UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

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

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McDermott International, Inc.

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

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Dear Stockholder:

 

You are cordially invited to attend this year’s Annual Meeting of Stockholders of McDermott International, Inc., which will be held on Friday, May 7, 2010, at 757 N. Eldridge Parkway, Houston, Texas 77079, on the 14th floor, commencing at 9:30 a.m. local time. The notice of annual meeting and proxy statement following this letter describe the matters to be acted on at the meeting.

 

McDermott is pleased to, again, be taking advantage of the Securities and Exchange Commission’s Notice and Access proxy rule, which allows companies to furnish proxy materials via the Internet as an alternative to the traditional approach of mailing a printed set to each stockholder. In accordance with these rules, we have sent a Notice of Internet Availability of Proxy Materials to all shareholders who have not previously elected to receive a printed set of proxy materials. The Notice contains instructions on how to access our 2010 Proxy Statement and Annual Report to Shareholders, as well as how to vote either online, by telephone or in person at the 2010 Annual Meeting.

 

It is very important that your shares are represented and voted at the Annual Meeting. Please vote your shares by Internet or telephone, or, if you received a printed set of materials by mail, by returning the accompanying proxy card, as soon as possible to ensure that your shares are voted at the meeting. Further instructions on how to vote your shares can be found in our Proxy Statement.

 

Thank you for your support of our company.

 

Sincerely yours,

 

JOHN A. FEES

 

 

 

 

Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting of Stockholders to Be Held on May 7, 2010.

 

The proxy statement and annual report are available on the Internet at www.proxyvote.com.

 

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

 

McDERMOTT INTERNATIONAL, INC.
777 N. Eldridge Pkwy.
Houston, Texas 77079

 

 

Notice of 2010 Annual Meeting of Stockholders

 

 

The 2010 Annual Meeting of the Stockholders of McDermott International, Inc., a Panamanian corporation, will be held at 757 N. Eldridge Parkway, Houston, Texas 77079, on the 14^th floor, on Friday, May 7, 2010, at 9:30 a.m. local time, in order to:

 

(1) elect eleven members to our Board of Directors, each for a term of one year;

 

(2) ratify our Audit Committee’s appointment of Deloitte & Touche LLP as our independent registered public accounting firm for the year ending December 31, 2010; and

 

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

 

If you were a stockholder as of the close of business on March 8, 2010, you are entitled to vote at the meeting and at any adjournment thereof.

 

Instead of mailing a printed copy of our proxy materials, including our Annual Report, to each shareholder of record, we are providing access to these materials via the Internet. This reduces the amount of paper necessary to produce these materials, as well as the costs associated with mailing these materials to all shareholders. Accordingly, on March 26, 2010, we began mailing a Notice of Internet Availability of Proxy Materials (the “Notice”) to all shareholders of record as of March 8, 2010, and posted our proxy materials on the Web site referenced in the Notice (www.proxyvote.com). As more fully described in the Notice, all shareholders may choose to access our proxy materials on the Web site referred to in the Notice or may request a printed set of our proxy materials. In addition, the Notice and Web site provide information regarding how you may request to receive proxy materials in printed form by mail or electronically by email on an ongoing basis.

 

If you received a printed copy of the materials, we have enclosed a copy of our 2009 Annual Report to Stockholders with this notice and proxy statement.

 

Your vote is important. Please vote your proxy promptly so your shares can be represented, even if you plan to attend the annual meeting. You can vote by Internet, by telephone, or by requesting a printed copy of the proxy materials and using the enclosed proxy card.

 

By Order of the Board of Directors,

 

LIANE K. HINRICHS
Secretary

 

Dated: March 26, 2010

 

 

Proxy Statement for 2010 Annual Meeting of Stockholders

 

 

Table of Contents

 

 

 

As more fully described in the Notice, the Board of Directors of McDermott International, Inc. (“McDermott”) has made these materials available to you over the Internet or, upon your request, has mailed you printed versions of these materials in connection with our 2010 Annual Meeting of Stockholders, which will take place on May 7, 2010. We mailed the Notice to our shareholders beginning March 26, 2010, and our proxy materials were posted on the Web site referenced in the Notice on that same date. McDermott, on behalf of its Board of Directors, is soliciting your proxy to vote your shares at the 2010 Annual Meeting of Stockholders. We solicit proxies to give all shareholders of record an opportunity to vote on matters that will be presented at the annual meeting. In this proxy statement, you will find information on these matters, which is provided to assist you in voting your shares.

 

Proxy materials have been sent or access to the materials has been provided to you because our Board of Directors is soliciting your proxy to vote your shares at our Annual Meeting to be held on May 7, 2010. We will bear all expenses incurred in connection with this proxy solicitation, which we expect to conduct primarily by mail. We have engaged The Proxy Advisory Group, LLC to assist in the solicitation for a fee that will not exceed $10,000, plus out-of-pocket expenses. In addition, our officers and regular employees may solicit your proxy by telephone, by facsimile transmission or in person, for which they will not be separately compensated. If your shares are held through a broker or other nominee (i.e., in “street name”) and you have requested printed versions of these materials, we have requested that your broker or nominee forward this proxy statement to you and obtain your voting instructions, for which we will reimburse them for reasonable out-of-pocket expenses. If your shares are held through the Thrift Plan for Employees of McDermott Incorporated and Participating Subsidiary and Affiliated Companies (the “McDermott Thrift Plan”) and you have requested printed versions of these materials, the trustee of that plan has sent you this proxy statement and you can instruct the trustee on how to vote your plan shares.

 

Our Board of Directors selected March 8, 2010 as the record date (the “Record Date”) for determining stockholders entitled to vote at the Annual Meeting. This means that if you were a registered stockholder with our transfer agent and registrar, Computershare Trust Company, N.A., on the Record Date, you may vote your shares on the matters to be considered by our stockholders at the Annual Meeting. If your shares were held in street name on that date, you should refer to the instructions provided by your broker or nominee for further information. They are seeking your instructions on how you want your shares voted. As a result of a change in the rules of the New York Stock Exchange, the election of directors is no longer considered a routine matter. That means that brokers may not vote your shares in the election of directors if you have not given your broker specific instructions as to how to vote. Please be sure to give specific voting instructions to your broker.

 

On the Record Date, 230,840,040 shares of our common stock were outstanding. Each outstanding share of common stock entitles its holder to one vote on each matter to be acted on at the meeting.

 

Most shareholders can vote by proxy in three ways:

 

 

If you are a stockholder of record, you can vote your shares in person at the Annual Meeting or vote now by giving us your proxy. You may give us your proxy by following the instructions included in the Notice or, if you received a printed version of these proxy materials, in the enclosed proxy card. If you want to vote by mail but have not received a printed version of these proxy materials, you may request a full packet of proxy materials through the instructions in the Notice. If you vote using either telephone or the Internet, you will save us mail expense.

 

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

 

If your shares are held in street name, the broker or nominee that holds your shares has the authority to vote them, absent your approval, only as to matters for which they have discretionary authority under the applicable New York Stock Exchange rules. For all

other matters, the broker or nominee that holds your shares will need to obtain your authorization to vote those shares. If you received a printed version of these proxy materials, you should have received a voting instruction form from your broker or nominee that holds your shares. For shares held in street name, follow the instructions contained in the Notice or voting instruction form to vote by Internet, telephone or mail. If you want to vote by mail but have not received a printed version of these proxy materials, you may request a full packet of proxy materials as instructed by the Notice. If you want to vote your shares in person at the Annual Meeting, you must obtain a valid proxy from your broker or nominee. You should contact your broker or nominee or refer to the instructions provided by your broker or nominee for further information.

 

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

 

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

 

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

 

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

 

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

 

We are asking you to vote on the following:

 

 

Each proposal, including the election of directors, requires the affirmative vote of a majority of the shares of our common stock present in person or represented by proxy at the Annual Meeting and entitled to vote on the matter. In the election of directors, you may vote “FOR” all director nominees or withhold your vote for any one or more of the director nominees. For the ratification of our Audit Committee’s appointment of Deloitte, you may vote “FOR” or “AGAINST” or abstain from voting. Because abstentions are counted for purposes of determining whether a quorum is present but are not affirmative votes for a proposal, they have the same effect as an “AGAINST” vote.

 

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

Pursuant to our Corporate Governance Guidelines, the Governance Committee will make a recommendation to the Board with respect to the director nominee’s resignation and the Board will consider the recommendation and take appropriate action within 120 days from the date of the certification of the election results.

 

If you submit a signed proxy card without specifying your vote, your shares will be voted “FOR” the election of all director nominees and the ratification of our Audit Committee’s appointment of Deloitte as our independent registered public accounting firm for the year ending December 31, 2010. If you hold your shares in street name and you do not instruct your broker or nominee how to vote those shares, they may vote your shares as they decide as to matters for which they have discretionary authority under the applicable New York Stock Exchange rules. Your broker will be entitled to vote your shares in its discretion, absent instructions from you, on the ratification of the appointment of the independent registered public accounting firm. As a result of recent New York Stock Exchange rule changes, your broker will no longer be entitled to vote your shares in its discretion in the election of directors. If you hold your shares in street name and you do not instruct your broker how to vote in the election of directors, no votes will be cast on your behalf on that matter. Broker non-votes are not considered a vote “FOR” or “AGAINST” a proposal and therefore will have no effect on the vote on the election of directors or on the ratification of the independent registered public accounting firm.

 

If you are a shareholder of record and you do not cast your vote, no votes will be cast on your behalf on any of the items of business at the Annual Meeting.

 

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

 

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

 

 

 

 

Historically, our Board of Directors has been classified into three classes, with the term of office of one class expiring each year. In 2007, with the approval of our stockholders, we amended our Articles of Incorporation to phase out the classification of our Board by 2010. Beginning with this year’s Annual Meeting, our Board will no longer be classified and all directors will be subject to annual election. Currently, our Board has eleven members. Stephen G. Hanks and David A. Trice each were appointed as a director in May 2009.

 

The term of office of all of our directors will expire at this year’s Annual Meeting. On the nomination of our Board, John F. Bookout, III, Roger A. Brown, Ronald C. Cambre, John A. Fees, Robert W. Goldman, Oliver D. Kingsley, Jr., D. Bradley McWilliams, Richard W. Mies and Thomas C. Schievelbein will stand for reelection as directors at this year’s Annual Meeting for a term of one year and Stephen G. Hanks and David A. Trice will stand for election as directors at this year’s Annual Meeting for a term of one year.

 

Our By-Laws provide that (1) a person shall not be nominated for election or reelection to our Board of Directors if such person shall have attained the age of 72 prior to the date of election or re-election and (2) any director who attains the age of 72 during his or her term shall be deemed to have resigned and retired at the first Annual Meeting following his or her attainment of the age of 72. Accordingly, a director nominee may stand for election if he or she has not attained the age of 72 prior to the date of election or reelection.

 

Unless otherwise directed, the persons named as proxies on the enclosed proxy card intend to vote “FOR” the election of the nominees. If any nominee should become unavailable for election, the shares will be voted for such substitute nominee as may be proposed by our Board of Directors. However, we are not aware of any circumstances that would prevent any of the nominees from serving. However, as we announced on December 7, 2009, we are pursuing the separation of the business and operations of our Power Generation Systems and Government Operations segments from the rest of our operations, through a spin-off distribution to our stockholders of all the common stock of The Babcock & Wilcox Company. In this proxy statement, we refer to The Babcock & Wilcox Company and all of our subsidiaries in those two segments collectively as “B&W.” In connection with that spin-off, we contemplate that some of our directors will become directors of B&W and will resign from our Board of Directors (though it is possible that one or more may serve on the Board of Directors of each company). Our Board of Directors has not yet determined which of its members may be designated to serve as directors of the newly public B&W, although it is contemplated that John A. Fees, Chief Executive Officer and one of our directors, would serve as non-executive Chairman of the Board of B&W. The spin-off transaction is subject to various conditions precedent, including approval of our Board of Directors. There can be no assurance that the spin-off transaction will be completed.

 

Set forth below is certain information (ages are as of May 7, 2010) with respect to each nominee for election to serve as a director after this year’s Annual Meeting.

 

 

 

Mr. Bookout has served as a Managing Director of Kohlberg Kravis Roberts & Co., a private equity firm, since March 2008. Previously, he served as Senior Advisor to First Reserve Corporation, a private equity firm specializing in the energy industry, from 2006 to March 2008. Until 2006, he was a director of McKinsey & Company, a global management consulting firm, which he joined in 1978. Mr. Bookout previously served as a director of Tesoro Corporation from 2006-2010.

 

 

From 2005 until his retirement in 2007, Mr. Brown was Vice President, Strategic Initiatives of Smith International, Inc., a supplier of goods and services to the oil and gas exploration and production industry, the petrochemical industry and other industrial markets. Mr. Brown was President of Smith Technologies (a business unit of Smith International, Inc.) from 1998 until 2005. Mr. Brown has also served as a director of Ultra Petroleum Corporation since 2007.

 

 

Mr. Cambre has served as our Chairman since October 1, 2008. From January 1995 until December 2001, Mr. Cambre was Chairman of the Board of Newmont Mining Corporation, an international mining company, and he served as its Chief Executive Officer from November 1993 until his retirement in December 2000. He was also President of Newmont Mining Corporation from June 1994 to July 1999. Mr. Cambre has also served as a director of Cliffs Natural Resources, Inc. (formerly, Cleveland-Cliffs Inc.) since 1996 and W.R. Grace & Co. since 1998, and previously served as a director of Inco Limited from 2000-2006.

 

 

Mr. Fees has been Chief Executive Officer of McDermott since October 2008. He joined our company in 1979 and served as President and Chief Executive Officer of B&W from January 2007 to October 2008; President and Chief Operating Officer of BWX Technologies, Inc., a subsidiary of ours, from September 2002 to January 2007; and President, General Manager of BWXT Services, Inc., a subsidiary of BWX Technologies, Inc., from September 1997 to November 2002. His earlier positions at subsidiaries of B&W include Vice President and General Manager.

 

 

Since October 2002, Mr. Goldman has served as an independent financial consultant. Previously, Mr. Goldman worked for Conoco Inc., an international, integrated energy company and predecessor to ConocoPhillips, from 1988 to 2002, most recently as Senior Vice President, Finance and Chief Financial Officer from 1998 to 2002. He formerly served as the Vice President, Finance of the World Petroleum Council from 2002 to 2008. He has also served as a director of El Paso Corporation since 2003, Parker Drilling Company since 2005 and Tesoro Corporation since 2004.

 

 

From November 2007 until his retirement in January 2008, Mr. Hanks was President of the Washington Division of URS Corporation, an engineering, construction and technical services company, and he also served as a member of URS Corporation’s Board of Directors during that time. Previously, from June 2001 to November 2007 he was President and CEO of Washington Group International, Inc., an integrated engineering, construction and management services company which was acquired by URS Corporation in 2007, and also served on its Board of Directors. Mr. Hanks has also served as a director of Lincoln Electric Holdings, Inc. since 2006.

 

 

Until his retirement in November 2004, Mr. Kingsley served as President and Chief Operating Officer of Exelon Corporation, an integrated utility company, from May 2003, Senior Executive Vice President from February 2002 and President and Chief Nuclear Officer from October 2000. Mr. Kingsley also served as President and Chief Executive Officer of Exelon’s subsidiary, Exelon Generation, from February 2000 to November 2004 and as President and Chief Nuclear Officer of Unicom Corporation, an integrated electric utility company, from November 1997 to October 2000. Mr. Kingsley has also served as a director of FPL Group, Inc. since 2007 and is the Associate Dean for Special Projects at the Sam Ginn College of Engineering, Auburn University.

 

 

From April 1995 until his retirement in April 2003, Mr. McWilliams was Senior Vice President and Chief Financial Officer of Cooper Industries Ltd., a worldwide manufacturer of electrical products, tools and hardware. He was Vice President of Cooper Industries from 1982 until April 1995. Mr. McWilliams previously served as a director of Kronos Incorporated from 1993 to 2005.

 

 

Admiral Mies is a Retired Admiral, United States Navy. He served in the U.S. Navy for 35 years, including most recently as Commander in Chief of the U.S. Strategic Command for the U.S. Air Force and U.S. Navy strategic nuclear forces from 1998 until his retirement from the Navy in 2002. Following his retirement from the Navy until 2007, he served as Senior Vice President of Science Applications International Corporation, a provider of scientific and engineering applications for national security, energy, environment, critical infrastructure and health. Since 2007, he has been Chief Executive Officer and President of The Mies Group, Ltd. (a consulting firm). He has also served as a director of Exelon Corporation since 2009 and Mutual of Omaha Insurance Company since 2002.

 

 

From November 2001 until his retirement in November 2004, Mr. Schievelbein was President of Northrop Grumman Newport News, a subsidiary of the Northrop Grumman Corporation, a global defense company. From October 1995 to October 2001, he served as Executive Vice President and Chief Operating Officer of Newport News Shipbuilding, Inc. Mr. Schievelbein has also served as a director of The Brinks Company since 2009 and New York Life Insurance Company since 2006.

 

 

From February 2000 until his retirement in May 2009, Mr. Trice was Chief Executive Officer and Chairman of the Board (since September 2004) of Newfield Exploration Company, an oil and natural gas exploration and production company. He has served as the non-executive Chairman of the Board of Directors of Newfield Exploration Company since May 2009, and as a director of New Jersey Resources Corporation since 2004 and Hornbeck Offshore Services, Inc. since 2002. Mr. Trice also previously served as a director of Grant PrideCo from 2003 to 2008.

 

 

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

 

 

We maintain a corporate governance section on our Web site which contains copies of our principal governance documents. The corporate governance section may be found at www.mcdermott.com at “Corporate Governance — Board Committees” and “Corporate Governance — Governance Policies.” The corporate governance section contains the following documents:

 

 

In addition, our Code of Business Conduct may be found on our Web site at www.mcdermott.com at “Corporate Governance — Code of Conduct.”

 

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

 

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

 

 

In determining the independence of the directors, our Board considered ordinary course transactions between us and other entities with which the directors are associated, none of which were determined to constitute a material relationship with us. Messrs. McWilliams, Schievelbein and Trice have no relationship with McDermott, except as a director and stockholder. Messrs. Bookout, Brown, Cambre, Goldman, Hanks, Kingsley and Admiral Mies are directors of entities with which we transact business in the ordinary course, and Mr. Bookout is also an outside consultant for an affiliate of an entity with which we transact business in the ordinary course. Our Board also considered unsolicited contributions by us to charitable organizations with which the directors were associated. Admiral Mies and Mr. Hanks each serve as a director of a separate charitable organization to which we made unsolicited contributions between 2007 and 2009. Mr. Bookout’s spouse serves as a director of a charitable organization to which we made an unsolicited contribution in 2007. The charitable contributions described above were in the usual course of our annual giving programs pursuant to which we made over $1.1 million in total 2009 contributions to more than 220 charitable organizations.

 

Our independent directors meet in executive session without management on a regular basis. Currently, Ronald C. Cambre, our non-executive Chairman of the Board, serves as the presiding director for these executive sessions. Stockholders or other interested persons may send written communications to the independent members of our Board, addressed to Board of Directors (independent members), c/o McDermott International, Inc., Corporate Secretary’s Office, 777 N. Eldridge Pkwy., Houston, Texas 77079. Information regarding this process is posted on our Web site at www.mcdermott.com under “Corporate Governance — Board Committees.”

 

Our Board met 12 times during 2009.  All directors attended 75% or more of the meetings of the Board and of the committees on which they served during 2009. In addition, as reflected in our Corporate Governance Guidelines, we have adopted a policy that each member of our Board must make reasonable

efforts to attend our Annual Meeting. All directors then serving on the Board attended our 2009 Annual Meeting.

 

Our Board currently separates the positions of Chief Executive Officer and Chairman of the Board. Mr. Fees serves as our Chief Executive Officer, and Mr. Cambre serves as our non-executive Chairman. Our Board believes that this leadership structure is appropriate for McDermott at this time because it allows Mr. Fees, who was appointed Chief Executive Officer in October 2008, to set our strategic direction and manage our day-to-day operations and performance, while Mr. Cambre is able to set the Board’s agenda and lead the Board while also monitoring and objectively evaluating Mr. Fees’ performance as Chief Executive Officer.

 

As part of its oversight function, the Board monitors various risks that McDermott faces. Our Chief Risk Officer administers our Enterprise Risk Program, or ERP, and presents information to senior management and the Board on matters relating to the ERP. In connection with the ERP, the Board reviewed key external, strategic, operational and financial risks and discussed the effectiveness of current efforts to mitigate certain focus risks. The Audit Committee further assists the Board in fulfilling its oversight responsibility by meeting periodically with management to review risk exposures and discuss McDermott’s policies and guidelines concerning risk assessment and risk management.

 

Our Board currently has, and appoints the members of, standing Audit, Compensation, Finance and Governance Committees. Each of those committees is comprised entirely of independent nonmanagement directors and has a written charter approved by the Board. The current charter for each standing Board committee is posted on our Web site at www.mcdermott.com under “Corporate Governance — Board Committees.” Additionally, in connection with the proposed spin-off of B&W, our Board established a special Restructuring Committee in January 2010.

 

The current members of the committees are identified below.

 

Audit Committee:

 

 

During the year ended December 31, 2009, the Audit Committee met four times. The Audit Committee’s role is financial oversight. Our management is responsible for preparing financial statements, and our independent registered public accounting firm is responsible for auditing those financial statements. The Audit Committee is not providing any expert or special assurance as to our financial statements or any professional certification as to the independent registered public accounting firm’s work.

 

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

 

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

 

Compensation Committee:

 

 

During the year ended December 31, 2009, the Compensation Committee met eight times. The Compensation Committee has overall responsibility for our officer compensation plans, policies and programs and has the authority to engage and terminate any compensation consultant or other advisors to assist the committee in the discharge of its responsibilities. 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. 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. The Compensation Committee considers recommendations from our Chief Executive Officer regarding the compensation of our executive officers. Please see the “Compensation

Discussion and Analysis” and “Compensation of Executive Officers” sections of this proxy statement for information about our 2009 executive officer compensation, including a discussion of the role of the compensation consultant.

 

The Compensation Committee regularly reviews the design of our significant compensation programs with the assistance of its compensation consultant. We believe our compensation programs motivate and retain our employees while allowing for appropriate levels of business risk through some of the following features:

 

 

The Compensation Committee administers our Executive Incentive Compensation Plan, or EICP, under which it awards annual cash-based incentive compensation to our officers based on the attainment of annual performance goals. The Compensation Committee approves, among other things, target EICP compensation for each officer, expressed as a percentage of the officer’s base salary for that year, and financial goals applicable to EICP compensation. The Compensation Committee authorized our Chief Executive Officer to establish individual goals for our other executive officers applicable to EICP compensation and, in coordination with his direct reports, to select such other officers and key employees to participate in the EICP and establish appropriate individual performance goals for them. Under both our 2001 Directors and Officers Long-Term Incentive Plan, which we refer to as the 2001 D&O Plan, and our 2009 McDermott International, Inc. Long-Term Incentive Plan, which we refer to as the 2009 LTIP, our Compensation Committee may delegate some of its duties to our Chief Executive Officer or other senior

officers. Our restricted stock awards granted in 2008 under the 2001 D&O Plan provide for accelerated vesting at the Compensation Committee’s discretion if the participant retires and is at least 60 years of age with at least 10 years of service. To facilitate a timely determination in these instances, the Compensation Committee has authorized our General Counsel and Vice President of Human Resources, acting jointly, to consider and determine whether to approve any request for such accelerated vesting.

 

Finance Committee:

 

 

During the year ended December 31, 2009, the Finance Committee met seven times. The Finance Committee has the overall responsibility of reviewing and overseeing financial policies (including any dividend recommendations and stock repurchase programs) and financial strategies, mergers, acquisitions, financings, liabilities, investment performance of our pension plans and the capital structures of McDermott and its subsidiaries. Generally, the Finance Committee has responsibility over many activities up to $50 million, and for such activities involving amounts over $50 million, the Finance Committee will review the activity and make a recommendation to the Board.

 

Governance Committee:

 

 

During the year ended December 31, 2009, the Governance Committee met seven times. This committee, in addition to other matters, recommends to our Board of Directors: (1) the qualifications, term limits and nomination and election procedures relating to our directors; (2) nominees for election to our Board of Directors; and (3) compensation of nonmanagement directors. This committee will consider individuals recommended by stockholders for nomination as directors in accordance with the procedures described under “Stockholders’ Proposals.” Our Governance Committee has primary oversight responsibility for our compliance and ethics program, excluding certain oversight responsibilities assigned to the Audit Committee, and our director and officer insurance program. In conjunction with the Compensation Committee, the Governance Committee oversees the annual evaluation of our Chief Executive Officer.

 

In May 2009, at the request of the Chairman of the Governance Committee, Hewitt performed a market analysis of nonemployee director compensation using our Custom Peer Group (as defined in “Compensation Discussion and Analysis”) and made recommendations regarding nonemployee director compensation to the Governance Committee. Based on those recommendations, the Governance Committee recommended no changes in the form and amounts of nonmanagement director compensation for 2009. Our management is not substantively involved in Hewitt’s market analysis or recommendation regarding nonmanagement director compensation.

 

Restructuring Committee:

 

 

In connection with the proposed spin-off of B&W, in January 2010 our Board established a special Restructuring Committee. The Restructuring Committee has overall responsibility for reviewing and evaluating the details of the proposed separation, including significant financial, governance and other policies and matters.

 

All members of our Compensation Committee are independent in accordance with the New York Stock Exchange listing standards. No member of the Compensation Committee (1) was, during the year ended December 31, 2009, or had previously been, an officer or employee of McDermott or any of its subsidiaries or (2) had any material interest in a transaction of McDermott or a business relationship with, or any indebtedness to, McDermott. No interlocking relationship existed during the year ended December 31, 2009 between any member of the Board of Directors or the Compensation Committee and an executive officer of McDermott.

 

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

 

 

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

 

 

While McDermott does not have a specific policy addressing board diversity, the Board recognizes the benefits of a diversified board and believes that any search for potential director candidates should consider diversity as to gender, ethnic background and personal and professional experiences. In 2009 our Governance Committee engaged Cornerstone International Group (“Cornerstone”), an independent director search firm, in order to assist in selecting director candidates. Cornerstone initially identified over 1,000 men and women as candidates, representing a cross-section of ethnicities, industries, educational backgrounds, experience and professional affiliations. From this pool, nine candidates were presented to the Governance Committee for review. Following lengthy discussions in which the Governance Committee considered each candidate’s experience, education, prior board memberships, key accomplishments, areas of expertise, professional affiliations and industry experience, among other factors, the Governance Committee recommended Mr. Hanks and Mr. Trice to the Board for appointment as directors.

 

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

 

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

 

The Governance Committee will consider candidates identified through the processes described above and will evaluate each of them, including incumbents, based on the same criteria. The Governance Committee also takes into account the contributions of incumbent directors as Board members and the benefits to us arising from their experience on the Board. Although the Governance Committee will consider candidates identified by stockholders, the Governance Committee has sole discretion whether to recommend those candidates to the Board. None of the director nominees for the 2010 Annual Meeting are standing for election for the first time, with the exception of Messrs. Hanks and Trice, who were each appointed to the Board in May 2009.

 

In nominating individuals to become members of the Board of Directors, the Governance Committee considers the experience, qualifications, and skills of each potential member. Each nominee brings a strong and unique background and set of skills to the Board, giving the Board as a whole competence and experience in a wide variety of areas. In concluding each individual was an appropriate nominee, the Governance Committee and the Board of Directors considered the following:

 

 

 

 

 

The table below summarizes the compensation earned by or paid to our nonemployee directors during the year ended December 31, 2009. Pursuant to our By-Laws, which require a director to retire at the first Annual Meeting of Stockholders after attaining the age of 72, Robert L. Howard retired from the Board of Directors at the 2009 Annual Meeting. Messrs. Hanks and Trice were appointed to the Board in May 2009.

 

 

 

The compensation for nonemployee directors for 2009 was comprised of cash and equity compensation earned by directors in connection with their service as directors. The cash compensation consisted of retainers and meeting fees described in more detail below. The equity compensation consisted of restricted stock awards issued under our 2009 LTIP. Employee directors do not receive any compensation for their service as directors.

 

Fees Earned or Paid in Cash.  Under our current director compensation program, cash compensation for nonemployee directors consists of the following:

 

 

As of January 1, 2010, any director who attends a meeting of the Restructuring Committee receives a fee of $1,750 for each meeting personally attended and $1,000 for each meeting attended by telephone, and the Non-Executive Chairman receives a fee of $1,750 for any committee meeting personally attended and $1,000 for any committee meeting attended by telephone.

 

The chairs of Board committees and the Non-Executive Chairman receive additional annual retainers as follows (pro-rated for partial terms):

 

 

 

Beginning in May 2009, all director annual retainers are paid in quarterly installments.

 

Stock and Option Awards.  In addition to the fees provided to our directors described above, we granted equity awards to our directors under the 2009 LTIP.

 

Under the 2009 LTIP, nonemployee directors may be granted stock option, restricted stock, performance unit, restricted stock unit and performance share awards, in such amounts and on such terms, as the Compensation Committee or the Board may determine from time to time. In 2009, each of our nonemployee directors received 6,060 shares of restricted stock. Under the terms of each award, the restricted stock vested immediately on the grant date.

 

The amounts reported in the “Stock Awards” column represent the grant date fair value computed in accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Topic 718. Under FASB ASC Topic 718, the fair value of restricted stock 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.

 

The following table reflects the number of shares and grant date fair value, computed in accordance with FASB ASC Topic 718, with respect to each restricted stock award granted to nonemployee directors in 2009 and the restricted stock and stock option awards each nonemployee director had outstanding as of December 31, 2008.

 

Equity Awards Granted to Directors in 2009 and
Outstanding at December 31, 2009

 

 

 

The following are named executive officer profiles that summarize the compensation earned or paid in 2009 to our Chief Executive Officer, our Chief Financial Officer and our three other most highly compensated executive officers, whom we refer to as our “Named Executives.” The individual executive profiles provide biographical information, including age as of May 7, and summarize the compensation disclosures that are provided in the Compensation Discussion and Analysis and executive compensation tables in this proxy statement. These profiles are supplemental, and are being provided in addition to, and not in substitution for, the detailed compensation tables required by the Securities Exchange Commission that follow the Compensation Discussion and Analysis. We believe these profiles provide stockholders with a concise and easy to understand summary of 2009 compensation. The compensation information presented in the following executive profiles is derived from the more detailed compensation tables that begin on page 42 of this proxy statement. Please consult those tables and the accompanying footnotes for an explanation of how the compensation information is calculated.

 

John A. Fees

 

Chief Executive Officer & Director, Mcdermott International, Inc.

 

Age: 52

 

Tenure with McDermott: 31 years

 

Mr. Fees has been Chief Executive Officer of McDermott since October 2008. He joined our company in 1979 and served as President and Chief Executive Officer of B&W from January 2007 to October 2008; President and Chief Operating Officer of BWX Technologies, Inc., a subsidiary of ours, from September 2002 to January 2007; and President, General Manager of BWXT Services, Inc., a subsidiary of BWX Technologies, Inc., from September 1997 to November 2002. His earlier positions at subsidiaries of B&W include Vice President and General Manager.

 

2009 Compensation

 

 

2009 Total Compensation

 

 

 

Equity Awarded in 2009

 

 

Michael S. Taff

 

Chief Financial Officer, Mcdermott International, Inc.

 

Age: 48

 

Tenure with McDermott: 5 years

 

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

 

2009 Compensation

 

 

 

2009 Total Compensation

 

 

 

Equity Awarded in 2009

 

 

Brandon C. Bethards

 

President & Chief Executive Officer, The Babcock & Wilcox Company

 

Age: 62

 

Tenure with McDermott: 36 years

 

Mr. Bethards has been President and Chief Executive Officer of B&W since November 2008 after serving as Interim Chief Executive Officer since September 2008. He joined Babcock & Wilcox Power Generation Group, Inc., a major operating subsidiary of B&W, in the early 1970s and served most recently as its President from January 2007 to October 2008 and Senior Vice President and General Manager of its Fossil Power division from February 2001 to January 2007. His earlier positions within the Power Generation Group include Vice President of Business Development, General Manager, District Engineer and Field Service Engineer.

 

2009 Compensation

 

 

 

2009 Total Compensation

 

 

 

Equity Awarded in 2009

 

 

Stephen M. Johnson

 

President & Chief Executive Officer, J. Ray Mcdermott, S.A.

 

Age: 58

 

Tenure with McDermott: 1 year

 

Mr. Johnson has been President and Chief Executive Officer of J. Ray McDermott, S.A., one of our subsidiaries, since January 2010. Previously, he served as our President and Chief Operating Officer from April 2009 to December 2009, and from 2001 to 2008 as Senior Executive Vice President and Member, Office of the Chairman, at Washington Group International, Inc. (“Washington Group”) and at URS Corporation, which acquired Washington Group in 2007. Prior to joining Washington Group, Mr. Johnson held various management positions within Fluor Corporation, an engineering, procurement, construction and maintenance services company, from 1973 through 2001.

 

2009 Compensation

 

 

 

2009 Total Compensation

 

 

 

Equity Awarded in 2009

 

 

Robert A. Deason

 

Former President & Chief Executive Officer, J. Ray Mcdermott, S.A.

 

Age: 64

 

Tenure with McDermott: 7 years

 

Mr. Deason served as President and Chief Executive Officer of our subsidiary, J. Ray McDermott, S.A., from June 2007 to January 2010. He currently serves as its Executive Vice President and is expected to retire at the end of March 2010. Previously, he served as President and Chief Operating Officer of J. Ray McDermott, S.A. from March 2003, when he joined the Company. Prior to that, Mr. Deason served as a vice president with Fluor Corporation, an engineering, procurement, construction and maintenance services company.

 

2009 Compensation

 

 

 

2009 Total Compensation

 

 

 

Equity Awarded in 2009

 

 

 

Set forth below is the age (as of May 7, 2010), the principal positions held with McDermott or our subsidiaries, and other business experience information for each of our current executive officers other than our Named Executives. For information on our Named Executives, see “Named Executives Profiles” above. Unless we otherwise specify, all positions described below are positions with McDermott International, Inc.

 

Dennis S. Baldwin, 49, has been Vice President and Chief Accounting Officer of McDermott since October 2007. Previously, he served as Chief Accounting Officer of Integrated Electrical Services, Inc,. a national electrical contracting company, from February 2007 to October 2007; as Vice President and Corporate Controller of Veritas DGC, Inc., a seismic company which provides geophysical services to the petroleum industry, from 2005 to 2007; and as Vice President and Corporate Controller of Universal Compression Holdings, Inc., a company providing gas compression services to the domestic and international gas industry, from 2002 to 2005.

 

Liane K. Hinrichs, 52, has been our Senior Vice President, General Counsel and Corporate Secretary since October 2008. Previously, she served as our Vice President, General Counsel and Corporate Secretary from January 2007 to September 2008; Corporate Secretary and Associate General Counsel, Corporate Compliance and Transactions from January 2006 to December 2006; Associate General Counsel, Transactions, Corporate Compliance and Deputy Corporate Secretary from June 2004 to December 2005; Assistant General Counsel, Corporate Secretary and Transactions from October 2001 to May 2004; and Senior Counsel from May 1999 to September 2001. Prior to joining McDermott in 1999, she was a partner in a New Orleans law firm.

 

Preston Johnson, Jr., 54, has been our Senior Vice President, Human Resources since May 2008. Previously, Mr. Johnson served as Vice President, Global Human Resources and Health Services at Anadarko Petroleum Corporation (a global oil and natural gas exploration and production company) from October 2005 to May 2008; Senior Vice President for Human Resources and Business Services at CenterPoint Energy, Inc. (an electric, gas, pipeline and power distribution and delivery company) from March 2000 to October 2005; and Global Director, Human Resources at The Dow Chemical Company (a diversified chemical company) from June 1977 to March 2000.

 

John D. Krueger, 63, has been our Vice President, Corporate Development and Strategic Planning since October 2008. He joined the Company in 1976 and served most recently as Vice President, Planning and Business Development for B&W from October 2006 to September 2008 and Vice President, Business Development of B&W from March 2004 to October 2006. He also served as Vice President, Business Development for J. Ray McDermott, S.A. from June 1998 to March 2004 and as Vice President, Planning and Business Development of McDermott International, Inc., from June 1993 to June 1998. His prior positions within the Company include Director of Corporate Business Planning & Analysis, Director of Corporate Development and Senior Analyst.

 

James C. Lewis, 54, has been our Vice President, Treasurer since March 2006. Previously, he was: Assistant Treasurer of McDermott from July 2003 to February 2006; Vice President, Structuring of Enron Corp., from December 2001 to July 2003 and Vice President, Structuring of Enron Global Markets, LLC, a subsidiary of Enron Corp., from September 2000 to December 2001.

 

John T. Nesser, III, 61, has been Executive Vice President and Chief Operating Officer of J. Ray McDermott, S.A. since October 2008. Previously, he served as our Executive Vice President, Chief Administrative and Legal Officer from January 2007 to September 2008; Executive Vice President and General Counsel from January 2006 to January 2007; Executive Vice President, General Counsel and Corporate Secretary from February 2001 to January 2006; Senior Vice President, General Counsel and Corporate Secretary from January 2000 to February 2001; Vice President and Associate General Counsel from June 1999 to January 2000; and Associate General Counsel from October 1998 to June 1999. Previously, he served as a managing partner of Nesser, King & LeBlanc, a New Orleans law firm, which he co-founded in 1985.

 

The following Compensation Discussion and Analysis, or CD&A, provides information relevant to understanding the 2009 compensation of our executive officers identified in the Summary Compensation Table, whom we refer to as our Named Executives. The following discussion also contains statements regarding future individual and company performance targets and goals. These targets and goals are disclosed in the limited context of 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 to other contexts.

 

Summary

 

The Compensation Committee continued its commitment to targeting reasonable and competitive compensation for our Named Executives in 2009, with a significant portion of that compensation being performance-based. Specifically, for Named Executives (other than Mr. Robert A. Deason):

 

 

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. 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.

 

The Compensation Committee believes 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 shareholder value. With this belief in mind, the Compensation Committee continued to tie annual and long-term incentive compensation to operating income in 2009. However, the Compensation Committee incorporated total shareholder return relative to select peer companies as an additional performance metric in 2009 long-term incentive compensation, to help align executive compensation with shareholder return. As a result of the performance metrics used and the emphasis on longer-term performance incentives, the Compensation Committee believes that our compensation practices help to create shareholder value without encouraging executives to take unnecessary and excessive risks to earn incentive compensation. See “Corporate Governance — Board of Directors and Its Committee — Compensation Committee” for information regarding the relationship between our compensation practices and risks.

 

The performance-based compensation that paid out in 2009 also reflected the Compensation Committee’s commitment to pay for performance. McDermott’s cumulative operating income of over $1.8 billion for the three-year period ended December 31, 2009 represents the largest amount of operating income in any three-year period since The Babcock & Wilcox Company was acquired by McDermott in 1978. As a result, our Named Executives earned payments at the maximum level under performance shares granted in 2006 and which vested in 2009. Most of our Named Executives were also eligible to earn the maximum payout under our annual incentive compensation program based on consolidated operating income of $546.5 million for 2009. As designed by the Compensation Committee, individual performance was the differentiator among Named Executive’s annual incentive compensation payouts for 2009.

 

In April 2009, Mr. Stephen M. Johnson joined McDermott as our President 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.

 

 

Overview of Compensation Programs
and Objectives

 

Philosophy and Objectives.  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:

 

 

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 on Form 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:

 

 

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 targets 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 appropriateness and/or competitiveness of a Named Executive’s compensation.

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 goals and/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 operations and/or energy. The component companies of this group include:

 

 

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, construction and/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:

 

 

 

 

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 on Form 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 the J.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.

 

2009 Target Total Direct Compensation Summary

 

 

 

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. On average, performance-based compensation accounted for approximately 56% of a Named Executive’s 2009 target total direct compensation and 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

 

 

 

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

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 earnings and/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:

 

 

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 EICP 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

 

 

 

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

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

 

 

 

 

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.

 

 

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:

 

 

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.

 

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.

 

 

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

 

 

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 mPower^tm modular nuclear reactor initiative. Relative to annual incentive compensation, the mPower^tm initiative is longer-term in nature and to avoid adversely impacting Named Executive’s EICP compensation for strategic investments, approximately $13 million of the mPower^tm 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.

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:

 

 

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

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:

 

 

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

 

 

 

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,

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 value 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 on Form 10-K or quarterly report on Form 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

incremental cost for personal use of aircraft based on the actual cost incurred by us for the flight, including:

 

 

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 a gross-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 tax gross-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:

 

 

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 annual cost-of-living increases. In lieu of future defined benefit plan accruals under those plans, we further amended our Thrift Plan to provide an automatic cash contribution

to the Thrift Plan accounts of affected employees and new hires in an amount between 3% and 8% of the 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 annual cost-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 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 of retirement or termination. Annually, we credit a participant’s notional account with an amount equal to 5% of the participant’s prior-year base salary and annual bonus paid in the prior year. 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. 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 as of December 31, 2008. Of the Named Executives with a SERP account balance as of the end of 2008, only Mr. Taff’s account was not fully vested. At the time of the amendment, Mr. Taff was 80% vested in his SERP balance. As a result of Mr. Johnson’s employment commencing April 1, 2009, he did not have a SERP balance and was therefore unaffected by this amendment. Please see 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 for change-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, the Compensation Committee has offered change-in-control agreements to key senior executives, including Named Executives, since 2005. Our change-in-control agreements generally provide 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, a cash payment equal to two years of medical benefits and an additional tax gross-up in the event of any excise tax liability. Mr. Johnson received a change-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 tax gross-up payment in connection with any new change-in-control agreements and, as a result, Mr. Johnson’s agreement does not contain such a tax gross-up provision.

 

Additionally, 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. 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 Named Executives, as well as other plans and

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 the Change-in-Control Agreements or other Company compensation plans, the Compensation Committee determined that the need 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 tax gross-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 vested 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, the Compensation Committee determined to add the vesting of Thrift Plan accounts to the severance benefits to avoid any ambiguity on that point. The Thrift Plan normally vests after three years of service. As a result of his commencement of employment in 2009, Mr. Johnson is 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 depending on the executive’s position. The guidelines require our Chief Executive Officer to own and retain a minimum of 100,000 shares of our common stock and our other Named Executives to own and retain at least 35,000 shares. The guidelines require nonmanagement directors to own and retain a minimum of 6,000 shares of our common stock.

 

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

 

 

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

Oliver D. Kingsley, Jr.

David A. Trice

 

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.

 

 

 

 

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 value 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:

 

Grant Date Fair Value Assuming
Maximum Performance

 

 

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 on Form 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

 

 

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.

Tax Gross-Ups.  The tax gross-ups reported for 2009 under “All Other Compensation” are attributable to the following:

 

 

Perquisites.  Perquisites and other personal benefits received by a Named Executive are not included if their aggregate value does not exceed $10,000. For Messrs. Fees, Bethards, Deason and Johnson, the values of the perquisites and other personal benefits reported for 2009 are as follows:

 

 

 

 

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.