YOUR VOTE IS IMPORTANT.

 

Whether or not you plan to attend the meeting, please take a few minutes now to vote your shares.

 

As more fully described in the Notice, the Board of Directors of McDermott International, Inc. (“McDermott” or “MII”) 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 2011 Annual Meeting of Stockholders, which will take place on May 6, 2011. We mailed the Notice to our stockholders beginning March 25, 2011, and our proxy materials were posted on the website 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 2011 Annual Meeting of Stockholders. We solicit proxies to give all stockholders 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.

 

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 $12,500, 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 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 7, 2011 as the record date (the “Record Date”) for determining stockholders entitled to vote at the Annual Meeting. This means that if you owned McDermott common stock on the Record Date, you may vote your shares on

the matters to be considered by our stockholders at the Annual Meeting.

 

There were 233,914,181 shares of our common stock outstanding on the Record Date. Each outstanding share of common stock entitles its holder to one vote on each matter to be acted on at the meeting.

 

Most stockholders can vote by proxy in three ways:

 

 

If you are a stockholder of record, i.e. a stockholder registered with our transfer agent and registrar, Computershare Trust Company, N.A., on the Record Date, 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 mailing 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, i.e. through a broker or nominee, you should refer to the instructions provided by your broker or nominee for further information. 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. The election of directors is not considered a routine matter. Additionally, stockholder actions on executive compensation matters (including advisory votes on executive compensation, the frequency with which to hold the advisory vote on executive compensation and the approval of our Executive Incentive Compensation Plan (the “EICP”)) are not considered routine matters. That means that brokers

may not vote your shares with respect to those matters 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.

 

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.

 

If you are a stockholder 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.

 

If your shares are 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:

 

 

Our By-Laws provide that, in all matters arising at a stockholders’ meeting, a majority of the voting power of our outstanding shares present in person or represented by proxy at the meeting and entitled to vote and actually voting on the matter shall be necessary and sufficient for approval, except where some larger percentage is required by applicable law or our articles of incorporation. No such larger percentage is applicable to any of the items we are asking you to vote on at the meeting. Because abstentions are not actual votes with respect to a proposal, they will have no effect on the outcome of the vote on a proposal. If none of the alternatives in the advisory vote to determine the frequency of the advisory vote on executive

compensation receives a majority vote, we will consider the alternative with the highest number of votes cast by stockholders to be the alternative that has been selected by stockholders.

 

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 advisory vote to determine the frequency with which to hold an advisory vote on executive compensation, you may vote to hold the advisory vote every “1 year”, “2 years”, or “3 years” or abstain from voting. For each other proposal, you may vote “FOR” or “AGAINST” or abstain from voting.

 

Our Corporate Governance Guidelines provide that, in an uncontested election of directors, the Board expects any incumbent director nominee who does not receive a “FOR” vote by a majority of shares present in person or by proxy and entitled to vote on the matter to promptly tender his or her resignation to the Governance Committee, subject to acceptance by our Board. Pursuant to our Corporate Governance Guidelines, the Governance Committee will make a recommendation to the Board with respect to the director nominee’s resignation and the Board will consider the recommendation and take appropriate action within 120 days from the date of the certification of the election results.

 

If you submit a signed proxy card without specifying your vote, your shares will be voted “FOR” the election of all director nominees, the advisory vote on executive compensation, the approval of our EICP and the ratification of our Audit Committee’s appointment of Deloitte as our independent registered public accounting firm for the year ending December 31, 2011. If you submit a signed proxy card without specifying your vote on the frequency of the advisory vote on executive compensation, your shares will be voted to require the advisory vote every year, in accordance with the recommendation of our Board of Directors.

 

If your shares are held 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. Your broker will not be entitled to vote your shares in its discretion in the election of directors or on the advisory vote on executive compensation, the advisory vote on the frequency with which to hold an advisory vote on executive compensation and the approval of our EICP. If you hold your shares in street name and you do not instruct your broker how to vote on these proposals, no votes will be cast on your behalf on that matter. Broker non-votes are not considered a vote “FOR” or “AGAINST” a proposal (or with respect to the advisory vote on the frequency with which to hold an advisory vote on executive compensation, a vote for “1 year,” “2 years” or “3 years”) and therefore will have no effect on the vote on the election of directors, the advisory vote on executive compensation, the advisory vote on the frequency with which to hold an advisory vote on executive compensation or the approval of our EICP.

 

If you are a stockholder 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:

 

 

 

(ITEM 1)

 

In 2010, pursuant to a previously approved amendment to our Articles of Incorporation, our Board ceased to be classified and all directors became subject to annual election.

 

Our Board has nominated eight persons for election as directors at this year’s Annual Meeting. Stephen M. Johnson, our President and Chief Executive Officer, was appointed as a director in July 2010 in connection with the spin-off of our former subsidiary, The Babcock & Wilcox Company (“B&W”), which we completed through a distribution of the common stock of B&W to our stockholders effective as of July 30, 2010 (the “Spin-off”). Mary Shafer-Malicki was appointed as a director on February 17, 2011.

 

On the nomination of our Board, John F. Bookout, III, Roger A. Brown, Stephen G. Hanks, D. Bradley McWilliams, Thomas C. Schievelbein and David A. Trice will stand for reelection as directors, and Stephen M. Johnson and Mary Shafer-Malicki will stand for election as a director, 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 reelection 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. Pursuant to these By-Law requirements, Ronald C. Cambre, our Chairman of the Board, will retire from our Board after 11 years of service, effective at this year’s Annual Meeting. It is anticipated that our Board will appoint a new Chairman or a lead director at the Board meeting held in connection with the Annual Meeting.

 

Unless otherwise directed, the persons named as proxies on the enclosed proxy card intend to vote “FOR” the election of the nominees. If any nominee should become unavailable for election, the shares will be voted for such substitute nominee as may be proposed by our Board of Directors. However, we are not aware of any circumstances that would prevent any of the nominees from serving.

 

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. The Governance Committee and the Board of Directors considered the following information, including the specific experience, qualifications, attributes or skills, in concluding each individual was an appropriate nominee to serve as a member of our Board for the term commencing at this year’s Annual Meeting (ages are as of May 6, 2011).

 

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:

 

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

 

In addition, our Code of Business Conduct may be found on our 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, our 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 addition, our board also determined, prior to their resignations, that the following directors who served during 2010 prior to the completion of the Spin-off were independent and met our categorical standards: Robert W. Goldman, Oliver D. Kingsley, Jr. and Richard W. Mies.

 

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. Cambre, Schievelbein and Trice have no relationship with McDermott, except as a director and stockholder. Messrs. Brown and Hanks and Ms. Shafer-Malicki are directors of entities with which we transact business in the ordinary course. Mr. Bookout is an outside consultant for an affiliate of an entity with which we transact business in the ordinary course. Messrs. Hanks and McWilliams are directors of B&W, which pursuant to the transition services agreements entered into by McDermott and B&W prior to the Spin-off, McDermott has transacted with following the Spin-off. Our Board also considered unsolicited contributions by us to charitable organizations with which the directors were associated. Mr. Hanks serves as a director of a charitable organization to which we made unsolicited contributions between 2008 and 2009. The charitable contribution was in the usual course of our annual giving programs.

 

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, 757 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 13 times during 2010.  All directors attended 75% or more of the meetings of the Board and of the committees on which they served during 2010. 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 2010 Annual Meeting.

 

Our Board currently separates the positions of Chief Executive Officer and Chairman of the Board. Mr. Johnson 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. Johnson, who was appointed Chief Executive Officer in July 2010, to set our strategic direction and manage our day-to-day operations and performance, while our non-executive Chairman is able to lead the Board in its responsibilities while also monitoring and objectively evaluating Mr. Johnson’s 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. Our Board has delegated to each of the Audit, Compensation, Finance and Governance Committees oversight of risks for each committee’s oversight areas, as set forth in their respective charters, and has directed that each committee periodically report to the Board on those risks.

 

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 non-management 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 January 2010 our Board established a special Restructuring Committee in connection with the Spin-off. Following the completion of the Spin-off, that committee was dissolved in August 2010.

The current members of the committees are identified below. Attendance at committee meetings is open to every director, regardless of whether he/she is a member of the committee.

 

Audit Committee:

 

Mr. Trice (Chairman)
Mr. Hanks
Mr. McWilliams

 

During the year ended December 31, 2010, 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. Trice, Hanks and McWilliams 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:

 

Mr. Schievelbein (Chairman)
Mr. Brown
Ms. Shafer-Malicki
Mr. Trice

 

During the year ended December 31, 2010, the Compensation Committee met seven 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.

 

In November 2010, after a selection process, the Compensation Committee selected Pay Governance, LLC as its compensation consultant, and Pay

Governance has been advising the Compensation Committee on the matters described above since that time. From February 2010 to November 2010, Meridian Compensation Partners LLC, or Meridian, which spun-off from Hewitt Associates LLC in February 2010, served as the consultant to the Compensation Committee. Prior to its spin-off of Meridian, Hewitt Associates LLC served as the consultant to the Compensation Committee since October 2007. 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 2010 executive officer compensation, including a discussion of the role of the Compensation Committee’s compensation consultant.

 

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. For 2010, 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.

 

Finance Committee:

 

Mr. McWilliams (Chairman)
Mr. Bookout
Mr. Hanks
Ms. Shafer-Malicki

 

During the year ended December 31, 2010, the Finance Committee met six 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 such matters 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:

 

Mr. Brown (Chairman)
Mr. Bookout
Mr. Schievelbein

 

During the year ended December 31, 2010, the Governance Committee met six 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 non-management 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. Additionally, the Governance Committee reviews our executive management succession planning on at least an annual basis.

 

In May 2010, at the request of the Chairman of the Governance Committee, Meridian 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 non-management director compensation for 2010. Our management is not substantively involved in Meridian’s market analysis or recommendation regarding non-management director compensation.

 

The Compensation Committee has concluded that risks arising from McDermott’s compensation

policies and practices for McDermott employees are not reasonably likely to have a materially adverse effect on McDermott. In reaching this conclusion, the Compensation Committee considered the policies and practices in the following paragraph.

 

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 executive officer employees while allowing for appropriate levels of business risk through some of the following features:

 

 

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, 2010, 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, 2010 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. The Governance Committee solicits ideas for possible candidates from a number of sources — including independent director candidate search firms, members of the Board and our senior level executives.

 

In 2010, our Governance Committee engaged Russell Reynolds Associates (“Russell Reynolds”), an independent director search firm, in order to assist in selecting director candidates. After review and consideration of approximately 25 prospective candidates identified by Russell Reynolds, Ms. Shafer-Malicki was appointed to the Board on February 17, 2011 in consideration of her extensive experience in our industry and other qualifications.

 

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 2011 Annual Meeting are standing for election for the first time, with the exception of Mr. Johnson and Ms. Shafer-Malicki, who were appointed to the Board in July 2010 and February 2011, respectively.

 

The compensation for nonemployee directors for 2010 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 2010 director compensation program, cash compensation for nonemployee directors consisted of the following:

 

 

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. Until its dissolution in August 2010, any director who attended a meeting of the Restructuring

Committee received a fee of $1,750 for each meeting personally attended and $1,000 for each 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):

 

 

The chair of the Restructuring Committee also received a retainer of $15,000 in 2010.

 

Since 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 in 2010 under the 2009 LTIP.

 

Under the 2009 LTIP, nonemployee directors may be granted stock options, restricted stock, performance units, restricted stock units 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 2010, each of our nonemployee directors received 4,243 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 2010 and the restricted stock and stock option awards each nonemployee director had outstanding as of December 31, 2010.

The following profiles provide summary information regarding the experience and 2010 compensation of our Chief Executive Officer, our Chief Financial Officer and our three other most highly compensated executive officers, who were employed by McDermott as of December 31, 2010, whom we refer to as our “Continuing Named Executives.” The Continuing Named Executives, our former Chief Executive Officer, Mr. John A. Fees, who became Chairman of the Board of Directors of B&W following the Spin-off, our former Chief Financial Officer, Mr. Michael S. Taff, who became Chief Financial Officer of B&W following the Spin-off, and Mr. Brandon C. Bethards, who became the Chief Executive Officer of B&W following the Spin-off, and would have been one of our three other most highly compensated executive officers had he been employed by McDermott as of December 31, 2010, are collectively referred to as our “Named Executives.” Information on Messrs. Fees, Taff and Bethards is provided in the

Compensation Discussion and Analysis and the compensation-related tables included in this proxy statement.

 

The Continuing Named Executive profiles provide biographical information, including age as of May 6, 2011, 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. Please consult the more detailed compensation tables and the accompanying footnotes following the Compensation Discussion and Analysis for an explanation of how the compensation information is calculated.

 

 

Age: 59

 

Tenure with McDermott: 2 years

 

Mr. Johnson has served as our President and Chief Executive Officer since July 2010. Previously, he served as: President and Chief Executive Officer of J. Ray McDermott, S.A., one of our subsidiaries, from January 2010 to July 2010; 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.

2010 Compensation

 

 

 

2010 Total Compensation

 

 

 

Equity Awarded in 2010

 

 

 

 

 

Age: 49

 

Tenure with McDermott: 1 year

 

Mr. Elders has served as our Senior Vice President and Chief Financial Officer since July 2010, and served in that capacity at our subsidiary J. Ray McDermott, S.A. from April 2010 to July 2010. Previously, he served as: Executive Vice President and Chief Financial Officer from February 2006 to April 2009, and Senior Financial Advisor from November 2005 to February 2006, of Bristow Group, Inc., a worldwide provider of helicopter services; Director, Financial Consulting of Sirius Solutions, an independent business consulting firm, from July 2005 to February 2006; and Vice President and Chief Accounting Officer of Vetco International, Ltd., a provider of upstream oil and gas production facilities, process systems, technology and products, from August 2004 to May 2005. Mr. Elders spent 20 years (1983-2003) in public accounting firms where he became an audit partner specializing in multi-national energy service companies. Mr. Elders is a Certified Public Accountant.

2010 Compensation

 

 

 

2010 Total Compensation

 

 

 

Equity Awarded in 2010

 

 

 

 

 

Age: 56

 

Tenure with McDermott: 1 year

 

Mr. Carlson has served as our Senior Vice President, Human Resources since July 2010. Previously, he served as: Senior Vice President, Human Resources and Organization Development for our subsidiary J. Ray McDermott, S.A. from March 2010 to July 2010; Senior Vice President, Human Resources of MWH Global, Inc., an energy and environmental engineering, construction and water resource management firm, from 2008 to 2010; and Vice President, Human Resources of KBR, Inc., an engineering, construction and services company, from 2004 to 2008.

2010 Compensation

 

 

 

2010 Total Compensation

 

 

 

Equity Awarded in 2010

 

 

 

 

 

Age: 53

 

Tenure with McDermott: 12 years

 

Ms. Hinrichs 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.

2010 Compensation

 

 

 

2010 Total Compensation

 

 

 

Equity Awarded in 2010

 

 

 

 

 

Age: 62

 

Tenure with McDermott: 13 years

 

Mr. Nesser has been our Executive Vice President and Chief Operating Officer since July 2010. Previously, he served as: Executive Vice President and Chief Operating Officer of J. Ray McDermott, S.A. since October 2008; 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.

2010 Compensation

 

 

 

2010 Total Compensation

 

 

 

Equity Awarded in 2010

 

 

 

 

 

The following Compensation Discussion and Analysis, or CD&A, provides information relevant to understanding the 2010 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.

 

Executive Summary

 

In 2010, our Compensation Committee continued its commitment to targeting reasonable and competitive total direct compensation for our Named Executives, with a significant portion of that compensation being performance-based. The Compensation Committee also took into special consideration the intended Spin-off of our subsidiary, B&W, which was completed on July 30, 2010. Because of the complexity and significance of the anticipated Spin-off and the material changes it would have on the company and its operations, our Compensation Committee implemented compensation practices during this transitional year that differed from our traditional practices. Individual elements of our compensation structure during this transitional year sought to incentivize operational performance, long-term stock appreciation and the completion of the Spin-off, and the individual elements of total direct compensation were structured with these goals in mind.

 

Reflecting our Compensation Committee’s compensation philosophy, compensation arrangements in 2010 for our Named Executives (excluding retention payments made in connection with the Spin-off and the sign-on equity grant provided to Mr. Carlson, as discussed in further detail below) resulted in:

 

 

As in prior years, our Compensation Committee continued to believe that a significant portion of a Named Executive’s compensation should be performance-based, designed to promote and reward the achievement of short-and longer-term objectives that are expected to drive stockholder value. Performance-based compensation for 2010 reflected a balance among the goals of driving operational performance, pursuing long-term stock appreciation and completing the Spin-off. As a result, McDermott continued to utilize traditional metrics, such as tying annual incentives to operating income and granting stock options as a component of long-term incentives, while adding incentives for certain Named Executive Officers based on completion of the Spin-off. In using these performance metrics and emphasizing longer-term performance incentives, the Compensation Committee believes that our compensation practices help to create stockholder value without encouraging executives to take unnecessary and excessive risks to earn incentive compensation. See “Corporate Governance — Board of Directors and Its Committee — Policies and Practices on Risk” for information regarding the relationship between our compensation practices and risks.

 

In anticipation of the Spin-off, the Compensation Committee made certain adjustments within each element of total direct compensation as set forth below:

 

 

 

Highlights of McDermott’s performance in 2010 include:

 

 

Following the completion of the Spin-off, we reviewed our compensation policies and practices and, based on this review, instituted the following changes:

 

 

Additionally, in March 2011, our Compensation Committee returned to the use of performance shares as a component of long-term incentive compensation. Long — term incentive awards to Continuing Named Executives in 2011 were comprised of 50% performance shares, 25% restricted stock units and 25% stock options, excluding Mr. Nesser who did not receive any long-term incentive compensation for 2011 as a result of his intentions to retire by year-end 2011. Combining the grant of performance shares with the continued use of stock options, 75% of target long-term incentive compensation for 2011 is performance-based.

 

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, has designed and administered compensation programs with the participation of our management. These programs generally seek to provide compensation that:

 

 

For 2010, we structured compensation in anticipation of the Spin-off. As a result, compensation arrangements in 2010 sought to balance operational performance, long-term stock appreciation and the completion of the Spin-off.

 

Compensation Consultant.  Our Compensation Committee determined it appropriate to engage a new compensation consultant following the completion of the Spin-off. After a selection process involving six compensation consulting firms, Pay Governance LLC, or “Pay Governance,” was selected, and has served as the consultant to the Compensation Committee on executive and director compensation matters since November 2010. Pay Governance provides advice and analysis to the Compensation Committee on the

design, structure and level of executive and director compensation, attends meetings of the Compensation Committee and participates in executive sessions without members of management present. Prior to November 2010, Meridian Compensation Partners LLC or “Meridian,” (which was spun-off from Hewitt Associates LLC, or “Hewitt,” in February 2010), served as the consultant to the Compensation Committee on executive and director compensation. Prior to its spin-off of Meridian, Hewitt served as the consultant to the Compensation Committee since October 2007.

 

In connection with their services to the Compensation Committee, both Pay Governance and Meridian 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 2010, neither Pay Governance nor Meridian performed any services for McDermott other than as described above. Hewitt assisted our management in preparing the performance graph included in our annual report on Form 10-K for the year ended December 31, 2010. 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 2010.

 

Elements.  With the objectives outlined above in mind, the Compensation Committee has approved 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 stockholders. Performance-based long-term incentive compensation is designed to promote the achievement of performance

goals, only over a longer period — typically of three years. Additionally, in 2010, retention grants were made to certain of our Named Executives in connection with their continued employment through the Spin-off. The retention grants were made pursuant to the terms of the retention agreements entered into with those Named Executives in December 2009. For more information on these retention grants, see “Long-Term Incentive Compensation” below.

 

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 approximately 15% of the median compensation of our market for comparable positions. Throughout this CD&A, we refer to compensation that is within approximately 15% of market median as “market range” compensation.

 

The Compensation Committee may set elements of total direct compensation above or below the market range to account for a Named Executive’s performance and experience, internal equity and other factors or situations that are not typically captured by looking at standard market data and practices and that the Compensation Committee deems relevant to the appropriateness and/or competitiveness of a Named Executive’s compensation.

 

When making decisions regarding individual compensation elements, the Compensation Committee also considered the effect on the Named Executive’s target total direct compensation and target total cash-based compensation (annual base salary and annual incentives), as applicable. Our Compensation Committee’s goal is to establish target compensation for each element 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 for each element of total direct 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. As a result, the annual base salary, target annual incentive compensation and target long-term incentive compensation as a whole for each of the Named Executives is benchmarked. However, the specific performance metrics and performance levels used within elements of annual and long-term compensation are designed for the principal purpose of supporting our strategic and financial goals and/or driving the creation of stockholder value, and, as a result, are not generally benchmarked.

 

At the request of the Compensation Committee, Meridian 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 upwards by Meridian for the purpose of bringing the market data current), Meridian 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, Meridian used regression analysis to adjust the market information on peer companies based on revenue. Prior to the Spin-off, Meridian analyzed information from two principal peer groups, the JRM/Corporate Group and the Babcock & Wilcox Group, to account for the diversity of geography and industry among our operations at that time. In anticipation of the Spin-off, Meridian also conducted a review of possible peer companies for McDermott and B&W post Spin-off. Through this review, the “Post-Spin Group” for McDermott was selected and approved by the Compensation Committee. In 2010, no Named Executives’ compensation was benchmarked against the Babcock & Wilcox Group other than Mr. Bethards. The component companies of each group are included on page 46 of this Compensation Discussion and Analysis.

 

JRM/Corporate Group.  With the exception noted below, the JRM/Corporate Group was the primary compensation benchmark prior to the Spin-off for our executives at the segments previously referred to as our corporate and Offshore Oil and Gas Construction segments, both of which are based in Houston, Texas. This group was compiled by Meridian with assistance from our management. The JRM/Corporate Group consisted of 43 companies with operations in engineering, construction, government operations and/or energy, and was generally utilized in determining market range compensation for Messrs. Johnson, Fees, Taff, Carlson and Nesser and Ms. Hinrichs. For

Mr. Johnson, the JRM/Corporate Group was adjusted by Meridian in consideration of the lower revenues of JRM as a standalone company as compared to McDermott. The Post-Spin Group was used as the benchmark for Mr. Johnson’s compensation adjustments in connection with his promotion to President and Chief Executive Officer of McDermott following the completion of the Spin-off.

 

Babcock & Wilcox Group.  The Babcock & Wilcox Group was the primary compensation benchmark for executives of our former Power Generation Systems and Government Operations segments, including Mr. Bethards. This group consisted of 27 engineering, construction and/or governments operations companies that were more specifically representative of our former Power Generation Systems and Government Operations segments.

 

Post-Spin Group.  The Post-Spin Group was utilized as the primary compensation benchmark for McDermott’s officers following the Spin-off, including for Mr. Johnson’s promotion to President and Chief Executive Officer of McDermott on July 30, 2010. Because of the proximity of the Spin-off to Mr. Elders’ date of hire, the Post-Spin Group was also utilized in determining the market range compensation for Mr. Elders when he was hired in April 2010. Meridian compiled this group with assistance from our management. The group consisted of 14 energy equipment and services and construction and engineering companies.

 

Custom Peer Group.  The Custom Peer Group was used by Meridian on a limited basis as a comparator to the JRM/Corporate Group and the Babcock & Wilcox Group. This group was identified by Hewitt in October 2007 with the assistance of management. The Custom Peer Group consisted of nine engineering and construction companies and is the same group we used

in the performance graph included in our annual report on Form 10-K for the years ended December 31, 2007 and 2008. Compensation information for Custom Peer Group companies was based on information reported by those companies in publicly available Securities and Exchange Commission filings.

 

In this CD&A references to “market” or “our market” are references to the compensation of executives at companies within the JRM/Corporate Group, Babcock & Wilcox Group or Post-Spin Group, as applicable.

 

Total Direct Compensation

 

2010 Overview.  Excluding the retention awards and the sign-on grant made to Mr. Carlson, the 2010 target total direct compensation for each of our Named Executives was within the market range of target total direct compensation, except for Messrs. Elders and Nesser. The target total direct compensation for Mr. Elders was set slightly above market range due to the level of compensation that was considered appropriate to induce Mr. Elders to accept the Chief Financial Officer position and the value of long-term incentives granted to him in connection with his hiring. The target total direct compensation for Mr. Nesser was set above market range based on his lengthy experience with and his depth of knowledge of McDermott.

 

The chart below shows the 2010 target total direct compensation by element for each Named Executive. Because the amount of compensation actually paid through the compensation elements that are performance-based is not fixed at the outset, Named Executives may earn compensation above or below the market range for similarly situated executives in our market.

 

2010 Base Salaries.  In considering the April 1, 2010 salary adjustments, the Compensation Committee was provided with and took into account (1) the recommendation of our then current Chief Executive Officer, Mr. Fees, as to 2010 base salaries for Messrs. Johnson, Taff, Bethards, Carlson and Nesser and Ms. Hinrichs, (2) Meridian’s analysis of market compensation for those individuals and for Mr. Fees (as adjusted by Meridian to bring the data forward to April 1, 2010) and (3) tally sheets showing the 2009 compensation and benefits of Messrs. Johnson, Fees, Taff and Bethards, who were each Named Executives in 2009, and annual and long-term incentives and

retention amounts previously awarded. Additionally, in May 2010, the Compensation Committee was provided with (1) the recommendation of our then current Chief Executive Officer, Mr. Fees, as to the 2010 base salary of Mr. Elders, and (2) Meridian’s analysis of market compensation for Mr. Elders.

 

In each instance, Meridian’s market analysis compared the recommended base salary and the target total direct compensation of each officer (assuming 2010 salary recommendations were approved and disregarding the retention payments and sign-on awards) to the median compensation of the applicable market.

 

 

When considering base salaries effective April 1, 2010, the Compensation Committee sought to set salaries within the market range, with increases in line with expected adjustments of 2-3% in our market as reported by Meridian. Accordingly, Messrs. Johnson, Fees, Taff, Bethards and Nesser and Ms. Hinrichs each received a salary increase within this range. Following such salary increases and the establishment of salary for Messrs. Elders and Carlson, our Named Executives’ base salaries were generally within market range with the exception of Mr. Nesser. Although Mr. Nesser’s base salary was above market range, the Compensation Committee considered this to be appropriate, based upon his experience and depth of knowledge of our operations and in anticipation of his promotion to Chief Operating Officer of McDermott following the Spin-off.

 

In August 2010, in consideration of the market compensation analysis and recommendation provided

by Meridian in connection with Mr. Johnson’s July 30, 2010 promotion to President and Chief Executive Officer of McDermott, the Compensation Committee increased Mr. Johnson’s base salary to $920,000, which was within market range.

 

Annual Incentive Compensation

 

2010 Overview and Target Compensation.  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 stockholder value.

The target 2010 EICP compensation for our Named Executives was as follows:

 

 

 

No changes were made to 2010 target EICP from the 2009 targets, except for Mr. Johnson, whose 2010 target EICP was increased effective and for the period beginning August 1, 2010 in connection with his promotion to President and Chief Executive Officer of McDermott. In connection with their hiring in 2010, the Compensation Committee set Messrs. Elders’ and Carlson’s 2010 target EICP at 70% and 55%, respectively, which was within the market range for their positions. Mr. Elders’ 2010 target EICP was prorated to take into account his April 30, 2010 hire date. Notwithstanding Mr. Carlson’s March 29, 2010 hire date, his 2010 target EICP was not prorated, in order to partially offset Mr. Carlson’s forfeiture of compensation and benefits at his previous employer. The Compensation Committee set 2010 target EICP for Messrs. Taff, Nesser and Bethards at the same level for internal equity reasons.

 

2010 EICP Performance Goals.  Traditionally, EICP compensation has consisted of a financial performance component and an individual performance component. To drive performance of McDermott’s operations, the 2010 EICP target compensation for business unit officers, including Messrs. Johnson and Bethards, was set utilizing the traditional financial and individual performance components. However, to drive the timely and successful completion of the Spin-off, 2010 EICP target compensation for our Corporate officers, including Messrs. Fees and Taff and

Ms. Hinrichs, was set based on the completion of the Spin-off. Generally, for non-Corporate executives the 2010 target EICP was split between financial and individual 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 stockholder 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 maintained the individual component for 2010 at 30% of target EICP for 2010. However, to maintain the emphasis on financial performance, payment of EICP compensation (including for individual performance) required the attainment of a threshold level of financial performance. The maximum EICP compensation a Named Executive could earn in 2010 was 200% of target EICP. For all Named Executives, the Compensation Committee had the discretion to decrease an EICP payment.

 

As a result, for Messrs. Johnson, Elders, Carlson and Nesser, 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).

 

In connection with the Spin-off, however, the Compensation Committee determined that for our Corporate executive officers, including Messrs. Fees and Taff and Ms. Hinrichs, the primary component of 2010 EICP compensation was completing the Spin-off. These Corporate Named Executives were eligible to receive target EICP compensation, prorated through the effective date of the Spin-off. For the Corporate executive officers who continued employment with McDermott following the Spin-off, EICP compensation for the balance of 2010 was set based on the traditional financial and individual components applicable to their post-spin employment, prorated for the balance of 2010.

As a result, the EICP payment amount for Ms. Hinrichs was principally determined based on: (1) the completion of the Spin-off (which represented 100%, prorated for the period through the completion of the Spin-off); (2) the attainment of financial goals for the remainder of 2010 (which represented up to 140%, prorated for the balance of 2010); and (3) the attainment of individual goals for the remainder of 2010 (which represented up to 60%, prorated for the balance of 2010).

 

Mr. Fees’ EICP payment amount was determined based on the completion of the Spin-off, which represented 100% of target EICP, prorated for his period of service as a Corporate executive officer. Because of Mr. Taff’s departure to join B&W and Mr. Bethards’ continued employment with B&W following the Spin-off, and in accordance with the Employee Matters Agreement dated July 2, 2010 to which McDermott and B&W became parties in connection with the Spin-off (the “Employee Matters Agreement”), their EICP payment amounts were determined and paid by B&W in 2011.

 

The components of EICP compensation for each of the Continuing Named Executives are illustrated in the charts below.

 

 

 

2010 Financial Goals.  Historically, the Financial Goals for the EICP consisted of operating income levels

related to McDermott and/or business unit operating income relevant to each Named Executive. Those Named Executives who were considered Corporate executive officers had Financial Goals generally based on consolidated McDermott operating income, whereas those Named Executives who were the chief executive officers of the business units had Financial Goals generally based on both consolidated McDermott operating income and business unit operating income. As discussed above, however, in connection with the Spin-off the Compensation Committee determined that the 2010 target award opportunity would be attributable to completing the Spin-off for Corporate executive officers. Additionally, the Compensation Committee determined that the chief executive officers of the business units (Messrs. Johnson and Bethards) should have Financial Goals entirely attributable to the operating income results of their respective business units. Accordingly, the respective business unit’s operating income was used for establishing each such Named Executive’s Financial Goals.

 

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 allocable to our operating segments.

 

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 stockholders for performance above the maximum payout level, thereby reducing risk related to incentive compensation.

The performance range between the threshold level and the maximum level was relatively narrow prior to 2009. In 2009, however, 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. The Compensation Committee maintained this approach in 2010, considering 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 120% of target operating income. Similar to 2009, and in consultation with Meridian, the Compensation Committee set the 2010 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 2010 EICP based on attaining the following levels of operating income:

 

 

For other levels of operating income between threshold and maximum, the percentage paid would have been determined by linear interpolation using the two neighboring pre-established performance levels and percentage payout of target award. No payment would have been earned under the EICP for 2010 if operating income results had been below the threshold level.

2010 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. Mr. Fees established the individual goals for Messrs. Johnson and Bethards. Messrs. Elders, Carlson and Nesser each proposed their respective individual goals, which were approved by Mr. Johnson. No pre Spin-off individual goals were established for Messrs. Fees and Taff and Ms. Hinrichs because their pre Spin-off EICP award

was entirely attributable to completing the Spin-off. At the time the target EICP awards were determined, individual goals relating to post Spin-off employment with either McDermott or B&W were deferred to be addressed by the respective company, as applicable. Ms. Hinrichs proposed her post Spin-off individual goals, which were approved by Mr. Johnson. The individual goals and their respective weightings for our Continuing Named Executives’ 2010 EICP compensation are set forth in the table below.

 

2010 Annual Incentive Compensation Payments.  The 2010 target and final EICP compensation amounts for each Named Executive are shown in the table below. No information is provided for Messrs. Taff or Bethards. Pursuant to the Employee Matters Agreement, B&W assumed responsibility for

the grant and payment of 2010 annual incentive compensation for certain employees, including Messrs. Taff and Bethards, which compensation was earned in connection with their employment with B&W following the Spin-off and paid by B&W in 2011.

 

 

2010 EICP Payment Summary

 

 

 

Analysis of 2010 EICP Payments.  In February 2011, the Compensation Committee considered (1) McDermott’s 2010 consolidated operating income, as adjusted to compare to the established JRM operating income performance goals; (2) the non-management directors’ assessment of the individual performance of Mr. Johnson; (3) Mr. Johnson’s self-assessment of his individual performance relative to his individual goals; and (4) Mr. Johnson’s recommendation of each other Continuing Named Executive’s 2010 EICP compensation based on his assessment of the financial and individual performance applicable to each of those Continuing Named Executives.

 

In February 2010, the financial performance goals for 2010 EICP compensation were established based on the operating income of JRM, which was comprised of the reporting segment we previously referred to as the Offshore Oil & Gas Construction segment. As a result of the Spin-off, however, the Offshore Oil & Gas Construction segment no longer exists as a segment for financial reporting purposes. Therefore, in order to determine the financial goals attained, the Compensation Committee utilized McDermott’s consolidated operating income of $314.9 million, taking into account legacy corporate general and administrative expenses to establish the operating income attributable to JRM had the Spin-off not occurred. The Compensation Committee also specifically considered certain impairments and charges totaling approximately $73.1 million, including costs incurred in connection with the discontinuance of our fabrication yard in Kazakhstan, impairment charges on two of the four vessels we are retaining from the Secunda acquisition, which charges diminished operating income, and also the asset impairment costs of our charter fleet business, as discussed in our Annual

Report on Form 10-K for the year ended December 31, 2010.

 

Mr. Johnson.  Mr. Johnson earned approximately 160.3% of his 2010 target EICP, or $1,218,863. Based on McDermott’s 2010 financial results, Mr. Johnson was eligible to earn 190% of his 2010 target EICP compensation, subject to the assessment of his individual goals. Mr. Johnson’s 160.3% was comprised 132% under the financial performance component based on McDermott’s operating income and 28.3% under the individual component based on the Governance Committee’s assessment of Mr. Johnson’s individual performance against stated goals.

 

Mr. Fees.  In connection with the Spin-off and Mr. Fees’ termination of employment for “good reason” as defined in his retention agreement, Mr. Fees was paid his prorated 2010 EICP compensation in August 2010. Per the terms of his retention agreement, Mr. Fees was to be paid a cash payment equal to his target bonus under the EICP times a fraction, the numerator of which was the number of days elapsed in the year in which the termination took place and the denominator of which was 365. Based on his July 30, 2010 termination date, Mr. Fees’ target bonus of $922,500 was prorated such that he received an EICP payment of $535,808.

 

Mr. Elders.  Mr. Elders earned approximately 181.5% of his 2010 target EICP (which was prorated based on his length of service with McDermott during 2010), or $398,147. Based on McDermott’s 2010 financial results, Mr. Elders was eligible to earn 190% of his 2010 target EICP compensation. Mr. Elders’ 181.5% was comprised 133.7% under the financial performance component based on McDermott’s operating income and 47.8% under the individual component based on Mr. Johnson’s assessment of Mr. Elders’ individual performance against stated goals.

 

Mr. Carlson.  Mr. Carlson earned 190% of his 2010 target EICP, or $334,400. Based on McDermott’s 2010 financial results, Mr. Carlson was eligible to earn 190% of his 2010 target EICP compensation. Mr. Carlson’s 190% was comprised 133% under the financial performance component based on McDermott’s operating income and 57% under the individual component based on Mr. Johnson’s assessment that Mr. Carlson met or exceeded his individual goals.

 

Ms. Hinrichs.  As a Corporate employee, Ms. Hinrichs had 2 EICP periods during 2010. For

the period prior to the Spin-off, and because of the completion of the Spin-off, Ms. Hinrichs earned 100% of her target EICP compensation, prorated for her length of service as a Corporate employee, or 7/12 of the year. For the period following the Spin-off, Ms. Hinrichs was eligible to earn 190% of her 2010 target EICP compensation, prorated for the balance of 2010, or 5/12 of the year. Following the Spin-off, Ms. Hinrichs earned 190% of her 2010 target EICP compensation, which was comprised 133% under the financial performance component based on McDermott’s operating income and 57% under the individual component based on Mr. Johnson’s assessment that Ms. Hinrichs met or exceeded her individual goals. As a result, Ms. Hinrichs earned 190% of her 2010 target EICP for 5/12 of the year, which combined with the pre Spin-off period, totaled $317,673.

 

Mr. Nesser.  Mr. Nesser earned approximately 171% of his 2010 target EICP, or $609,729. Based on McDermott’s 2010 financial results, Mr. Nesser was eligible to earn 190% of his 2010 target EICP compensation. Mr. Nesser’s 171% was comprised 133% under the financial performance component based on McDermott’s operating income and 38% under the individual component based on Mr. Johnson’s assessment of Mr. Nesser’s individual performance against stated goals.

 

Long-Term Incentive Compensation

 

The Compensation Committee believes that the interests of our stockholders are best served when a significant percentage of executive compensation is comprised of equity and other long-term incentives that appreciate in value contingent upon increases in the value of our common stock and other performance measures that reflect improvements in McDermott’s business fundamentals. Therefore, long-term incentive compensation represents the single largest element of our Named Executives’ total direct compensation.

 

Analysis of 2010 Equity Grants.

 

Mix of 2010 Equity.  In 2010, the type and mix of equity the Compensation Committee granted was principally a function of two factors: (1) the Compensation Committee’s desire to maintain a strong correlation between pay and performance in long-term incentives and (2) the anticipated Spin-off. As a result, the Compensation Committee allocated long-term incentive compensation to officers, including certain Named Executives, as follows (excluding retention

payments made in connection with the Spin-off and the sign-on grant made to Mr. Carlson):

 

 

To promote the retention of employees, restricted stock units represented a larger percentage of a Named Executive’s long-term incentive compensation than in the recent past. At the time of grant, the Compensation Committee anticipated that the restricted stock units would be converted at the Spin-off into restricted stock units of either McDermott or B&W, depending primarily on which company the recipient’s employment continued with post-spin. As a result, restricted stock units were intended to provide an immediate long-term retention for continuing employees. The restricted stock units generally vest one-third on the first, second and third anniversaries of the grant date.

 

To maintain its commitment to performance-based compensation, the Compensation Committee utilized stock options, which reward and drive performance based on absolute stock price improvement. The stock options also generally vest one-third on the first, second and third anniversaries of the grant date and have an option term of 7 years.

 

Consistent with our recent past practice, our grant agreements for awards made in 2010 contained a forfeiture provision. In 2010, this provision provided that, in the event the grantee is convicted of a felony or misdemeanor involving fraud, dishonesty or moral turpitude, or the grantee engages in conduct that adversely affects or, in the sole judgment of the Compensation Committee, may reasonably be expected to adversely affect, the business reputation or economic interests of the Company, then all rights and benefits awarded under the respective agreements are immediately forfeited, terminated and withdrawn.

 

The Compensation Committee also considered using performance shares in 2010, as it had each year since 2006. However, the Compensation Committee elected not to utilize performance shares as a component of long-term compensation during 2010, because it determined it was more appropriate for the post-spin board of directors at each post Spin-off company to establish performance targets and metrics tailored to the strategies of the post-spin company. The decision not to award performance shares was influenced by observed complexities in establishing goals for McDermott in the midst of significant change during the measurement period.

We anticipate that future long-term incentive compensation will continue to emphasize performance-based equity awards, including the use of performance shares. In March 2011, the Compensation Committee’s long-term compensation allocation for officers, excluding Mr. Nesser, who informed McDermott that he intends to retire by year-end 2011, was as follows:

 

 

For more information regarding the 2010 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 2010 Long-Term Incentive Compensation.  The 2010 target long-term incentive compensation for our Named Executives was as follows:

 

 

 

Meridian advised the Compensation Committee that due to economic and stock market conditions in 2010, the long-term incentive compensation of companies in our market decreased 10%-20% as compared to 2009. As a result of these market decreases, most of our executive officers, including Messrs. Johnson, Taff and Nesser and Ms. Hinrichs, received a lesser value of target long-term incentive compensation as compared to the 2009 target value awards (exclusive of the retention grants discussed below) in order for the

Compensation Committee to maintain their long-term incentive compensation within market range. The value of Messrs. Elders’ and Carlson’s long-term incentive compensation was above market range in order to induce Messrs. Elders and Carlson to accept positions at JRM with the expectation that they would become executive officers of McDermott upon completion of the Spin-off. As a result of internal equity considerations, the Compensation Committee set the same target long-term incentive value for Mr. Johnson and Mr. Bethards, although market data indicated that Mr. Bethards’ target long-term incentive compensation was approximately 21% below market — with the difference attributable to the use of different benchmarks for these positions.

 

As previously mentioned, Mr. Carlson was also granted additional long-term incentives in 2010 in the form of a sign-on grant of restricted stock units made to offset compensation and benefits he forfeited when he left his previous employer to join McDermott. The value of this sign-on grant was not included in setting Mr. Carlson’s target long-term incentive compensation.

 

Additionally, in connection with the Spin-off and pursuant to the retention agreements entered into by McDermott with certain key members of management in December 2009, as discussed in further detail below, Messrs. Johnson and Nesser and Ms. Hinrichs each received an additional award based on their continued employment with McDermott on the effective date of the Spin-off. Each of these Named Executives received an award of restricted stock equal in value to the sum of the Named Executive’s annual base salary and target bonus under the EICP in effect immediately prior to the effective date of the Spin-off. The restricted stock awards vest 100% on July 30, 2011, which is the first anniversary of the effective date of the Spin-off, provided the Named Executive remains employed with McDermott through that date. The Compensation Committee did not consider the retention agreement restricted stock awards when determining the value of long-term incentive to be awarded in 2010 because the restricted stock awards were an incentive to retain key members of management through the completion of and for one year following the Spin-off rather than to incentivize long-term performance. Additionally, pursuant to the retention agreements entered into in December 2009, at the time the 2010 target long-term incentive value was determined in early 2010, the restricted stock awards remained contingent and were not awarded until the completion of the Spin-off. The value of

the retention agreement restricted stock award grants to Messrs. Johnson and Nesser and Ms. Hinrichs were as follows:

 

 

Messrs. Bethards and Taff each received similar retention payments in the form of restricted stock award grants made by B&W equal in value to the sum of their respective annual base salary and target bonus in effect immediately prior to the effective date of the Spin-off, except that one-third of the value of Mr. Taff’s retention award was made in cash.

 

Sizing Long-Term Incentive Compensation.  The Compensation Committee generally determines the size of equity-based grants as a dollar value, rather than granting a targeted number of shares. The number of restricted stock units and stock options granted can be expressed through the following formula:

 

target value of target long-term incentive($) / FMV($).

 

The fair market value of one restricted stock unit or share of restricted stock was computed based on the full fair market value of McDermott’s common stock on the date of grant. The fair market value of one stock option was determined by Meridian using a Black-Scholes formula based also on the full fair market value of our common stock on the date of grant. For example, for the long-term incentive compensation granted to all of the Named Executives (except Messrs. Elders and Carlson) in February 2010, 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 $25.37, compared to the discounted value of $17.11 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 to the nearest multiple of three.

 

In prior years, fair market value of the stock was determined using a discounted share price to reflect the vesting conditions and transfer restrictions characterizing the equity awards. The valuation methodology was changed with respect to awards made in 2010, which had the intended effect of lowering the number of shares and units that otherwise would have been granted.

All outstanding long-term incentive awards prior to the Spin-off, including those granted in 2010, were converted or adjusted in connection with the Spin-off. For more information, see “Treatment of Equity-Based Compensation in Connection with the Spin-off” below.

 

Timing of Equity Grants.  To avoid timing equity grants ahead of the release of material non-public information, the Compensation Committee generally grants stock option and other equity awards effective as of the first day of the next open trading window following the meeting at which the grants are approved, which is generally the third NYSE trading day following the filing of our annual report on Form 10-K or quarterly report on Form 10-Q with the Securities and Exchange Commission. This practice was followed for all long-term incentive compensation grants to Named Executives in 2010, with the exception of the restricted stock award retention grants made to Messrs. Johnson and Nesser and Ms. Hinrichs pursuant to their retention agreements. The retention grants of restricted stock were earned on the effective date of the Spin-off and, therefore, were made on the first business day following that date.

 

Treatment of Equity-Based Compensation in Connection with the Spin-off.  In connection with the Spin-off, McDermott sought to preserve the intrinsic value of outstanding equity awards as of the date of the Spin-off. As a result, McDermott’s outstanding equity-based compensation awards were generally treated as follows:

 

 

In the case of adjusting McDermott options or granting substitute B&W options, the conversion formula resulted in fractional shares or fractional cents in some cases. Any fractional shares that were subject to adjusted McDermott options and substitute B&W options were disregarded, and the number of shares subject to such options was rounded down to the next lower whole number of shares. The exercise price for such options was rounded up to the next higher whole cent. There were no stock appreciation rights outstanding under the McDermott incentive plans at the time of the Spin-off.

 

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 one 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, for purposes of our compensation related disclosures in this proxy statement, 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 is used primarily for business travel, incremental costs generally exclude fixed costs such as the purchase price of our interest 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, but only when the presence of that guest is related to the underlying business purpose of the trip. We also provide our Named Executives with a tax gross-up for income incurred in connection with a relocation with McDermott or one of our

affiliated companies. During 2010, in connection with the Spin-off and the realignment of the management teams for McDermott and B&W, relocation benefits, including tax gross-ups, were provided to certain executives under our relocation program.

 

On February 28, 2011 the Compensation Committee adopted a perquisite allowance for certain officers, including our Named Executives.

 

Retirement Plans

 

Overview.  We have provided retirement benefits for most of our U.S. employees, including our Named Executives, through sponsorship of 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.” Prior to the Spin-Off, we sponsored the following Retirement Plans under which the eligible Named Executives were covered:

 

 

As a result of the Spin-off, we are no longer a sponsor of the B&W Government Operations Retirement Plan or the B&W Commercial Operations Retirement Plan.

 

In addition to the broad-based qualified plans described above, we sponsor unfunded, nonqualified excess retirement plans, which we refer to as “Excess Plans.” The Excess Plans cover a small group of highly compensated employees, including Messrs. Fees, Bethards and Nesser and Ms. Hinrichs, whose ultimate benefits under the Retirement Plans are reduced by Internal Revenue Code limits on the amount of benefits which may be provided under qualified plans and the amount of compensation which may be taken into

account in computing benefits under qualified plans. Benefits under the Excess Plans are paid from our general assets.

 

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.”

 

In 2006, we closed the MI Retirement Plan, B&W Governmental Operations Retirement Plan and B&W Commercial Operations Retirement Plan 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 did not participate in a Retirement Plan or an Excess Plan because he had not met the MI Retirement Plan eligibility requirements at the time that Plan was closed to new participants.

 

In 2007, we offered salaried participants in the MI Retirement Plan, B&W Governmental Operations Retirement Plan, and B&W Commercial Operations Retirement Plan with between five and 10 years of credited service as of January 1, 2007 the one-time irrevocable choice between (i) continuing to accrue future benefits under the Retirement Plan or (ii) 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. Nesser and Ms. Hinrichs met this credited service criteria under the MI Retirement Plan and thus were affected by this action. Mr. Nesser and Ms. Hinrichs elected to continue accruing benefits under the Retirement Plan. As discussed below, as of June 30, 2010, all benefit accruals under the Retirement Plan were frozen, including Mr. Nesser’s and Ms. Hinrichs’ benefits under the Retirement Plan.

 

Messrs. Johnson, Elders, Taff and Carlson do not participate in a Retirement Plan or an Excess Plan, because their employment with McDermott

commenced after new participation in the applicable Retirement Plan was closed, as discussed above.

 

During 2010, and in connection with the Spin-off, the Retirement Plans were realigned, such that assets and liabilities under these Plans which were attributable to B&W employees and certain former employees were transferred to the B&W Government Operations Retirement Plan and the B&W Commercial Operations Retirement Plan, as applicable, and the MI Retirement Plan was merged into the JRM Retirement Plan. These changes are described further below, under “Recent Changes to Retirement Plans.” Since the Spin-off, the only Retirement Plan we sponsor is the consolidated JRM Retirement Plan, which has been renamed the “McDermott (U.S.) Retirement Plan”.

 

See the Pension Benefit table under “Compensation of Executive Officers” below for more information regarding our Retirement Plans and our Excess Plans.

 

Recent Changes to Retirement Plans Covering Named Executives.  As of April 30, 2010, and in anticipation of the Spin-off, the assets and liabilities attributable to participants in the MI Retirement Plan who were either (1) active employees of B&W or one of its subsidiaries on July 1, 2010 (“B&W Employees”), or (2) terminated employees of McDermott, B&W or a subsidiary on July 1, 2010, but originally hired by B&W or one of its subsidiaries (“Former B&W Employees”), were transferred to the B&W Governmental Operations Retirement Plan, and, effective May 1, 2010, a subsidiary of B&W assumed sponsorship of the B&W Governmental Operations Retirement Plan from McDermott. The participants affected by this transfer became covered under the B&W Governmental Operations Retirement Plan, and are entitled to benefits under that Plan identical to those which they had accrued under the MI Retirement Plan as of the date of the transfer. For purposes of eligibility and vesting under the B&W Governmental Operations Retirement Plan, the affected participants were credited with service for any period of employment with McDermott or a subsidiary to the same extent that such service would be credited if it had been performed for B&W or one of its subsidiaries. For purposes of benefit levels, accruals and benefit commencement entitlements under the B&W Governmental Operations Retirement Plan, the affected participants were credited with service for any period of employment with McDermott or a subsidiary to the same extent that such service would have been taken into account pursuant to the terms of the MI

Retirement Plan. Mr. Fees was affected by this change, based on his status as a Former B&W Employee on the relevant date, and therefore his coverage was transferred from the MI Retirement Plan to the B&W Governmental Operations Retirement Plan.

 

All remaining assets and liabilities of the MI Retirement Plan were then transferred as of May 31, 2010 to the JRM Retirement Plan, and the MI Retirement Plan was merged into the JRM Retirement Plan and thereafter renamed “McDermott (U.S.) Retirement Plan” (referred to herein as the “McDermott Retirement Plan”). As of June 30, 2010, all benefit accruals under the McDermott Retirement Plan were frozen and any further cost-of-living increases on accrued benefits ceased. As active employees of McDermott on the relevant date participating in the MI Retirement Plan, Ms. Hinrichs and Mr. Nesser were affected by the merger of the two Plans. Moreover, based on Mr. Nesser’s and Ms. Hinrichs’ 2007 elections to continue accruing benefits under the retirement plan in lieu of receiving the service-based cash contribution under the Thrift Plan, their benefit accruals under the McDermott Retirement Plan were frozen.

 

Also in connection with the Spin-off, the B&W Commercial Operations Retirement Plan and other qualified pension plans and Excess Plans sponsored by B&W or a subsidiary prior to the Spin-off were transferred to B&W.

 

Deferred Compensation Plan.  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 referred to as the “SERP,” to help maintain the competitiveness of our post-employment compensation as compared to our market. In November 2010, our Board of Directors and Compensation Committee approved amendments to the SERP which (1) changed the name of the SERP to the McDermott International, Inc. Director and Executive Deferred Compensation Plan, which we refer to as our Deferred Compensation Plan, (2) provided for the participation of members of our Board in the Deferred Compensation Plan, and (3) provided for other updates to the Deferred Compensation Plan.

The Deferred Compensation Plan is an unfunded, nonqualified plan that provides participants with benefits based on the participant’s notional account balance at the time of retirement or termination. Under the Deferred Compensation Plan, on an annual basis the Compensation Committee has the discretion to credit a specified participant’s notional account with an amount equal to a percentage of the participant’s prior-year base salary and annual bonus paid in the prior year. We refer to such credit as a “Company Contribution.” In 2010, Messrs. Fees, Taff, Bethards and Nesser and Ms. Hinrichs each were participants in the Deferred Compensation Plan and received a Company Contribution in an amount equal to 5% of their respective prior-year base salaries and annual bonuses paid in the prior year. Mr. Johnson was also a participant and received a Company Contribution in an amount equal to 5% of his prior-year base salary paid. In addition, Mr. Johnson received a discretionary contribution equal in value to 5% of his target bonus for 2010 and the value of the prior-year target base salary he would have earned for the period January 1, 2009 through his April 1, 2009 hire date. No Company Contribution was made for Messrs. Elders or Carlson, because they were not participants in the Deferred Compensation Plan at the time such contributions were made.

 

Additionally, under the amendments to the Deferred Compensation Plan adopted in November 2010, beginning in 2011 any eligible employee, including our Continuing Named Executives, may defer up to 50% of his or her annual salary and/or up to 100% of any bonus earned in any plan year, and any director may elect to defer up to 100% of his or her annual retainer and fees earned in any plan 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 for any Company Contribution or participant elected deferrals. Each participant allocates any Company Contributions and deferrals among the various deemed investments. Deferred Compensation Plan benefits are based on the participant’s vested notional account balance at the time of retirement or termination. Please see the Nonqualified Deferred Compensation table and accompanying narrative below for more information about the Deferred Compensation Plan and Company Contributions to our Named Executives’ Deferred Compensation Plan accounts.

Employment and Severance Arrangements

 

Employment and Separation Agreements.  Except for change-in-control agreements 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 certain executive officers are common within our industry, and our Board and Compensation Committee believe that providing these agreements to our Named Executives protects stockholders’ interests by helping to assure management continuity and focus through and beyond a change in control. Accordingly, the Compensation Committee has offered change-in-control agreements to key senior executives since 2005. Following the Spin-off, on August 6, 2010, our Board of Directors approved a new form of change-in-control agreement for Messrs. Johnson and Nesser and Ms. Hinrichs, and provided change-in-control agreements to Messrs. Elders, and Carlson. Our change-in-control agreements generally provide a cash severance payment of two (2.99 for Mr. Johnson) times the sum of the Named Executive’s annual base salary and target EICP and a pro-rated bonus payment under the EICP. In addition, each such officer would become fully vested in any outstanding and unvested equity-based awards and his or her respective account balance in our Deferred Compensation Plan.

 

Our change-in-control agreements contain what is commonly referred to as a “double trigger,” that is, they provide benefits only upon an involuntary termination or constructive termination of the executive officer within one year following a change in control. In addition, the new change-in-control agreements: (1) do not provide for excise tax gross-ups; (2) require the applicable officer’s execution of a release prior to payment of certain benefits; and (3) provide for the potential reduction in payments to an applicable officer in order to avoid excise taxes. Because they are no longer employed by McDermott, Messrs. Fees, Taff and Bethards no longer have change-in-control agreements with McDermott. See the Potential Payments Upon Termination or Change in Control table under “Compensation of Executive Officers” below and the accompanying disclosures for more information regarding the change-in-control agreements with our Continuing Named Executives, as well as other plans and arrangements that have different trigger mechanisms that relate to a change in control.

Retention Agreements.  In connection with the December 2009 announcement of our plans to complete the Spin-off, and to ensure retention of key employees and executives through the completion of the separation of B&W from McDermott and for one year thereafter, on December 10, 2009, we entered into retention agreements with 17 key members of management, including Messrs. Johnson, Fees, Taff, Nesser and Bethards and Ms. Hinrichs.

 

Generally, the retention agreements provided either a retention or severance payment to the Named Executives in connection with the Spin-off. The retention agreements generally provided a retention payment in the form of a restricted stock grant made near the time of the Spin-off that vests one year following the effective date of the Spin-off, 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 have been provided under each Named Executive’s retention agreement in the event of a qualifying termination on a change in control, and discussed below. Accordingly, on the first NYSE trading day following the effective date of the Spin-off, McDermott made grants of restricted stock to Messrs. Johnson and Nesser and Ms. Hinrichs in connection with their continued employment with McDermott. The grants of restricted stock made to Messrs. Taff and Bethards were made by B&W pursuant to the terms of their respective retention agreements, which were assumed by B&W on completion of the Spin-off pursuant to the Employee Matters Agreement. With respect to Mr. Taff, one-third of his retention payment was payable in cash on the effective date of the Spin-off, in recognition of his agreement to serve as the Chief Financial Officer of B&W following the Spin-off, and that payment was made by B&W.

 

Although the Spin-off did not constitute a change in control for purposes of the change-in-control agreements or other McDermott 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 Spin-off. 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. 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 Deferred Compensation Plan balance. The only payments provided for under the retention agreement not otherwise payable in a change in control were (1) a cash payment equal to two years of medical benefits and (2) 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 Spin-off generally would have been 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 with a retention agreement to which this benefit may be applicable.

 

Mr. Fees’ retention agreement also contained restrictions on his ability to compete with McDermott (including both B&W and JRM), 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 certain of our Named Executives.

 

Other Compensation Policies

 

Stock Ownership Guidelines.  To assist with the alignment of the interests of directors, executive officers and stockholders, we believe our directors and officers should have a significant financial stake in McDermott. To further that goal, we adopted stock ownership guidelines in 2005, as amended effective August 9, 2010, requiring generally that our non-management directors and our officers at the level of vice president or above maintain a minimum ownership interest in McDermott. The stock ownership requirements are as follows:

 

 

Directors and officers have five years from the effective date of the amended stock ownership guidelines or their initial election as a director/officer, whichever is later, to comply with the guidelines. The Governance Committee reviews each director’s and officer’s progress towards the requirements of the stock ownership guidelines annually, and may waive or modify the stock ownership guidelines for directors and officers in the Governance Committee’s sole discretion.

 

Derivatives Trading and Hedging.  McDermott’s Insider Trading Policy prohibits all directors, officers and employees, including our Continuing Named Executives, from engaging in “short sales” or trading in puts, calls or other options on McDermott’s common stock. Additionally, directors, officers

and employees are prohibited from engaging in hedging transactions, and from holding McDermott shares in a margin account or pledging McDermott shares as collateral for a loan.

 

Clawback Policy.  Our Compensation Committee has adopted a clawback policy under which McDermott shall seek to recover any incentive-based award granted to any executive officer as required by the provisions of the Dodd-Frank Wall-Street Reform and Consumer Protection Act or any other “clawback” provision required by law or the listing standards of the New York Stock Exchange.

 

Additionally, consistent with our recent past, our grant agreements for awards made in 2010 contain a forfeiture provision. In 2010, this provision provided that in the event the grantee is convicted of a felony or misdemeanor involving fraud, dishonesty or moral turpitude, or the grantee engages in conduct that adversely affects or, in the sole judgment of the Compensation Committee, may reasonably be expected to adversely affect, the business reputation or economic interests of the Company, then all rights and benefits awarded under the respective agreements are immediately forfeited, terminated and withdrawn.

 

Alliant Techsystems Inc.

Ameron International Corp.

Anadarko Petroleum Corp.

Baker Hughes, Inc.

BJ Services Company

Cameron International, Inc.

Chicago Bridge & Iron Company N.V.          

Cooper Industries Plc

Curtiss-Wright Corporation

Devon Energy Corporation

Dover Corporation

Eaton Corporation

El Paso Corporation

ESCO Technologies Inc.

Flowserve Corporation

FMC Technologies, Inc.

Foster Wheeler AG

General Dynamics Corporation

Granite Construction Incorporated

Halliburton Company

Honeywell International, Inc.

Hubbell Incorporated

Illinois Tool Works Inc.

Ingersoll-Rand plc

ITT Corp.

Joy Global Inc.

KBR, Inc.

Lockheed Martin Corporation

Martin Marietta Materials, Inc.

Noble Corporation

Northrop Grumman Corporation

Pioneer Natural Resources Company

Raytheon Company

Rockwell Collins, Inc.

The Shaw Group Inc.

The Williams Companies, Inc.

Terex Corporation

Textron Inc.

Thomas & Betts Corporation

USG Corporation

Valmont Industries, Inc.

Vulcan Materials Company

Walter Industries, Inc.

 

Ameron International Corp.

Chicago Bridge & Iron Company N.V.          

Cooper Industries Plc

Curtiss-Wright Corporation

Dover Corporation

Eaton Corporation

ESCO Technologies Inc.

Flowserve Corporation

General Dynamics Corporation

Honeywell International, Inc.

Hubbell Inc.

Illinois Tool Works Inc.

Ingersoll-Rand plc

ITT Corporation

Joy Global Inc.

Lockheed Martin Corporation

Martin Marietta Materials, Inc.

Northrop Grumman Corporation

Raytheon Company

Rockwell Collins, Inc.

The Shaw Group Inc.

Terex Corporation

Textron, Inc.

Thomas & Betts Corporation

USG Corporation

Valmont Industries, Inc.

Vulcan Materials Company

 

Cal Dive International, Inc.

Cameron International, Inc.

Chicago Bridge & Iron Company N.V.          

Dresser Rand Group, Inc.

Foster Wheeler AG

Fluor Corporation

Global Industries, Inc.

Helix Energy Solutions Group, Inc.

KBR, Inc.

Oceaneering International, Inc.

Oil States International, Inc.

The Shaw Group, Inc.

Tetra Technologies, Inc.

URS Corporation

 

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.

URS Corporation.