Sincerely yours,

 

BRUCE W. WILKINSON

The 20072008 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 4, 2007,9, 2008, at 9:30 a.m. local time, in order to:

 

 

 

 

 

If you were a stockholder as of the close of business on March 26, 2007,31, 2008, you are entitled to vote at the meeting and at any adjournment thereof.

 

 

We have enclosed a copy of our 20062007 Annual Report to Stockholders with this notice and proxy statement.

 

By Order of the Board of Directors,

LIANE K. HINRICHS

Secretary

 

 

 

 

We are mailing this proxy statement and accompanying proxy card to our stockholders beginning on MarchApril   , 2007.2008. Our Board of Directors is soliciting your proxy to vote your shares at our Annual Meeting to be held on May 4, 2007.9, 2008. We will bear all expenses incurred in connection with this proxy solicitation, which we expect to conduct primarily by mail. We have engaged The Proxy Advisory Group, LLC to assist in the solicitation for a fee that will not exceed $10,000, 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”), 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”), the trustee of that plan has sent you this proxy statement and a voting instruction form, which you can use to direct the trustee on how to vote your plan shares.

 

Our Board of Directors selected March 26, 200731, 2008 as the record date (the “Record Date”) for determining stockholders entitled to vote at the Annual Meeting. This means that if you were a registered stockholder with our transfer agent and registrar, Computershare Trust Company, N.A., on the Record Date, you may vote your shares on the matters to be considered by our stockholders at the Annual Meeting. If your shares were held in street name on that date, the broker or other nominee that was the record holder of your shares has the authority to vote them at the Annual Meeting. They have forwarded to you this proxy statement seeking your instructions on how you want your shares voted.

 

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

 

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

 

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

 

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

 

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

 

If you submit a signed proxy card without specifying your vote, your shares will be voted “FOR” the election of all director nominees, the proposalsproposal to amend our Articles of Incorporation and the ratification of our Audit Committee’s appointment of Deloitte & Touche LLP as our independent registered public accounting firm for the year ending December 31, 2007.2008. If you hold your shares in street name and you do not instruct your broker or nominee how to vote those shares, they may vote your shares as they decide as to matters for which they have discretionary authority under the applicable New York Stock Exchange rules. Your broker will be entitled to vote your shares in its discretion, absent instructions from you, on the election of directors, the proposalsproposal to amend our Articles of Incorporation and the ratification of the appointment of the independent registered public accounting firm.

 

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

 

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

 

 

 

Our Articles of Incorporation provide for the classification ofHistorically, our Board of Directors has been classified into three classes, and provide thatwith the term of office of one class shall expireexpiring each year. We have proposed an amendment toIn 2007, with the approval of our stockholders, we amended our Articles of Incorporation to among other things, declassifyphase 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 provide fora 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 of directors over a three-year period, as more fully described in Item 2 to this Proxy Statement.election. Currently, our Board of Directors has ten members. John F. Bookout III, who became a director in October 2006, was assigned to Class III.

 

The term of office of our Class IIII directors — John F. Bookout III, Ronald C. Cambre,Roger A. Brown, Oliver D. Kingsley, Jr., and Bruce DeMars and Robert W. GoldmanWilkinson — will expire at this year’s Annual Meeting. On the nomination of our Board, Messrs. Bookout, CambreBrown, Kingsley and Goldman and Admiral DeMarsWilkinson will stand for re-electionreelection as Class IIII directors at this year’s Annual Meeting for a term of three years as required under our current Articles of Incorporation.one year.

 

In May 2006, we amended our by-laws toOur By-Laws provide that (1) a person shall not be nominated for election or re-electionreelection 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 re-election.

 

Unless otherwise directed, the persons named as proxies inon 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 III Directors” and “Class IIIII 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 or are standing for election as directors at this year’s Annual Meeting.stockholders.

 

We maintain a corporate governance section on our website which contains copies of our principal governance documents. The corporate governance section may be found atwww.mcdermott.comat “Investor Relations“Corporate Governance — 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
Officers, Board Members & Contact Information

 

In addition, our Code of Business Conduct may be found on our website atwww.mcdermott.comat “Corporate InfoGovernance — Ethics.”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 “Investor Relations“Corporate Governance — Corporate Governance.Governance Policies.”

 

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

 

 

Messrs.Neither Mr. McWilliams andnor Mr. Schievelbein have nohas any relationship with McDermott, except as directorsa director and stockholders.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 Boardboard of Directors, and for Mr. Brown, considered ordinary course transactions between McDermott and Smith International, Inc. for which he is an officer.directors. With respect to Mr. Bookout, who joined our Board in October 2006, our Board also considered an unsolicited 2007 contribution by McDermott to a charitable organization for which Mr. Bookout’s spouse is a current director and an unsolicited 2005 contribution by McDermott to a charitable organization for which one of Mr. Bookout’s family membersspouse formerly served as a member of its Board. Finally, indirector. In determining the independence of Mr. Howard, our Board considered unsolicited2004-20062005-2007 contributions by McDermott to a charitable organization for which he serves as a member of the Board. The charitable contributions described above were in the usual course of McDermott’sour annual giving programs pursuant to which McDermott and itsour subsidiaries make donations to in excess of approximately 200 charitable organizations.

 

Stockholders or other interested persons may send written communications to the independentnonmanagement members of our Board, addressed to Board of Directors (independent members),c/o McDermott International, Inc., Corporate

 

In January 2007, our Board approved the continued designation of Admiral DeMars as lead director to preside at all executive sessions of nonmanagement directors. Admiral DeMars has served as lead director since January 2004. In his absence, the remaining nonmanagement directors may appoint a presiding director by majority vote. The nonmanagement directors meet in executive session without management on a regular basis. Stockholders or other interested persons may send written communications to Admiral DeMars, addressed to Admiral DeMars,c/o McDermott International, Inc., Corporate Secretary’s Office, 777 N. Eldridge Pkwy., Houston, Texas 77079.

 

Board of Directors.  Our Board met fiveseven times during 2006.2007. All directors attended 75% or more of the meetings of the Board and of the committees on which they served during 2006.2007. In addition, as reflected in our Corporate Governance Guidelines, we have adopted a policy that each member of our Board must make reasonable efforts to attend our Annual Meeting. All directors then serving on the Board attended our 20062007 Annual Meeting.

 

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

 

 

Audit Committee.  During the year ended December 31, 2006,2007, the Audit Committee met sevenfive times. The Audit Committee’s role is financial oversight. Our management is responsible for preparing financial statements, and our independent registered public accounting firm is responsible for auditing those financial statements. The Audit Committee is not providing any expert or special assurance as to our financial statements or any professional certification as to the independent registered public accounting firm’s work.

 

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

 

Our Board has determined that Messrs. McWilliams, Bookout and Goldman and Admiral DeMars each qualify as an “audit committee financial expert” within the definition established by the Securities and Exchange

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

Finance Committee.  Our Board of Directors constitutedDuring the year ended December 31, 2007, the Finance Committee in January 2007 formet six times. The Finance Committee has the general purposeoverall responsibility of reviewing and overseeing financial policies and strategies, mergers, acquisitions and financings, liabilities and investment performance of our pension plans and the capital structures of McDermott and its subsidiaries.

Governance Committee.  During the year ended December 31, 2006, the Governance Committee met fiveseven times. This committee, in addition to other matters, recommends to our Board of DirectorsDirectors: (1) for approval and adoption, the qualifications, term limits and nomination and election procedures relating to our directors,directors; (2) nominees for election to our Board of Directors,Directors; and (3) compensation of non-managementnonmanagement 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.

 

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, 2006,2007, or had previously been, an officer or employee of McDermott or its subsidiaries or (2) had any material interest in a transaction of McDermott or a business relationship with, or any indebtedness to, McDermott. No interlocking relationship existed during the year ended December 31, 20062007 between any member of the Board of Directors or the Compensation Committee and an executive officer of McDermott.

 

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

 

 

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

 

 

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

 

Any stockholder may nominate one or more persons for election as one of our directors at an annual meeting of stockholders if the stockholder complies with the notice, information and consent provisions contained in ourby-laws. See “Stockholders’ Proposals” in this proxy statement and our by-laws, which may be found on our website atwww.mcdermott.comat “Investor Relations“Corporate Governance — 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 may determine not to recommend those candidates to the Board, and the Board may determine not to nominate those candidates. None of the director nominees for the 2008 Annual Meeting are standing for election for the first time.

 

 

 

Set forth below is the age (as of May 4, 2007)9, 2008), the principal positions held with McDermott or our subsidiaries, and other business experience information for each of our executive officers other than Bruce W. Wilkinson, who is our Chief Executive Officer and Chairman of the Board. For more information on Mr. Wilkinson, see his biographical information under “Election of Directors.”Directors” above. Unless we otherwise specify, all positions described below are positions with McDermott International, Inc.

 

Robert A. Deason, 61,62, has been President and Chief OperatingExecutive Officer of our subsidiary J. Ray McDermott, S.A. since March 2003.June 2007. Previously, he was:served as President and Chief Operating Officer of J. Ray McDermott, S.A. from March 2003 to June 2007. He was also Vice President, Operations of Fluor Corporation, an engineering, procurement, construction and maintenance services company, from March 1999 to January 2003; and Vice President, Project Management Production, Pipelines & Marine Services of Fluor Corporation from June 1997 to March 1999.

 

James R. Easter, 50,51, has been our Vice President, Corporate Development and Strategic Planning since March 2006. Previously, he was: Vice President, Finance and Treasurer from September 2002 to February 2006; Assistant Treasurer of McDermott from May 2002 to September 2002; Vice President in the Retail Energy Solutions Group of Reliant Resources, Inc., an electricity and energy services company, from December 2000 to May 2002; and was associated with Industrial Growth Partners LP, a private equity fund, from January 2000 to December 2000.

 

John A. Fees, 49,50, has been our President and Chief Executive Officer of our subsidiary The Babcock & Wilcox CompaniesCompany since January 2007 and President and Chief Operating Officer of our subsidiary BWX Technologies, Inc. since September 2002. Previously, he served as President and General Manager of BWXT Services, Inc., a subsidiary of BWX Technologies, from September 1997 to November 2002.

 

Liane K. Hinrichs, 49,50, has been our Vice President, General Counsel and Corporate Secretary since January 2007. Previously, she served as our Corporate Secretary and Associate General Counsel, Corporate Compliance and Transactions from January 2006 to December 2006; as Associate General Counsel, Transactions, Corporate Compliance and Deputy Corporate Secretary from June 2004 to December 2005; as Assistant General Counsel, Corporate Secretary and Transactions from October 2001 to May 2004; and as Senior Counsel from May 1999 to September 2001. Prior to joining McDermott in 1999, she was a partner in a New Orleans law firm.

 

Francis S. Kalman, 59,60, has beenannounced his intent to retire from McDermott in 2008. He served as our Executive Vice President and Chief Financial Officer sincefrom February 2002.2002 to April 2007 when he retired from his position as Chief Financial Officer. He continues to serve as Executive Vice President. Previously, he was:served as Senior Vice President and Chief Financial Officer of Vector ESP, Inc., a technology solutions provider, from March 2000 to February 2002; as a principal of Pinnacle Equity Partners, LLC from April 1999 to March 2000; as Executive Vice President and Chief Financial Officer of Chemical Logistics Corporation, a logistics company specializing in the storage and movement of chemicals, from February 1998 to April 1999; and as Senior Vice President and Chief Financial Officer of Keystone International, Inc., a manufacturer of industrial products, from May 1996 to September 1997. Mr. Kalman is a director of Pride International, Inc.

 

 

John T. Nesser, III, 58,59, has been our Executive Vice President, Chief Administrative and Legal Officer since January 2007. Previously, he wasserved as our Executive Vice President and General Counsel from January 2006 to December 2006;January 2007; as Executive Vice President, General Counsel and Corporate Secretary from February 2001 to December 2005;

 

 

McDermott’sOur compensation programs are based on our belief that our ability to hireattract, retain and retainmotivate employees and executives with the requisite skillsskill and experience to develop, expand and execute sound business opportunities is essential to our success and the success of our shareholders. WhileTo that end, we believe that McDermott offers a work environment in which employees can find attractive career challengesdesign and opportunities, we also understand that those employees have a choice regarding where they pursue their careers and the compensation we offer plays a significant role in their decision to choose McDermott. As a result, we seek to deliver fair and competitive compensation for our employees, including named executive officers (“NEOs”), by structuring compensation principally around two goals. First, we target compensation at or near the median of the market. Second, we believe employees should be rewarded for executing on goals designed to generate returns for our shareholders but not for poor performance. As a result, we tie selected elements of our programs that target market-median compensation to individualand/or company performance capable of producing above or below market-median compensation depending on the achievement of predetermined performance measures.

 

 

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

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

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

Relationship of Elements.  The determination of each element of total direct compensation (base salary, annual bonus compensation plans have received stockholder approval and long-term compensation) is generally independent of the decisions regarding other elements, except to the extent applicable, were prepared withannual bonus amounts or long-term compensation are expressed as percentages of base salary. However, when determining each element, the intention that our incentiveCompensation Committee considers the overall effect of each element on total direct compensation would qualify as performance-basedfor a Named Executive relative to the median compensation under Section 162(m). While we intend to continue to rely on performance-based compensation programs, we are cognizant of the needmarket for flexibilitysimilarly situated officers. Our Compensation Committee reserves the right to adjust the compensation of any individual element to ensure the reasonablenessand/or competitiveness of the total direct compensation for a Named Executive. However, our Compensation Committee made no such adjustments to base salary, annual bonus or long-term compensation awarded to Named Executives in making executive compensation decisions, based on the relevant facts and circumstances, so that the best interests of McDermott and our shareholders are achieved. To the extent consistent with this goal and to help us manage our compensation costs, we attempt to satisfy the requirements of Section 162(m) with respect to those elements of our compensation programs that are performance-based.2007.

 

We use the base salary element of Total Direct Compensation toBase salaries provide the foundation of a fair and competitive compensation opportunity for each individual NEO. We reviewour total direct compensation. Our Compensation Committee reviews base salaries annually and target salary compensationtargets base salaries at or near the median base salary practices of the market, but maintainour market. Our Compensation Committee maintains flexibility to deviate from market-median practicescompensation for individual circumstances. Generally,circumstances but generally does not consider the ratio of the Chief Executive Officer’s compensation to the other Named Executives.

In January 2007, Compass Consulting and Benefits, Inc., our Compensation Committee startsCommittee’s consultant at that time, provided the Total Direct Compensation analysis at the last committee meeting of each calendar year by reviewing compensation trends identified by Compass Consulting. At the beginning of each year, Compass Consulting presents our Compensation Committee with itsan analysis of market-median Total Direct Compensation,total direct compensation for each Named Executive based on the median compensation for similarly situated executives in our market, together with the separate recommendations of Compass Consultingthe consultant and our Chief Executive Officer with respect to the base salaries of each NEO. The determination of base salaries is generally independent of the decisions regarding other elements of compensation, but the other elements of Total Direct Compensation are dependent on the determination of base salary, to the extent they are expressed as percentages of base salary.

After reviewing the recommendations and market survey information, our Compensation Committee set 2007 base salaries for the Named Executives (except Mr. Wilkinson) at or within 2% below the median market base salaries identified, with the exception ofsalary indicated by our Chief Executive Officer.benchmark. At the Chief Executive Officer’sMr. Wilkinson’s request, his 20062007 salary remainedwas unchanged from 2006. As a result, his 2007 salary was about 27% below market-median at $750,000 per year, after a 7.1% increase from the prior year. Otherwise, themedian base salaries ofsalary indicated by our NEOs were within 7% of market-median.

 

2007 Overview.Our Compensation Committee administers our Executive Incentive Compensation Plan, (the “EICP”)which we refer to provideas the short-term incentive compensation element ofEICP, was most recently approved by our Total Direct Compensation program.shareholders in 2006. The EICP is a cash-based performance incentive programcash bonus plan designed to motivate and reward NEOsour Named Executives and other key employees for their contributions to factorsbusiness goals and business goalsother factors that we believe drive our earningsand/or create shareholder value.

 

 

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

2007 EICP Individual Goals.  The individual performance measuresgoals and target weighting for our Chief Executive Officer based on the Board of Director’s evaluation and adopted specific individual performance measures recommended by our Chief Executive Officer for our remaining NEOs.Named Executives’ 2007 EICP awards were set as follows:

 

For Bruce W. Wilkinson, our Chief Executive Officer, the individual measures and their weights of the target EICP award were set as follows:Officer:

 

 

For Francis S. Kalman, our Executive Vice President and former Chief Financial Officer, the individual measures and their weights of the target EICP award were set as follows:Officer:

 

 

For Robert A. Deason,Michael S. Taff, our Senior Vice President and Chief Operating Officer of J. Ray McDermott, S.A., the individual measures and their weights of the target EICP award were set as follows:Financial Officer:

 

 

In prior2007 Overview.  Similar to 2006, the long-term compensation element of total direct compensation consisted entirely of grants of performance shares, which vest three years we have granted equity-from the date of grant in an amount between 0% and cash-based awards under our 2001 Directors & Officers Long-Term Incentive Plan (the “2001 D&O Plan”) in amounts consistent with market trends and in150% of the form of non-qualified stock options and full value awards such as restricted stock, deferred stock units and performance units. For 2006, Compass Consulting analyzedtarget share amount depending on the form of stock awards among Peer Group companies and reported to our Compensation Committee a decline over the prior two years in the use of stock options in favor of restricted stock, performance awards and long-term cash-based incentives. As a result, and to emphasize the performance naturelevel of our Total Direct Compensation, our Compensation Committee granted performance shares to our officerscumulative operating income for 2007, 2008 and key employees, including our NEOs, instead of stock options in 2006.

For more information regarding the 2007 performance shares, see the Grants of Plan-Based Awards Table below on a pre-split basis atpage    and the timeaccompanying narrative disclosures under the market analysis was prepared)heading“Estimated Future Payouts Under Equity Incentive Plan Awards.”

2007 Target Long-Term Compensation.  For 2007, the performance shares granted generally reflected the market-medianmedian value of annual stock awards to similarly situated executives in our market, with the exception of our Chief Executive Officer.Mr. Wilkinson. At his request, the value of target performance shares granted to him was approximately 50% of the market-medianmedian value. The values of the target performance shares granted to the other NEOsNamed Executives in 20062007 were all within 15%2% of market-median.

2007 Performance Targets for Long-Term Compensation.  The 2007 performance shares vest between 0% and 150% of the dateamount of grant based on our cumulative GAAP operating income for the three-year period ending on December 31, 2008. These grants containshares initially granted relative to threshold, target and maximum levels of cumulative GAAP operating income and will vest, if at all, between 25% (threshold) and 150%

We do own a fractional interest in two aircraft, which we acquired and use for business purposes and which we make available to our NEOs and other executive officersNamed Executives for personal use upon the approval of our Chief Executive Officer. With respect toWhen 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 andbut higher income taxes to us due to Internal Revenue Service limitations on deducting the full amount of aircraft expenses ifthat exceed the income imputed income is based on SIFL rates.to employees. To minimize our cost of providingpermitting the perquisite,personal use of the aircraft, we impute income to the executive officer for personal use of aircraft to our Named Executives based on the actual cost incurred by us for the flight. Please reviewflight, rather than the SIFL rates.

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

Since the two aircraft are used primarily for business travel, incremental costs generally exclude fixed costs such as the purchase price of our interests in the aircraft, aircraft management fees, depreciation, maintenance and insurance. Our cost for flights using aircraft, whether business or personal, is not affected by the number of passengers. As a result, we do not assign any amount, other than the amount of any disallowed deduction, when computing incremental costs for the presence of guests accompanying narrative disclosures presenteda Named Executive on such flights. While we do not generally incur any additional cost, this travel may result in this proxy statementimputed income to the Named Executive and disallowed deductions on our income taxes. We provide the Named Executive with a taxgross-up for more information on perquisites and other personal benefits we providethe imputed income when spousal attendance is related to our NEOs.the underlying business purpose of a particular flight.

 

We also sponsor an unfunded nonqualifiedSupplemental Plans.  In 2005, as part of our philosophy to move away from defined benefit plans, our management recommended that the Board of Directors and the Compensation Committee terminate our then existing defined benefit supplemental executive retirement plan (“SERP”), which covers officers selected for participation byplan. In its place, our Compensation Committee. Our Board of Directors and Compensation Committee established a new supplemental executive retirement plan, which we refer to as the SERP, in 2005 upon the recommendation of management to help ensuremaintain the competitiveness of our Post-Employment Compensation Programpost-employment compensation as compared to our Peer Group.market. The SERP replaced our former, more expensive, defined benefit supplemental executive retirementis an unfunded, nonqualified plan andthat provides participants an opportunity to participate in a defined contribution plan with benefits based upon the participant’s notional account balance at the time of retirement or termination. Annually, we credit a participant’s notional account with an amount equal to 5% of the participant’s base salary and annual bonus,bonus. The Compensation Committee has designated deemed mutual fund investments to serve as indices for the purpose of determining notional investment gains and losses to the participant’s account. Each participant allocates the annual notional contribution among the various deemed investments. SERP benefits are based on the participant’s vested notional account balance at the time of retirement or such other amounts as determined by our Compensation Committee.termination. Please see the Nonqualified Deferred Compensation table on page    and accompanying narrative for further information about the SERP and our contributions to our NEOs’Named Executives’ accounts.

 

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

 

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

 

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

 

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

 

THE COMPENSATION COMMITTEE

 

 

The following table summarizes compensation of our Chief Executive Officer, our current and former Chief Financial Officer and our three highest paid executive officers other thanwho did not serve as our CEO and CFO during 2007, whom we refer to as our Named Executives, for the fiscal yearyears ended December 31, 2006.2006 and December 31, 2007. No compensation information for Mr. Taff is provided for 2006 because he became a Named Executive in 2007. Amounts will be included under the “Non-Equity Incentive Plan Compensation” and “Total” columns when the non-equity incentive plan compensationNon-Equity Incentive Plan Compensation is determined.