McDermott has filed a motion with the Bankruptcy court seeking approval for an employee retention plan for both senior executives and key employees who are not executives. CEO David Dickson could receive $6.3 million in 2020 if the company hits its targets.
As a reminder, the company, which is based in west Houston, awarded Mr Dickson a $3.375 million cash retention bonus only last October. The company filed for Chapter 11 bankruptcy in January 2020, at which point the company paid out the last 30% of that award, even though it wasn’t technically earned.
Quarterly retention bonuses
The retention bonuses will be paid quarterly in cash. The senior executives and their target bonuses are as follows;
- David Dickson (CEO) – $6.3 million
- Chris Krummel (CFO) – $1.2 million
- John Freeman (Chief Legal Officer) – $1.1 million
- Samik Mukherjee (COO) – $1.3 million
- Ian Prescott (Senior VP, Asia Pacific) – $423,000
The bonuses are dependent on the following performance metric;
- Adjusted EBITDA (27.5%)
- Available cash balance (27.5%)
- Technology Business sale proceeds (15%)
- Safety (15%)
- Achievement targets (15%)
The maximum payout is 200% of target, so Dickson could get $12.6 million.
The incentive scheme runs until the end of 2020, irrespective of whether McDermott exits Chapter 11 before then.
In October 2019, senior management got $7 million in bonuses
Freeman, Mukherjee and Prescott also got retention bonuses in October, similar to the targets above. Then-CFO Stuart Spence got $1.3 million, only to leave the company two weeks later. He got to keep his bonus, of course. If Mr Krummel got a bonus at that time, it wasn’t disclosed.
What’s particularly galling to me, is that, in October, when McDermott got their expensive financing and gave out the retention bonuses, the company was forecasting adjusted EBITDA for 2019 of $474 million. By the time they filed for bankruptcy three months later, that figure had been reduced to $183 million. They did meet their 2019 free cash flow forecast – an outflow of $1.2 billion – but only because they held back $300 million in payments to vendors.
There’s no real details on the key employees scheme, other than payments will be in fixed amounts, paid quarterly.
[UPDATE 02-16-20 Having reviewed the document filed with the bankruptcy court there are 13 employees in the senior executive plan. In the key employee plan there are 1,112 employees expected to receive a retention bonus worth a total of $79.4 million, an average of $71,403 each].
A reminder of how the company got into this mess
The bankruptcy stems from McDermott’s disastrous acquisition of fellow Houston company, CB&I in May 2018 for $4.1 billion ($2.4 billion cash, $1.7 billion stock). CB&I had a lot of legacy Engineering & Construction projects that have turned out to be much less profitable than McDermott expected at acquisition.
The costs to complete estimated at acquisition on just 3 projects (Cameron LNG, Freeport LNG and Calpine Power) increased by over $1 billion. As a result, the goodwill on CB&I ended up being $4.8 billion. McDermott wrote down $2.1 billion in goodwill 7 months after acquisition. That’s a quick destruction of shareholder value!
After the deal closed, Mr Dickson received a 25% increase in base salary to $1.125 million and a $1.125 cash bonus for completing the acquisition.