Dear Stockholder:

 

You are cordially invited to attend this year’s Annual Meeting of Stockholders of McDermott International, Inc., which will be held on Friday, May 4, 2007, at 757 N. Eldridge Parkway, Houston, Texas 77079, on the 14^th floor, commencing at 9:30 a.m. local time. The notice of annual meeting and proxy statement following this letter describe the matters to be acted on at the meeting.

 

If Computershare Trust Company, N.A., our transfer agent and registrar, holds your shares of record, we have enclosed a proxy card for your use. You may vote these shares by completing and returning the proxy card or, alternatively, calling a toll-free telephone number or using the Internet as described on the proxy card. If a broker or other nominee holds your shares in “street name,” your broker has enclosed a voting instruction form, which you should use to vote those shares. The voting instruction form indicates whether you have the option to vote those shares by telephone or by using the Internet.

 

Thank you for your support of our company.

 

Sincerely yours,

 

BRUCE W. WILKINSON

 

 

 

 

McDERMOTT INTERNATIONAL, INC.

777 N. Eldridge Pkwy.
Houston, Texas 77079

 

 

Notice of 2007 Annual Meeting of Stockholders

 

 

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

 

(1)  elect four Class III Directors;

 

(2)  amend our Articles of Incorporation to declassify our Board of Directors, as provided in Item 2;

 

(3)  amend our Articles of Incorporation to increase the number of authorized shares of our common stock from 150,000,000 to 400,000,000;

 

(4)  ratify our Audit Committee’s appointment of Deloitte & Touche LLP as our independent registered public accounting firm for the year ending December 31, 2007; and

 

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

 

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

 

Please indicate your vote as to the matters to be acted on at the meeting by following the instructions provided in the enclosed proxy card or voting instruction form, whether or not you plan on attending the meeting. If you plan to attend the meeting and wish to vote or change your vote there, please review the instructions set forth in the 2007 Proxy Statement under “Voting Information.”

 

We have enclosed a copy of our 2006 Annual Report to Stockholders with this notice and proxy statement.

 

By Order of the Board of Directors,

 

LIANE K. HINRICHS

Secretary

 

Dated:  March 30, 2007

 

 

PROXY STATEMENT FOR 2007 ANNUAL MEETING OF STOCKHOLDERS

 

 

TABLE OF CONTENTS

 

 

We are mailing this proxy statement and accompanying proxy card to our stockholders beginning on March 30, 2007. Our Board of Directors is soliciting your proxy to vote your shares at our Annual Meeting to be held on May 4, 2007. We will bear all expenses incurred in connection with this proxy solicitation, which we expect to conduct primarily by mail. We have engaged The Proxy Advisory Group, LLC to assist in the solicitation for a fee that will not exceed $10,000, plus out-of-pocket expenses. In addition, our officers and regular employees may solicit your proxy by telephone, by facsimile transmission or in person, for which they will not be separately compensated. If your shares are held through a broker or other nominee (i.e., in “street name”), we have requested that your broker or nominee forward this proxy statement to you and obtain your voting instructions, for which we will reimburse them for reasonable out-of-pocket expenses. If your shares are held through the Thrift Plan for Employees of McDermott Incorporated and Participating Subsidiary and Affiliated Companies (the “McDermott Thrift Plan”), 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, 2007 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, 111,155,785 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 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 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.

 

You may receive more than one proxy statement and proxy card or voting instruction form if your shares are held through more than one account (e.g., through different brokers or nominees). Each proxy card or voting

instruction form only covers those shares of common stock held in the applicable account. If you hold shares in more than one account, you will have to provide voting instructions as to all your accounts to vote all your shares.

 

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

 

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

 

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

 

We are asking you to vote on the following:

 

 

With the exception of the proposals to amend our Articles of Incorporation, 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 Incorporation to declassify the Board of Directors requires the affirmative vote of two-thirds of the outstanding shares of our common stock entitled to vote on the matter. The proposal to amend our Articles of Incorporation to increase the number of authorized shares requires the affirmative vote of a majority of the outstanding shares of our common stock. 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 the effect of a vote against each of the proposals to amend our Articles of Incorporation.

 

In January 2007, our Board amended our Corporate Governance Guidelines to 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 amended Corporate

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

 

If you submit a signed proxy card without specifying your vote, your shares will be voted “FOR” the election of all director nominees, the proposals 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. 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 proposals 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:

 

 

(ITEM 1)

 

Our Articles of Incorporation provide for the classification of our Board of Directors into three classes, and provide that the term of office of one class shall expire each year. We have proposed an amendment to our Articles of Incorporation to, among other things, declassify our Board and to provide for the annual election of directors over a three-year period, as more fully described in Item 2 to this proxy statement. 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 III directors — John F. Bookout III, Ronald C. Cambre, Bruce DeMars and Robert W. Goldman — will expire at this year’s Annual Meeting. On the nomination of our Board, Mr. Bookout will stand for election and Messrs. Cambre and Goldman and Admiral DeMars will stand for reelection as Class III directors at this year’s Annual Meeting for a term of three years as required under our current Articles of Incorporation.

 

In May 2006, we amended our by-laws to provide that (1) a person shall not be nominated for election or re-election to our Board of Directors if such person shall have attained the age of 72 prior to the date of election or re-election and (2) any director who attains the age of 72 during his or her term shall be deemed to have resigned and retired at the first Annual Meeting following his or her attainment of the age of 72. Accordingly, a director nominee may stand for election if he or she has not attained the age of 72 prior to the date of election or reelection.

 

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

 

Set forth below is certain information (ages are as of May 4, 2007) with respect to each nominee for election as a director and each director of our company who will continue to serve as a director after this year’s Annual Meeting.

 

 

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

 

 

 

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

 

In addition, our Code of Business Conduct may be found on our website at www.mcdermott.com at “Corporate Goverance — 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 at www.mcdermott.com under “Corporate Governance — Governance Policies.”

 

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

 

 

Messrs. McWilliams and Schievelbein have no relationship with McDermott, except as directors and stockholders. In determining the independence of Messrs. Bookout, 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, and for Mr. Brown, considered ordinary course transactions between McDermott and Smith International, Inc. for which he is an officer. With respect to Mr. Bookout, who joined our Board in October 2006, our Board also considered an unsolicited 2005 contribution by McDermott to a charitable organization for which one of Mr. Bookout’s family members served as a member of its Board. Finally, in determining the independence of Mr. Howard, our Board considered unsolicited 2004-2006 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’s annual giving programs pursuant to which McDermott and its subsidiaries make donations to in excess of approximately 200 charitable organizations.

 

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 at www.mcdermott.com under “Corporate Governance — Board Committees.”

 

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 five times during 2006. All directors attended 75% or more of the meetings of the Board and of the committees on which they served during 2006. 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 2006 Annual Meeting.

 

Committees.  Our Board currently has, and appoints the members of, standing Audit, Compensation, Governance and Finance Committees. Each of the Board committees is comprised entirely of independent nonmanagement directors. Each of the Audit, Compensation and Governance Committees has a written charter approved by the Board. The current charter for each committee is posted on our website at www.mcdermott.com under “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, the Audit Committee met seven 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 Commission (“SEC”). For more information on the backgrounds of these directors, see their biographical information under “Election of Directors.”

 

Compensation Committee.  During the year ended December 31, 2006, the Compensation Committee met five times. The Compensation Committee has overall responsibility for our officer compensation plans, policies and

programs. The Compensation Committee has the authority to retain, approve fees and other terms for, and terminate any compensation consultant, outside counsel, accountant or other advisors to assist the committee in the discharge of its responsibilities. Since 2000, the Compensation Committee has engaged Compass Consulting & Benefits, Inc. (formerly known as Apogee, “Compass Consulting”), an outside health and welfare benefits, compensation and executive benefits consulting firm, to assist the Compensation Committee in its administration of compensation programs for our officers. Compass Consulting performs market analyses of executive compensation practices from which it makes recommendations to the Compensation Committee as to the form and amount of executive compensation and regularly attends the meetings of the Compensation Committee along with our Chief Executive Officer, Chief Financial Officer, Executive Vice President of Human Resources, General Counsel and Corporate Secretary. Our Chief Executive Officer made separate recommendations to the Compensation Committee with respect to both the form and amount of executive compensation and our Chief Financial Officer presented the Compensation Committee with management’s recommendation regarding company performance targets for much of the executive compensation program’s “at risk” performance-based compensation elements. Please see the “Compensation Discussion and Analysis” section of this proxy statement for information about our 2006 executive officer compensation. In addition, the Compensation Committee regularly met with Compass Consulting in executive sessions without members of management.

 

The Compensation Committee administers our Executive Incentive Compensation Plan (“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. The Compensation Committee also sets company and individual performance measures for each of Messrs. Wilkinson, Deason, Fees, Kalman, Nesser and Sannino and authorizes each, in coordination with Mr. Wilkinson, to select such other officers and key employees to participate in the EICP and establish appropriate performance measures for them. Under our 2001 Directors and Officers Long-Term Incentive Plan (the “2001 D&O Plan”), the 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 constituted the Finance Committee in January 2007 for the general purpose 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 five times. This committee, in addition to other matters, recommends to our Board of Directors (1) for approval and adoption, 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 2006, at the request of the Chairman of the Governance Committee, Compass Consulting performed a market analysis of nonemployee director compensation among Peer Group companies (as defined in our “Compensation Discussion and Analysis” section below) and made recommendations regarding nonemployee director compensation to the Governance Committee. Based on those recommendations, the Governance Committee recommended to the Board of Directors the form and amounts of nonemployee director compensation. Our

management is not substantively involved in Compass Consulting’s market analysis or recommendation regarding nonmanagement director compensation.

 

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, 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, 2006 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 our by-laws. See “Stockholders’ Proposals” in this proxy statement and our by-laws, which may be found on our website at www.mcdermott.com at “Corporate Governance — Governance Policies.”

 

The Governance Committee will consider candidates identified through the processes described above, and will evaluate each of them, including incumbents, based on the same criteria. The Governance Committee also takes into account the contributions of incumbent directors as Board members and the benefits to us arising from their experience on the Board. Although the Governance Committee will consider candidates identified by stockholders, the Governance Committee may determine not to recommend those candidates to the Board, and the Board may determine not to nominate those candidates. Mr. Bookout, who was elected to our Board in October 2006, is the only director nominee for the 2007 Annual Meeting who is standing for election for the first time. Mr. Bookout was recommended as a director candidate by a former member of our Board.

 

Nonemployee directors are compensated as follows:

 

 

We also provide travel accident insurance to nonemployee directors under the same terms and conditions applicable to our employees. Employee directors are not paid for their services as directors.

 

Directors Stock Plans.  In addition to the fees and benefits provided to our directors described above, we currently have a directors stock plan under which we have granted stock options and issued restricted stock to our nonemployee directors. A maximum of 150,000 shares of our common stock may be issued under the 1997 Director Stock Program, which we adopted and our stockholders approved in 1997. Pursuant to the terms of this program, no award may be granted under this program on or after June 6, 2007. Under this program:

 

 

In addition, we may issue shares of our common stock to nonemployee directors under the 2001 D&O Plan, which we originally adopted and our stockholders approved in 2002. The 2001 D&O Plan was amended in 2006 to increase the number of shares authorized to be issued. That amendment was approved by our stockholders at our 2006 Annual Meeting of Stockholders. Under the 2001 D&O Plan:

 

 

The table below summarizes the compensation paid by us to our nonemployee directors during the year ended December 31, 2006.

 

 

 

 

 

 

Set forth below is the age (as of May 4, 2007), 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.” Unless we otherwise specify, all positions described below are positions with McDermott International, Inc.

 

Robert A. Deason, 61, has been President and Chief Operating Officer of our subsidiary J. Ray McDermott, S.A. since March 2003. Previously, he was: 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, 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 associated with Industrial Growth Partners LP, a private equity fund, from January 2000 to December 2000.

 

John A. Fees, 49, has been our President and Chief Executive Officer of our subsidiary The Babcock & Wilcox Companies 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, 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; Associate General Counsel, Transactions, Corporate Compliance and Deputy Corporate Secretary from June 2004 to December 2005; Assistant General Counsel, Corporate Secretary and Transactions from October 2001 to May 2004; and Senior Counsel from May 1999 to September 2001. Prior to joining McDermott in 1999, she was a partner in a New Orleans law firm.

 

Francis S. Kalman, 59, has been our Executive Vice President and Chief Financial Officer since February 2002. Previously, he was: Senior Vice President and Chief Financial Officer of Vector ESP, Inc., a technology solutions provider, from March 2000 to February 2002; a principal of Pinnacle Equity Partners, LLC from April 1999 to March 2000; 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 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.

 

James C. Lewis, 51, has been our Vice President, Treasurer since March 2006. Previously, he was: Assistant Treasurer of McDermott from July 2003 to February 2006; Vice President, Structuring of Enron Corp., from December 2001 to July 2003 and Vice President, Structuring of Enron Global Markets, LLC, a subsidiary of Enron Corp., from September 2000 to December 2001.

 

John T. Nesser, III, 58, has been our Executive Vice President, Chief Administrative and Legal Officer since January 2007. Previously, he was our Executive Vice President and General Counsel from January 2006 to December 2006; Executive Vice President, General Counsel and Corporate Secretary from February 2001 to December 2005; Senior Vice President, General Counsel and Corporate Secretary from January 2000 to February 2001; Vice President and Associate General Counsel from June 1999 to January 2000; and Associate General Counsel from October 1998 to June 1999. Previously, he served as a managing partner of Nesser, King & LeBlanc, a New Orleans law firm which he co-founded in 1985.

 

Louis J. Sannino, 58, has been our Executive Vice President, Human Resources, Health, Safety & Environmental since February 2005. Previously, he was: Senior Vice President, Human Resources, Health, Safety & Environmental from June 2004 to February 2005; Senior Vice President, Human Resources and Corporate Compliance Officer from October 2000 to June 2004; Vice President, Human Resources from November 1998 to October 2000; and Director, Human Resources from April 1989 to November 1998.

 

Michael S. Taff, 45, has been our Vice President and Chief Accounting Officer since June 2005. Previously, he served as Vice President and Chief Financial Officer of HMT Inc., an engineering and construction company, from June 2004 to June 2005 and Vice President and Corporate Controller of Philip Services Corporation, a provider of industrial, environmental, transportation and container services, from September 1994 to May 2004.

 

The following discussion and analysis contains statements regarding future individual and company performance targets and goals. These targets and goals are disclosed in the limited context of McDermott’s compensation programs and should not be understood to be statements of management’s expectations or estimates of results or other guidance. McDermott specifically cautions investors not to apply these statements to other contexts.

 

Philosophy and Objectives

 

McDermott’s ability to hire and retain employees and executives with the requisite skills and experience to develop, expand and execute business opportunities is essential to our success and the success of our shareholders. While we believe that McDermott offers a work environment in which employees can find attractive career challenges 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 individual and/or company performance capable of producing above or below market-median compensation depending on the achievement of predetermined performance measures.

 

To implement this philosophy, the Compensation Committee of our Board of Directors primarily utilizes our Total Direct Compensation program. In 2006, our Compensation Committee targeted the elements of this program at or near market-median for all our NEOs except our Chief Executive Officer, whose target compensation was set below the market-median level at his request. In addition, and upon the recommendation of management, our Compensation Committee structured the annual bonus and equity-based elements of the program to promote the achievement of our long-term growth goal of attaining $600 million in annual operating income by our 2010 fiscal year. Our Compensation Committee also administers a Post-Employment Compensation program to supplement Total Direct Compensation.

 

Our compensation programs generally seek to:

 

 

 

 

Defining the Market — Benchmarking

 

Upon management’s recommendation in 2000, our Compensation Committee has engaged Compass Consulting to help ensure that executive compensation opportunities are both competitive and targeted at or near market-median compensation levels. Compass Consulting utilizes compensation information from (1) a “Peer Group” of companies in specific industries in which we compete, through a review of their proxy statements and (2) general industry companies with consolidated and/or segment revenues comparable to McDermott’s, through survey data described below.

 

The Peer Group was selected by the Compensation Committee, on the joint recommendation of Compass Consulting and our management, and have business operations and sales volumes, market capitalizations,

employment levels, and one or more lines of business that we believe are comparable to McDermott’s. The Peer Group is the same as the 2006 Peer Group used in connection with the performance graph included in our annual report on Form 10-K and is comprised of the following 12 companies:

 

 

Peer Group compensation data is limited to publicly available information and therefore generally does not provide precise comparisons by position as offered by more comprehensive survey data. As a result, our Compensation Committee uses Peer Group data on a limited basis to analyze the competitiveness of our compensation and the consistency between our target compensation and our general compensation philosophy. In 2006, our Compensation Committee principally used Peer Group data to track recent trends in the type and value of long-term incentives awards.

 

As a result of the limited nature of the Peer Group data, our Compensation Committee also utilized commercially available survey data related to general industry executive compensation to identify market-median and other market elements related to our 2006 compensation programs.

 

 

TOTAL DIRECT COMPENSATION

 

Our Total Direct Compensation program is built around our philosophy of targeting market-median compensation with incentive components that reflect positive, as well as negative, company and individual performance. Total Direct Compensation consists of three key elements:

 

 

For our 2006 NEOs, approximately 30% of target-level Total Direct Compensation is attributable to base salary, and approximately 70% is attributable to “at-risk” performance-based incentive compensation consisting of annual bonus and equity awards, consistent with our goal to emphasize “at risk” compensation.

 

Section 162(m) of the Internal Revenue Code limits our tax deductions relating to the compensation paid to NEOs, unless the compensation is performance-based and the material terms of the applicable performance goals are disclosed to and approved by our shareholders. All of our equity-based and annual bonus compensation plans have received stockholder approval and, to the extent applicable, were prepared with the intention that our incentive compensation would qualify as performance-based compensation under Section 162(m). While we intend to continue to rely on performance-based compensation programs, we are cognizant of the need for flexibility 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.

 

Base Salary

 

We use the base salary element of Total Direct Compensation to provide the foundation of a fair and competitive compensation opportunity for each individual NEO. We review base salaries annually and target salary compensation at or near the median base salary practices of the market, but maintain flexibility to deviate from market-median practices for individual circumstances. Generally, our Compensation Committee starts 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 its analysis of market-median Total Direct Compensation, together with the separate recommendations of Compass Consulting 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.

 

For 2006, the base salaries of the NEOs reflected the median market base salaries identified, with the exception of our Chief Executive Officer. At the Chief Executive Officer’s request, his 2006 salary remained below market-median at $750,000 per year, after a 7.1% increase from the prior year. Otherwise, the base salaries of our NEOs were within 7% of market-median.

 

Please see the Summary Compensation Table presented in this proxy statement and the accompanying narrative disclosures for more information regarding the base salaries of our NEOs.

 

Annual Bonus

 

Our Compensation Committee administers our Executive Incentive Compensation Plan (the “EICP”) to provide the short-term incentive compensation element of our Total Direct Compensation program. The EICP is a cash-based performance incentive program designed to motivate and reward NEOs and other key employees for their contributions to factors and business goals that we believe drive our earnings and/or create shareholder value.

 

Under the EICP, our Compensation Committee establishes, for each NEO, an annual target award at or near the market-median identified by Compass Consulting, with the discretion to adjust the target awards to reflect individual contributions of a NEO or to ensure consistency within our executive hierarchy. The target EICP awards are expressed as a percentage of the participating NEO’s base salary.

 

For 2006, our Compensation Committee set the amount of target EICP awards at or near the market-median target, except for the award of our Chief Executive Officer. At his request, our Compensation Committee set the Chief Executive Officer’s EICP target award amount at a level approximately 20% below market-median. The 2006 EICP target award amounts for the other NEOs in 2006 were all within 15% of market-median. For 2006, the target award for each NEO was as follows:

 

 

The payment amount, if any, of an EICP award is determined based on: (1) the attainment of financial performance measures, (2) the attainment of individual performance measures, and (3) the exercise of the Compensation Committee’s discretionary authority. Business and individual performance measures are set by our Compensation Committee based on recommendations from management.

 

Typically, and for 2006, 70% of the target EICP award is attributable to a financial performance measure and 30% of the target EICP award is attributable to individual performance measures. The financial performance measure comprises threshold, target and maximum performance levels which, if achieved, results in payments of 25%, 100% and 200% of the target financial performance measure component, respectively. If the threshold

financial measure is not achieved, no amount is paid on an EICP award under the financial measure component. For purposes of evaluating McDermott’s performance under the financial performance component, our Compensation Committee may adjust McDermott’s results prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) for unusual, non-recurring or other items in the Committee’s discretion. With respect to the individual performance component, up to 30% of the target EICP award is paid based on the attainment of the NEO’s individual performance measures as determined by the Chief Executive Officer and approved by our Compensation Committee. Additionally, the Compensation Committee has the discretion to award up to an additional 30% of the target EICP award. As a result, participating employees, including our NEOs, may earn bonuses of up to 200% of their target EICP award.

 

For our 2006 EICP awards, our Compensation Committee set the performance levels of the financial measure based upon year-over-year increases in our operating income. We consider operating income the optimal business measure to target, because we believe it is the primary driver of net income, which we expect 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. Based upon the recommendation of management, our Compensation Committee set the 2006 target and maximum performance levels at approximately 6.0% and 14.0% year-over-year growth from our 2005 non-GAAP operating income, respectively. The Compensation Committee believed that no amount should be paid on an EICP award under the business measure component for operating income below 85% of the target level. Accordingly, the Compensation Committee set performance levels of the 2006 financial measure component at GAAP consolidated operating income, as may be adjusted by our Compensation Committee, as follows:

 

 

By setting the target and maximum performance levels of 6% and 14% year-over-year growth in operating income, our Compensation Committee sought to accomplish two principal objectives:

 

 

In calculating our 2005 non-GAAP operating income, we adjusted our 2005 reported operating income primarily to include the operating results of B&W (which remained deconsolidated in 2005 due to the pendency of its now concluded Chapter 11 proceedings), excluding asbestos-related settlement costs.

 

For NEOs affiliated with an individual operating segment (specifically, Messrs. Deason and Fees), our Compensation Committee divided the financial performance measure between the operating income at the individual operating segment and the combined operating income at corporate and the three principal operating segments. Our Compensation Committee attributed 50% of the target EICP award to the operating income of the NEO’s individual operating segment and 20% of the target EICP award to the consolidated operating income. Our Compensation Committee derived the threshold, target and maximum levels of operating income at the individual operating segments from the consolidated operating income levels discussed above less the unallocated portion of operating expenses of our corporate segment, as follows:

 

 

Finally, our Compensation Committee set specific individual performance measures 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.

 

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

 

 

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

 

 

For Robert A. Deason, 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:

 

 

For John A. Fees, President and Chief Executive Officer of The Babcock & Wilcox Companies, the individual measures and their weights of the target EICP award were set as follows:

 

 

For John T. Nesser, our Executive Vice President, Chief Administrative and Legal Officer, the individual measures and their weights of the target EICP award were set as follows:

 

 

In February 2007, our Compensation Committee evaluated the performance of the financial and individual components previously established for the purpose of determining the amount to be paid under the EICP for 2006. With respect to the financial performance component, which constituted 70% of the target EICP award, the 2006 GAAP operating income results exceeded the maximum performance levels applicable to each NEO. As a result, each NEO received 140% of the applicable target award (200% of the target financial performance component). The individual performance component constituted 30% of an NEO’s target 2006 EICP award. Each NEO met or exceeded the performance measures applicable to him, except with respect to one applicable individual performance measure, which constituted 10% of the target award for Messrs. Wilkinson, Fees and Deason. As a result of the individual performances, Messrs. Kalman and Nesser received 30% of the applicable target award and Messrs. Wilkinson, Fees and Deason received 20% of the applicable target award. After further consideration of the operational and financial performance of McDermott during 2006, including the amount by which operating

income exceeded the performance levels and the performance of McDermott’s stock in 2006, our Compensation Committee exercised its discretionary authority and awarded each NEO an additional 30% of the applicable target award. As a result, the payment of 2006 EICP awards to NEOs were as follows:

 

 

Equity-Based and Other Long-Term Incentive Compensation

 

Our Compensation Committee believes that the interests of our shareholders are best served when a significant percentage of our officers’ compensation is comprised of equity-based and other long-term incentives that appreciate in value contingent upon increases in the share price of our common stock and other indicators that reflect improvements in business fundamentals. Therefore, it is our Compensation Committee’s intention to make annual grants of equity-based awards to our NEOs and other key employees at such times and in such amounts as may be required to accomplish the objectives of our compensation programs.

 

For the past two years, our Compensation Committee has granted annual equity-based awards at its meeting held in connection with our annual meeting of stockholders and we do not currently anticipate a change in that practice. To avoid timing equity-based grants ahead of the release of material nonpublic information, our Compensation Committee generally approves stock option and other equity-based awards effective as of the first day of the open trading window following the date of the Committee’s action (which is generally the third day following the filing of our annual report on Form 10-K or quarterly report on Form 10-Q with the Securities and Exchange Commission).

 

In prior years, we have granted equity- 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 in 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 analyzed 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 nature of our Total Direct Compensation, our Compensation Committee granted performance shares to our officers and key employees, including our NEOs, instead of stock options in 2006.

 

Consistent with our compensation philosophy, the value of the 2006 target performance share grants (calculated by multiplying the number of shares granted by $60, the price of our stock on a pre-split basis at the time the market analysis was prepared) generally reflected the market-median value of annual stock awards, with the exception of our Chief Executive Officer. At his request, the value of performance shares granted to him was approximately 50% of the market-median value. The values of the performance shares granted to the other NEOs in 2006 were all within 15% of market-median.

 

Under the terms of these performance share grants, recipients will receive shares of our common stock for each performance share that vests on the third anniversary of the date of grant based on our cumulative GAAP operating income for the three-year period ending on December 31, 2008. These grants contain threshold, target and maximum levels of cumulative GAAP operating income and will vest, if at all, between 25% (threshold) and 150% (maximum) of the amount of performance shares originally granted, depending on the cumulative GAAP operating income obtained over the three-year period. 100% of the performance shares granted will vest if the target cumulative GAAP operating income level is attained over that measurement period. For purposes of evaluating the vesting criteria under our 2006 performance share awards, our Compensation Committee may adjust our GAAP cumulative operating income during the three-year measurement period for unusual, non-recurring or other items in its discretion.

 

The Compensation Committee, on the recommendation of management, tied the target and maximum performance levels to 6% and 14% year-over-year increases in our operating income from our 2005 non-GAAP operating income, respectively, over the three-year measurement period. Our Compensation Committee set the target performance level to complement the annual bonus by rewarding the attainment of longer-term operating income at levels targeted to generate shareholder value. Our Compensation Committee set the maximum performance level to reward the attainment of a compound annual growth rate in operating income necessary to promote the achievement our 2010 operating income goal. The Compensation Committee believed that no award should vest for cumulative operating income below 85% of the target level and set the threshold level accordingly. As a result, no portion of our 2006 performance share award will vest if our cumulative GAAP operating income is below the threshold level for the three-year measurement period.

 

We believe that a three-year vesting period is appropriate in connection with the 2006 Performance Share awards because:

 

 

Please see the Grants of Plan Based Awards Table and accompanying narrative disclosures presented in this proxy statement for more information regarding the performance share awards to our NEOs.

 

Effective November 8, 2006, our Compensation Committee approved a supplemental grant of performance shares to Mr. Fees to reflect the increase in responsibilities attributable to his new role within McDermott announced in September 2006. The supplemental grant of performance shares was designed to make up the difference between market-median Total Direct Compensation opportunities in his position prior to and upon assuming his new role. Our Compensation Committee elected to address the difference in total compensation opportunities solely through our equity-based compensation element to more closely align the compensation of Mr. Fees with his long-term performance in his new position.

 

Perquisites

 

Perquisites and other personal benefits are not factored into our Total Direct Compensation program. The Company prefers to compensate NEOs using a mix of current, short-term and long-term compensation with an emphasis on performance and does not believe that providing an executive perquisite program is consistent with our overall compensation philosophy. We typically provide perquisites and other personal benefits to NEOs on an exception-basis. We do own a fractional interest in two aircraft, which we use for business purposes and which we make available to our NEOs and other executive officers for personal use upon the approval of our Chief Executive Officer. With respect to personal use of aircraft, 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 and higher income taxes to us due to Internal Revenue Service limitations on deducting the full amount of aircraft expenses if imputed income is based on SIFL rates. To minimize our cost of providing the perquisite, we impute income to the executive officer for personal use of aircraft based on the actual cost incurred by us for the flight. Please review the Summary Compensation Table and accompanying narrative disclosures presented in this proxy statement for more information on perquisites and other personal benefits we provide to our NEOs.

 

POST-EMPLOYMENT COMPENSATION PROGRAM

 

Retirement Plans

 

We provide retirement benefits through a combination of qualified defined benefit pension plans (the “Retirement Plans”) and a qualified defined contribution 401(k) Plan (the “Thrift Plan”) for most of our

regular employees, including our NEOs. We do not provide retirement benefits to certain nonresident alien employees of foreign subsidiaries. Our Retirement Plans consist of four defined benefit pension plans:

 

 

Over the past several years, we have increased the use of defined contribution plans within our Post-Employment Compensation Program in an effort to reduce the volatility, cost and complexity associated with defined benefit plans and to provide greater clarity and flexibility offered by defined contribution plans. In 2006, we concluded an in-depth assessment of the costs, risks and benefits associated with our Retirement Plans. As a result, we amended our Retirement Plans (other than the JRM Retirement Plan) and the Thrift Plan for salaried employees (other than JRM employees) with less than five years of service as of March 31, 2006. Specifically, we discontinued benefit accruals for employees with less than five years of service as of March 31, 2006 under the B&W, BWXT and McDermott Retirement Plans and began making automatic company cash contributions to those employees’ Thrift Plan accounts in amounts equal to between 3% and 8% of their regular salaries (including overtime pay, expatriate pay and commissions), subject to Internal Revenue Code limits, depending on their years of service. Benefits already accrued by those employees in these Retirement Plans were frozen and immediately vested. The frozen accrued benefits increase annually, in line with the Consumer Price Index, up to a maximum of 8%, for each year the affected employee remains with McDermott. Previously in 2003, we implemented similar changes to the JRM Retirement Plan and Thrift Plan. As a result of those changes, the JRM Retirement Plan was closed to new participants, benefit accrual under that plan was frozen for existing participants and the Thrift Plan was amended to provide for automatic company cash contributions equal to 3% of regular salary (including overtime pay, expatriate pay and commissions), subject to Internal Revenue Code limits, to the Thrift Plan accounts of affected employees.

 

In addition to the broad-based qualified plans described above, we sponsor nonqualified “Excess Plans.” The Excess Plans cover a small group of highly compensated employees, including our NEOs, whose ultimate benefit under the applicable Retirement Plan is reduced by Internal Revenue Code Sections 415(b) and 401(a)(17) limits. The Excess Plans are unfunded, nonqualified plans. Benefits under the Excess Plans are paid from our general assets. Please see the Pension Benefit Table and accompanying narrative for more information regarding our Retirement Plans.

 

We also sponsor an unfunded nonqualified supplemental executive retirement plan (“SERP”), which covers officers selected for participation by our Compensation Committee. Our Board of Directors and Compensation Committee established the SERP in 2005 upon the recommendation of management to help ensure the competitiveness of our Post-Employment Compensation Program as compared to our Peer Group. The SERP replaced our former, more expensive, defined benefit supplemental executive retirement plan and 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, or such other amounts as determined by our Compensation Committee. Please see the Nonqualified Deferred Compensation table and accompanying narrative for further information about the SERP and our contributions to our NEOs’ accounts.

 

For more information regarding our retirement plans, please see the Pension Table and Nonqualified Deferred Compensation Table and accompanying narratives.

 

Employment and Severance Arrangements

 

We do not currently have any employment or severance agreements with any of our NEOs, except for change-in-control agreements with Messrs. Wilkinson, Kalman, Nesser, Fees and Deason. In addition, our long-

term incentive plans and our SERP have provisions regarding vesting following a change-in-control, as defined in those plans.

 

In our experience, change-in-control agreements for NEOs are common among our Peer Group, and our Board and Compensation Committee believes that providing these agreements to our NEOs would protect shareholders’ interests in the event of a change-in-control by helping to assure management continuity. In general, our change-in-control agreements provide a severance payment of two times the sum of the NEO’s base salary and target EICP award. Further, these agreements contain a “double trigger,” providing benefits only upon an involuntary termination or constructive termination of the executive officer within one year following a change-in-control. Please review the Potential Payments Upon Termination or Change in Control table presented in this proxy statement and the accompanying narrative disclosures for more information regarding the change-in-control agreements with our NEOs, as well as other plans and arrangements that have different trigger mechanisms that relate to a change-in-control.

 

To help assure smooth transitions in succession plans, our Compensation Committee also believes it may be appropriate to provide transition agreements to key officers of McDermott and our operating segments who announce their intent to retire. The terms and conditions of any such transition agreement will be established by our Compensation Committee. However, we expect that under any such agreement, the officer could continue to be employed for a limited period, receive an annual salary, continue with normal participation in retirement and health plans and continue vesting in equity awards at the normal vesting schedule. Additionally, any unvested portion of the officer’s SERP at the end of the transition agreement could become vested, but we would not make any additional contributions to the SERP during the duration of the transition agreement, and the officer could be eligible to receive a pro rated EICP award for the year the transition agreement commences, but the officer would not be eligible for any EICP or equity awards following the effective date of the transition agreement. During this time, we contemplate that the officer would assist us in the transition to his successor, would be available to assist McDermott on an as-needed basis and would execute a non-compete agreement with us. During 2006, we did not enter into a transition agreement with any of our officers.

 

Stock Ownership Guidelines

 

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

 

Ronald C. Cambre, Chairman

Roger A. Brown

Oliver D. Kingsley, Jr.

Thomas C. Schievelbein

 

The following table summarizes compensation of our Chief Executive Officer, Chief Financial Officer and our three highest paid executive officers other than our CEO and CFO (our named executive officers or “NEOs”) for the fiscal year ended December 31, 2006.

 

 

 

 

 

 

The aggregate value of perquisites and other personal benefits received by a named executive officer during 2006 is not included if it does not exceed $10,000. For Messrs. Wilkinson and Kalman, the values of the perquisites and other personal benefits reported are attributable to personal use of aircraft in which we have a minority equity interest, as follows:

 

 

The invoices for aircraft use are based on the duration and mileage of the flight, not on the number of passengers. We do not incur any additional costs for adding passengers when there are seats available on the aircraft. Accordingly, we do not assign any cost for family members accompanying an executive officer on any of those flights. We do not gross-up an executive officer’s compensation or otherwise reimburse an executive officer to cover taxes on any income imputed as a result of personal aircraft usage. However, as a result of Internal Revenue Service rules, executives are imputed income for a spouse accompanying the executive officer on business flights. In instances where spousal attendance has been related to the business purpose of the trip, we have grossed-up the executive officer’s compensation to cover taxes on any income imputed as a result of the spouse’s attendance.

 

We have provided the following Grants of Plan Based Awards table to provide additional information about stock and option awards and equity and non-equity incentive plan awards granted to our NEOs during the year ended December 31, 2006.

 

 

 

 

In addition, we have provided the following Outstanding Equity Awards at Fiscal Year-End table to summarize the equity awards we have made to our NEOs which were outstanding as of December 31, 2006.

 

 

 

 

 

 

We have provided the following Option Exercises and Stock Vested table to provide additional information about the value realized by our NEOs on option award exercises and stock award vesting during the year ended December 31, 2006.

 

 

 

 

82,500 restricted stock — $3,045,895.50
89,550 performance units — $3,237,172.80
10,533 deferred stock units — $492,452.86

 

 

7,500 restricted stock — $361,725.00
47,475 performance units — $1,716,189.60
4,497 deferred stock units — $210,249.74

 

 

12,000 restricted stock — $434,559.60
26,100 performance units — $943,497.60
4,575 deferred stock units — $213,896.50

 

 

42,750 restricted stock — $1,522,719.90
30,825 performance units — $1,114,303.20
3,195 deferred stock units — $149,376.90

We have provided the following Pension Benefits table to show the present value of accumulated benefits payable to each of our NEOs under our qualified and nonqualified pension plans.

 

 

 

 

We maintain retirement plans that are funded by trusts and cover substantially all regular full-time employees of McDermott and its subsidiaries hired before April 1, 2006, except certain nonresident alien employees who are not citizens of a European Community country or who do not earn income in the United States, Canada or the United Kingdom. Eligible employees of McDermott Incorporated are covered under the Retirement Plan for Employees of McDermott Incorporated and Participating Subsidiary and Affiliated Companies (the “McDermott Retirement Plan”). Eligible employees of our Offshore Oil and Gas Construction segment are covered under The Retirement Plan of Employees of J. Ray McDermott Holdings, Inc. (the “JRM Retirement Plan”). Eligible employees of our Government Operations segment are covered under the Retirement Plan for Employees of BWX Technologies, Inc. (the “BWXT Retirement Plan”). Eligible employees of our Power Generation Systems segment are covered under the Retirement Plan for Employees of The Babcock & Wilcox Company and Participating Subsidiary and Affiliated Companies (the “B&W Retirement Plan”). As of March 31, 2003, benefit accrual under the JRM Retirement Plan ceased and the plan was closed to new participants and we amended our Thrift Plan to provide for automatic company cash contributions equal to 3% of regular salary (including overtime pay, expatriate pay and commissions), subject to Internal Revenue Code limits, to the Thrift Plan accounts of affected employees. As of March 31, 2006, benefit accrual under the McDermott Retirement Plan, the B&W Retirement Plan and the BWXT Retirement Plan ceased for employees first hired on or after April 1, 2001. The March 31, 2006 accrued benefit of affected employees under these plans will increase annually in line with increases in the Consumer Price Index, up to a maximum of 8%, for each year the employee remains employed. Employees do not contribute to any of these plans, and company contributions are determined on an actuarial basis. We further amended our Thrift Plan to provide for automatic company cash contributions in an amount equal to