Vote of the Week: Hercules Offshore, first company to fail in 2011 and 2012

Hercules Offshore is the first company to fail Say on Pay in both 2011 and 2012, with 41% approval last year and 48% this year. We looked into the circumstances at Hercules Offshore and suspect that the failed 2012 Say on Pay vote was likely the result of increased pay year over year due to special retention awards coupled with proxy advisor concerns with several aspects of the program. Pay and Performance Background

• 1-yr TSR: +28%
• 3-yr TSR: -2%
• 5-yr TSR: -31%
• 1-yr Revenue growth: +5%
• 1-yr Net income: $-66.5 million
• 1-yr CEO pay change: +110%, to $5.3m

Pay Program

• Annual bonus based on financial and operating goals (e.g., EBITDA, working capital, safety, and individual goals at corporate, division financial and operating goals for the divisions), measured over 2 separate 6-month periods
• Special program implemented in 2010 because the company could not provide competitive LTI grants due to the low share price; provides a certain amount guaranteed with upside opportunity based on the same goals as the annual incentive. Program terminated in 2012.
• Long term incentives include restricted stock and performance-based RSUs (based on 1-year safety and EBITDA goals)
• Granted a special retention award to the CEO (50% time vested, 50% performance vested)

Compensation Arrangements and Practices

• Changes following 2011 Say on Pay vote include: eliminated excise tax gross-ups from current and future agreements, eliminated share recycling, and terminated poison pill, instituted minimum vesting requirements for all equity-based awards, amended certificate of incorporation and bylaws to allow shareholders to call special meetings, and adopted an anti-hedging policy
• Additional changes considered following the 2012 vote to address proxy advisor concerns

Other Meaningful Factors

• Proxy advisors take issue with several elements of the program: CEO retention award, peer group with majority of peers above 2.0x revenue, the 6-month time frame for the annual incentive plan, the rigor of the goals in the CEO’s performance award, and duplicative performance measures in the annual and long-term plans
• Relatively complex compensation program given various special retention programs
• Directors up for re-election received support between 86% and 95% (no Compensation Committee directors were up for re-election and the CEO received 95% support)

Investor Outreach

• Shareholder engagement following failed 2011 vote results and enhanced proxy disclosure (to more thoroughly describe performance and rationale for compensation awards)
• Filed a DEFA14A specifically responding to and criticizing ISS’s recommendation