned by all directors and executive officers as a group include 382,755 shares of common stock that may be acquired on the exercise of stock options, as described above, 91,541 restricted shares of common stock as to which they have sole voting power but no dispositive power, 145,319 shares of common stock that will be acquired on the vesting of restricted stock units, as described above, and 42,506 shares of common stock held in the McDermott Thrift Plan. |
Shares beneficially owned in all cases constituted less than one percent of the outstanding shares of common stock on March 1, 2010, as determined in accordance withRule 13d-3(d)(1) under the Securities Exchange Act of 1934.
Security Ownership of Certain Beneficial Owners
The following table furnishes information concerning all persons known by us to beneficially own 5% or more of our outstanding shares of common stock, which is our only class of voting stock outstanding:
| | | | | | | | | | | |
| | | | | Amount and
| | |
| | | | | Nature of
| | |
| | | | | Beneficial
| | Percent of
|
| Title of Class | | Name and Address of Beneficial Owner | | Ownership | | Class(1) |
| Common Stock | | T. Rowe Price Associates, Inc. 100 E. Pratt Street
Baltimore, MD 21202 | | | 28,706,971 | (2) | | | 12.44 | % |
| | | | | | | | | | | |
| Common Stock | | PRIMECAP Management Company
225 South Lake Ave., #400,
Pasadena, CA 91101 | | | 13,114,160 | (3) | | | 5.68 | % |
| | | | | | | | | | | |
| Common Stock | | BlackRock Inc.
40 East 52nd Street
New York, NY 10022 | | | 11,944,038 | (4) | | | 5.17 | % |
| | |
(1) | | Percent is based on outstanding shares of our common stock on March 1, 2010. |
|
(2) | | As reported on Schedule 13G filed with the SEC on February 12, 2010. The Schedule 13G reports beneficial ownership of 28,706,971 shares of our common stock, sole voting power over 7,314,005 shares and sole dispositive power over 28,706,971 shares. |
|
(3) | | As reported on Schedule 13G/A filed with the SEC on February 11, 2010. The Schedule 13G/A reports beneficial ownership of 13,114,160 shares of our common stock and sole voting power over 7,472,760 shares and sole dispositive power over 13,114,160 shares. |
|
(4) | | As reported on Schedule 13G filed with the SEC on January 29, 2010. The Schedule 13G reports beneficial ownership of 11,944,038 shares of our common stock and sole voting power and sole dispositive power over 11,944,038 shares. |
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Audit Committee Report
The Board of Directors appoints an Audit Committee to review McDermott International, Inc.’s financial matters. Each member of the Audit Committee meets the independence requirements established by the New York Stock Exchange. The Audit Committee is responsible for the appointment, compensation, retention and oversight of McDermott’s independent registered public accounting firm. We are also responsible for recommending to the Board that McDermott’s audited financial statements be included in its Annual Report onForm 10-K for the fiscal year.
In making our recommendation that McDermott’s financial statements be included in its Annual Report onForm 10-K for the year ended December 31, 2009,2011, we have taken the following steps:
We discussed with Deloitte & Touche LLP (“D&T”), McDermott’s independent registered public accounting firm for the year ended December 31, 2011, those matters required to be discussed by Statements on Auditing Standards No. 61, as amended, issued by the Auditing Standards Board of the American Institute of Certified Public Accountants, including information regarding the scope and results of the audit. These communications and discussions are intended to assist us in overseeing the financial reporting and disclosure process.
We conducted periodic executive sessions with D&T, with no members of McDermott management present during those discussions. D&T did not identify any material audit issues, questions or discrepancies, other than those previously discussed with management, which were resolved to the satisfaction of all parties.
| | |
| • | We discussed with Deloitte & Touche LLP (“D&T”), McDermott’s independent registered public accounting firm for the year ended December 31, 2009, those matters required to be discussed by Statements on Auditing Standards Nos. 61 and 90, each as amended, issued by the Auditing Standards Board of the American Institute of Certified Public Accountants, including information regarding the scope and results of the audit. These communications and discussions are intended to assist us in overseeing the financial reporting and disclosure process. |
|
| • | We conducted periodic executive sessions with D&T, with no members of McDermott management present during those discussions. D&T did not identify any material audit issues, questions or discrepancies, other than those previously discussed with management, which were resolved to the satisfaction of all parties. |
|
| • | We conducted periodic executive sessions with McDermott’s internal audit department and regularly received reports regarding McDermott’s internal control procedures. |
|
| • | We reviewed, and discussed with McDermott’s management and D&T, management’s report and D&T’s report and attestation on internal control over financial reporting, each of which was prepared in accordance with Section 404 of the Sarbanes-Oxley Act. |
|
| • | We received and reviewed the written disclosures and the letter from D&T required by applicable requirements of the Public Company Accounting Oversight Board regarding D&T’s communications with the audit committee concerning D&T’s independence from McDermott, and have discussed with D&T their independence from McDermott. We also considered whether the provision of nonaudit services to McDermott is compatible with D&T’s independence. |
|
| • | We determined that there were no former D&T employees, who previously participated in the McDermott audit, engaged in a financial reporting oversight role at McDermott. |
|
| • | We reviewed, and discussed with McDermott’s management and D&T, McDermott’s audited consolidated balance sheet at December 31, 2009, and consolidated statements of income, comprehensive income, cash flows and stockholders’ equity for the year ended December 31, 2009. |
We conducted periodic executive sessions with McDermott’s internal audit department and regularly received reports regarding McDermott’s internal control procedures.
We reviewed, and discussed with McDermott’s management and D&T, management’s report and D&T’s report and attestation on internal control over financial reporting, each of which was prepared in accordance with Section 404 of the Sarbanes-Oxley Act.
We received and reviewed the written disclosures and the letter from D&T required by applicable requirements of the Public Company Accounting Oversight Board regarding D&T’s communications with the audit committee concerning D&T’s independence from McDermott, and have discussed with D&T its independence from McDermott. We also considered whether the provision of non-audit services to McDermott is compatible with D&T’s independence.
We determined that there were no former D&T employees, who previously participated in the McDermott audit, engaged in a financial reporting oversight role at McDermott.
We reviewed, and discussed with McDermott’s management and D&T, McDermott’s audited consolidated balance sheet at December 31, 2011, and consolidated statements of income, comprehensive income, cash flows and stockholders’ equity for the year ended December 31, 2011.
Based on the reviews and actions described above, we recommended to the Board that McDermott’s audited financial statements be included in its Annual Report onForm 10-K for the year ended December 31, 20092011 for filing with the Securities and Exchange Commission.
David A. Trice, Chairman
Stephen G. Hanks
D. Bradley McWilliams Chairman
Robert W. Goldman
Stephen G. Hanks
Richard W. Mies
David A. Trice
63
RATIFICATIONOF APPOINTMENTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMFOR YEAR ENDING DECEMBER 31, 2012
(ITEM 3)
Ratification of Appointment of Independent Registered Public Accounting Firm
for Year Ending December 31, 2010
(Item 2)
Our Board of Directors has ratified the decision of the Audit Committee to appoint Deloitte & Touche LLP to serve as the independent registered public accounting firm to audit our financial statements for the year ending December 31, 2010.2012. Although we are not required to seek stockholder approval of this appointment, it has been our practice to do so. No determination has been made as to what action the Audit Committee and the Board of Directors would take if our stockholders fail to ratify the appointment. Even if the appointment is ratified, the Audit Committee retains discretion to appoint a new independent registered public accounting firm at any time if the Audit Committee concludes such a change would be in the best interests of McDermott. We expect that representativesRepresentatives of Deloitte & Touche LLPD&T will be present at the Annual Meeting and will have an opportunity to make a statement if they desire to do so and to respond to appropriate questions.
For the years ended December 31, 20092011 and 2008,2010, McDermott paid Deloitte & Touche fees, including expenses and taxes, totaling $8,649,858$3,621,356 and $8,097,071,$5,888,537, which can be categorized as follows:
| | | | | | | | | |
| | | 2009 | | | 2008 | |
Audit | | | | | | | | |
| The Audit fees for the years ended December 31, 2009 and 2008 were for professional services rendered for the audits of the consolidated financial statements of McDermott, the audit of McDermott’s internal control over financial reporting, statutory and subsidiary audits, reviews of the quarterly consolidated financial statements of McDermott and assistance with review of documents filed with the SEC. | | $ | 7,195,103 | | | $ | 7,208,475 | |
Audit-Related | | | | | | | | |
| The Audit-Related fees for the years ended December 31, 2009 and 2008 were for assurance and related services, employee benefit plan audits and advisory services related to Sarbanes-Oxley Section 404 compliance. | | $ | 271,405 | | | $ | 12,300 | |
Tax | | | | | | | | |
| The Tax fees for the years ended December 31, 2009 and 2008 were for professional services rendered for consultations on various U.S. federal, state and international tax matters, international tax compliance and tax planning, and assistance with tax examinations. | | $ | 916,131 | | | $ | 807,046 | |
All Other | | | | | | | | |
| The fees for All Other services for the years ended December 31, 2009 and 2008 were for professional services rendered for translation services and other advisory or consultation services not related to audit or tax. | | $ | 267,219 | | | $ | 69,250 | |
Total | | $ | 8,649,858 | | | $ | 8,097,071 | |
| | | | | | | | |
| | | 2011 | | | 2010 | |
Audit | | | | | | | | |
The Audit fees for the years ended December 31, 2011 and 2010 were for professional services rendered for the audits of the consolidated financial statements of McDermott, the audit of McDermott’s internal control over financial reporting, statutory and subsidiary audits, reviews of the quarterly consolidated financial statements of McDermott and assistance with review of documents filed with the SEC. | | $ | 3,220,477 | | | $ | 3,992,500 | (1) |
Audit-Related | | | | | | | | |
The Audit-Related fees for the years ended December 31, 2011 and 2010 were for assurance and related services, employee benefit plan audits and advisory services related to Sarbanes-Oxley Section 404 compliance. | | $ | 114,367 | | | $ | 518,205 | (2) |
Tax | | | | | | | | |
The Tax fees for the years ended December 31, 2011 and 2010 were for professional services rendered for consultations on various U.S. federal, state and international tax matters, international tax compliance and tax planning, and assistance with tax examinations. | | $ | 286,512 | | | $ | 1,232,498 | (3) |
All Other | | | | | | | | |
The fees for All Other services for the years ended December 31, 2011 and 2010 were for professional services rendered for translation services and other advisory or consultation services not related to audit or tax. | | $ | 0 | | | $ | 145,334 | (4) |
Total | | $ | 3,621,356 | | | $ | 5,888,537 | |
| (1) | Audit fees for 2010 include $215,000 of fees paid by McDermott attributable to the audit of B&W. |
| (2) | Audit-Related fees for 2010 include $480,205 of fees paid by McDermott attributable to audit-related services for B&W. |
| (3) | Tax fees for 2010 include $91,800 of fees paid by McDermott attributable to tax services for B&W. |
| (4) | All Other fees for 2010 include $140,000 of fees paid by McDermott attributable to other services for B&W. |
It is the policy of our Audit Committee to preapprove all audit, review or attest engagements and permissible non-audit services to be performed by our independent registered public accounting firm, subject to, and in compliance with, thede minimisexception for non-audit services described in Section 10A(i)(1)(B) of the Securities Exchange Act of 1934 and the applicable rules and regulations of the SEC. Our Audit Committee did not rely on thede minimisexception for any of the fees disclosed above.
Recommendation and Vote Required
Our Board of Directors recommends that stockholders vote “FOR” the ratification of the decision of our Audit Committee to appoint Deloitte & Touche LLP as our independent registered public accounting firm for the year ending December 31, 2010.2012. The proxy holders will vote all proxies received for approval of this proposal unless instructed otherwise. Approval of this proposal requires the affirmative vote of a majority of the outstanding shares of common stock present in person or represented by proxy and entitled to vote and actually voting on this proposal at the Annual
64
Meeting. Because abstentions are
counted as present for purposesnot actual votes with respect to this proposal, they have no effect on the outcome of the vote on this
matter but are not votes “FOR” this proposal, theyproposal.SECURITY OWNERSHIPOF DIRECTORSAND EXECUTIVE OFFICERS
The following table sets forth the number of shares of our common stock beneficially owned as of February 29, 2012 by each director or nominee as a director, and each Named Executive and all our directors and executive officers as a group, including shares that those persons have the same effectright to acquire within 60 days on the vesting of restricted stock units or the exercise of stock options.
| | | | |
| Name | | Shares Beneficially Owned | |
John F. Bookout, III(1) | | | 40,106 | |
Roger A. Brown(2) | | | 74,766 | |
Gary L. Carlson(3) | | | 44,423 | |
Perry L. Elders(4) | | | 41,030 | |
Stephen G. Hanks | | | 16,620 | |
Liane K. Hinrichs(5) | | | 205,715 | |
Stephen M. Johnson(6) | | | 514,834 | |
D. Bradley McWilliams(7) | | | 70,671 | |
John T. McCormack(8) | | | 70,845 | |
John T. Nesser(9) | | | 409,470 | |
Thomas C. Schievelbein(10) | | | 103,108 | |
Mary Shafer-Malicki | | | 6,790 | |
David A. Trice | | | 16,165 | |
All directors and executive officers as a group (16 persons)(11) | | | 1,938,545 | |
| (1) | Shares owned by Mr. Bookout include 6,105 shares of common stock that he may acquire on the exercise of stock options, as described above. |
| (2) | Shares owned by Mr. Brown include 38,085 shares of common stock that he may acquire on the exercise of stock options, as described above. |
| (3) | Shares owned by Mr. Carlson include 20,064 shares of common stock that he may acquire on the exercise of stock options, as described above, 14,654 shares of common stock that he will acquire on the vesting of restricted stock units, as described above, and 42 shares of common stock held in the McDermott Thrift Plan. |
| (4) | Shares owned by Mr. Elders include 28,274 shares of common stock that he may acquire on the exercise of stock options, as described above, 3,250 shares of common stock that he will acquire on the vesting of restricted stock units, as described above, and 27 shares of common stock held in the McDermott Thrift Plan. |
| (5) | Shares owned by Ms. Hinrichs include 64,772 shares of common stock that she may acquire on the exercise of stock options, as described above, 65,975 shares of common stock that she will acquire on the vesting of restricted stock units, as described above, and 2,980 shares of common stock held in the McDermott Thrift Plan. |
| (6) | Shares owned by Mr. Johnson include 297,605 shares of common stock that he may acquire on the exercise of stock options, as described above, 44,831 shares of common stock that he will acquire on the vesting of restricted stock units, as described above, and 637 shares of common stock held in the McDermott Thrift Plan. |
| (7) | Shares owned by Mr. McWilliams include 37,876 shares of common stock that he may acquire on the exercise of stock options, as described above. |
| (8) | Shares owned by Mr. McCormack include 34,994 shares of common stock that he may acquire on the exercise of stock options, as described above, 34,546 shares of common stock that he will acquire on the vesting of restricted stock units, as described above, and 1,305 shares of common stock held in the McDermott Thrift Plan. |
| (9) | Shares owned by Mr. Nesser include 62,121 shares of common stock held in a grantor retained annuity trust of which he is trustee and has indirect beneficial ownership, 69,717 shares of common stock that he may acquire on the exercise of stock options, as described above, and 8,276 shares of common stock that he will acquire on the vesting of restricted stock units. |
| (10) | Shares owned by Mr. Schievelbein include 72,538 shares of common stock that he may acquire on the exercise of stock options, as described above. |
| (11) | Shares owned by all directors and executive officers as a group include 792,219 shares of common stock that may be acquired on the exercise of stock options, as described above, 213,188 shares of common stock that may be acquired on the vesting of restricted stock units, as described above, and 23,172 shares of common stock held in the McDermott Thrift Plan. |
Shares beneficially owned in all cases constituted less than one percent of the outstanding shares of common stock on February 29, 2012, as votes “AGAINST” this proposal.
SECURITY OWNERSHIPOF CERTAIN BENEFICIAL OWNERS
The following table furnishes information concerning all persons known by us to beneficially own 5% or more of our outstanding shares of common stock, which is our only class of voting stock outstanding:
| | | | | | | | | | |
| Title of Class | | Name and Address of Beneficial Owner | | Amount
and Nature of Beneficial Ownership | | | Percent of Class(1) | |
Common Stock | | T. Rowe Price Associates, Inc. 100 E. Pratt Street Baltimore, MD 21202 | | | 37,243,988 | (2) | | | 15.84 | % |
Common Stock | | BlackRock, Inc. 40 East 52nd Street New York, NY 10022 | | | 15,391,846 | (3) | | | 6.55 | % |
Common Stock | | Artisan Partners Holdings LP 875 East Wisconsin Avenue Suite 800 Milwaukee, WI 53202 | | | 13,551,800 | (4) | | | 5.77 | % |
Common Stock | | PRIMECAP Management Company 225 South Lake Ave., #400 Pasadena, CA 91101 | | | 12,406,760 | (5) | | | 5.28 | % |
Common Stock | | FMR LLC 82 Devonshire Street Boston, MA 02109 | | | 11,820,617 | (6) | | | 5.03 | % |
| (1) | Percent is based on outstanding shares of our common stock on February 29, 2012. |
| (2) | As reported on Schedule 13G/A filed with the SEC on February 10, 2012. The Schedule 13G/A reports beneficial ownership of 37,243,988 shares of our common stock by T. Rowe Price Associates, Inc. (“Price Associates”), which has sole voting power over 8,642,022 shares and sole dispositive power over 37,243,988 shares. These securities are owned by various individual and institutional investors, including T. Rowe Price Mid-Cap Growth Fund, which has sole voting power over 13,000,000 shares and sole dispositive power over no shares, for which Price Associates serves as an investment adviser with power to direct investments and/or sole power to vote the securities. For the purposes of the reporting requirements of the Securities Exchange Act of 1934, Price Associates is deemed to be the beneficial owner of such securities; however, Price Associates expressly disclaims that it is, in fact, the beneficial owner of such securities. |
| (3) | As reported on Schedule 13G/A filed with the SEC on February 13, 2012. The Schedule 13G/A reports beneficial ownership of 15,391,846 shares of our common stock and sole voting power and sole dispositive power over 15,391,846 shares. |
| (4) | As reported on Schedule 13G filed on February 7, 2012. The Schedule 13G reports beneficial ownership of 13,551,800 shares of our common stock, shared voting power over 13,219,900 shares and shared dispositive power over 13,551,800 shares. |
| (5) | As reported on Schedule 13G/A filed with the SEC on February 13, 2012. The Schedule 13G/A reports beneficial ownership of 12,406,760 shares of our common stock, sole voting power over 6,929,160 shares and sole dispositive power over 12,406,760 shares. |
| (6) | As reported on Schedule 13G filed jointly by FMR LLC, Edward C. Johnson 3d and Fidelity Management & Research Company with the SEC on February 14, 2012. According to the Schedule 13G, FMR LLC has sole voting power over 880,417 shares and sole dispositive power over 11,820,617 shares. Of the shares reported, 10,940,200 shares are beneficially owned by Fidelity Management & Research Company, an investment adviser and a wholly-owned subsidiary of FMR LLC, as a result of acting as investment advisor to various investment companies (collectively, the “Fidelity Funds”); and each of FMR LLC and Mr. Edward C. Johnson 3d exercise sole dispositive power and the Fidelity Funds’ Board of Trustees exercises sole voting power with respect to these shares. In addition, FMR LLC and Mr. Edward C. Johnson 3d each exercise sole dispositive power and sole voting power with respect to 454 shares. |
CERTAIN RELATIONSHIPSAND RELATED TRANSACTIONS
Certain Relationships and Related Transactions
Pursuant to our Code of Business Conduct, all employees (including our Named Executives) who have, or whose immediate family members have, any direct or indirect financial or other participation in any business that competes with, supplies goods or services to, or is a customer, of McDermott, are required to disclose to us and receive written approval from our Corporate Ethics and Compliance department prior to transacting such business. Our employees are expected to make reasoned and impartial decisions in the workplace. As a result, approval of the business is denied if we believe that the employee’s interest in such business could influence decisions relative to our business, or have the potential to adversely affect our business or the objective performance of the employee’s work. Our Corporate Ethics and Compliance department implements our Code of Business Conduct and related policies and the Governance Committee of our Board is responsible for overseeing our Ethics and Compliance Program, including compliance with our Code of Business Conduct. Our Board members are also responsible for complying with our Code of Business Conduct. Additionally, our Governance Committee is responsible for reviewing the professional occupations and associations of our Board members and reviews transactions between McDermott and other companies with which our Board members are affiliated. To obtain a copy of our Code of Business Conduct, please see the “Corporate Governance” section above in this proxy statement.
Our grant agreements for restricted stock units awarded under various long-term incentive plans provide that the withholding obligation of any applicable federal, state or other taxes that may be due on the vesting of those awards be satisfied by the grantee returning to us the number of such vested shares having a fair market value equal to the amount of such taxes. Accordingly, in the year ending December 31, 2012, this withholding method will apply to an aggregate of 209,208 shares held by Mr. Johnson, 16,137 shares held by Mr. Elders, 14,654 shares held by Mr. Carlson, 10,302 shares held by Mr. Cummins, 65,975 shares held by Ms. Hinrichs, 15,577 shares held by Mr. Daniel M. Houser, 37,232 shares held by Mr. McCormack, 10,057 shares held by Mr. Mitchell and 21,297 shares held by Mr. Roll.
In the year ended December 31, 2011, a similar withholding method applied with respect to certain of
Each ofour grant agreements, and Messrs. Fees, Taff, Bethards, Deason, S. Johnson, Baldwin, P. Johnson, Lewis,Elders, Houser, McCormack, Mitchell, Nesser and Roll and Ms. Hinrichs has irrevocably elected to satisfy withholding obligations relating to all or a portion of any applicable federal, state or other taxes that maywould be due on the vesting in the year ending December 31, 2010 of certain shares of restricted stock and restricted stock units and performance shares awarded under various long-term incentive plans by returning to usthat did not provide for a withholding method in the number of such vested shares having a fair market value equal to the amount of such taxes.same manner. These elections which applywere subject to an aggregate of 149,504 shares held by Mr. Fees, 54,519 shares held by Mr. Taff, 70,854 shares held by Mr. Bethards, 30,995 shares held by Mr. S. Johnson, 57,740 shares held by Mr. Deason, 21,270 shares held by Mr. Baldwin, 48,366 shares held by Ms. Hinrichs, 9,297 shares held by Mr. P. Johnson, 16,712 shares held by Mr. Lewis and 65,048 shares held by Mr. Nesser, are subject tothe approval of the Compensation Committee of our Board, which approval was granted. In the year ended December 31, 2009, a similar election was made whichAccordingly, this withholding method applied to an aggregate of 110,940205,316 shares held by Mr. Fees, 27,047Johnson, 12,887 shares held by Mr. Taff, 32,477Elders, 13,137 shares held by Mr. Bethards, 156,540Carlson, 9,165 shares held by Mr. Deason, 700 shares held by Mr. Baldwin, 23,177Cummins, 119,901 shares held by Ms. Hinrichs, 90019,452 shares held by Mr. P. Johnson, 18,664Houser, 29,822 shares held by Mr. Lewis and 44,837McCormack, 14,021 shares held by Mr. Mitchell, 85,423 shares held by Mr. Nesser that vested in the year ended December 31, 2009. Those elections were also approvedand 21,479 shares held by the Compensation Committee. Mr. Roll.
We expect any transfers reflecting shares of restrictedMcDermott stock returned to us will be reported in the SEC filings made by those transferring holders who are obligated to report transactions in our securities under Section 16 of the Securities Exchange Act of 1934.
Additionally, during 2011, the Investment Committee of the McDermott Master Trust (the “Trust”), the funding vehicle underlying the Retirement Plan, entered into an agreement with BlackRock Institutional Trust Company, N.A. (“BlackRock”), pursuant to which BlackRock agreed to manage the investment of a portion of the Trust assets. BlackRock is a subsidiary of BlackRock, Inc. and, collectively with certain other subsidiaries of BlackRock, Inc., owned approximately 6.55% of McDermott common stock on December 31, 2011 as reported on BlackRock, Inc.’s Schedule 13G/A filed with the SEC on February 13, 2012. The amount of Trust assets under management with BlackRock may vary from time to time. As of December 31, 2011, the value of the Trust assets under management with BlackRock was approximately $78.6 million. BlackRock receives a fee for investment management services for the portion of the Trust assets allocated to BlackRock. These fees are calculated quarterly in arrears by averaging the account’s prior three month-end market values and applying 25% of the annual fee schedule (6.0 basis points), or 1.5 basis points quarterly.
Section 16(a) Beneficial Ownership ComplianceThe Investment Committee of the Trust is a fiduciary of the Retirement Plan appointed by McDermott’s subsidiary that maintains the Retirement Plan. The Investment Committee is responsible for the management and control of the Trust assets and is authorized to appoint fund managers under the
terms of the Retirement Plan and the Trust. Selection of fund managers is performed with the assistance of a third party investment consulting firm, in accordance with an investment policy statement approved and adopted by the Investment Committee.
SECTION 16(a) BENEFICIAL OWNERSHIP COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, and persons who own 10% or more of our voting stock, to file reports of ownership and changes in ownership of our equity securities with the SEC and the New York Stock Exchange. Directors, executive officers and 10% or more holders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. Based solely on a review
of the copies of those forms furnished to us, or written representations that no forms were required, we believe that our directors, executive officers and 10% or more beneficial owners complied with all Section 16(a) filing requirements during the year ended December 31, 2009.2011, with the exception of Ms. Hinrichs, who filed one late Form 4 reporting one open market sale transaction.
65
STOCKHOLDERS’ PROPOSALSStockholders’ Proposals
Any stockholder who wishes to have a qualified proposal considered for inclusion in our proxy statement for our 20112013 Annual Meeting must send notice of the proposal to our Corporate Secretary at our principal executive office no later than November 26, 2010.30, 2012. If you make such a proposal, you must provide your name, address, the number of shares of common stock you hold of record or beneficially, the date or dates on which such common stock was acquired and documentary support for any claim of beneficial ownership.
In addition, any stockholder who intends to submit a proposal for consideration at our 20112013 Annual Meeting, but not for inclusion in our proxy materials, or who intends to submit nominees for election as directors at the meeting must notify our Corporate Secretary. Under our By-Laws, such notice must (1) be received at our executive offices no earlier than November 8, 201011, 2012 or later than January 7, 201110, 2013, and (2) satisfy specified requirements. A copy of the pertinent By-Law provisions can be found on our Web site atwww.mcdermott.comat “Corporate“About Us — Leadership & Corporate Governance — Governance Policies.Corporate Governance.”
By Order of the Board of Directors,
Secretary
Dated: March 26, 2010
66
Secretary
*** Exercise Your Right to Vote *** IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS Meeting Information MCDERMOTT INTERNATIONAL, INC. Meeting Type: Annual Meeting Date: May 7, 2010 Time: 9:30 a.m. CDT For holders as of: March 8, 2010 Location: McDermott International, Inc. 757 N. Eldridge Parkway 14th Floor Houston, Texas 77079 You are receiving this communication because you hold shares in the above named company. This is not a ballot. You cannot use this notice to vote MCDERMOTT INTERNATIONAL, INC. these shares. This communication presents only an 777 NORTH ELDRIDGE PARKWAY HOUSTON, TX 77079 overview of the more complete proxy materials that are available to you on the Internet. You may view the proxy materials online at www.proxyvote.com or easily request a paper copy (see reverse side). We encourage you to access and review all of the important information contained in the proxy materials before voting. See the reverse side of | | |
| | VOTE BY INTERNET -www.proxyvote.com
 Before You Vote How to Access the Proxy Materials Proxy Materials Available to VIEW or RECEIVE: NOTICE AND PROXY STATEMENT ANNUAL REPORT How to View Online: Have the 12-Digit Control Number available (located in the box on the following page) and visit: www.proxyvote.com. How to Request and Receive a PAPER or E-MAIL Copy: If you want to receive a paper or e-mail copy of these documents, you must request one. There is NO charge for requesting a copy. Please choose one of the following methods to make your request: 1) BY INTERNET: www.proxyvote.com 2) BY TELEPHONE: 1-800-579-1639 3) BY E-MAIL*: sendmaterial@proxyvote.com * If requesting materials by e-mail, please send a blank e-mail with the 12-Digit Control Number (located in the box on the following page) in the subject line. Requests, instructions and other inquiries sent to this e-mail address will NOT be forwarded to your investment advisor. Please make the request as instructed above on or before April 25, 2010 to facilitate timely delivery. How To Vote Please Choose One of the Following Voting Methods Vote In Person: Please check the meeting materials for any special requirements for meeting attendance. At the Meeting you will need to request a ballot to vote these shares. Vote By Internet: To vote now by Internet, go to www.proxyvote.com. Use the Internet to transmit your voting instructions and for electronic delivery of information up until 11:59 p.m. Eastern Time on May 6, 20109, 2012 (May 4, 2010 for participants in McDermott’s Thrift Plan). Have the 12 Digit Control Number (located in the box on M21026-P91520 the following page) available and follow the instructions. Vote By Mail or Telephone: You can vote by mail or telephone by requesting a paper copy of the materials, which will include a proxy card with further instructions. |
Voting Items The Board of Directors recommends that you vote FOR the following: 1. Election of Directors Nominees: 01) John F. Bookout, III 07) Oliver D. Kingsley, Jr. 02) Roger A. Brown 08) D. Bradley McWilliams 03) Ronald C. Cambre 09) Richard W. Mies 04) John A. Fees 10) Thomas C. Schievelbein 05) Robert W. Goldman 11) David A. Trice 06) Stephen G. Hanks The Board of Directors recommends you vote FOR the following proposal: 2. Ratification of appointment of McDermott’s independent registered public accounting firm for the year ending December 31, 2010. P91520 -M21027 |
 THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED. KEEP THIS PORTION FOR YOUR RECORDS DETACH AND RETURN THIS PORTION ONLY TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS: Signature [PLEASE SIGN WITHIN BOX] Date Signature (Joint Owners) Date MCDERMOTT INTERNATIONAL, INC. M20989-P91520 MCDERMOTT INTERNATIONAL, INC. 777 NORTH ELDRIDGE PARKWAY HOUSTON, TX 77079 To withhold authority to vote for any individual nominee(s), mark “For All Except” and write the number(s) of the nominee(s) on the line below. Please indicate if you plan to attend this meeting. For Against Abstain 2. Ratification of appointment of McDermott’s independent registered public accounting firm for the year ending December 31, 2010. For address changes and/or comments, please check this box and write them on the back where indicated. For All Withhold All For All Except 0 0 0 0 0 0 Yes No 0 0 0 Vote on Directors 01) John F. Bookout, III 02) Roger A. Brown 03) Ronald C. Cambre 04) John A. Fees 05) Robert W. Goldman 06) Stephen G. Hanks 1. Election of Directors Nominees: Vote on Proposal VOTE BY INTERNET — www.proxyvote.com Use the Internet to transmit your voting instructions and for electronic delivery of information up until 11:59 p.m. Eastern Time on May 6, 2010 (May 4, 20107, 2012 for participants in McDermott’s Thrift Plan). Have your proxy card in hand when you access the web site and follow the instructions to obtain your records and to create an electronic voting instruction form.VOTE BY PHONE —- 1-800-690-6903 Use any touch-tone telephone to transmit your voting instructions up until 11:59 p.m. Eastern Time on May 6, 20109, 2012 (May 4, 20107, 2012 for participants in McDermott’s Thrift Plan). Have your proxy card in hand when you call and then follow the instructions. VOTE BY MAIL Mark, sign and date your proxy card and return it in the postage-paid envelope we have provided or return it to Vote Processing, c/o Broadridge, 51 Mercedes Way, Edgewood, NY 11717. ELECTRONIC DELIVERY OF FUTURE PROXY MATERIALS If you would like to reduce the costs incurred by our company in mailing proxy materials, you can consent to receiving all future proxy statements, proxy cards and annual reports electronically via e-mail or the Internet. To sign up for electronic delivery, please follow the instructions above to vote using the Internet and, when prompted, indicate that you agree to receive or access proxy materials electronically in future years. |
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS: M43299-P20059 KEEP THIS PORTION FOR YOUR RECORDS DETACH AND RETURN THIS PORTION ONLY THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | MCDERMOTT INTERNATIONAL, INC. | | For
All | | Withhold All | | For All
Except | | To withhold authority to vote for any individual nominee(s), mark “For All Except” and write the number(s) of the nominee(s) on the line below. | | | | | | | | | | | The Board of Directors recommends you vote FOR the following: | | | | | | | | | | | | | | | | | | 1. | | Election of Directors | | ¨ | | ¨ | | ¨ | | | | | | | | | | | | | | | | | Nominees: | | | | | | | | | | | | | | | | | | | | | | | 01) John F. Bookout, III | | 05) D. Bradley McWilliams | | | | | | | | | | | | | | | | | | | | | | | | | 02) Roger A. Brown | | 06) Thomas C. Schievelbein | | | | | | | | | | | | | | | | | | | | | | | | | 03) Stephen G. Hanks | | 07) Mary Shafer-Malicki | | | | | | | | | | | | | | | | | | | | | | | | | 04) Stephen M. Johnson | | 08) David A. Trice | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | The Board of Directors recommends you vote FOR the following proposals: | | | | | | For | | Against | | Abstain | | | | | 2. | | Advisory vote to approve named executive officer compensation. | | ¨ | | ¨ | | ¨ | | | | | 3. | | Ratification of the appointment of McDermott’s independent registered public accounting firm for the year ending December 31, 2012. | | ¨ | | ¨ | | ¨ | | | | | The shares represented by this proxy when properly executed will be voted in the manner directed herein by the undersigned Stockholder(s).If no direction is made, this proxy will be voted FOR itemsALL for item 1, and 2.FOR items 2 and 3. If any other matters properly come before the meeting, the personpersons named in this proxy will vote in their discretion. The Board of Directors recommends that | | | | | | | | | | | For address changes and/or comments, please check this box and write them on the back where indicated. Please indicate if you vote FOR the following: The Board of Directors recommends you vote FOR the following proposal: 07) Oliver D. Kingsley, Jr. 08) D. Bradley McWilliams 09) Richard W. Mies 10) Thomas C. Schievelbein 11) David A. Trice plan to attend this meeting. | | ¨ | | ¨ ¨ | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Yes | | No | | | | | | | | | | | | | | | Please sign your name exactly as it appears hereon. When signing as attorney, executor, administrator, trustee, guardian or other fiduciary, please give full title as such. When signing as joint tenants, all parties in the joint tenancy must sign. If a signer is a corporation or partnership, please sign in full corporate or partnership name by duly authorized officer. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Signature [PLEASE SIGN WITHIN BOX] | | Date | | | | | | | | Signature (Joint Owners) | | Date | | | | | | | | |
Address Changes/Comments: (If | | | | |  | | McDermott International, Inc. Annual Meeting Thursday, May 10, 2012 at 10:00 a.m. 757 N. Eldridge Parkway, 14th Floor Houston, Texas 77079 | | |
| | | | | | | Dear Stockholder: McDermott International, Inc. encourages you noted any Address Changes/Comments above, please mark corresponding box onto vote the reverse side.) shares electronically through the Internet or the telephone, which are available 24 hours a day, 7 days a week. This eliminates the need to return the proxy card. Your electronic vote authorizes the named proxies in the same manner as if you marked, signed, dated and returned the proxy card. If you choose to vote the shares electronically, there is no need for you to mail back the proxy card. Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting: The Notice and Proxy Statement and Annual Report are available at www.proxyvote.com | | |
IF YOU HAVE NOT VOTED VIA THE INTERNET OR TELEPHONE, FOLD ALONG PERFORATION, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE | | | | | | | | | | | | | | | McDERMOTT INTERNATIONAL, INC. This proxy is solicited on behalf of the Board of Directors Annual Meeting of Stockholders — Friday,- Thursday, May 7, 2010 9:3010, 2012 at 10:00 a.m. The undersigned hereby appoints John A. FeesStephen M. Johnson and Liane K. Hinrichs, and each of them individually, as proxies, each with the power to appoint (his/her)his or her substitute, and hereby authorizes them to represent and to vote, as designated on the reverse side of this ballot, all of the shares of Common Stock of MCDERMOTT INTERNATIONAL, INC. (“McDermott”), that the stockholder(s) is/are entitled to vote at the Annual Meeting of Stockholder(s)Stockholders to be held at 9:3010:00 a.m. CDT,local time, on Friday,Thursday, May 7, 2010,10, 2012 at 757 N. Eldridge Parkway, 14th Floor,floor, Houston, TX,Texas 77079, and any adjournment or postponement thereof. THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS DIRECTED BY THE STOCKHOLDER(S). IF NO SUCH DIRECTIONS ARE MADE, THIS PROXY WILL BE VOTED FOR THE ELECTION OF THE NOMINEES LISTED UNDER ITEM 1 ON THE REVERSE SIDE FOR THE BOARD OF DIRECTORS, AND FOR THE PROPOSAL. EACH OF ITEMS 2 AND 3. THE UNDERSIGNED ACKNOWLEDGES RECEIPT OF MCDERMOTT’S ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 20092011 AND ITS NOTICE OF 20102012 ANNUAL MEETING AND RELATED PROXY STATEMENT. ATTENTION PARTICIPANTS IN MCDERMOTT’S THRIFT PLAN: If you hold shares of McDermott common stock through Thethe McDermott Thrift Plan for Employees of McDermott Incorporated and Participating Subsidiary and Affiliated Companies (the “Thrift Plan”), this proxy covers all shares for which the undersigned has the right to give voting instructions to Vanguard Fiduciary Trust Company (“Vanguard”), Trustee of the McDermott Thrift Plan. Your proxy must be received no later than 11:59 p.m. Eastern Time on May 4, 2010.7, 2012. Any shares of McDermott common stock held in the Thrift Plan that are not voted or for which Vanguard does not receive timely voting instructions, will be voted in the same proportion as the shares for which Vanguard receives timely voting instructions from other participants in the Thrift Plan. PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE REPLY CARD ENVELOPE Important Notice Regarding | | | | | | | | | | | | | | Address Changes/Comments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (If you noted any Address Changes/Comments above, please mark corresponding box on the Availability of Proxy Materials for the Annual Meeting: The Notice and Proxy Statement and Annual Report are available at www.proxyvote.com. reverse side.) CONTINUED AND TO BE SIGNED ON REVERSE SIDE M20990-P91520 IF YOU HAVE NOT VOTED VIA THE INTERNET OR TELEPHONE, FOLD ALONG PERFORATION, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE Dear Stockholder: McDermott International, Inc. encourages you to vote the shares electronically through the Internet or the telephone, which are available 24 hours a day, 7 days a week. This eliminates the need to return the proxy card. Your electronic vote authorizes the named proxies in the same manner as if you marked, signed, dated and returned the proxy card. If you choose to vote the shares electronically, there is no need for you to mail back the proxy card. McDermott International, Inc. Annual Meeting Friday, May 7, 2010 at 9:30 a.m. 757 N. Eldridge Parkway, 14th Fl. Houston, TX 77079 | | |
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