UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No.  )

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Hercules Offshore, Inc. 

(Name of Registrant as Specified In Its Charter)

 

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HERCULES OFFSHORE, INC.
9 Greenway Plaza, Suite 2200
Houston, Texas 77046

 

NOTICE OF 2008 ANNUAL MEETING OF STOCKHOLDERS

To Be Held on April 23, 2008

 

To the Stockholders

of Hercules Offshore, Inc.:

 

The annual meeting of stockholders of Hercules Offshore, Inc. will be held on April 23, 2008, at 10:00 a.m., local time, at the InterContinental Hotel, 2222 West Loop South, Houston, Texas for the following purposes:

 

1. To elect two directors to the class of directors whose term will expire at the 2011 Annual Meeting of Stockholders;

 

2. To approve our Employee Stock Purchase Plan;

 

3. To ratify the appointment of Ernst & Young LLP as our independent registered public accounting firm for the year ending December 31, 2008;

 

4. To approve the adjournment of the meeting, if necessary or appropriate, to solicit additional proxies in favor of any of the foregoing proposals; and

 

5. To transact such other business as may properly come before the meeting or any adjournments or postponements thereof.

 

Attached to this notice is a proxy statement setting forth information with respect to the above items and certain other information.

 

The board of directors has fixed the close of business on March 3, 2008 as the record date for the determination of stockholders entitled to notice of and to vote at the annual meeting or any adjournment or postponement thereof. Only holders of record of our common stock at the close of business on the record date are entitled to notice of and to vote at the meeting. For a period of 10 days prior to the meeting, a complete list of such stockholders will be available at our executive offices for inspection by stockholders during normal business hours for proper purposes.

 

Your vote is important. All stockholders are cordially invited to attend the meeting. We urge you, whether or not you plan to attend the meeting, to submit your proxy by completing, signing, dating and mailing the enclosed proxy card in the postage-paid envelope provided. If a stockholder who has submitted a proxy attends the meeting in person, such stockholder may revoke the proxy and vote in person on all matters submitted at the meeting.

 

By Order of the Board of Directors

 

 

James W. Noe

Senior Vice President, General Counsel,

Chief Compliance Officer and Secretary

 

Houston, Texas

March 14, 2008

 

HERCULES OFFSHORE, INC.
9 Greenway Plaza, Suite 2200
Houston, Texas 77046

 

PROXY STATEMENT

For 2008 Annual Meeting of Stockholders

To Be Held on April 23, 2008

 

GENERAL

 

This proxy statement is furnished to stockholders of Hercules Offshore, Inc. in connection with the solicitation of proxies by our board of directors for use at the annual meeting of stockholders to be held on April 23, 2008, or at any adjournment or postponement thereof, at the time and place and for the purposes specified in the accompanying notice of annual meeting. The approximate date of mailing of this proxy statement and the accompanying proxy, together with our 2007 annual report, is March 18, 2008.

 

Proxies and Voting Instructions

 

If you hold shares of our common stock in your name, you can submit your proxy by completing, signing and dating your proxy card and mailing it in the postage-paid envelope provided. Proxy cards must be received by us before voting begins at the annual meeting.

 

If you hold shares of our common stock through someone else, such as a bank, broker or other nominee, you may obtain material from them asking you how you want to vote your shares. Please follow the directions provided by the nominee to indicate how you want to vote.

 

You may revoke your proxy at any time prior to its exercise by:

 

 

Your attendance at the annual meeting in person without voting will not automatically revoke your proxy. If you hold shares through someone else, such as a bank, broker or other nominee, and you desire to revoke your proxy, you should follow the instructions provided by your nominee.

 

Voting Procedures and Tabulation

 

We will appoint one or more inspectors of election to act at the annual meeting and to make a written report thereof. The inspectors will ascertain the number of shares outstanding and the voting power of each, determine the shares represented at the annual meeting and the validity of proxies and ballots, count all votes and ballots, and perform certain other duties. The determination of the inspectors as to the validity of proxies will be final and binding.

 

All properly executed written proxies delivered pursuant to this solicitation, and not later revoked, will be voted at the annual meeting in accordance with the instructions given in the proxy. Stockholders should vote their shares on the enclosed proxy card. If no choice is indicated, proxies that are signed and returned will be voted “FOR” the election of all director nominees, “FOR” approval of our Employee Stock Purchase Plan, “FOR” approval of the ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for the year ending December 31, 2008 and “FOR” approval of the adjournment of the meeting, if necessary or appropriate, to solicit additional proxies in favor of any of the foregoing proposals. All shares of our

common stock represented by properly executed and unrevoked proxies will be voted if such proxies are received in time for the meeting.

 

The two nominees for director who receive the greatest number of votes cast at the meeting will be elected as directors. Cumulative voting is not permitted in the election of directors. The approval of our Employee Stock Purchase Plan, the ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for the year ending December 31, 2008 and the adjournment proposal are subject to the approval of a majority of the shares of common stock voting on the matter.

 

Abstentions and broker non-votes (proxies submitted by brokers that do not indicate a vote for a proposal because they do not have discretionary voting authority and have not received instructions as to how to vote on the proposal) are counted as present in determining whether the quorum requirement for the annual meeting is satisfied. For purposes of determining the outcome of any matter to be voted upon as to which the holder has abstained or as to which the broker has physically indicated on the proxy that the broker does not have discretionary authority to vote, these shares will be treated as not voting with respect to that matter.

 

With regard to the election of directors, votes may be cast in favor of or withheld from each nominee. Votes that are withheld will be excluded entirely from the vote and will have no effect. Broker non-votes will have no effect on the outcome of the election of directors.

 

With regard to the proposals to approve our Employee Stock Purchase Plan, to ratify the appointment of Ernst & Young LLP as independent registered public accounting firm for 2008 and to approve the adjournment proposal, abstentions and broker non-votes will not affect the outcome of the voting on the proposals.

 

VOTING SECURITIES

 

Our only outstanding voting securities are shares of our common stock. Only holders of record of common stock at the close of business on March 3, 2008, the record date for the annual meeting, are entitled to notice of and to vote at the annual meeting. On the record date for the annual meeting, there were 89,475,008 shares outstanding and entitled to be voted at the annual meeting. A majority of such shares, present in person or represented by proxy, is necessary to constitute a quorum. Each share is entitled to one vote.

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS
FOR THE STOCKHOLDERS MEETING TO BE HELD ON APRIL 23, 2008

 

This proxy statement and our 2007 annual report to shareholders are available at http://www.proxydocs.com/hero.

 

ELECTION OF DIRECTORS
(Item 1 on Proxy Card)

 

Our certificate of incorporation provides for three classes of directors serving staggered three-year terms. There are two Class III directors whose terms expire at the 2008 annual meeting: F. Gardner Parker and John T. Reynolds. The nominating and governance committee of our board of directors has approved, and our board has unanimously nominated, Mr. Parker and Mr. Reynolds for reelection as directors of Hercules Offshore to serve until the 2011 annual meeting of stockholders or until his successor is elected and qualified. If any of the nominees becomes unavailable for any reason, which is not anticipated, the board of directors in its discretion may designate a substitute nominee. If you have filled out the accompanying proxy card in favor of the unavailable nominee, your vote will be cast for the substitute nominee designated by the board of directors.

 

The directors nominated for election this year will be elected by a plurality of the shares of our common stock present in person or represented by proxy at the annual meeting and entitled to vote. In other words, the two nominees for director who receive the greatest number of votes cast at the meeting will be elected as directors. All duly submitted and unrevoked proxies will be voted for the nominees selected by our board, except where authorization to do so has been withheld.

 

Board Recommendation

 

Our board recommends that stockholders vote FOR the election of its nominees for director.

Board of Directors

 

Information with respect to the directors nominated for election this year, and the directors whose terms do not expire at the 2008 annual meeting, is presented below.

 

Nominees for Election as Class III Directors

 

 

Directors Not Standing for Election

 

Class I Directors (Term Expiring in 2009)

 

 

Class II Directors (Term Expiring in 2010)

 

 

ADDITIONAL INFORMATION REGARDING THE BOARD OF DIRECTORS

 

Board Independence

 

It is the policy of our board of directors that a substantial majority of the members of our board qualify as “independent directors” in accordance with the qualification requirements of the NASDAQ Global Market. It is also the policy of the board that all of the members of our audit committee, compensation committee, and nominating and governance committee qualify as “independent directors” in accordance with the qualification requirements of the NASDAQ Global Market, and that all of the members of the audit committee satisfy the criteria for independence under applicable provisions of the Securities Exchange Act of 1934 and SEC rules, in each case within the applicable phase-in provisions thereof. Our board has determined that all of the directors and nominees for director, except Mr. Stilley, who is employed by Hercules Offshore, satisfy the independence standards of the NASDAQ Global Market. Our board also has determined that each member of the audit committee qualifies as “independent” under Rule 10A-3 under the Securities Exchange Act of 1934.

 

Board Committees and Meetings

 

We have a standing audit committee, compensation committee, and nominating and governance committee of the board of directors, as well as a special governance committee that will cease to exist on the third anniversary of our acquisition of TODCO. Each of these committees operates under a written charter that has been adopted by the respective committee and by our board. The charters are published under the “Corporate Governance” section of our website at www.herculesoffshore.com. The charter of our audit committee is attached to this proxy statement as Annex A.

 

The current members of the committees, the number of meetings held by each committee in 2007 and a description of the functions performed by each committee are set forth below:

 

Audit Committee (10 meetings).  The current members of the audit committee are Suzanne V. Baer, Thomas J. Madonna, F. Gardner Parker (chair) and John T. Reynolds. The committee’s purpose is to assist the board of directors in overseeing our accounting and financial reporting processes, the audits of our financial statements and our internal control over financial reporting. In addition, the audit committee is directly responsible for the appointment, compensation, retention and oversight of the work of our independent registered public accounting firm. The board of directors has determined that Mr. Parker qualifies as an “audit committee financial expert,” as such term is defined in the rules of the SEC. The board of directors also has determined that each member of the audit committee qualifies as “independent” under Rule 10A-3 under the Securities Exchange Act of 1934.

Compensation Committee (8 meetings, 5 of which were held as the Nominating, Governance and Compensation Committee prior to the TODCO acquisition, and the other 3 of which were held as the Compensation Committee after the TODCO acquisition). The current members of the compensation committee are Thomas R. Bates, Jr., Thomas M Hamilton (chair), F. Gardner Parker and Thierry Pilenko. The purposes of the committee are, among other things, to discharge the responsibilities of the board relating to the compensation of our Chief Executive Officer and other executive officers, to administer our equity-based compensation plans and to review and approve our objectives and elements of executive compensation.

 

The compensation committee annually reviews the performance of our Chief Executive Officer and makes compensation decisions for the Chief Executive Officer based on that review. The Chief Executive Officer annually reviews the performance of each of the other executive officers and, based on this review, makes recommendations to the committee with respect to their compensation. The recommendations, including with respect to salary adjustments, bonus percentages, equity awards and perquisites, are presented to the committee by our Chief Executive Officer and our Vice President — Human Resources. The committee can exercise its discretion in modifying any recommended adjustments to salary, bonus percentages, perquisites or equity awards to the executive officers. The committee approves the elements of compensation relevant to Chief Executive Officer and executive officer compensation based on, among other information, established corporate goals and objectives, company performance targets, personal performance objectives, and the compensation paid by the company’s competitors.

 

In addition, the responsibilities of the compensation committee include, among other things:

 

 

Nominating and Governance Committee (7 meetings, 5 of which were held as the Nominating, Governance and Compensation Committee prior to the TODCO acquisition, and the other 2 of which were held as the Nominating and Governance Committee after the TODCO acquisition). The current members of the nominating and governance committee are Thomas N. Amonett, Thomas R. Bates, Jr., Thomas J. Madonna (chair) and Steven A. Webster. The purposes of the committee are, among other things, to identify and recommend individuals qualified to become board members consistent with criteria approved by the board and by the special governance committee, to assist the board in determining the composition of the board and its committees, to develop, implement and review our corporate governance guidelines, practices and procedures and to oversee a process to assess board and committee effectiveness. Until the third anniversary of the effective time of the TODCO acquisition, the nominating and governance committee will adopt and implement the director nominations and proposals and other actions taken by the special governance committee in accordance with its charter.

 

In assessing the qualifications of prospective nominees to the board of directors, the nominating and governance committee considers any factors it deems relevant, including each nominee’s general understanding of marketing, finance, or other elements relevant to the success of a publicly traded company in the current business environment, understanding of our business on an operational level, integrity, education and professional background, and willingness to devote time to the board of directors’ duties. In addition, the committee evaluates each

individual in the context of the board of directors as a whole, with the objective of recommending individuals that can best perpetuate the success of our business and represent stockholder interests through the exercise of sound business judgment using their diversity of experience in these various areas.

 

The nominating and governance committee will consider director candidates recommended by stockholders. If a stockholder wishes to recommend a director for nomination by the committee, the stockholder should submit the recommendation in writing to the Chair, Nominating and Governance Committee, in care of the Secretary, Hercules Offshore, Inc., 9 Greenway Plaza, Suite 2200, Houston, Texas 77046. In accordance with our Policy Regarding Director Nominations by Stockholders, which can be found under the “Corporate Governance” section of our website at www.herculesoffshore.com, the recommendation should contain the following information:

 

 

Candidates recommended by stockholders are evaluated on the same basis as candidates recommended by the board of directors, executive officers, third-party search firms or other sources.

 

Special Governance Committee (no meetings).  The current members of the special governance committee are Thomas N. Amonett, Thomas R. Bates, Jr., Thomas J. Madonna (chair) and Steven A. Webster. The merger agreement under which we acquired TODCO contains provisions intended to maintain, for a period of three years following the effective time of the merger, a ratio on our board of directors of seven directors nominated by Hercules Offshore and three directors nominated by TODCO. Our bylaws and the charter of the special governance committee include provisions related to the composition of our board, including that ratio. The purpose of the committee is to nominate individuals to fill any vacancies on the board created by the cessation of service of any director of Hercules Offshore or TODCO, as the case may be, who was designated to be a director of our company as of the effective time of the merger and any other director who takes office thereafter who is nominated, or proposed to the committee for election or appointment, to the board by recommendation of a majority of Hercules Offshore directors or legacy TODCO directors, as the case may be.

 

In 2007, our board of directors held 12 meetings. Each director attended at least 75% of the total number of meetings of the board of directors and of the committees of the board on which he served, in each case held during the period for which he was a director. Directors are expected to attend meetings of the board of directors and meetings of committees on which they serve and to spend as much time and meet as frequently as necessary to properly discharge their responsibilities. In addition, directors are expected to attend annual meetings of our stockholders. All of our directors who were serving as directors at our 2007 annual meeting of stockholders attended that meeting.

 

Compensation Committee Interlocks and Insider Participation.  None of our executive officers have served as a member of a compensation committee (or if no committee performs that function, the board of directors) of any other entity that has an executive officer serving as a member of our board of directors.

 

Corporate Governance

 

Corporate Governance Guidelines.  The board of directors has established Corporate Governance Guidelines to assist the board in the exercise of its responsibilities under applicable law. The guidelines provide a framework for governance of our company and the board, covering such matters as determining director independence; director orientation and continuing education; director responsibilities; director access to officers, management and advisors; annual evaluations of the board; and other corporate governance practices and

principles. The guidelines are available on our website at www.herculesoffshore.com under the “Corporate Governance” section. In addition, the guidelines, as well as the charters of the audit committee, the compensation committee, the nominating and governance committee and the special governance committee and our Code of Business Conduct and Ethics, are available in print to any investor requesting a copy. Requests should be directed to our Investor Relations Department.

 

Code of Business Conduct and Ethics.  All of our directors and employees must act ethically at all times and in accordance with the policies comprising our Code of Business Conduct and Ethics. The code is a reaffirmation that we expect all directors and employees to uphold our standards of honesty, integrity, ethical behavior and compliance with the law, and to avoid actual or apparent conflicts of interest between their personal and professional affairs. Directors and employees are obligated to promptly report any good faith concerns or problems or any actual or suspected violations of the code. The code sets forth the procedures for the confidential and anonymous reporting of a violation of the code. We prohibit any form of retaliation against any employee for reporting, in good faith, suspected violations of the code. The code also sets forth procedures to receive, retain and treat complaints received regarding accounting, internal accounting controls or auditing matters, and to allow for the confidential and anonymous submission by employees of concerns regarding questionable accounting or auditing matters. The code is available on our website at www.herculesoffshore.com as described above.

 

Executive Sessions.  The independent directors meet regularly in executive session without management participation after each regular non-telephonic board meeting. Currently, the director who presides at these meetings is the Chairman of the Board. If the Chairman ceases to be independent, then the presiding director will be chosen by a vote of the independent directors.

 

Communication with the Independent Directors.  Stockholders and other interested parties may make their concerns known confidentially to the independent directors by submitting a communication in an envelope marked “Confidential” addressed to the “Board of Directors,” a specifically named independent director or the “Independent Directors” as a group, in care of our Corporate Secretary. All such communications will be conveyed, as applicable, to the full board of directors, the specified independent director or the independent directors as a group.

 

EXECUTIVE OFFICERS

 

We have presented below information about our executive officers as of March 3, 2008. Officers are appointed annually by the board of directors and serve until their successors are chosen or until their resignation or removal.

 

 

 

 

John T. Rynd became Executive Vice President and Chief Operating Officer in July 2007. From October 2005 to July 2007, he was Senior Vice President of Hercules Offshore and President of Hercules Drilling Company, LLC. Prior to joining Hercules Offshore, Mr. Rynd worked at Noble Drilling Services Inc., a wholly owned subsidiary of

Noble Corporation, a contract drilling company, as Vice President — Investor Relations from October 2000 to September 2005 and as Vice President — Marketing and Contracts from September 1994 to September 2000. From June 1990 to September 1994, Mr. Rynd worked for Chiles Offshore Corporation, a contract drilling company, including as Vice President — Marketing.

 

Lisa W. Rodriguez served as chief financial officer on an interim basis from January 2007 to March 2007. Ms. Rodriguez became Senior Vice President and Chief Financial Officer in March 2007. Ms. Rodriguez also serves as Hercules Offshore’s principal accounting officer. Prior to joining Hercules Offshore, Ms. Rodriguez was Senior Vice President and Chief Financial Officer of Weatherford International Ltd. from June 2002 to November 2006. Ms. Rodriguez joined Weatherford in 1996 and served in several positions, including Vice President — Accounting and Finance from February 2001 to June 2002, Vice President — Accounting from June 2000 to February 2001 and Controller from 1999 to February 2001.

 

James W. Noe has served as Senior Vice President, General Counsel, Chief Compliance Officer and Secretary since April 2007. From October 2005 to April 2007, Mr. Noe served as Vice President, General Counsel and Secretary of Hercules Offshore. From July 2002 to October 2005, Mr. Noe was Corporate Counsel for BJ Services Company, a worldwide oilfield services company. He was in private legal practice from October 1997 to July 2002. On several occasions during 2000 and 2001 while still in private practice, Mr. Noe served as counsel for Single Buoy Mooring, a company that designs, owns and operates floating production systems.

 

Randal R. Reed has served as President of our subsidiary, Hercules Liftboat Company, LLC, since October 2004. From 1995 to October 2004, Mr. Reed was manager of the fleet of liftboats, diveboats and crewboats of Global Industries, Ltd., an oilfield services company.

 

Terrell L. Carr joined Hercules Drilling Company, LLC as Vice President of Operations in January 2007. He is now Hercules Offshore’s Vice President of Worldwide Operations and is responsible for Hercules Offshore’s day to day drilling operations. From 2006 to January 2007, Mr. Carr served as Manager, Operations for the Asia Pacific Region of ENSCO International Incorporated and from 2001-2006, he served as a Rig Manager and Country Manager in various international locations for Ensco International Incorporated. Prior to joining ENSCO, from 1982 to 2001, Mr. Carr was employed by Reading & Bates Corporation (later R&B Falcon Corporation) in various key international operations and marketing roles.

 

Don P. Rodney has served as President of Hercules International Holdings Ltd. since December 2005 and President of Hercules Oilfield Services Ltd. since September 2006. From July 2004 to December 2005, Mr. Rodney served as Vice President, Finance of Hercules Drilling Company, LLC. From October 2003 to June 2004, Mr. Rodney was Chief Financial Officer of Hercules Offshore Corporation, which is not related to our company. Mr. Rodney was retired from July 2003 to October 2003. From November 2002 to July 2003, he was Treasurer of TODCO, a contract drilling company. Mr. Rodney was Controller, Inland Water Division of Transocean from February 2001 until October 2002. From November 1992 until January 2001, Mr. Rodney served as Vice President, Finance for R&B Falcon Drilling USA, Inc., a marine contract drilling company, and its predecessors. From 1976 to November 1992, Mr. Rodney worked for Atlantic Pacific Marine Corp., a marine contract drilling company, in a number of positions, including as Controller from 1983 until November 1992.

 

Todd Pellegrin was named Managing Director for the West Africa Region in July 2007. Prior to this appointment, Mr. Pellegrin held the position of Managing Director of Hercules Offshore Nigeria from March 2006 to July 2007. Mr. Pellegrin was the Managing Director of Danos & Curole Nigeria, Ltd. from January 2004 to February 2006. From August 1998 to December 2003, he served in several capacities for Danos & Curole, including International Business Development Representative. From February 1997 to July 1998, he was the Chief Executive Officer of South Central Planning & Development Commission in Louisiana.

 

SECURITY OWNERSHIP

 

The following table sets forth information as of March 3, 2008 with respect to the beneficial ownership of our common stock by (1) each stockholder who we know to be a beneficial owner of more than 5% of our common stock, (2) our directors and director nominees and the persons named in the “Summary Compensation Table” below, and (3) all current executive officers and directors as a group. To our knowledge, except as indicated in the footnotes to this table or as provided by applicable community property laws, the persons named in the table have sole investment and voting power with respect to the shares of common stock indicated.

 

 

 

 

 

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

 

Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers and directors and beneficial owners of more than ten percent (10%) of any class of equity securities to file initial reports of ownership and reports of changes in ownership of our common stock with the SEC and, pursuant to rules promulgated under Section 16(a), such individuals are required to furnish us with copies of Section 16(a) reports they file. Based solely on a review of the copies of such reports furnished to us during the year ended December 31, 2007 and written representations from our officers and directors, all Section 16(a) reports applicable to our officers and directors and any beneficial owners of ten percent (10%) or more of a class of equity securities were filed on a timely basis, except one Form 4 that reported a grant of restricted stock for each of Messrs. Madonna and Parker; one Form 4 that reported a grant of restricted stock and options for each of Randall D. Stilley, John T. Rynd, James W. Noe, James C. Bryan, Steven A. Manz and Randal R. Reed; one Form 4 that reported a grant of options for Don P. Rodney; and one Form 4 that reported a grant of restricted stock for each of our nonemployee directors Thomas N. Amonett, Suzanne V. Baer, Thomas R. Bates, Jr., Thomas J. Madonna, Thierry Pilenko, F. Gardner Parker, John T. Reynolds, Thomas M Hamilton and Steven A. Webster. The Forms 4 with respect to the nonemployee director restricted stock grants were filed promptly following the closing of the acquisition of TODCO and upon the final determination of the equity portions of the merger consideration in accordance with the exchange ratio included in the merger agreement. In addition, a Form 5 was filed for Mr. Webster in 2008 to report a transaction that should have been reported in July 2007, and an amended Form 4 was filed for Mr. Hamilton in 2008 to correct the reporting of a transaction in July 2007.

 

COMPENSATION DISCUSSION AND ANALYSIS

 

Overview of Compensation Program

 

The Compensation Committee of the board of directors has responsibility for establishing, implementing and monitoring adherence to our compensation philosophy. The committee seeks to provide total compensation paid to our executive officers that is fair, reasonable and competitive and that rewards our executive officers for furthering our strategic objectives of being a leading shallow water services provider and expanding our international

presence. Generally, the types of compensation and benefits we provide to our executive officers are similar to those provided to executive officers of our peer companies, which are identified later in this compensation discussion and analysis.

 

In this compensation discussion and analysis, our executive officers named in the Summary Compensation Table below who are current employees are referred to as the named executive officers.

 

Compensation Philosophy and Objectives

 

The committee believes that the most effective executive compensation program is one that attracts and rewards executives for the achievement of specific annual, long-term and strategic goals of our company and that aligns executives’ interests with those of the stockholders by rewarding performance at or above established goals. The ultimate objective of our compensation program is to improve stockholder value. We aim to achieve this goal by following our philosophy of attracting and retaining executives who show exceptional leadership and are capable of assisting with various and diverse functions of executive management as is typical of a dynamic and growing company. The committee evaluates both performance and compensation in an effort to ensure that we maintain the ability to attract and retain highly qualified employees in key positions and that compensation provided to key employees remains competitive relative to the companies with whom we compete. To that end, the committee believes the executive compensation packages we provide to our executives, including the named executive officers, should include both cash and stock-based compensation that rewards performance as measured against established goals.

 

Role of Executive Officers in Compensation Decisions

 

Each of our Chief Executive Officer, our Vice President of Human Resources, and our Senior Vice President, General Counsel, Chief Compliance Officer and Secretary plays a role in our compensation process. On an annual basis, our Chief Executive Officer reviews the performance of each of the other named executive officers and, based on this review, makes recommendations to the committee with respect to their compensation. The Chief Executive Officer considers internal pay equity issues, individual performance and company performance in making his recommendations to the committee. The Vice President -Human Resources and the Senior Vice President, General Counsel, Chief Compliance Officer and Secretary provide general administrative support implementing the committee’s decisions, such as providing legal and market updates and advice to the committee and overseeing the documentation of equity plans and awards as approved by the committee.

 

Establishing Executive Compensation

 

Consistent with our compensation objectives, the committee has structured our annual and long-term incentive-based executive compensation to encourage executives to achieve our strategic goals and reward our executives for achieving these goals. To assist it in structuring our compensation program, the committee engaged, prior to our acquisition of TODCO on July 11, 2007, Towers Perrin, and after July 11, 2007, Frederic W. Cook & Co., Inc. (“F.W. Cook”), each an outside compensation consulting firm, to conduct an annual review of our total compensation program for our key employees, including the named executive officers. During the periods of their respective engagements, Towers Perrin and F.W. Cook provided the committee with relevant market data and alternatives to consider when making decisions with respect to the Chief Executive Officer’s compensation and his recommendations with respect to the compensation of the other named executive officers. Our management did not engage Towers Perrin or F.W. Cook in any other capacity for 2007 and does not direct or oversee the retention or activities of Towers Perrin or F.W. Cook with respect to our executive compensation program.

 

In making compensation decisions, the committee compares each element of total compensation against a peer group of publicly traded offshore drilling and oilfield service companies. The current peer group consists of companies against which the committee believes we compete for talent, business and stockholder investment. With F.W. Cook’s assistance and input from senior management, the committee periodically reviews and adjusts the composition of the peer group. In September 2007, the committee revised our peer group to include companies that

more closely compete with us in our business and better match our revenue, net income, market capitalization, and employee numbers. The companies currently comprising the peer group are:

 

 

The committee targets total direct compensation for named executive officers, which includes base salary, annual cash incentives and long-term equity incentives, within the range of the median to the 75^th percentile of total compensation paid to similarly situated executives within the peer group. Significant variations from this range of compensation may occur based on the experience level of the individual, individual and company performance, the unique roles played by the individual and the individual’s total compensation relative to other executives. Variations from this range may also result because certain executive officers may have a more expansive role in executing the management of our company compared to similarly situated executives in the peer group. The committee’s compensation objectives reflect the committee’s expectation that, over the long term, we will generate growth and stockholder returns in excess of the average of the peer group. For 2007, actual total direct compensation for our named executive officers generally was between the median and the 75^th percentile of our peer group, with one executive officer being paid below the median.

 

A significant percentage of total compensation is allocated to annual and long-term incentives and therefore is at risk. There is no pre-established policy or target for the allocation between either cash and noncash or short-term and long-term incentive compensation. Rather, the committee reviews market data provided by its outside compensation consultant, prior pay history and individual and company performance, and makes a subjective determination about the appropriate level and mix of incentive compensation. Income from such incentive compensation is realized as a result of the performance of our company and the individual, depending on the type of award, compared to established goals.

 

The committee reviews compensation matters throughout the year. For example, in 2007, the committee approved 2006 bonuses and approved equity awards to our executive officers in the first quarter. F.W. Cook presented the results of an executive compensation study covering trends in compensation as well as the regulatory environment regarding executive compensation, and participated in a discussion regarding the uses of equity-based compensation, at the meeting in the third quarter. At its meeting in the fourth quarter, the committee further discussed the compensation recommendations given by F.W. Cook, reviewed the progress made to date against the bonus targets for 2007, and reviewed the succession plans for our executive officers. In its regularly scheduled meeting in the first quarter of 2008, the committee determined to maintain the base salaries of the named executive officers at approximately the median level, while increasing the bonus targets for the named executive officers. The committee feels that this approach further incentivizes the executive officers to achieve the financial objectives set forth by the committee by providing a larger potential bonus for achieving such objectives.

 

2007 Executive Compensation Components

 

For 2007, the principal components of compensation for named executive officers were:

 

 

• annual cash awards

 

• long-term equity-based awards

 

 

Base Salary

 

The committee believes base salary is a critical element of executive compensation because it provides executives with a base level of monthly income. The committee determines the base salary of each named executive officer based on his or her position and responsibility. During its review of base salaries for executives, the committee primarily considers:

 

 

The committee typically considers base salary levels annually as part of its review of our performance and from time to time upon a promotion or other change in job responsibilities. In connection with its 2007 review and in recognition of outstanding performance by certain of the named executive officers and our company, and taking into consideration the significant increase in responsibility and the increased complexity of the company resulting from the TODCO acquisition, the committee increased the base salaries of the named executive officers named in the table below, other than the Chief Executive Officer, effective as of the closing of the acquisition. In July 2007, the committee also increased the base salary of the Chief Executive Officer for the same reasons as they increased the base salaries of the other named executive officers. The committee determined base salaries following an extensive review of our outside compensation consultant’s analysis of executive compensation levels within the peer group and, for the named executive officers other than our Chief Executive Officer, the Chief Executive Officer’s recommendations. The following table reflects these increases:

 

 

Our Chief Executive Officer’s current base salary of $700,000 is between the median and 75th percentile of the peer group. The base salaries of the other named executive officers are also between the median and 75th percentile of the peer group. The committee reviewed the base salaries in the first quarter of 2008 and decided to maintain the salaries at their current levels.

 

Incentive Compensation

 

Cash Program

 

The Hercules Offshore Incentive Compensation Program, referred to in this proxy statement as the “HERO Plan,” is an annual cash incentive program the committee approved for use beginning in 2006. The HERO Plan provides guidelines for the calculation of annual non-equity incentive-based compensation, subject to committee oversight. The committee, in its discretion, from time to time may modify certain elements of the guidelines in order to account for special events, such as acquisitions made by the company, or to more closely align the guidelines with the strategic objectives of the company. At the beginning of 2007, the committee established a target range of eligibility for potential payouts for the named executive officers. The various incentive levels are based on the participant’s responsibility for and impact on our operations, with target and maximum award opportunities established as a percentage of base salary. The target and maximum awards for 2007 performance and results were 75% and 180% for the Chief Executive Officer, 55% and 110% for our Executive Vice President and Chief Operating Officer, 55% and 110% for our Senior Vice President and Chief Financial Officer, 50% and 100% for our

Senior Vice President, General Counsel, Chief Compliance Officer and Secretary, and 50% and 100% for our President — Domestic Liftboats.

 

In January 2007, the committee set threshold, target and maximum, or stretch, incentive bonus and performance objectives for each component of the corporate and divisional objectives of the HERO Plan. In July 2007, the committee reviewed our objectives and increased the threshold, target and stretch levels for each component of the corporate objectives to reflect the impact of special events such as the TODCO acquisition. Payment of awards under the HERO Plan for 2007 was based upon the achievement of these objectives. The named executive officers participating in the HERO Plan receive payment of a percentage of his or her salary based on the achievement of the objectives. Each component is weighted with the total potential threshold, target and stretch award opportunities as a percent of salary for the named executive officers set forth below:

 

 

For 2007, the named executive officers’ HERO Plan awards, excluding Mr. Reed, were based upon achievement of corporate objectives relating to Net Income, as adjusted, Return on Capital Employed and the level of safety training by us, with the components accounting for 50%, 40% and 10%, respectively. Return on Capital Employed is calculated as [operating income, net of tax] / [average total debt + average stockholders’ equity – average cash]. The 2007 HERO Plan awards for Mr. Reed were based upon achievement of division financial objectives relating to earnings adding back interest and taxes (“EBIT”), maintenance capital expenditures and safety, with these components accounting for 60%, 20%, and 20%, respectively.

 

The payout guidelines are as follows:

 

 

Upon completion of the fiscal year, the committee assesses performance for each objective of the HERO Plan comparing the actual results to the predetermined threshold, target and maximum levels for each objective and a payment for each objective is calculated.

 

The following table shows the performance goals, other than the safety goal, and the actual 2007 results:

 

2007 HERO Plan Performance Objectives and Results

 

Corporate:

 

 

 

Liftboats:

 

 

The safety objective for all named executive officers was to train 1,200 employees in our behavior based safety training program or HERO training during 2007. As of December 31, 2007, we had trained over 1,300 employees. The safety component of the award was paid at target for all named executive officers, except Mr. Reed. Due to the EBIT performance of the liftboat business exceeding the target objective and the safety and Maintenance Capital Expenditures meeting objectives, Mr. Reed was also paid the safety and maintenance capital expenditures components at the same level as the EBIT component.

 

The named executive officers received the following payments, expressed as a percentage of base salary and in dollars, in February 2008 under the HERO Plan based on 2007 performance objectives set forth above.

 

 

In addition, in December 2007, the committee approved the payment of a special cash bonus of $200,000 to each of James W. Noe, Lisa W. Rodriguez, and John T. Rynd to reward and encourage their substantial and continuing efforts arising out of the integration of TODCO with the operations of our company.

The table below sets forth the potential threshold, target and maximum awards that each of our named executive officers is eligible to receive in 2009 based on 2008 performance.

 

 

Equity-Based Program

 

Our Long-Term Incentive Plan, referred to in this proxy statement as the “LTIP,” encourages participants to focus on our long-term performance and provides an opportunity for executive officers and certain designated key employees to increase their stake in our company through grants of restricted common stock and, for executives, stock options. When allocating long-term incentives to our executive officers in 2007, the committee’s goal was for two-thirds of the total value to consist of stock options, with the remaining one-third consisting of restricted stock grants. In 2008, based upon the recommendation of F.W. Cook, the committee set a goal for one-half of the total value of long-term incentives to consist of stock options and the other one-half to consist of restricted stock grants. For this purpose, the Committee values stock options by using the Binomial Lattice Option Pricing Model. By using a mix of stock options and restricted stock grants, we are able to compensate our executive officers for sustained increases in our stock performance as well as long-term growth. In 2007, option grants to executives comprised approximately 74% of the total value of long-term incentives, while restricted stock grants comprised approximately 26%.

 

The LTIP was designed prior to our initial public offering in November 2005 with an initial goal of attracting high-caliber executives to build a company and take it public. As a result, most of the initial grants were part of employment agreements designed to encourage experienced executives to leave their positions with established employers and take the risks associated with a start-up company. Therefore, past grants were not related as much to industry norms as they were to what was necessary to adequately compensate an executive with a successful track record to leave other short-term bonus potential payouts, long-term incentives and service credits in various benefit programs. The committee did not make awards under the LTIP in 2006. Beginning with 2007 awards, the committee reviews compensation data prepared by our outside compensation consultant from published proxies and other publicly available information related to long-term incentive levels in place within the peer group. The committee recognizes that even though various accepted models for valuing long-term incentive awards must be relied on for making assumptions, predictions and accounting treatments, restricted stock and especially stock options have uncertain values both at the time of award and over the life of the award. Therefore, the committee recognizes there may be years when awards appear to lead the competition, but there may also be years when the awards lag relative to the competition. With this in mind, and the fact that we have been public since only November 2005, the committee makes subjective judgments about the level of long-term incentive awards.

 

The HERO Plan and LTIP give the committee the latitude to design cash and stock-based incentive compensation programs to promote high performance and achievement of corporate goals by executives and key employees, encourage the growth of stockholder value and allow key employees to participate in the long-term growth and profitability of our company. In total, we currently have approximately 135 key employees, including the named executive officers, and nonemployee directors who have received awards under the LTIP.

 

Under the LTIP, the committee may grant participants stock options, restricted stock, performance stock awards and other stock-based awards. In granting these awards, the committee may establish any conditions or restrictions it deems appropriate within the limits of the plan. Awards of restricted stock or stock options issued to date under the LTIP vest within three years after the date of the grant. Awards to officers subject to Section 16(b) of the Securities Exchange Act of 1934, including the named executive officers, require the approval of the committee.

The exercise price of stock options granted prior to 2008 equals the average of the high and low trading price of our common stock on the NASDAQ Global Market on the date of grant. For option grants made in 2008 and going forward, the committee determined that the exercise price of stock options will equal the closing price of our common stock on the date of grant. This change was made because it is a more standard method of determining the exercise price and provides greater transparency to the determination of the price. The committee reviewed awards to each named executive officer under the LTIP in detail prior to its regularly scheduled meeting in the first quarter of the past year. However, on occasion the committee approves awards for newly hired employees, newly promoted employees, or other key employees during other times of the year. On occasion, the committee may delegate its authority to approve awards of stock options or restricted stock to a committee consisting of one director in order to effectuate awards to newly hired employees or to existing employees for promotion and retention purposes. Awards granted by this committee of one are limited to only new hire, promotion, and retention awards and such awards are reported to the committee at each of its meetings. Grants of restricted stock to eligible newly hired executive officers and newly elected directors are reviewed at the next regularly scheduled committee meeting following their hire date or election.

 

Since becoming a publicly traded company, we have not granted options with an exercise price that is less than the average of the high and low trading price of our common stock on the NASDAQ Global Market on the grant date, and we have not made grants with a grant date that occurs before committee action. Beginning in 2008, however, we are now granting options with an exercise price equal to the closing price of our common stock on the NASDAQ Global Market on the grant date. We do not time the release of material nonpublic information for the purpose of affecting the value of executive compensation.

 

All of the options granted by the committee in 2007 and 2008 vest one-third per year over the first three years and have a ten-year term. All of the shares of restricted stock granted by the committee in 2007 and 2008 vest one-third per year for three years, except those of the named executive officers, whose restricted stock has a three-year cliff vesting schedule (i.e., the restricted stock vests 100% on the third anniversary of the grant date).

 

Retirement, Perquisites and Other Personal Benefits

 

401(k) Plan

 

All eligible employees, including the named executive officers, may participate in our 401(k) plan. The plan is a tax-qualified, defined contribution retirement plan, which is designed to assist participants with saving for retirement. Eligible employees, including the named executive officers, are allowed to direct pre-tax contributions (up to an annual limit prescribed each year by the Internal Revenue Service) to the plan from their compensation. During 2007, we matched 100% of the first 3% of pay that was contributed to the plan and 50% of the next 2% of pay contributed. Beginning January 1, 2008, we make matching contributions equal to the amount of each employee’s contribution, up to a maximum of 6% of compensation each pay period. All employee contributions to the plan, as well as our matching contributions, are fully vested from the time of contribution.

 

Deferred Compensation Plan

 

The named executive officers, in addition to other executives and certain other employees, are entitled to participate in our deferred compensation plan. Participating employees can defer up to 80% of their base salary and 100% of any annual bonus paid from the HERO Plan. Participants are also eligible for discretionary contributions that we may choose to make under this plan. Discretionary contributions could be made in particular circumstances where, for example, a participant’s deferrals under the deferred compensation plan adversely affected the matching contributions under the 401(k) plan for that employee. In addition, a discretionary contribution could be made if a participant’s “compensation” for purposes of computing matching contributions under the 401(k) plan were to exceed the Internal Revenue Service limit on the amount of “compensation” that is eligible for match under the 401(k) plan. The purpose of the deferred compensation plan is to provide the participants with the ability to defer federal income taxation on compensation that would otherwise be taxed currently. Please see “— Tax Matters” below for additional information about tax considerations related to deferred compensation.

Perquisites and Other Personal Benefits

 

We provide named executive officers with perquisites and other personal benefits that we and the committee believe are reasonable and consistent with the overall compensation program to better enable us to attract and retain superior employees for key positions. The committee compared the levels of limited perquisites and other personal benefits provided to named executive officers in 2007 with those common among the peer group, and determined to continue that level of perquisites and other personal benefits in 2008.

 

Each of the named executive officers is reimbursed for financial planning assistance (up to $5,000 per year), an annual physical and club memberships, limited to one social club membership and one country club membership for each named executive officer. We also provide additional life insurance and disability benefits as follows:

 

 

Employment Agreements

 

We have entered into executive employment agreements with each of the named executive officers. For additional information about these agreements and the payments that may be made under those agreements in the event of a termination or change in control, please read “— Summary Compensation Table for 2007” and “— Potential Payments Upon Termination or Change of Control” below.

 

Executive Equity Ownership Guidelines

 

In order to align further the interests of our management and our stockholders and further promote our commitment to sound corporate governance, we have established the following equity ownership guidelines applicable to executive officers:

 

 

Executive officers are expected to attain these minimum levels of stock ownership by January 1, 2012, for executives employed on January 1, 2007, and, for any executive officer appointed after January 1, 2007, on the fifth January 1 that occurs at least one year following the date of appointment. Until an executive officer achieves the ownership guidelines, the executive officer is required to retain at least 50% of the net shares received under the LTIP. Net shares refer to the number of shares received after shares are sold or netted to pay the applicable exercise price and/or applicable taxes.

 

In addition to common stock owned, the value of shares of restricted stock and stock options granted under the LTIP is included in the calculation. For this purpose, common stock and restricted stock are valued based on the average daily closing price of our common stock during 2007, and stock options are valued based on the grant date value of the option determined using the Trinomial Option Pricing Model.

All of our named executive officers currently exceed the equity ownership guidelines, as set forth in the following table:

 

 

Tax Matters

 

Deductibility of Executive Compensation

 

As part of its role, the committee gives some consideration to the deductibility of executive compensation under Section 162(m) of the Internal Revenue Code, which provides that we may not deduct certain compensation in excess of $1,000,000 that is paid to certain individuals. The committee may approve compensation that will be subject to and in excess of the deduction limitations under Section 162(m) of the Internal Revenue Code to ensure competitive levels of total compensation for executive officers.

 

Non-Qualified Deferred Compensation

 

To the extent one or more elements of compensation provided to our employees are subject to Section 409A of the Internal Revenue Code, we intend that those elements comply with the necessary requirements so that the employees will not be subject to increased income taxes, penalty and interest. Section 409A was added to the Internal Revenue Code by the American Jobs Creation Act of 2004 and requires that certain elements of “deferred compensation” comply with specific deferral and payment rules to avoid the imposition on the employee of an additional 20% income tax and, in some circumstances, penalties and interest. We believe that, if the adverse tax consequences of Section 409A become applicable to elements of our compensation arrangements, such arrangements would be less efficient and less effective in incentivizing and retaining our employees. Therefore, to the extent reasonably practical, we intend to operate our compensation arrangements and to amend or modify our programs and awards as necessary to make them compliant with Section 409A.

 

REPORT OF THE COMPENSATION COMMITTEE

 

The Compensation Committee has reviewed and discussed with our management the Compensation Discussion and Analysis included in this proxy statement. Based on that review and discussion, the Compensation Committee has recommended to the board of directors that the Compensation Discussion and Analysis be included in this proxy statement.

 

COMPENSATION COMMITTEE

 

Thomas M Hamilton, Chairman
Thomas R. Bates, Jr.
F. Gardner Parker
Thierry Pilenko

 

March 13, 2008

 

EXECUTIVE COMPENSATION

 

Summary Compensation Table

 

The table below summarizes the total compensation paid or earned for the years ended December 31, 2007 and 2006 by our Chief Executive Officer, our Chief Financial Officer, the three next most highly compensated executive officers for 2007 and one former executive officer who resigned in August 2007. We have entered into employment agreements with all of the named executive officers currently employed by our company.

 

 

 

 

 

 

 

Grants of Plan-Based Awards for 2007

 

The table below reports all grants of plan-based awards made during 2007.

 

 

 

 

Outstanding Equity Awards at Fiscal Year-End 2007

 

 

 

 

Option Exercises and Stock Vested for 2007

 

Two of the named executive officers exercised stock options and two grants of restricted stock vested during 2007 as follows:

 

 

 

 

Non-Qualified Deferred Compensation

 

In January 2007, we implemented the Hercules Offshore, Inc. Deferred Compensation Plan, effective as of January 1, 2007. The plan was approved by our board of directors. Directors and, subject to the discretion of a committee appointed by the board of directors to administer the plan, certain management and other highly compensated employees of our company, including our Chief Executive Officer and our Chief Financial Officer, are eligible to participate in the plan. Participants may elect to defer, on a pre-tax basis, up to 80% of base salary and up to 100% of any director fees, bonus or compensation under the LTIP. All deferrals are credited to a deferred compensation account. We may make contributions to a participant’s deferred compensation account (1) to restore any 401(k) matching contribution the participant may forego because of compensation deferred into the plan and (2) at the discretion of the board of directors, to recognize a participant’s service to our company. Participants are fully vested in their deferrals at all times; however, contributions by us to a participant’s deferred compensation account may be subject to vesting requirements. Compensation deferred under the plan earns interest based on the performance of measurement funds selected by the participant.

 

Under certain circumstances, including in connection with a change in control of our company, distributions of amounts deferred under the plan may accelerate. We may terminate the plan at any time. An optional termination of the plan by us will not result in a distribution acceleration except as permitted by the Internal Revenue Code and related Treasury guidance in connection with a change in control.

 

The plan is administered by the Compensation Committee. Following a change in control, the members of the committee in place immediately prior to the change in control may appoint an independent third party to administer the plan.

 

In connection with the adoption of the plan, we adopted a trust agreement with JPMorgan Chase Bank, N.A. as the trustee. We currently deposit amounts to the trust under the trust agreement as such amounts are deferred by

participants or contributed by us. The trust is a “rabbi trust,” meaning that the funds held by the trustee remain subject to the claims of our general creditors in the event of our insolvency.

 

 

 

 

Potential Payments Upon Termination or Change of Control

 

The tables below reflect the amount of compensation that would be payable to each of our named executive officers in the event of termination of the executive’s employment without cause, termination by the executive for “good reason” and termination in the event of disability or death of the executive, and in the event of a termination following a change of control. The amounts shown in the table assume that the termination was effective as of December 31, 2007, and thus include amounts earned through such time and are estimates of the amounts which would be paid out to the executives upon their termination. The actual amounts to be paid out can be determined only at the time of the executive’s separation from our company.

 

Payment or Benefit Upon Change of Control

 

 

 

 

Payment or Benefit Outside of Change of Control

 

 

 

 

Employment Agreements

 

We have entered into executive employment agreements with each of the named executive officers currently employed by us. These employment agreements have terms ending in February 2010 for Mr. Stilley, February 2011 for Ms. Rodriguez and Messrs. Rynd and Noe, and February 2009 for Mr. Reed. Each agreement for Ms. Rodriguez and Messrs. Stilley, Rynd and Noe is subject to automatic renewals for successive two-year terms until either party terminates the contract effective at the end of the term of the respective agreement, with at least one year’s advance notice. The agreement for Mr. Reed is subject to automatic renewal for successive one-year terms, until either party terminates the contract at the end of the term of the agreement, with at least six months advance notice.

 

Each agreement provides a non-compete clause for one year after any termination other than by the executive for good reason. In the event of a termination by the executive for good reason, the non-compete clause does not apply.

 

Under the employment agreements, each of the named executive officers is entitled to health benefits and participation in our incentive, savings and retirement plans, in each case equal to those benefits provided to similarly situated senior executives of us and our affiliated companies, and to the severance benefits described below.

 

Payments Made upon Termination.  Regardless of the manner in which a named executive officer’s employment terminates, he or she is entitled to receive certain amounts earned during his or her term of employment, including:

 

 

Termination Other Than Upon Change of Control.  Under the employment agreements with each named executive officer, if employment is terminated (other than termination by us for cause) or if the executive terminates

his employment in certain circumstances defined in the agreement which constitute “good reason”, in addition to the benefits listed under the heading “— Potential Payments Upon Termination” above, the named executive officer will receive:

 

 

 

 

Retirement.  In the event of the retirement of a named executive officer, no additional compensation or benefits are applicable.

 

Death or Disability.  In the event of the death or disability of a named executive officer, in addition to the benefits listed under the headings “— Potential Payments Upon Termination” above, the named executive officer or beneficiary will receive benefits under our disability plan or payments under our life insurance plan, as applicable.

 

Change of Control.  Under the employment agreements with each named executive officer, if an executive’s employment is terminated following a change of control (other than termination by us for cause or by reason of death or disability) in addition to the benefits listed under the heading “— Potential Payments Upon Termination” above, the named executive officer will receive:

 

 

 

 

In addition, all stock options and restricted stock held by the executive will automatically vest and become exercisable. Generally, under the agreements, a change of control is deemed to occur:

 

 

 

 

Under the terms of the merger agreement with TODCO, the named executive officers delivered waivers of the change of control provisions of their respective employment agreements and equity awards that would otherwise have been triggered by and at the time of the merger.

 

Manz Separation Agreement

 

In September 2007, we entered into a separation agreement with Steven A. Manz, our former Senior Vice President — Planning and Corporate Development, effective as of September 20, 2007. The separation agreement provided for a payment of approximately $1.2 million, which included a pro-rated bonus for 2007 paid in a lump sum upon the effective date, plus a lump-sum severance payment paid six months following termination of employment equal to (a) two times the sum of Mr. Manz’s annual base salary plus the highest bonus paid or payable to Mr. Manz in respect of any of the two most recently completed fiscal years plus (b) the cash value of 18 months of continued subsidized benefits coverage. In addition, as of the effective date, each unvested stock option and restricted stock award owned by Mr. Manz then outstanding vested and/or became exercisable and any contractual restrictions on sale or transfer of any such award terminated. Mr. Manz had 106,400 stock options and 6,500 shares of restricted stock that vested as of the effective date.

 

Additionally, pursuant to the separation agreement, Mr. Manz and/or his dependents are entitled to continued coverage under our medical benefits plan for a period of 18 months from the effective date, in accordance with COBRA. Mr. Manz has agreed not to solicit any of our employees to leave or compete with us for a 10-month period. In addition, the separation agreement contains customary confidentiality and non-disparagement provisions.

 

Compensation of Directors

 

Directors who are also full-time officers or employees of our company receive no additional compensation for serving as directors. All other directors receive an annual retainer of $50,000. Each nonemployee director also receives a fee of $1,500 for each board meeting and each committee meeting attended in person and $1,000 for each board meeting and each committee meeting attended by telephone. In addition, the chairman of the audit committee receives an annual fee of $15,000 and the chairman of each of the compensation committee, the special governance committee and the nominating and governance committee receives an annual fee of $10,000. We also reimburse the reasonable expenses incurred by the directors in attending meetings and other company business. Each nonemployee director, then serving, also receives an annual grant of 3,000 shares of restricted stock under the LTIP on the day of our annual meeting. The restricted stock grants vest on the business day after the following year’s annual meeting of stockholders.

The table below summarizes the total compensation paid or earned by each of our nonemployee directors for 2007.

 

Director Compensation for 2007

 

 

 

 

 

APPROVAL OF EMPLOYEE STOCK PURCHASE PLAN

 

(Item 2 on Proxy Card)

 

Description of the Proposal

 

In March 2008, the board of directors approved, subject to stockholder approval, the Hercules Offshore, Inc. Employee Stock Purchase Plan. The plan is designed to allow certain eligible employees of our company and designated subsidiaries to voluntarily purchase shares of our common stock on favorable terms, and is designed to qualify for the favorable U.S. tax treatment afforded by Section 423 of the Internal Revenue Code. The board of directors is requesting stockholders to approve the Hercules Offshore, Inc. Employee Stock Purchase Plan.

The following is a summary of the material terms of the plan and is qualified in its entirety by reference to the complete text of the plan, a copy of which is attached to this proxy statement as Appendix B.

 

Purpose and Eligibility

 

The purpose of the plan is to provide our eligible employees and employees of our designated subsidiaries with an opportunity to acquire a proprietary interest in our long-term performance and success through the purchase of shares of our common stock at a favorable price from funds accumulated through payroll deductions. Generally, our employees and employees of a subsidiary designated as a participating subsidiary by the board of directors or the compensation committee of our board of directors are eligible to participate in the plan. As of March 13, 2008, approximately 2,700 employees, including all of our executive officers, except Mr. Pellegrin, would be eligible to participate in the plan.

 

Shares Available

 

Up to 1,500,000 shares of our common stock may be purchased under the plan. The number of shares reserved under the plan may be adjusted for any increase or decrease in the number of issued shares of common stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of our common stock, or any other increase or decrease in the number of shares effected without our receipt of consideration.

 

Term

 

The plan was adopted as of March 13, 2008 and will be effective upon stockholder approval. There is no limit on the term of the plan.

 

Participation

 

For each purchase period under the plan, participants may contribute no more than 20% of their eligible compensation as defined in the plan, provided that the shares purchased under the plan may not exceed maximum share limitation described below. Participation in the plan is at the discretion of each employee. Accordingly, the dollar value and number of shares that may be purchased is not determinable.

 

Purchase of Shares

 

The purchase price for shares under the plan will be 85% of the lesser of (1) the fair market value of a share of our common stock on the first day of a designated purchase period, which will generally be a one-year purchase period but may be for such other period (not to exceed 27 months) as may be specified by the compensation committee, or (2) the fair market value of a share of our common stock on the last day of the purchase period. Unless a participant elects otherwise, the dollar amount in the participant’s account at the end of the purchase period is used to purchase as many whole shares of common stock as the funds in his or her account will allow, subject to the maximum share limitation. No interest or other earnings will accrue on a participant’s contributions to the plan or be payable to a participant upon any payment to or withdrawal by that participant of funds from his or her account.

 

Maximum Share Limitation

 

A participant may not accrue the right to purchase more than $25,000 of our common stock in any calendar year. For the purpose of applying this limit, our stock is valued at the beginning of each offering period, and a maximum number of shares that may be purchased is determined as of such date. Any participant’s contributions above these limits will be returned to the participant, without interest, rather than used to purchase shares under the plan.

 

Administration and Amendment

 

The board of directors may amend or terminate the plan at any time, subject to the approval of our stockholders if required under Section 423 of the Internal Revenue Code or any other applicable law or regulation. The

compensation committee, a committee whose members are appointed by our board of directors or another committee of our board of directors, will administer and interpret the plan.

 

Termination of Employment

 

If the employment of a participant in the plan is terminated for any reason, then that employee’s participation in the plan automatically terminates as of the date of termination of employment.

 

Certain U.S. Federal Income Tax Consequences

 

The following is a summary of the general rules of present U.S. federal income tax law relating to the tax treatment of the common stock issued under the plan. The discussion is general in nature and does not take into account a number of considerations that may apply based on the circumstances of a particular participant under the plan, including the possibility that a participant may not be subject to U.S. federal income taxation. The plan is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code. The participant is not subject to income tax when shares are purchased under the plan, even though they are purchased at a discount.

 

If the participant sells shares acquired under the plan more than two years from the first trading day of the offering period (the “grant date”) and more than one year from the last trading day of the offering period (the “purchase date”), with this period referred to as the “holding period,” at a price in excess of the purchase price paid for the shares, generally, the gain on the sale of the shares will be taxed to the participant as:

 

 

(1) the excess of the fair market value of the shares on the grant date over the purchase price; or

 

(2) the excess of the amount realized from the sale of the shares over the purchase price; and

 

 

The amount that is ordinary income is added to the participant’s basis in the shares for purposes of determining the amount of long-term capital gain.

 

If the participant sells shares acquired under the plan after the holding period at a price less than the purchase price paid for the shares, generally, the participant’s loss on the sale will be treated as a long-term capital loss.

 

If the participant’s death occurs while holding shares purchased under the plan, the participant will realize ordinary income in the year of death as if the shares had been disposed of after satisfying the holding period.

 

We are not entitled to any deduction for federal income tax purposes for shares sold after the holding period, whether at a gain or a loss.

 

If the participant sells shares before the end of the holding period, which is referred to as a “disqualifying disposition,” then the participant will recognize ordinary income in an amount equal to the difference between the purchase price paid for the shares and the fair market value of the shares on the purchase date. In addition, we will be entitled to a corresponding deduction for federal income tax purposes.

 

If the participant makes a disqualifying disposition at a price in excess of the purchase price paid for the shares, the participant will recognize capital gain in an amount equal to the difference between the selling price of the shares and the fair market value of the shares on the purchase date.

 

Alternatively, if the participant makes a disqualifying disposition at a price less than the fair market value of the shares on the purchase date, the participant will recognize a capital loss in an amount equal to the difference between the fair market value of the shares on the purchase date and the selling price of the shares.

 

We will not receive a deduction for federal income tax purposes with respect to any capital gain the participant recognizes as the result of making a disqualifying disposition.

Board Recommendation

 

Our board recommends that stockholders vote FOR the approval of the Hercules Offshore, Inc. Employee Stock Purchase Plan.

 

Equity Compensation Plan Information

 

The following table sets forth information about our common stock that may be issued under all existing equity compensation plans as of December 31, 2007. The table does not include information regarding our Employee Stock Purchase Plan, which is subject to stockholder approval at the annual meeting.