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

 

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

 

The 20082009 Annual Meeting of the Stockholders of McDermott International, Inc., a Panamanian corporation, will be held at 757 N. Eldridge Parkway, Houston, Texas 77079, on the 14^th floor, on Friday, May 9, 2008,8, 2009, at 9:30 a.m. local time, in order to:

 

 

 

 

 

If you were a stockholder as of the close of business on March 31, 2008,9, 2009, you are entitled to vote at the meeting and at any adjournment thereof.

 

 

WeIf you received a printed copy of the materials, we have enclosed a copy of our 20072008 Annual Report to Stockholders with this notice and proxy statement.

 

By Order of the Board of Directors,

 

LIANE K. HINRICHS

 

 

 

As more fully described in the Notice, the Board of Directors of McDermott International, Inc. (“McDermott”) has made these materials available to you over the Internet or, upon your request, has mailed you printed versions of these materials in connection with our 2009 Annual Meeting of Stockholders, which will take place on May 8, 2009. We are mailingmailed the Notice to our shareholders beginning March 27, 2009, and our proxy materials were posted on the Web site referenced in the Notice on that same date. McDermott, on behalf of its Board of Directors, is soliciting your proxy to vote your shares at the 2009 Annual Meeting of Stockholders. We solicit proxies to give all shareholders of record an opportunity to vote on matters that will be presented at the annual meeting. In this proxy statement, and accompanying proxy cardyou will find information on these matters, which is provided to assist you in voting your shares.

Proxy materials have been sent or access to the materials has been provided to you because our stockholders beginning on April 4, 2008. Our Board of Directors is soliciting your proxy to vote your shares at our Annual Meeting to be held on May 9, 2008.8, 2009. We will bear all expenses incurred in connection with this proxy solicitation, which we expect to conduct primarily by mail. We have engaged The Proxy Advisory Group, LLC to assist in the solicitation for a fee that will not exceed $10,000, plusout-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 reasonableout-of-pocket expenses. If your shares are held through the Thrift Plan for Employees of McDermott Incorporated and Participating Subsidiary and Affiliated Companies (the “McDermott Thrift Plan”), and you have requested printed versions of these materials, the trustee of that plan has sent you this proxy statement and a voting instruction form, which you can use to directinstruct the trustee on how to vote your plan shares.

 

Our Board of Directors selected March 31, 20089, 2009 as the record date (the “Record Date”) for determining stockholders entitled to vote at the Annual Meeting. This means that if you were a registered stockholder with our transfer agent and registrar, Computershare Trust Company, N.A., on the Record Date, you may vote your shares on the matters to be considered by our stockholders at the Annual Meeting. If your shares were held in street name on that date, the broker or other nominee that was the record holder of your shares has the authority to vote them at the Annual Meeting. They have forwarded to you this proxy statementare seeking your instructions on how you want your shares voted.

 

On the Record Date, 226,741,650228,655,752 shares of our common stock were outstanding. Each outstanding share of common stock entitles its holder to one vote on each matter to be acted on at the meeting.

 

If you are a stockholder of record, you can vote your shares in person at the Annual Meeting or vote now by giving us your proxy. You may give us your proxy by completingfollowing the enclosed proxy card and returning itinstructions included in the enclosed U.S. postage-prepaid envelopeNotice or, by callingif you received a toll-free telephone number or using the Internet as further describedprinted version of these proxy materials, in the enclosed proxy card. In either case, telephone and Internet voting proceduresIf you want to vote by mail but have been designed to verify your identitynot received a printed version of these proxy materials, you may request a full packet of proxy materials through a personal identification or control number and to confirm that your votingthe instructions have been properly recorded.in the Notice. If you vote using either of these electronic means,telephone or the Internet, you will save us return mail expense.

 

With the exception of the proposal to amend our Articles of Incorporation,approve the 2009 LTI Plan, each proposal, including the election of directors, requires the affirmative vote of a majority of the shares of our common stock present in person or represented by proxy at the Annual Meeting and entitled to vote on the matter. The proposal to amend our Articles of Incorporationapprove the 2009 LTI Plan requires the affirmative vote of a majority of the outstanding shares of our common stock present in person or represented by proxy at the Annual Meeting and entitled to vote on the matter.proposal, provided that the total number of votes cast on the proposal represents a majority of the shares outstanding on the Record Date. In the election of directors, you may vote “FOR” all director nominees or withhold your vote for any one or more of the director nominees. For each other proposal, you may vote “FOR” or “AGAINST” or abstain from voting. Because abstentions are counted for purposes of determining whether a quorum is present but are not affirmative votes for a proposal, they have the same effect as an “AGAINST” vote. Broker non-votes will have no effect on the vote on the election of directors or on the ratification of the independent registered public accounting firm. Broker non-votes will have no effect on the proposal to approve the 2009 LTI Plan, as long as the total number of votes cast on the proposal represents a majority of the shares entitled to vote. Otherwise, the effect of a broker non-vote will be the same as a vote against the proposal to amend our Articles of Incorporation.proposal.

 

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

 

 

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

 

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

The term of office of our Class II directors — D. Bradley McWilliams, Richard W. Mies and Thomas C. Schievelbein — will expire at this year’s Annual Meeting. On the nomination of our Board, Messrs. McWilliams and Schievelbein will stand for reelection and Admiral Mies will stand for election as Class II directors at this year’s Annual Meeting for a term of one year.

 

Our By-Laws provide that (1) a person shall not be nominated for election or reelection to our Board of Directors if such person shall have attained the age of 72 prior to the date of election or re-election and (2) any director who attains the age of 72 during his or her term shall be deemed to have resigned and retired at the first Annual Meeting following his or her attainment of the age of 72. Accordingly, a director nominee may stand for election if he or she has not attained the age of 72 prior to the date of election or reelection. Pursuant to these By-Law requirements, Admiral Bruce DeMars, our Lead Director,Robert L. Howard will retire from our Board after 1112 years of service, effective at this year’s Annual Meeting.

 

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

 

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

 

By-Laws

Corporate Governance Guidelines

Code of Ethics for CEO and Senior Financial Officers

Board of Directors Conflicts of Interest Policies and Procedures

Audit Committee Charter

Compensation Committee Charter

Finance Committee Charter

Governance Committee Charter

 

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

 

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

 

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

 

 

In determining the independence of the directors, our Board considered ordinary course transactions between us and other entities with which the directors are associated. Neither Mr. McWilliams nor Mr. Schievelbein has any relationship with McDermott, except as a director and stockholder. In determining the independence of Messrs. Bookout, Brown, Cambre, Goldman and Kingsley and of Admiral DeMars, our Board considered ordinary course transactions between McDermott and other companies for which these directors are also members of the board of directors. With respect todirectors of one of those entities and Mr. Bookout ouris an outside consultant for an affiliate of one of those entities. Our Board also considered an unsolicited 2007 contributioncontributions by McDermottus to charitable organizations with which the directors were associated. Admiral Mies and Mr. Howard each serve as a director of a separate charitable organization to which we made unsolicited contributions between 2006 and 2008. Mr. Bookout’s spouse serves as a director of a charitable organization forto which Mr. Bookout’s spouse is a current director andwe made an unsolicited 2005 contribution by McDermott to a charitable organization for which Mr. Bookout’s spouse formerly served as a director. In determining the independence of Mr. Howard, our Board considered unsolicited2005-2007 contributions by McDermott to a charitable organization for which he serves as a member of the Board.in 2007. The charitable contributions described above were in the usual course of our annual giving programs pursuant to which McDermott and our subsidiaries make donationswe made over $1.7 million in total 2008 contributions to in excess of approximatelymore than 200 charitable organizations.

 

Our nonmanagement 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 nonmanagement members of our Board, addressed to Board of Directors (independent members),c/o McDermott International, Inc., Corporate Secretary’s Office, 777 N. Eldridge Pkwy., Houston, Texas 77079. Information regarding this process is posted on our website atwww.mcdermott.comunder “Corporate Governance — Board Committees.”

 

The Compensation Committee administers our Executive Incentive Compensation Plan, or EICP, under which it awards annual bonuses to our officers based upon the attainment of annual performance goals. The Compensation Committee establishes target EICP awards for each officer, expressed as a percentage of the officer’s base salary for that year, and financial goals applicable to EICP awards. The Compensation Committee authorized Mr. Wilkinsonour Chief Executive Officer to establish individual goals for our other executive officers applicable to EICP awards and, each of Messrs. Deason, Fees, Kalman, Taff, Nesser and Sannino, in coordination with Mr. Wilkinson,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 our 2001 Directors and Officers Long-Term Incentive Plan, which we refer to as the 2001 D&O Plan, our Compensation Committee may delegate its duties to our Chief Executive Officer or other senior officers. Pursuant to this authority, our Compensation Committee has authorized our Vice President of Human Resources, together with our Chief Executive Officer, to approve awards of options to purchase up to 5,000 shares of stock options and 1,000 shares of restricted stock or performance units under the 2001 D&O Plan to officers or employees (other than officers subject to the reporting provisions of Section 16 of the Securities Exchange Act of 1934, as amended) in connection with their initial employment or promotion within McDermott; provided that time does not permit the review and approval by the Compensation Committee at its next regularly scheduled meeting and that any grants awarded pursuant to this authorization are subject to ratification by the Compensation Committee at its next regularly scheduled meeting. In addition, our restricted stock awards granted under the 2001 D&O Plan in 2008 provide for accelerated vesting at the Compensation Committee’s discretion if the participant retires and is at least 60 years of age with at least 10 years of service. To facilitate a timely determination in these instances, the Compensation Committee has authorized our General Counsel and Vice President of Human Resources, acting jointly, to consider and determine any request for such accelerated vesting.

 

Finance Committee.  During the year ended December 31, 2007,2008, the Finance Committee met sixseven times. The Finance Committee has the overall responsibility of reviewing and overseeing financial policies (including dividend recommendations and stock repurchase programs) and financial strategies, mergers, acquisitions, and financings, liabilities, and investment performance of our pension plans and the capital structures of McDermott and its subsidiaries. Generally, the Finance Committee has responsibility over suchmany activities up to $50 million, and for such activities involving amounts aboveover $50 million, the Finance Committee will review the activity and make a recommendation to the Board.

 

Governance Committee.  During the year ended December 31, 2007,2008, the Governance Committee met sevensix times. This committee, in addition to other matters, recommends to our Board of Directors: (1) the qualifications, term limits and nomination and election procedures relating to our directors; (2) nominees for election to our Board of Directors; and (3) compensation of nonmanagement directors. This committee will consider individuals recommended by stockholders for nomination as directors in accordance with the procedures described under “Stockholders’ Proposals.” Our Governance Committee has primary oversight responsibility for our compliance and ethics program, excluding certain oversight responsibilities assigned to the Audit Committee. In conjunction with the Compensation Committee, the Governance Committee oversees the annual evaluation of our Chief Executive Officer.

 

In May 2007,2008, at the request of the Chairman of the Governance Committee, Compass ConsultingHewitt performed a market analysis of nonemployee director compensation among 2007 peer group companiesusing our Custom Peer Group (as identifieddefined in “Compensation Discussion and Analysis” below)) and made recommendations regarding nonemployee director compensation to the Governance Committee. Based on those recommendations, the Governance Committee recommended no changesto the Compensation Committee an increase in the form and amountsvalue of nonmanagement director compensationequity awards from $80,000 to $110,000 for 2007.2008. Our

 

All members of our Compensation Committee are independent in accordance with the New York Stock Exchange listing standards. No member of the Compensation Committee (1) was, during the year ended December 31, 2007,2008, or had previously been, an officer or employee of McDermott or its subsidiaries or (2) had any material interest in a transaction of McDermott or a business relationship with, or any indebtedness to, McDermott. No interlocking relationship existed during the year ended December 31, 20072008 between any member of the Board of Directors or the Compensation Committee and an executive officer of McDermott.

 

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

 

 

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

 

 

The 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 members of the Board, our senior level executives and individuals personally known to the members of the Board.

 

Any stockholder may nominate one or more persons for election as one of our directors at an annual meeting of stockholders if the stockholder complies with the notice, information and consent provisions contained in our by-laws.By-Laws. See “Stockholders’ Proposals” in this proxy statement and our by-laws,By-Laws, which may be found on our website atwww.mcdermott.comat “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 20082009 Annual Meeting are standing for election for the first time.time, with the exception of Mr. Fees and Admiral Mies, who were appointed to the Board in October 2008 and August 2008, respectively. Admiral Mies was recommended as a director candidate by a former member of our Board.

 

The table below summarizes the compensation paid by us to our nonemployee directors during the year ended December 31, 2007.2008. Pursuant to our By-Laws, which require a director to retire at the first Annual Meeting of Stockholders after attaining the age of 72, Bruce DeMars retired from the Board of Directors at the 2008 Annual Meeting. Admiral Mies was appointed to the Board in August 2008.

 

The compensation for nonemployee directors for 20072008 was comprised of cash and equity compensation earned by directors in connection with their service as a director.directors. The cash compensation consisted of retainers and meeting fees described in more detail below. The equity compensation consisted of stock option and restricted stock awards issued under our 1997 Director Stock Program, which we refer to as our 1997 Director Program, and our 2001 Directors and Officer Long-Term Incentive Plan, which we refer to as our 2001 D&O Plan, as described in more detail below. The amounts reported in the “Option Awards” column represent the associated dollar amounts we recognized for financial statement reporting purposes under SFAS No. 123R. Employee directors do not receive any compensation for their service as directors.

 

 

 

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

 

 

Defining our Market — Benchmarking.  The Compensation Committee principally relies on “benchmarking” — reviewing the compensation of our Named Executives relative to the compensation paid to similarly-situatedsimilarly situated executives at companies we consider to be our peers as well as industry specificindustry-specific survey data — to identify the median50th percentile of compensation paid byfor each element. Performance goals used within elements of total direct compensation are designed for the markets in which we compete.principal purpose of supporting our strategic and financial goalsand/or driving the creation of shareholder value, and, as a result, are not generally benchmarked. Benchmarking is an important, but not the only, tool that provides ourthe Compensation Committee a point of reference to ensure that our target compensation is competitive among companies with whom we compete for business and executive talent. While our

The Compensation Committee believes that benchmarking isrequested Hewitt to conduct a market compensation analysis and provide advice regarding the appropriate starting pointthree elements of total direct compensation for our elected officers, including the Named Executives. Using survey data from its annualproprietary compensation process, it is notdatabase and other publicly available data, Hewitt collected information from companies generally reflecting the determinative factorsize, scope and complexity of the business and executive talent at McDermott. To account for the amountsize of compensation ultimately paid. As further discussed throughoutour operations, Hewitt used regression analysis to adjust the market information based on revenue. To account for the diversity of geography and industry among our operations, Hewitt analyzed information from two principal groups, the J. Ray/Corporate Group and the Babcock & Wilcox Group. In this CD&A, unless the Compensation Committee, withcontext indicates otherwise, our “market” means the assistance of its compensation consultant and in consultation with our management, tailors compensation opportunities aroundJ. Ray/Corporate Group discussed below.

 

 

 

While we do not set a specific target allocation among the total direct compensation elements, historically we have attemptedthe Compensation Committee believes that equity-based and performance-based compensation relate most directly to emphasize performance-based, “at-risk” incentive elements when settingachievement of strategic and financial goals and to building shareholder value and, as a result, should represent a majority of the total direct compensation. For 2007, that trend continued.

 

 

Mr. Kalman,Wilkinson, who had served as our Executive Vice PresidentChairman and Chief FinancialExecutive Officer since February 2002, resigned as Chief Financial Officer in March 2007 and2000, announced his intention to retire from McDermott in February 2008 and retired on September 30, 2008. As a result, he did not receive any long-term compensationequity award in 2007.2008. Without any long-term compensation,equity, only about 39%50% of his 20072008 target total direct compensation was attributable to “at-risk” incentive compensation, with the remaining 61% from base salary.

 

Base salaries provide2008 Salaries.  Annual base salary is the foundationfixed component of our total direct compensation. Ourcompensation which the Compensation Committee reviews annually. Our Board of Directors reviews the base salaries annually and targets base salaries at or near the median base salary practices of our market. Our Compensation Committee maintains flexibility to deviate from market-median compensation for individual circumstances but generally does not considerelected officers at the ratiorequest of the Chief Executive Officer’s compensationCompensation Committee. With respect to 2008 salaries, our Board of Directors approved the othersalaries of our elected officers, including our Named Executives.Executives, as approved by the Compensation Committee.

 

In January 2007, Compass Consulting and Benefits, Inc., our Compensation Committee’s consultant at that time,2008, Hewitt provided the committeeCompensation Committee with an analysis of total direct compensation for our elected officers, including for each Named Executive, based onindicating the median compensation targeted by compensation element for similarly situated executives in our market, together withmarket. Additionally, Hewitt presented the separate recommendations of the consultantHewitt and our Chief Executive Officer with respectas to the 20072008 base salaries and Hewitt’s market analysis of the Named Executives.

The Compensation Committee asked Hewitt to provide further market compensation analysis for selected positions in connection with the October 1, 2008 promotions of Messrs. Fees, Bethards and Nesser. After reviewing the analysis and the separate recommendations of Hewitt and our benchmark.Chief Executive Officer for each position, the Compensation Committee increased Mr. Bethards’ annual base salary to $526,200, which equaled the median salary for his position in our market. Based on Mr. Nesser’s skills and experience, as well as the change in responsibility from corporate and legal focus to an operations focus, and on consideration of survey data of our market and our Custom Peer Group, the Compensation Committee considered Mr. Nesser’s base salary competitive for his new position and his salary remained unchanged. Our Board of Directors set Mr. Fees’ base salary and other compensation at the time of his appointment. In setting Mr. Fees’ annual base salary as Chief Executive Officer, our Board of Directors considered a number of market practices and other factors regarding internal chief executive officer promotions highlighted by Hewitt, including the following:

 

20072008 Overview.  OurThe Compensation Committee administers our short-term incentive compensation program under our Executive Incentive Compensation Plan, which we refer to as the EICP, was most recently approved by our shareholdersEICP. For 2008, the Compensation Committee authorized separate discretionary bonus payments in 2006. addition to the amounts paid under the EICP. See “— Analysis of 2008 Discretionary Awards” below for more information regarding the discretionary payments.

The EICP is a cash bonus plan designed to motivate and reward our Named Executives and other key employees for their contributions to business goals and other factors that we believe drive our earningsand/or create shareholder value. The payment amount, if any, of an EICP award is determined based on: (1) the attainment of short-term financial goals; (2) the attainment of short-term individual goals; and (3) the exercise of the Compensation Committee’s discretionary authority. The EICP award is generally expressed as a percentage of the Named Executive’s annual base salary. For more information regarding the mechanics of the EICP and the 20072008 award opportunities under the EICP, see the Grants of Plan-Based Awards table under “Compensation of Executive Officers” below on page 29 and the accompanying narrative disclosures under the heading““Compensation of Executive Officers — Estimated Possible Payouts Under Non-Equity Incentive Plan Awards.” In 2008, the Compensation Committee requested that Hewitt assess our compensation programs with a specific focus on the EICP. Based on the input received from Hewitt following that review, the Compensation Committee determined that the overall structure of our EICP was competitive for purposes of providing 2008 annual bonus compensation.

 

2007 EICP Changes.  Prior to 2007, each EICP award was weighted between the financial and individual goals, with 0-140% attributable to the attainment of financial goals and 0-30% attributable to the attainment of the individual goals. OurThe Compensation Committee also had the discretion to award up to an additional 30% of the target EICP award. Relative to the individual goals and discretionary components, our Compensation Committee considered theconsiders financial goals to be more objective and to more directly influence the creation of shareholder value.value, as compared to individual goals and the exercise of the Compensation Committee’s discretion. As a result, our Compensation Committee changed the weighting allocation among the components to give greater weightlargest percentage of an EICP award is allocated to the attainment of financial goals. For 2007,With respect to our 2008 EICP awards, up to 170% of an EICPa target award was attributable to financial performance relative to the attainment of the financialspecific goals, andwhile up to 30% of an EICP award was attributable to thea Named Executive’s performance relative to specific individual goals determined and evaluated by our Chief Executive Officer. Ourgoals. The Compensation Committee may increase or decrease an EICP award in its discretion. Thediscretion and the maximum EICP award a Named Executive can earn is 200% of his target EICP award.

 

 

20072008 EICP Target Awards.  For 2007, ourThe Compensation Committee set the amount of target 2008 EICP awards for all Named Executives, including Mr. Wilkinson but excluding Mr. Taff, at or near the median annual incentive award targeted by our market for similarly situated executives. Specifically,The Compensation Committee determined the median annual incentive award target for our market as a percentage of median annual base salary for our market (rather than the median dollar amount of the awards targeted by our market). With regard to Mr. Taff, after considering his 2007 promotion to Chief Financial Officer as discussed above under “— Annual Base Salary,” the Compensation Committee increased his 2008 target EICP award to 55% from 45% in 2007. As a percentage of annual base salary, Mr. Taff’s 2008 target EICP award was approximately 21% below the median target annual bonus (as a percentage of median annual base salary) for chief financial officers in our market. Otherwise, the 2008 EICP target awards, as a percentage of annual base salary, for

 

20072008 EICP Financial Goals.  Our Compensation Committee establishes three levels of financial goals for determining the threshold, target and maximum payment under an EICP award for financial performance. For the 20072008 EICP awards, ourthe Compensation Committee set financial goals based uponyear-over-year increases in our consolidated and, where applicable, segment operating income. We considerThe Compensation Committee considers operating income the optimal businessan appropriate financial measure to use for this purpose, because we believeit believes it is the primary driver of net income, which we expectit expects to drive our stock price. In comparison to net income, operating income is more directly influenced by the revenues generated and costs incurred as a result of management action, and is more readily attributable to our operating segments.

20072008 EICP Individual Goals.  As discussed above under “— 2008 Overview” above, collectively the individual goals represent 0-30% of each Named Executive’s EICP award. The individual goals and target weightingtheir respective weightings for our Named Executives’ 20072008 EICP awards were set as follows:

 

 

 

2007Analysis of 2008 EICP Payments.  In February 2008,2009, our Chief Executive Officer presented ourthe Compensation Committee with an assessment regarding the financial and individual performance goals applicable to each of the Named Executives, together with his recommendation for each Named Executive’s 20072008 EICP award.

 

Financial Component Payment.Payment  To determine:  Financial performance accounted for 85% of each Named Executive’s target 2008 EICP award or, depending on the amountperformance achieved, 0-170% of the 2007final EICP award amount. As discussed above, the financial goals consisted of consolidatedand/or segment operating income goals with three performance levels that determined threshold, target and maximum payments. Operating income at the threshold level would produce a payout of 25% of the target EICP award attributable to financial goals. Operating income at the target and maximum levels would produce a payout of 100% and 200%, respectively, of the target EICP award attributable to financial goals. The percentage paid out between threshold and maximum is interpolated. No payment would be paidmade under the financial component which constitutes 0-170%if the level of operating income earned was below the EICP award amount, theapplicable threshold level.

The Compensation Committee considered McDermott’s 2007our 2008 GAAP consolidated and segment operating income in light of the established operating income goals. BecauseMcDermott earned approximately $570 million of consolidated operating income in 2008, which exceeded the levelsthreshold goal but not the target goal and resulted in a 51% payout on the financial component related to consolidated operating income goals. At least part of the financial component of the 2008 EICP award for all Named Executives (including Mr. Wilkinson) was based on consolidated operating income results. As a result, all six Named Executives earned 51% of that portion of the target financial component that was tied to consolidated operating income. B&W earned over $450 million of operating income, attainedwhich exceeded its maximum level and resulted in a 200% payout on the maximum financial goalcomponent related to B&W operating

 

Individual Component Payment.Payment  Our Compensation Committee also considered the Chief Executive Officer’s assessments:  Individual performance accounted for 15% of each Named Executive’s target 2008 EICP award, or, depending on the level of individual and financial performance, 0-30% of the final EICP award amount. The Compensation Committee considered (1) the Governance Committee’s assessment of the individual performance of Messrs. Fees and Wilkinson and (2) Mr. Fees’ assessment of each other Named Executive’s individual performance. In addition to those assessments, the Compensation Committee applied the following three general principles to determine the amount to be paid underfor individual performance:

Mr. Fees and Mr. Taff both achieved all of their individual goals. However, the portion of Mr. Fees’ award attributable to his service as McDermott’s Chief Executive Officer, and as to Mr. Taff, the Compensation Committee limited their respective individual components to 15% since the consolidated operating income results were below target performance levels. As to Mr. Fees’ individual component related to that portion of his EICP award received as Chief Executive Officer of B&W, the Compensation Committee approved the individual component which constitutes 0-30% of the EICP award amount. Each of Mr. Deason and Mr. Kalman achieved the individual goals applicable to him. As a result, our Compensation Committee accepted our Chief Executive Officer’s recommendation to pay each of those Named Executivesthat portion at 30% of their target award amount.. Messrs. Wilkinson, Fees,Bethards, Nesser and TaffWilkinson met or exceeded their individual goals, except with respect to one of their goals, which in each case was only partially achieved. Mr. Nesser, as to that portion of this EICP award attributable to his service as McDermott’s Chief Administrative and Legal Officer, and Mr. Wilkinson, earned slightly less than the 15% target amount as a result of the consolidated operating income results, and Mr. Bethards earned slightly less than 30% for individual performance as to both of his EICP awards as a result of B&W’s operating income results. As a result of J. Ray’s operating income results, Mr. Nesser earned no payment on the individual goals achievedcomponent of his EICP award attributable to his service as Chief Operating Officer of J. Ray.

Analysis of 2008 Discretionary Awards.  The financial performance of J. Ray in 2008 negatively impacted the amount of EICP awards paid out to each Named Executive for 2008. The Compensation Committee believed that J. Ray’s results disproportionately impacted the EICP awards of Messrs. Fees, Bethards, Nesser and Taff. Specifically, the awards earned by Messrs. Fees and Nesser were both considerably lower than the awards they would have otherwise received in recognitiontheir former positions. To a lesser extent, Mr. Bethards’ EICP award was affected by J. Ray’s financials as a result of each officer’sthe consolidated operating income goal that became applicable to him on his appointment as Chief Executive Officer of B&W. In addition, Mr. Taff’s target EICP award was already 21% below market-median, as discussed above. However, as a result of J. Ray’s financial performance, Mr. Taff’s actual 2008 award was approximately 46% below market, which the Compensation Committee concluded was significantly beyond the reasonable range of competitive compensation. Finally, the Compensation Committee considered the below-market salary and bonus paid to Mr. Fees and the execution of his100-day plan as McDermott’s Chief Executive Officer. As a result, the Compensation Committee authorized additional awards to these Named Executives in amounts it considered reasonable and appropriate under the circumstances to incentivize and reward them for their individual contribution to the individual goal partially achieved, our Compensation Committee accepted the recommendationoverall performance of our Chief Executive OfficerMcDermott. No discretionary bonus was paid to pay each of these Named Executives 20% of their target award amount under the individual component and an additional 5% under its discretionary authority.Mr. Deason, as discussed above, or to Mr. Wilkinson, who retired in 2008.

 

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

 

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

Mix of 2008 Equity.  In 2006 and 2007, Overview.  Similarthe Compensation Committee relied exclusively on performance shares to deliver equity-based compensation to Named Executives. These performance shares generally provided for vesting three years from the date of grant in an amount between 0% and 150% of the number of shares granted depending on the level of cumulative consolidated operating income achieved during2006-2008, for the 2006 grants, and2007-2009, for the 2007 grants. At the Compensation Committee’s request, Hewitt reviewed our long-term incentive program relative to the equity practices among the companies in our J.Ray/Corporate Group and our Custom Peer Group. Hewitt’s analysis showed that both groups use a mix of equity types but relied to a significant extent on time-based vesting awards such as restricted stock. Accordingly, Hewitt recommended that the Compensation Committee consider adding restricted stock for retention purposes and to remain competitive with our market. Having considered Hewitt’s analysis and in consideration that compensation elementthrough both our EICP awards and performance share awards is based on achieving operating income targets, the Compensation Committee concluded that using restricted stock as part of total directour equity-based compensation consisted entirelyprogram was important for retention purposes. However, the Compensation Committee decided that a majority of grantsequity-based compensation for senior executives, including Named Executives, should continue to be performance-based. As a result, the Compensation Committee approved the use of a mix of performance shares whichand restricted stock awards in 2008 along the following general guidelines:

Similar to prior years, our 2008 performance shares are generally scheduled to vest three years from the date of grant in an amount between 0% and 150% of the target share amountnumber of shares granted, depending on the level of our cumulative consolidated operating income for 2007,achieved during2008-2010. The shares of restricted stock we awarded in 2008 generally vest one-third on the first, second and 2009. Consistent with our compensation philosophy, our Compensation Committee structuredthird anniversary of the 2007date of grant. For 2008, performance shares with variable vesting contingent on operating income to encouragerepresented approximately 75% and reward financial performance we expect to generate shareholder value. Additionally, our Compensation Committee believes that the three-year vesting condition provides an important retention component. The 2007 performance share grants accounted for betweenrestricted stock represented approximately 40% and 50% of the 2007 target total direct compensation25% of our Named Executives, excludingExecutives’ equity-based compensation, except for Mr. Kalman, who announcedBethards. Restricted stock comprised approximately 54% of Mr. Bethards’ 2008 equity-based compensation due to a restricted stock grant made in connection with his intentpromotion to retire prior to the grantingChief Executive Officer of B&W. That grant was made in November 2008, and, with one-third of the 2007 long-term compensation awards.performance measurement period already completed, the Compensation Committee believed that restricted stock provided a greater incentive at that time than performance shares.

 

For more information regarding the 20072008 performance shares,share and restricted stock awards, see the Grants of Plan-Based Awards table under “Compensation of Executive Officers” below on page 29 and the accompanying narrative disclosures under the heading““Compensation of Executive Officers — Estimated Future Payouts Under Equity Incentive Plan Awards.”

 

2007 Target Long-Term Compensation.  For 2007,Sizing Equity Awards.  The Compensation Committee generally determines the performance shares granted generally reflectedsize of equity awards as a percentage of a Named Executive’s annual base salary, rather than granting a targeted number of shares. The Compensation Committee determined the median valueamount of each Named Executive’s target equity-based compensation, as a percentage of his annual stock awardsbase salary, based on market data provided by Hewitt. Hewitt applied a discount to similarly situated executives in

 

On the recommendationBased on information provided by management, ourthe Compensation Committee tied theset cumulative operating income at the target and maximum vesting levels toat amounts that represent 6% and 10%year-over-year increases in our operating income from assumedthe same adjusted 2007 operating income levels. Ouramounts used to set payouts under our 2008 annual bonus plan. The Compensation Committee determined to structure performance share vesting around the same baseline used in connection with the 2007 EICP goal as the baseline operating income to determine the cumulative operating income goal for target vesting (100%). By structuring target vesting from target EICP,determination of our Compensation Committee soughtannual bonus, to complement and leverage consolidated operating income results that may be achieved as a result of our annual bonus element to Total Direct Compensation. To determineawards. In addition, the cumulative operating income goal for maximum vesting (150%), our Compensation Committee assumed 2007 operating income at a level it expectedsought to encourage consistent and profitable growth. By increasing operating income at 10% annually from that baseline, our Compensation Committee sought to drivegrowth while driving the creation of significant shareholder value by setting the goal for maximum vesting at a level that was approximately 45% higher than the cumulative operating income goal for maximum vesting undervalue. Finally, consistent with our 2006 and 2007 performance shares. Finally, as with our 2007 EICPshare awards, ourthe Compensation Committee believesconcluded that, based on the levels of the performance goals established, no performance shares should vest for cumulative operating income below 85% of the target level. As a result, no portion of our 2007 performance share awards will vest if our cumulative operating income is below the threshold level for the three-year measurement period.

 

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

 

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

 

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

 

 

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