UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

(RULE 14a-101)

 

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

 

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

Filed by the Registrantt þ

 

Filed by a Party other than the Registrantt o

 

Check the appropriate box:

 

o  Preliminary Proxy Statement

o  Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

þ  Definitive Proxy Statement

o  Definitive Additional Materials

o  Soliciting Material Pursuant to §240.14a-12

 

Royal Caribbean Cruises Ltd.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

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ROYAL CARIBBEAN CRUISES LTD.

1050 Caribbean Way

Miami, Florida 33132

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

TO BE HELD MAY 13, 2008

 

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR

THE SHAREHOLDERS MEETING TO BE HELD ON MAY 13, 2008

 

This Notice, the Proxy Statement, the Annual Report

and all other proxy materials are available at www.rclinvestor.com

 

 

 

To the Shareholders of

ROYAL CARIBBEAN CRUISES LTD.

 

Notice is hereby given that the Annual Meeting of Shareholders of Royal Caribbean Cruises Ltd. (the “Company”) will be held at 9:00 A.M. on Tuesday, May 13, 2008 at the JW Marriott, 1109 Brickell Avenue, Miami, Florida.

 

The Annual Meeting will be held for the following purposes:

 

1. To elect four directors to the Company’s Board of Directors;

 

2. To approve the Royal Caribbean Cruises Ltd. 2008 Equity Incentive Plan;

 

3. To ratify the selection of the Company’s independent registered certified public accounting firm;

 

4. To vote on a shareholder proposal in the accompanying proxy statement; and

 

 

The Board of Directors has fixed the close of business on March 26, 2008 as the record date for the determination of shareholders entitled to notice of and to vote at the meeting or any adjournment thereof. This proxy statement and the accompanying proxy card are being distributed on or about April 11, 2008.

 

All shareholders are cordially invited to attend the meeting in person. Whether or not you expect to attend in person, the Company requests that you promptly fill in, sign and return the enclosed proxy card.

 

Bradley H. Stein,
Secretary

 

April 9, 2008

TABLE OF CONTENTS

 

ROYAL CARIBBEAN CRUISES LTD.
1050 Caribbean Way
Miami, Florida 33132

 

PROXY STATEMENT
FOR ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 13, 2008

 

 

 

 

 

This proxy statement is being furnished to you in connection with the solicitation of proxies by the Board of Directors of Royal Caribbean Cruises Ltd. (the “Board”) to be used at the 2008 Annual Meeting of Shareholders to be held on May 13, 2008, and any adjournments or postponements thereof. References in this proxy statement to “we,” “us,” “our,” “Company” and “Royal Caribbean” refer to Royal Caribbean Cruises Ltd.

 

Holders of the Company’s common stock, par value $.01 per share, as reflected in our records at the close of business on March 26, 2008 (the record date), may vote at the Annual Meeting of Shareholders to be held on May 13, 2008, and any adjournment or postponement thereof.

 

As of March 26, 2008, the Company had 223,759,981 issued and outstanding shares of common stock. Each issued and outstanding share is entitled to one vote.

 

You may vote in person at the meeting or by proxy. You may vote by proxy on the Internet, by telephone or by signing, dating and mailing your proxy card. Detailed instructions for Internet and telephone voting are set forth on the enclosed proxy card. We recommend that you vote by proxy even if you plan to attend the meeting. You can always change your vote at the meeting.

 

All properly executed proxies will be voted in accordance with the instructions contained thereon, and if no choice is specified, the proxies will be voted for the election of the directors named elsewhere in this proxy statement, for the approval of the Royal Caribbean Cruises Ltd. 2008 Equity Incentive Plan, for the ratification of the selection of the independent registered certified public accounting firm and against the shareholder proposal. Abstentions are counted as present in determining the existence of a quorum but will not have the effect of votes in opposition to the election of a director or a “no” vote on proposals 2 or 3 or the shareholder proposal. Under New York Stock Exchange (“NYSE”) rules, if your broker holds your shares in its name, your broker is permitted to vote your shares on proposals 1 and 3 even if it does not receive voting instructions from you, but it cannot vote on proposal 2 or the shareholder proposal without your instructions.

 

We are not aware of any matters to be presented for a vote at the Annual Meeting of Shareholders other than those described in this proxy statement. If any matters not described in this proxy statement are properly presented at the meeting, the proxies will use their own judgment to determine how to vote your shares. If the meeting is postponed or adjourned, the proxies will vote your shares on the new meeting date in accordance with your previous instructions, unless you have revoked your proxy.

 

A majority of the votes represented by the shares of common stock present at the meeting in person or by proxy is required for approval of proposals 1, 2 and 3 and the shareholder proposal.

 

Any proxy may be revoked by a shareholder at any time before it is exercised by giving written notice to that effect to the Corporate Secretary of the Company or by signing and submitting a later-dated proxy, unless the proxy submitted is entitled “irrevocable proxy.” Shareholders who attend the Annual Meeting may revoke any proxy previously granted and vote in person.

 

We have adopted corporate governance principles which, along with board committee charters and key committee practices, provide the framework for the governance of the Company. The corporate governance principles address such matters as director qualifications, director independence, director compensation, board committees and committee evaluations. We believe that the corporate governance principles comply with the corporate governance rules adopted by the NYSE. A copy of the corporate governance principles of the Company is posted in the corporate governance section on the Company website at www.rclinvestor.com and is available in print to shareholders upon written request to the Corporate Secretary, Royal Caribbean Cruises Ltd., 1050 Caribbean Way, Miami, Florida 33132.

 

The Board has established an Audit Committee, a Compensation Committee, a Nominating and Director Affairs Committee and an Environmental, Safety and Security Committee. The functions of each of these committees are described below. Each committee has adopted a charter and a copy of each committee charter is posted in the corporate governance section on the Company website at www.rclinvestor.com and is available in print to shareholders upon written request to the Corporate Secretary, Royal Caribbean Cruises Ltd., 1050 Caribbean Way, Miami, Florida 33132.

 

 

 

The Company’s corporate governance principles contain guidelines established by the Board to assist it in determining director independence as defined by the listing standards of the NYSE. The Company’s corporate governance principles state that a majority of the Company’s directors shall be independent directors under NYSE rules. The Board believes that directors who do not meet the NYSE’s independence standards also make valuable contributions to the Board and to the Company by reason of their experience and wisdom, and the Board expects that some minority of its Board will not meet the NYSE’s independence standards.

 

To be considered independent under the NYSE rules, the Board must determine that a director does not have any direct or indirect material relationship with the Company or any of its subsidiaries (collectively, the “Royal Caribbean Group”). The Board has established the following guidelines to assist it in determining director independence in accordance with those rules:

 

 

 

Each director must regularly disclose to the Board whether his or her relationships satisfy these independence tests. Based on these disclosures and other information available to it, the Board has determined that each of the directors is independent with the exception of Messrs. Fain and Reilly. Mr. Fain is not considered independent as a result of his position as Chief Executive Officer of the Company. Mr. Reilly is not considered independent due to his consulting arrangement with the Company. See “Consulting Arrangement with William K. Reilly.” In determining that Messrs. Aronson, Grundekjoen and Kimsey are independent, the Board considered that each individual is a non-management director of a company with which we do business. In determining that Mr. Wilhelmsen is independent, the Board considered that he is President and Chief Executive Officer of a company that in 2007 provided us with crew manning services in the ordinary course of business of approximately $50,000.

 

The Board has adopted a Code of Business Conduct and Ethics that applies to all employees of the Company, including its executive officers, and our directors. A copy of the Code of Business Conduct and Ethics is posted in the corporate governance section on the Company website at www.rclinvestor.com and is available in print, without charge, to shareholders upon written request to Corporate Secretary, Royal Caribbean Cruises Ltd., 1050 Caribbean Way, Miami, Florida 33132. Any amendments to the code or any waivers from any provisions of the code granted to executive officers or directors will be promptly disclosed to investors by posting on the Company website at www.rclinvestor.com.

 

Interested parties who wish to communicate with non-management members of the Board can address their communications to the attention of the Corporate Secretary of the Company at its principal address or via email to corporatesecretary@rccl.com. The Corporate Secretary will maintain a record of all such communications and promptly forward to the Chairman of the Nominating and Director Affairs Committee (the “Committee Chair”), who presides at meetings of the independent directors, those communications that the Corporate Secretary believes require immediate attention. The Corporate Secretary shall periodically provide the Committee Chair with a summary of all such communications. The Committee Chair shall notify the Board or the chairs of the relevant committees of the Board of those matters that he or she believes are appropriate for further action or discussion.

 

Unless otherwise stated, this table sets forth information as of February 12, 2008 about persons we know to beneficially own more than five percent of any class of our voting common stock.

 

 

 

 

This table sets forth information as of February 12, 2008 about the amount of common stock beneficially owned by our current directors, current named executive officers listed in the “Compensation Discussion and Analysis” below, and the current directors and named executive officers as a group.

 

The number of shares beneficially owned by each named person or entity is determined under rules of the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose. No shares of common stock held by our directors or named executive officers have been pledged.

 

 

 

 

The following table summarizes our equity plan information as of December 31, 2007.

 

 

 

Section 16(a) of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”) requires the Company’s directors, executive officers and persons who beneficially own more than ten percent of our common stock to file reports on Forms 3, 4 and 5 with the SEC. Based solely upon a review of such reports filed since the Company last made such a disclosure in its proxy statement distributed in connection with the 2007 annual meeting, all reporting persons filed on a timely basis the reports required by Section 16(a) of the Exchange Act.

 

A. Wilhelmsen AS and Cruise Associates are parties to a Shareholders’ Agreement dated as of February 1, 1993 as amended (the “Shareholders’ Agreement”) and, pursuant thereto, have agreed upon certain matters relative to the organization and operation of the Company and certain matters concerning their respective ownership of the Company’s voting stock. Pursuant to the Shareholders’ Agreement, Wilhelmsen and Cruise Associates have agreed to vote their shares of common stock in favor of the following individuals as directors of the Company: (i) up to four nominees of Wilhelmsen (at least one of whom must be independent); (ii) up to four nominees of Cruise Associates (at least one of whom must be independent); and (iii) one nominee who must be Richard D. Fain or such other individual who is then employed as the Company’s chief executive officer.

 

Of the persons nominated for election at the 2008 Annual Meeting, Wilhelmsen has nominated Arne Alexander Wilhelmsen and Cruise Associates has nominated Laura D.B. Laviada and Eyal Ofer. Of the remaining directors, Wilhelmsen nominated Arvid Grundekjoen, Gert W. Munthe and Bernt Reitan, and Cruise Associates nominated Bernard W. Aronson and Thomas J. Pritzker.

 

The Board of Directors is currently divided into three classes. The current term of office of directors in Class III expires at the 2008 Annual Meeting. The Board has proposed to nominate the four nominees described below, each of whom is currently serving as a Class III director, to be elected for a new term of three years and until his or her successor is duly elected and qualified. Upon the election of the nominees named below, there will be a total of eleven directors consisting of three directors in Class I and four directors in each of Class II and Class III. The election of each of the nominees to the Board of Directors requires the approval of a majority of the votes cast at the Annual Meeting.

 

Each of the nominees has consented to serve as a director. If any of them become unavailable to serve as a director, the Board may designate a substitute nominee. In that case, the persons named as proxies will vote for the substitute nominee named by the Board. The Class III directors standing for election are:

 

Laura D.B. Laviada, 57, has served as a Director since July 1997. Ms. Laviada sits on the board of several public and not-for-profit companies in Mexico, including Telemex, Grupo Financiero Inbursa, Pro Mujer (an organization that provides micro credit for women in Mexico) and is the President of the Board of Trustees of the Museum of San Il defonso. In 2006, Ms. Laviada, along with a group of investors acquired a controlling stake in Grupo Aeroportuario del Pacifico, which operates 12 airports in Mexico including Puerto Vallarta, Guadalajara, Los Cabos and Tijuana. Prior to 2000, Ms. Laviada was the Chairman and CEO of Editorial Televisa, the largest Spanish language magazine publisher with 40 titles distributed throughout 19 countries.

 

Eyal Ofer, 57, has served as a Director since May 1995. Mr. Ofer has served as the Chairman and CEO of Carlyle M.G. Limited, an international real estate management company, since May 1991.

 

William K. Reilly, 68, has served as a Director since January 1998. Mr. Reilly is the Founding Partner of Aqua International Partners L.P., an investment group that finances water and renewable energy companies. From 1989 to 1993, Mr. Reilly served as the Administrator of the U.S. Environmental Protection Agency. He has also previously served as the Payne Visiting Professor at Stanford University’s Institute of International Studies, president of World Wildlife Fund and of The Conservation Foundation. He is Chairman Emeritus of the World Wildlife Fund and of the Board of Advisors to the Nicholas Institute for Environmental Policy Solutions at Duke University, and also serves on the board of trustees of the American Academy in Rome, National Geographic Society and the Packard Foundation. He serves as a director of E.I. Du Pont de Nemours and Company, ConocoPhillips, AgraQuest and Eden Springs Ltd.

 

Arne Alexander Wilhelmsen, 42, has served as a Director since May 2003. Mr. Wilhelmsen is a member of the board of directors of A. Wilhelmsen AS and other companies affiliated with A. Wilhelmsen AS and has held since 1995 a variety of managerial positions with such entities. In 2005, Mr. Wilhelmsen was elected President and Chief Executive Officer of AWILHELMSEN MANAGEMENT AS (formerly, Anders Wilhelmsen & Co. AS), the management company for the companies owned by A. Wilhelmsen AS. From 1996 through 1997, Mr. Wilhelmsen was engaged as a marketing analyst for the Company and since 2001 has served as a member of the board of directors of Royal Caribbean Cruise Line AS, a wholly owned subsidiary of the Company that is responsible for the sales and marketing activities of the Company in Europe. Mr. Wilhelmsen has a Masters of Business Administration from IMD, Lausanne, Switzerland.

 

THE BOARD UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE “FOR” THE

ELECTION OF EACH OF THE NOMINEES FOR DIRECTOR.

 

 

Class I Directors

 

The following Class I directors are serving for a term ending in 2009:

 

Bernard W. Aronson, 61, has served as a Director since July 1993. Mr. Aronson is currently Managing Partner of ACON Investments, LLC. Prior to that, he served as international advisor to Goldman, Sachs & Co. From June 1989 to July 1993, Mr. Aronson served as Assistant Secretary of State for Inter-American Affairs. Prior to that, Mr. Aronson served in various positions in the private and government sectors. Mr. Aronson is a member of the Council on Foreign Relations. Mr. Aronson serves as a director of Liz Claiborne, Inc., Global Hyatt Corporation and Mariner Energy Incorporated.

 

Richard D. Fain, 60, has served as a Director since 1979 and as Chairman and Chief Executive Officer of the Company since 1988. Mr. Fain is Chairman of the Cruise Line International Association, an industry trade organization consisting of 16,000 travel agencies and 21 cruise lines. Mr. Fain has been involved in the shipping industry for over 25 years.

 

Arvid Grundekjoen, 52, has served as a Director since November 2000. He serves as Chairman of the Supervisory Board of AWILHELMSEN MANAGEMENT AS, the management company for the companies owned by A. Wilhelmsen AS, and serves as Chairman of the supervisory boards of Statkraft AS, Pluss Bank and Creati AS. Mr. Grundekjoen has previously served as Chief Executive Officer of AWILHELMSEN MANAGEMENT AS.

 

Class II Directors

 

The following Class II directors are serving for a term ending in 2010:

 

William L. Kimsey, 65, has served as a Director since April 2003. Mr. Kimsey was employed for 32 years through September 2002 with the independent public accounting firm Ernst & Young L.L.P. From 1998 through 2002, Mr. Kimsey served as the Chief Executive Officer of Ernst & Young Global and Global Executive Board member of Ernst & Young and from 1993 through 1998 as the Firm Deputy Chairman and Chief Operating Officer. Mr. Kimsey also serves on the board of Western Digital Corporation, Parsons Corporation, Accenture, Ltd. and NAVTEQ Corporation. Mr. Kimsey has served on the audit committee of Accenture Ltd., NAVTEQ Corporations, Western Digital Corporation and Royal Caribbean Cruises Ltd. Mr. Kimsey is a certified public accountant and a member of the American Institute of Certified Public Accountants.

 

Gert W. Munthe, 51, has served as a Director since May 2002. Since September 2002, Mr. Munthe has served as managing partner of Herkules Capital (formerly, Ferd Private Equity), a private equity company that focuses on mid-cap companies in the technology area. From 1994 through January 2000, Mr. Munthe was a director of Alpharma, Inc., a life science company active in animal health and generic pharmaceuticals, and served as its Chief Operating Officer from 1998 until 1999 and as its Chief Executive Officer in 1999. From 1993 through 1998, Mr. Munthe was the President and Chief Executive Officer of NetCom, a leading wireless telecommunication operator in Norway that was listed on the Oslo and London Stock Exchanges. He served in the Royal Norwegian Navy and was previously with McKinsey & Co.

 

Thomas J. Pritzker, 57, has served as a Director since February 1999. Mr. Pritzker is Chairman of Global Hyatt Corporation and Marmon Holdings, Inc. He is Chairman and Chief Executive Officer of The Pritzker Organization LLC, which provides certain services primarily to and/or in connection with business interests of trusts for the benefit of various members of the Pritzker family. Mr. Pritzker is a member of the Board of Trustees of the University of Chicago and Chairman of the Art Institute of Chicago.

 

Bernt Reitan, 59, has served as a director of the Company since September 2004. Mr. Reitan is an Executive Vice President of Alcoa Inc. and is the Group President for the Global Primary Products division, with responsibility for the strategic management of Alcoa Inc.’s alumina refineries and primary aluminum smelters worldwide and associated businesses, such as metal purchasing, trading and transportation. Mr. Reitan joined Alcoa Inc. in 2000 as general manager of Alcoa World Alumina & Chemicals and was named President of Alcoa World Alumina & Chemicals in January 2001. In July of that year, he was elected a Vice President of Alcoa Inc. In January 2003, he was appointed President, Alcoa Primary Metals. In November 2004, he was named an Executive Vice President of

the company. Before joining Alcoa Inc., he was employed for 20 years in a number of positions with Elkem ASA in Norway. Mr. Reitan serves on the board of the International Primary Aluminum Institute and holds a master’s degree in civil engineering from the Technical University, Trondheim, Norway.

 

Directors who are Company employees do not receive any fees for their services as directors. For services in the fiscal year 2007, each non-employee director was entitled to receive an annual retainer of $50,000 and $1,200 for each Board meeting attended in his or her capacity as director and $1,200 for each committee meeting attended. The Chair of the Audit Committee is entitled to an additional annual retainer of $30,000, the Chair of the Compensation Committee is entitled to an additional annual retainer of $15,000 and the Chairs of the Nominating and Director Affairs, and Environmental, Safety and Security Committees each is entitled to an additional annual retainer of $6,000. Other members of the Audit Committee are entitled to an additional annual retainer of $15,000 and other members of the Compensation, Nominating and Director Affairs, and Environmental, Safety and Security Committees are entitled to an additional annual retainer of $5,000. We pay all these fees quarterly in arrears. The foregoing fees were subject to a cap of $100,000 per year per director. In 2008, the Board removed the cap after confirming that such a cap was not customary among the Company’s market comparison group. Directors may elect to defer their fees, in whole or in part, under the Company’s Board of Directors Nonqualified Deferred Compensation Plan provided the deferral is made in advance in accordance with IRS requirements. Each director may elect to invest their contributions to the plan in one or more investment funds and must designate the form and timing of their distributions. Directors are reimbursed for their travel expenses, and occasionally for those of an accompanying guest, for meetings attended.

 

At the discretion of the Board, each non-employee director was eligible to receive an annual grant of equity awards with an aggregate value on the date of grant equal to $90,000. Two-thirds of this annual grant was awarded in the form of restricted stock units and one-third was awarded in the form of stock options to purchase the Company’s common stock. Directors were previously encouraged to accumulate ownership of at least $100,000 of the Company’s common stock, including the value of restricted stock units. In 2008, the Board revised the stock ownership guidelines to require directors to accumulate ownership of at least $150,000 of the Company’s common stock, including the value of restricted stock units, within three years of becoming a director. In addition, if the value of their stock holdings falls below this amount, directors cannot sell the Company’s common stock.

 

In order to increase knowledge and understanding of our business, we encourage Board members and their families to experience our cruises. As a result, the Company has adopted a Board Member Cruise Policy (the “Cruise Policy”). Under the Cruise Policy, a Board member is entitled to one stateroom accommodation per year on a complimentary basis. Immediate family members traveling with a Board member are also entitled to one complimentary stateroom per year. Additional guests traveling with a Board member will receive a 15% discount off of the lowest available fare for up to 20 staterooms. Immediate family members not traveling with a Board member are entitled to a complimentary stateroom, provided they have not already traveled with a Board member that same calendar year.

 

Consulting Arrangement with William K. Reilly.  The Company has a consulting arrangement with Mr. Reilly under which it pays him $300,000 a year in consultancy fees in exchange for his providing services with respect to, and overseeing, the Company’s environmental programs. As part of his responsibilities, Mr. Reilly serves on the Grants Committee of the Royal Caribbean Ocean Fund.

The table below summarizes the compensation of our outside directors in 2007.

 

 

 

Related Person Transaction Policy and Procedure

 

The Company has a written Related Person Transaction Policy that requires review of all relationships and transactions in which the Company and any director or executive officer or their immediate family members have a direct or indirect material interest. Under this policy, each director, director nominee and executive officer is required to promptly notify the Corporate Secretary of any such transaction. The Corporate Secretary then presents such transactions to the Audit Committee and the Audit Committee is responsible for determining whether to approve or ratify the transactions. The following types of transactions are deemed not to create or involve a material interest on the part of the related person and do not require approval or ratification under the policy:

 

 

 

In making its decision, the Audit Committee reviews and considers all relevant facts and circumstances, including:

 

 

If after the review described above, the Audit Committee determines not to approve or ratify the transaction, it will not be entered into or continued, as the case may be.

 

Related Person Transactions

 

The Audit Committee reviewed and approved or ratified all of the following transactions in accordance with our Related Person Transaction Policy.

 

During the fiscal year ended December 31, 2007, the Company paid the Global Hyatt Corporation approximately $793,491 to provide accommodations to the Company’s guests. In addition, certain employees of the Company stay at Hyatt Hotels while traveling on business and the Company may make use of Hyatt facilities for business purposes although Hyatt has no specific arrangement or understanding with the Company in that connection. Mr. Thomas J. Pritzker, one of the Company’s directors and shareholders, is Chairman of the Global Hyatt Corporation.

 

During the fiscal year ended December 31, 2007, the Company paid Red Sail Sports approximately $432,689 as a shore excursions operator in the Caribbean. Red Sail Sports is owned by one of Mr. Pritzker’s brothers.

 

During the fiscal year ended December 31, 2007, the Company paid ScanShip Environmental and its affiliate (“ScanShip”) $965,298. ScanShip provides advanced waste water purification systems onboard a number of our vessels as well as the mechanical parts and chemicals for such systems. Mr. William K. Reilly, one of the Company’s directors and shareholders, was the Chief Executive Officer of the private equity fund that owned ScanShip during a portion of 2007.

 

During the fiscal year ended December 31, 2007, the Company paid Mr. Reilly $300,000 under his consulting arrangement with the Company, which is described above in “Consulting Arrangement with William K. Reilly.”

 

During the fiscal year ended December 31, 2007, the Company paid Drinker Biddle & Reath $120,769 for legal services. The father of Mr. Adam Goldstein, President and CEO of Royal Caribbean International, is a partner at Drinker Biddle & Reath.

 

During the fiscal year ended December 31, 2007, our subsidiary contracted with Ms. Marilyn Ofer, Mr. Eyal Ofer’s wife, for a full ship charter of the Celebrity Xpedition scheduled for sailing later this year. Ms. Ofer entered into our standard ship charter agreement and agreed to pay a charter fee of $400,000, which is what we would have expected to received from a third party.

 

The Company currently maintains equity based compensation arrangements designed to provide an additional incentive for the directors, officers and employees who are key to the Company’s success. The Board believes that these plans have been effective in providing such an incentive. The Board also believes that, for the Company to continue to attract and retain outstanding individuals at all levels of the Company’s organization, it must continue to offer these types of incentive plans.

 

The Company’s 2000 Stock Award Plan (the “2000 Equity Plan”), which was approved by the Company’s shareholders, and along with its predecessor plans has served as an important part of the Company’s overall compensation program through its enabling of stock option and other equity based awards to directors and employees.

 

As of December 31, 2007, there were 2,003,033 shares of the common stock of the Company available for grant under the Company’s 2000 Equity Plan. If approved, the Company’s 2008 Equity Incentive Plan (the “2008 Equity Plan”) will become effective immediately following its approval by shareholders and will replace the Company’s existing plan for new grants when the shares available for grant under the 2000 Equity Plan are exhausted. The 2008 Equity Plan has been approved by the Board and is being presented for shareholder approval to comply with certain regulatory requirements. If shareholders do not approve the 2008 Equity Plan, the plan’s adoption will be nullified and rescinded and no grants will be made under it. In such a case, the Company’s existing plan will remain in effect.

 

The proposed 2008 Equity Plan is attached as Appendix A to this proxy statement. The principal features of the 2008 Equity Plan are summarized below.

 

Shares Available for Awards

 

Under the 2008 Equity Plan, the number of shares of common stock available for issuance will be 5,000,000 shares, subject to adjustment by the Compensation Committee for stock splits and other events as set forth in the 2008 Equity Plan. Each stock appreciation right will be counted against the 2008 Equity Plan’s authorized shares. If an award under the 2008 Equity Plan is cancelled or forfeited without the delivery of the full number of shares underlying such award, only the net number of shares actually delivered to the participant will be counted against the 2008 Equity Plan’s authorized shares. Also, shares underlying awards issued in assumption of or substitution for awards issued by a company acquired by the Company (“Substitute Awards”) will not reduce the number of shares remaining available for issuance under the 2008 Equity Plan.

 

No participant may receive options and stock appreciation rights under the 2008 Equity Plan relating to more than 500,000 shares of common stock, subject to adjustment as noted above, in any calendar year.

 

Material Features of the 2008 Equity Plan

 

The 2008 Equity Plan will be administered by the Compensation Committee. The Compensation Committee will have, among other powers, the power to interpret and construe any provision of the 2008 Equity Plan, to adopt rules and regulations for administering the 2008 Equity Plan and to perform other acts relating to the 2008 Equity Plan. Decisions of the Compensation Committee are final and binding on all parties. The Board may appoint another committee to perform the functions of the Compensation Committee under the 2008 Equity Plan.

 

The Compensation Committee will have the sole discretion to grant to eligible participants one or more equity based awards, including options, stock appreciation rights, stock, restricted stock and restricted stock units, performance shares, or any combination thereof. The Compensation Committee will have the sole discretion to determine the number or amount of any award to be awarded to any participant. Awards to directors shall be recommended by the Compensation Committee and approved by the full Board.

 

If a dividend or other distribution, recapitalization, stock split, or other corporate event or transaction (more fully described in Section 7 of the 2008 Equity Plan) affects the shares in such a way that an adjustment is

appropriate to prevent dilution or enlargement of the benefits, or potential benefits, intended to be made available under the 2008 Equity Plan, the Compensation Committee shall, in such manner as it may deem equitable and appropriate, adjust: (i) the number of shares (or other securities) which may be made the subject of awards, (ii) the number of shares subject to outstanding awards, (iii) the grant, purchase or exercise price with respect to any award, and (iv) any other provision determined by the Compensation Committee to be necessary for an equitable adjustment. If such event involves a merger or sale of the Company or its assets, the Compensation Committee may provide for the assumption or substitution of such award, or for the termination of such award for a cash payment. The Compensation Committee may not take any other action to directly or indirectly reduce, or have the effect of reducing, the total exercise price of any option as established at the time of grant.

 

Awards may provide that upon their exercise the holder will receive cash, stock, other securities or other awards or any combination thereof, as the Compensation Committee determines. Any shares of stock deliverable under the 2008 Equity Plan may consist in whole or in part of authorized and unissued shares or shares acquired by the Company.

 

Except in the case of Substitute Awards, the exercise price of stock under any stock option, the grant price of any stock appreciation right, and the purchase price of any security which may be purchased under any other stock-based award will not be less than 100% of the fair market value of the stock or other security on the date of the grant of the option, right or award. The Compensation Committee will determine the times at which options and other purchase rights may be exercised and the methods by which and the forms in which payment of the purchase price may be made. Under the 2008 Equity Plan, determinations of the fair market value of shares of the Company’s common stock will be based on the average of the high and low quoted sales price on the date in question and determinations of fair market value with respect to other property will be made in accordance with methods or procedures established by the Compensation Committee.

 

No awards may be granted under the 2008 Equity Plan after the date of the annual shareholders meeting in 2018.

 

Awards

 

Options.  An option is a right to purchase from the Company a stated number of shares at an exercise price and for a period of time established by the Compensation Committee. The duration of options granted under the 2008 Equity Plan will be established by the Compensation Committee but may not exceed ten years. The Compensation Committee may impose a vesting schedule on options, and will determine the acceptable form(s) in which the exercise price may be paid. In general, options are exercisable following termination of employment for 12 months, if such options were exercisable at the time of termination. Upon termination of employment by reason of the holder’s death or permanent and total disability, options held by the holder shall become exercisable in full, and may be exercised at any time prior to the earlier of (i) one year following the date of such death or disability or (ii) the expiration date of such option.

 

Options granted under the 2008 Equity Plan may be “incentive stock options” (“ISOs”), which afford certain favorable tax treatment for the holder, or “nonqualified stock options” (“NQSOs”). See “Tax Matters” below.

 

Stock Appreciation Rights.  A stock appreciation right (“SAR”) is the right to receive an amount equal to the excess of the fair market value of the shares underlying the SAR over the base price of the SAR. The settlement amount of SARs may be paid in cash or shares. The Compensation Committee determines the terms of each SAR at the time of the grant. Any freestanding SAR may not have a base price less than the fair market value of the stock on the date the SAR is granted and cannot have a term of longer than ten years. The employment termination provisions applicable to SARs are the same as those described above for options.

 

Stock Awards.  The Compensation Committee may award shares of stock that are not subject to any restriction.

 

Restricted Stock and Restricted Stock Units.  Restricted stock is an award of shares that is subject to a risk of forfeiture for a period of time specified on the date of grant. A restricted stock unit is an award payable in cash or stock and represented by a bookkeeping credit, in which both the number of shares and the settlement date are fixed on the date of grant. The Compensation Committee may impose restrictions on restricted stock and restricted stock units at its discretion. These restrictions may lapse as the Compensation Committee deems appropriate. Upon termination of employment during the restriction period by reason of the holder’s death or permanent and total

disability, any restricted stock and restricted stock units held by the participant will fully vest and be settled. Holders of restricted stock unit awards may provide for the receipt of dividend equivalents, which may be paid currently or credited to the participant’s account. No participant may accrue more than $500,000 in dividend equivalents in any calendar year. Also, the Compensation Committee may establish provisions applicable to restricted stock and restricted stock units upon termination of employment that differ from those contained in the 2008 Equity Plan.

 

Performance Shares.  The Compensation Committee may grant performance shares, the grant or vesting of which is subject to the attainment of performance goals. The Compensation Committee will establish the performance criteria, the length of the performance period and the form and time of payment of the award. In the event of the holder’s death or permanent and total disability, the holder or his beneficiary or estate will receive the performance share award upon the expiration of the applicable performance period. Also, the Compensation Committee may establish provisions applicable to performance shares upon termination of employment that differ from those contained in the 2008 Equity Plan.

 

Awards (other than options and stock appreciation rights) to certain senior executives will, if the Compensation Committee intends any such award to qualify as “qualified performance based compensation” under Section 162(m) of the Internal Revenue Code, become earned and payable only if preestablished targets relating to one or more of the following performance measures are achieved during a performance period or periods, as determined by the Compensation Committee: stock price, earnings per share, price-earnings multiples, net earnings, operating earnings, revenue, number of days sales outstanding in accounts receivable, productivity, margin, cost management, EBITDA (earnings before interest, taxes, depreciation and amortization), net capital employed, return on assets, shareholder return, return on equity, return on invested capital, growth in assets, unit volume, occupancy rates, sales, cash flow, market share, performance relative to a comparison group designated by the Compensation Committee and/or strategic business criteria consisting of one or more objectives based on meeting specified revenue goals, market penetration goals, customer growth, customer satisfaction, geographic business expansion, acquisition or investment goals, cost targets and/or goals relating to investments, acquisitions or divestitures. Such targets may relate to the Company as a whole, or to one or more units thereof, on an absolute or relative basis and may be measured over such periods, as the Compensation Committee shall determine. The Compensation Committee may exclude the impact of any event or occurrence which the Compensation Committee determines is appropriate to exclude. The maximum number of shares which may be payable under any such performance share award granted in any year is 500,000 shares or the equivalent cash value thereof on the last day of the applicable performance period.

 

Transferability

 

The 2008 Equity Plan provides that, except as described in the following sentence, no options or SARs granted under the 2008 Equity Plan may be transferred or otherwise encumbered by the individual to whom it is granted, other than by will, court order or by designation of a beneficiary and that, during the individual’s lifetime, each award will be exercisable only by the individual or by the individual’s guardian or legal representative. The Compensation Committee may permit options or SARs to be transferred to an optionholder’s or SAR holder’s family members or a trust for the benefit of family members, or to certain controlled corporations. Shares represented by restricted stock awards may not be sold, assigned, transferred, pledged or otherwise encumbered, except as permitted by the Compensation Committee, during the applicable vesting period.

 

Change of Control

 

In general, if a participant’s employment is terminated by the Company without Cause, or by the participant with Good Reason within 18 months following a Change of Control (as defined in the 2008 Equity Plan), all outstanding awards will become fully exercisable and vested, and any restrictions applicable to any award shall automatically lapse.

 

Eligibility and Participation

 

Any employee of the Company or its affiliates, including any officer or employee and any director of the Company, will be eligible to receive awards under the 2008 Equity Plan. Additionally, any holder of an outstanding

equity based award issued by a company acquired by the Company may be granted a Substitute Award under the 2008 Equity Plan. The Company and its affiliates had approximately 46,000 employees and directors as of December 31, 2007.

 

Amendment and Termination

 

The Compensation Committee may at any time terminate, suspend or discontinue the 2008 Equity Plan. The Compensation Committee may amend the 2008 Equity Plan at any time, provided that no such amendment shall be made without the approval of the Company’s shareholders (a) to the extent that such approval is required by applicable law or by the listing standards of any applicable exchange(s) on or after the adoption of the 2008 Equity Plan, (b) to the extent that such amendment would materially increase the number of securities which may be issued under the 2008 Equity Plan, (c) to the extent that such amendment would materially modify the requirements for participation in the 2008 Equity Plan, or (d) to the extent that such amendment would accelerate the vesting of any restricted stock or restricted stock units under the 2008 Equity Plan except as otherwise provided therein.

 

New Plan Benefits

 

Any awards under the 2008 Equity Plan will be at the discretion of the Compensation Committee. Therefore, it is not possible at present to determine the amount or form of any award that will be available for grant to any individual during the term of the 2008 Equity Plan or that would have been granted during the last fiscal year had the 2008 Equity Plan been in effect.

 

Tax Matters

 

The following discussion is a brief summary of the principal United States Federal income tax consequences under current Federal income tax laws relating to awards under the 2008 Equity Plan. This summary is not intended to be exhaustive and, among other things, does not describe state, local or foreign income and other tax consequences.

 

Nonqualified Stock Options.  An optionee will not recognize any taxable income upon the grant of an NQSO and the Company will not be entitled to a tax deduction with respect to the grant of an NQSO. Upon exercise of an NQSO, the excess of the fair market value of the underlying shares of common stock on the exercise date over the option exercise price will be taxable as compensation income to the optionee and will be subject to applicable withholding taxes. The Company will generally be entitled to a tax deduction at such time in the amount of such compensation income. The optionee’s tax basis for the shares received pursuant to the exercise of an NQSO will equal the sum of the compensation income recognized and the exercise price.

 

In the event of a sale of shares received upon the exercise of an NQSO, any appreciation or depreciation after the exercise date generally will be taxed as capital gain or loss and will be long-term capital gain or loss if the holding period for such shares is more than one year.

 

Incentive Stock Options.  An optionee will not recognize any taxable income at the time of grant or timely exercise of an ISO and the Company will not be entitled to a tax deduction with respect to such grant or exercise. Exercise of an ISO may, however, give rise to taxable compensation income subject to applicable withholding taxes, and a tax deduction to the Company, if the ISO is not exercised on a timely basis (generally, while the optionee is employed by the Company or within 90 days after termination of employment) or if the optionee subsequently engages in a “disqualifying disposition”, as described below. Also, the excess of the fair market value of the underlying shares on the date of exercise over the exercise price will be an item of income for purposes of the optionee’s alternative minimum tax in the year of exercise.

 

A sale or exchange by an optionee of shares acquired upon the exercise of an ISO more than one year after the transfer of the shares to such optionee and more than two years after the date of grant of the ISO will result in any difference between the net sale proceeds and the exercise price being treated as long-term capital gain (or loss) to the optionee. If such sale or exchange takes place within two years after the date of grant of the ISO or within one year from the date of transfer of the ISO shares to the optionee, such sale or exchange will generally constitute a “disqualifying disposition” of such shares that will have the following results: any excess of (i) the lesser of (a) the

fair market value of the shares at the time of exercise of the ISO and (b) the amount realized on such disqualifying disposition of the shares over (ii) the option exercise price of such shares, will be ordinary income to the optionee, subject to applicable withholding taxes, and the Company will be entitled to a tax deduction in the amount of such income. Any further gain or loss after the date of exercise generally will qualify as capital gain or loss and will not result in any deduction by the Company.

 

Stock Appreciation Rights.  Generally, the recipient of a stand-alone SAR will not recognize taxable income at the time the stand-alone SAR is granted. The amount of cash, or the value of stock received upon exercise of the SAR will be taxed as ordinary income to the employee at the time it is received. In general, there will be no federal income tax deduction allowed to the Company upon the grant or termination of SARs. However, upon the exercise of a SAR, the Company will be entitled to a deduction equal to the amount of ordinary income the recipient is required to recognize as a result of the exercise.

 

Stock and Restricted Stock.  A grantee will not recognize any income upon the receipt of restricted stock unless the holder elects under Section 83(b) of the Internal Revenue Code, within thirty days of such receipt, to recognize ordinary income in an amount equal to the fair market value of the restricted stock at the time of receipt, less any amount paid for the shares. If the election is made, the holder will not be allowed a deduction for amounts subsequently required to be returned to the Company. If the election is not made, the holder will generally recognize ordinary income, on the date that the stock is no longer subject to restrictions, in an amount equal to the fair market value of such shares on such date, less any amount paid for the shares. With respect to a stock award that is not subject to restrictions, the holder will generally recognize ordinary income on the grant date in an amount equal to the fair market value of such shares on the grant date, less any amount paid for the shares. At the time the holder recognizes ordinary income, the Company generally will be entitled to a deduction in the same amount.

 

Generally, upon a sale or other disposition of stock or restricted stock with respect to which the holder has recognized ordinary income (i.e., a Section 83(b) election was previously made or the restrictions were previously removed), the holder will recognize capital gain or loss in an amount equal to the difference between the amount realized on such sale or other disposition and the holder’s basis in such shares. Such gain or loss will be long-term capital gain or loss if the holding period for such shares is more than one year.

 

Restricted Stock Units and Performance Shares.  The grant of an award of restricted stock units or a performance share will not result in income for the grantee or in a tax deduction for the Company. Upon the settlement of such an award, the grantee will recognize ordinary income equal to the aggregate value of the payment received, and the Company generally will be entitled to a tax deduction in the same amount.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” APPROVAL OF THE ROYAL CARIBBEAN CRUISES LTD. 2008 EQUITY INCENTIVE PLAN.

 

The Audit Committee of the Board has appointed PricewaterhouseCoopers LLP as the independent registered certified public accounting firm for the Company for the fiscal year ending December 31, 2008. PricewaterhouseCoopers LLP has served as the Company’s independent registered certified public accounting firm for over 15 fiscal years. A representative of PricewaterhouseCoopers LLP will be present at the Annual Meeting to respond to questions from the shareholders and to make a statement if the representative desires to do so.

 

Although ratification by the shareholders of the appointment of the independent registered certified public accounting firm for the Company is not legally required, the Board believes that such action is desirable. If the shareholders do not approve this proposal, the Audit Committee will consider selection of another accounting firm for the fiscal year 2008 and future fiscal years.

 

Aggregate fees for professional services rendered by PricewaterhouseCoopers LLP for the fiscal years ended December 31, 2007 and 2006 were:

 

 

Pursuant to the terms of its charter, the Audit Committee shall approve all audit engagement fees and terms and all non-audit engagements with the independent registered certified public accounting firm. The Chairman of the Audit Committee also has the authority to approve any non-audit engagements with the independent registered certified public accounting firm but must report any such approvals to the Audit Committee at its next meeting. Our Audit Committee was not called upon in the fiscal years ended December 31, 2007 or 2006 to approve, after the fact, any non-audit, review or attest services pursuant to the pre-approval waiver provisions of the auditor independence rules of the SEC.

 

The audit fees for the fiscal years ended December 31, 2007 and 2006 were for professional services rendered for the annual audits of our consolidated financial statements, opinions related to our internal control over financial reporting in connection with our compliance with Section 404 of the Sarbanes-Oxley Act of 2002, statutory audits required by foreign jurisdictions, quarterly reviews, consents, comfort letters and review of documents filed with the SEC. The audit fees for the fiscal year ended December 31, 2006 reflect an adjustment of $125,000 for certain audit fees that were paid in 2007.

 

The audit-related fees for the fiscal years ended December 31, 2007 and 2006 were primarily for the audits of employee benefit plans.

 

Tax fees for the fiscal year ended December 31, 2007 and 2006 were for services performed in connection with international tax compliance, consulting, tax research and transfer pricing services.

 

All other fees for the fiscal year ended December 31, 2007 and 2006 were primarily for subscription fees for accounting research software.

 

The Audit Committee has considered and determined that the services provided by PricewaterhouseCoopers LLP are compatible with maintaining PricewaterhouseCoopers LLP’s independence.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” RATIFICATION OF THE SELECTION OF PRICEWATERHOUSECOOPERS LLP AS THE COMPANY’S INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM FOR THE 2008 FISCAL YEAR.

 

In accordance with its charter, the Audit Committee of Royal Caribbean Cruises Ltd. (the “Company”) is responsible for assisting the Board of Directors in fulfilling its oversight responsibilities for the integrity of the Company’s financial statements; the Company’s compliance with legal and regulatory requirements; the independent auditor’s qualifications and independence; and the performance of the Company’s internal audit function and independent registered certified public accounting firm.

 

It is the responsibility of the Company’s management to prepare the Company’s financial statements and to develop and maintain adequate systems of internal controls over financial reporting. The internal auditors’ and the independent registered certified public accounting firm’s responsibilities are to review and, when appropriate, audit the financial statements and internal controls over financial reporting. The independent registered certified public accounting firm has the responsibility to express an opinion on the financial statements and internal controls over financial reporting based on an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board.

 

The Audit Committee has reviewed and discussed the audited financial statements contained in the 2007 Annual Report on Form 10-K and the Company’s internal controls over financial reporting with the Company’s management and its independent registered certified public accounting firm. The Audit Committee has discussed with the independent registered certified public accounting firm the matters required to be discussed by the Statement on Auditing Standards No. 90, Audit Committee Communications, as amended. The Audit Committee has received the written disclosures and the letter from the independent registered certified public accounting firm required by Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees, as amended and has discussed with the independent registered certified public accounting firm their independence. The Audit Committee has also considered whether the provision of non-audit services is compatible with maintaining the independence of the independent registered certified public accounting firm.

 

Based on the review and discussions referred to above, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, for filing with the Securities and Exchange Commission.

 

THE AUDIT COMMITTEE

OF ROYAL CARIBBEAN CRUISES LTD.

 

William L. Kimsey, Chairman

Gert W. Munthe

Bernt Reitan

 

The Compensation Committee of the Board of Directors of Royal Caribbean Cruises Ltd. has reviewed and discussed with management the Compensation Discussion and Analysis (“CD&A”) and, based on such review and discussion, has recommended to the Board that the CD&A be included in the Company’s 2008 proxy statement.

 

COMPENSATION COMMITTEE

OF THE BOARD OF DIRECTORS

 

Bernt Reitan, Chairman

Bernard W. Aronson

Laura D.B. Laviada

Gert W. Munthe

 

COMPENSATION DISCUSSION AND ANALYSIS

 

Executive Summary

 

We are the second largest cruise company in the world with 35 ships operating under five different cruise brands, sailing to approximately 380 destinations and employing approximately 46,000 shipboard and shoreside employees worldwide as of December 31, 2007. We have enjoyed continued growth and operated our business with a small and tightly integrated leadership team. This year the Company performed well in the face of many challenges. The compensation actions taken and described in detail below were done to retain this talented team and recognize their overall contributions to our business.

 

Our executive compensation programs are designed to: attract and retain executives who contribute to the Company’s long-term success; reward executives for their contribution to achieving the Company’s short- and long-term strategic goals; align executive compensation and shareholder interests through performance and equity based plans; and recognize individual contributions to the Company’s performance.

 

We provide compensation to our executives consisting of three principal elements: base salary, performance based annual incentive and long-term incentive awards (“Total Direct Compensation”). The objectives of each element of compensation are described below.

 

Principal Compensation Objectives

 

 

While the principal elements of our compensation programs are quantitative in nature, our programs also take into account qualitative factors to avoid an overly formulaic approach in determining compensation. The key quantitative and qualitative considerations that we used in assessing performance, and the process by which we linked compensation to them, are described in this CD&A.

The following table identifies our Chief Executive Officer, Chief Financial Officer and our three most highly compensated executives other than the Chief Executive Officer and Chief Financial Officer for the fiscal year ended December 31, 2007 (“Named Executive Officers” or “NEOs”).

 

 

Based on our pay for performance orientation and the desire to create long-term earnings opportunities, we place a significant portion of Total Direct Compensation at risk, as illustrated below. This mix of Total Direct Compensation elements is consistent with general market trends and with the mix provided by companies in our 2007 Market Comparison Group identified below (the “Market Comparison Group”).

 

 

 

Over the past several years we have made strides in adjusting our compensation programs in a manner that facilitates the achievement of our stated objectives. We believe that the 2007 compensation, outlined in this CD&A, appropriately reflects each NEO’s contributions when considering the performance of these individuals and our Company.

 

The process of making compensation decisions begins with establishing a Market Comparison Group. This is the foundation of our review of compensation practices and levels for our Named Executive Officers. The Compensation Committee engages Watson Wyatt Worldwide (“Consultant”), an executive compensation consulting firm, to assist with constructing the Market Comparison Group. Traditionally, this group consists of companies that generally operate in the travel and tourism, hospitality, leisure, air transportation and food and beverage industries. The companies in the Market Comparison Group range in size from $2.2 billion to $11.8 billion in revenue (generally one-half to two times our size). The Compensation Committee selects these companies based upon their size and industry as well as the operational similarities of their business to our own, even though many of them may not be our direct or indirect competitors. For 2007, we added two media companies to reflect a broader cross section of companies with which we compete for managerial talent.

The table below sets forth the companies included in our Market Comparison Group for 2007, and our relative positioning within the group in terms of revenues. In terms of revenues, we are at approximately the 40th percentile of the Market Comparison Group.

 

 

 

We intend to keep the Market Comparison Group as stable as possible from year to year. We revise the group when companies change significantly in scope, cease to be public companies, significantly underperform the group or otherwise cease to be appropriate comparators. The Consultant obtains the data on these companies and the compensation of their executives from their public filings. The Compensation Committee relies on the Consultant to analyze the data and present its findings.

 

The Consultant’s analysis compares each of the NEO’s elements of Total Direct Compensation to counterparts in the Market Comparison Group and provides senior management and the Compensation Committee with the relative positioning for compensation. Additionally, the Consultant makes recommendations with regard to changes that may be appropriate in the approach to compensating the NEOs; for 2007 there were no material changes to our methodology.

 

The Compensation Committee reviews and evaluates this data and recommendations to determine the appropriate compensation programs and levels. In doing so, it carefully considers the performance of our Company, each Brand and each NEO. For the Company and each Brand, both financial (as determined by operating and net income, EBITDA, total shareholder return and earnings per share) and operational performance (including customer satisfaction and operational efficiencies) are carefully reviewed. For each NEO, the Compensation Committee assesses how the executive contributed to financial and operational performance and his long-term contributions to our Company.

 

For each NEO, other than the Chairman and Chief Executive Officer, the Compensation Committee consults with and receives the recommendation of the Chairman and Chief Executive Officer, but is ultimately responsible for determining whether to accept such recommendations. For the compensation related to the Chairman and Chief Executive Officer, the Compensation Committee meets in executive session. It considers the opinion of the Consultant as well as the performance criteria identified in this CD&A.

 

For 2007, the Compensation Committee also reviewed compensation data from general industry executive compensation surveys (Mercer Benchmark Data Executive Compensation Survey and Watson Wyatt Top Management Compensation Survey) for general competitiveness. The Consultant advised the Compensation Committee that this data did not reflect the specific nature of our business and the Compensation Committee decided that the data was mainly helpful as a limited point of reference.

The elements of our compensation programs are discussed more fully below.

 

Base Salary

 

The Compensation Committee seeks to pay each NEO a level of fixed compensation that is competitively attractive, relative to the Market Comparison Group, in order to retain and motivate them. The primary considerations used in setting base salary levels include each NEO’s scope of responsibilities, expertise, experience, performance and potential to further our business objectives. We generally adjust salaries annually, to reflect changes in such considerations and to respond to market conditions and competitive pressures. The table below shows each NEO’s Fiscal Year 2006 and 2007 base salary. These adjustments reflect the following:

 

 

 

Performance Based Annual Incentive

 

Under the Executive Incentive Plan (“EIP”), we award performance-based annual incentives that are tied to four components: Corporate Performance, Brand Performance (if applicable), Individual Performance and a discretionary performance multiplier based on the Compensation Committee’s assessment of our overall operational performance.

 

For 2007, the Compensation Committee established a target incentive opportunity for each NEO, expressed as a percentage of base salary; it further allocated the target incentive in accordance with the design of the EIP as set forth below.

 

 

The Compensation Committee also confirmed that the previously established threshold and maximum performance and funding levels for the Corporate and Brand components were commensurate with the market and should be retained for 2007. The four performance and funding levels are illustrated below.

 

 

Corporate Performance — The Compensation Committee approves an EIP net income target, for corporate performance, based on guidance that we announce at the beginning of the calendar year. For 2007, the Compensation Committee approved an EIP net income target for corporate performance of approximately $667 million, which represents the midpoint of the range of our guidance announced in January 2007.

 

When we establish this target, we do not attempt to forecast changes in fuel price as we do not believe such forecasts are reliable or relevant to management’s performance. Accordingly, as our operating results are sensitive to fuel price fluctuations, we believe that retrospective adjustments to operating results to account for fuel price increases or decreases are appropriate in determining the EIP awards. Additionally, the Compensation Committee reviews our operating results to determine if adjustments are required because of other events outside of management’s control. For 2007, the Compensation Committee determined that the July 2007 Celebrity Millennium grounding, which resulted in damage to the ship’s propellers and caused the cancellation of two 12-night Mediterranean sailings, was an event outside of management’s control.

 

Following an upward adjustment of $85 million to account for the fuel cost increases and half of the financial impact of the Celebrity Millennium incident, our 2007 EIP-adjusted net income was $21 million over the net income target. This yielded a funding level for the EIP corporate performance component of 232.5%, or approximately two-thirds above target.

 

Brand Performance — Because some executives are dedicated to specific brands, a portion of their EIP award is tied to the performance of their respective brands. The target performance levels for each brand were established in accordance with our operating plan and were equally as challenging as the corporate performance objective discussed above. Although the brand component of the 2007 EIP awards was originally tied to EBITDA, the Board asked management in early 2007 to focus more on operating income. Operating income takes into account capital costs that are important in calculating returns on invested capital, which is a fundamental precept of the Company’s operating plan. Accordingly, the brand performance calculations of Messrs. Goldstein and Hanrahan were measured against their respective brand’s operating income instead of EBITDA. This revised measurement resulted in an increase in the total EIP award payout to each of Messrs. Goldstein and Hanrahan of approximately 11% as compared to the payouts they would have received had their performance been tied to their brand’s EBITDA. In terms of actual Total Direct Compensation, this adjustment represented an increase of approximately 4% for each of Messrs. Goldstein and Hanrahan. The adjustment for the Celebrity Millennium incident, described above, also had an impact on Celebrity’s operating income and, therefore, the brand performance component of the EIP award for Mr. Hanrahan. Additionally, the adjustment for the increase in fuel costs, described above, had a corresponding impact on the brand performance component of the EIP award for Messrs. Goldstein and Hanrahan.

 

Individual Performance — In determining the NEO’s individual performance component, the Compensation Committee considered the recommendation of Mr. Fain, in each case except for himself. The Compensation Committee evaluated those recommendations based on: its knowledge of our Company and each NEO’s overall contributions to our successful growth and achievement of priority strategic objectives; how the NEO directed his area of responsibility to meet challenges in the market; the results of specific projects the NEO may have been responsible for during the year; and, overall company performance compared with competitors.

 

In the case of Mr. Fain, the Compensation Committee considered various objective measures including shareholder return and customer satisfaction, and subjective criteria including Mr. Fain’s contribution to the growth of the Company, his long tenure as CEO and their desire to have him continue in that capacity. Based on these

factors, the Compensation Committee awarded Mr. Fain 100% of the individual performance component of his EIP award. For Mr. Rice, the Compensation Committee considered the positive results that he had achieved in improving our financial management and our revenue management functions. Mr. Goldstein was responsible for the ongoing success of the Royal Caribbean International brand and the Compensation Committee considered this factor in determining his individual performance component. Mr. Hanrahan oversaw improvements in the performance of Celebrity Cruises and the successful launch of a new brand, Azamara Cruises. In keeping with past practice, the Compensation Committee awarded Mr. Kulovaara a special performance bonus of $150,000 for overseeing the successful design, construction and delivery of a new cruise ship in 2007, Liberty of the Seas. His individual performance component of the EIP award reflects this contribution.

 

The table below shows the 2007 performance based annual incentive payout, as a percent of target, for each component of the EIP.

 

 

Performance Multiplier — The Compensation Committee can apply a performance multiplier, which may modify the total EIP award upwards or downwards by as much as 15% based on operational performance relative to industry competitors (subject to the maximum funding limit of 300% of the entire incentive amount). For 2007, the Compensation Committee decided not to apply the performance multiplier because the Company had only increased its relative performance by a nominal amount.

 

For 2007, the table below shows each NEO’s Target and Actual Incentive award. For Mr. Kulovaara, the ship delivery bonus is not factored into the target, but it is included in the actual performance based annual incentive.

 

 

Long-Term Incentive Awards

 

The Compensation Committee grants long-term equity based incentive compensation under the 2000 Stock Award Plan (“2000 Equity Plan” or “LTIP”). Under the 2000 Equity Plan, the Compensation Committee can grant the following types of awards: stock options, performance shares, restricted stock, restricted stock units (“RSUs”), and stock appreciation rights. In balancing the Company’s retention objectives with its pay for performance orientation, the Compensation Committee considered the spectrum of potential equity instrument designs, vesting criteria and schedules.

 

As in previous years, the long-term incentive award granted to the NEOs was comprised of stock options and RSUs. In making the allocation between the two types of awards, the Compensation Committee considered that, of the two award designs, RSUs have a relatively greater retentive effect, and stock options have a relatively greater performance incentive impact. Also, the Compensation Committee considered the shareholder dilutive effect of the

two awards, which is greater in the case of stock options. As shown below, the Compensation Committee allocated up to 75% of the award value to RSUs and the remainder to stock options, as this combination reflects the optimum balance between retention goals and performance incentive.

 

To further promote retention, the stock options and RSUs vest in equal installments over a four year period on the anniversary date of the grant. As the awards are inherently tied to the performance of Company stock, a vesting schedule based on continued service is considered appropriate to meet the desire for both retention and performance incentive.

 

In determining long-term incentive awards, the Compensation Committee considers the compensation of the Market Comparison Group, a review of other elements of compensation and the NEO’s contribution to the overall results of the Company. Below is a table which illustrates the 2007 grant values for the NEOs and the allocation of the grants between stock options and RSUs.

 

 

Equity Grant Practices

 

The Compensation Committee generally grants annual equity awards to Named Executive Officers and management at the first meeting of the calendar year. All stock options have a ten year term and an exercise price of not less than 100% of the fair market value of the underlying shares on the date of the Compensation Committee’s approval. The 2000 Equity Plan defines the fair market value as the average of the high and low prices of the Company’s stock on the grant date. To determine the number of stock options awarded, the total grant value of the award is multiplied by the stock option allocation and then divided by the Black-Scholes value of a stock option as of the grant date. To determine the number of RSUs awarded, the total grant value is multiplied by the RSU allocation and then divided by the fair market value of the Company stock as of the grant date. A small number of equity awards are granted outside of the annual grant cycle in connection with events such as hiring and promotion. The grants are priced pursuant to the methodology outlined above.

 

Stock Ownership Guidelines

 

We recognize the importance of aligning our management’s interests with those of our shareholders. As a result, the Board, at the recommendation of the Compensation Committee, has established stock ownership guidelines for our executives. Under these guidelines, over a three-year period, the NEOs are expected to accumulate Company stock, along with derivative forms of Company equity, such as unvested and vested stock options, having a fair market value equal to the multiples of their base salaries as shown in the table below.

 

 

As of December 31, 2007, each Named Executive Officer has exceeded his stock ownership guideline objective shown above.

Severance

 

The Company has entered into Employment Agreements (“Agreements”) with each of the NEOs. These Agreements provide for severance benefits in connection with various termination of employment scenarios, which are discussed in this CD&A under the heading “Payments Upon Termination of Employment”.

 

We do not currently provide enhanced severance benefits if termination should follow a change-in-control of the Company. However, the Compensation Committee may in its discretion accelerate the vesting of long-term incentive awards in connection with a change-in-control.

 

Elements of Other Compensation

 

In an effort to offer our employees a competitive remuneration package, we provide them with certain retirement, medical and welfare benefits. The NEOs are eligible to participate on a basis commensurate with that of other employees. They also participate in the Company’s: qualified defined contribution retirement plan; non-qualified (unfunded) Supplemental Executive Retirement Plan (SERP), which restores to them the benefits they are unable to receive under the qualified retirement plan due to IRS limitations; and life insurance coverage equal to five times their annual base salary. In addition, they are eligible to participate in a nonqualified deferred compensation plan which allows them to defer compensation on a pre-tax basis.

 

The Company grants 10,086 shares of Company stock on a quarterly basis to a trust for Mr. Fain’s benefit, as further discussed on page 37. These grants are intended to give Mr. Fain a wealth accumulation opportunity commensurate with that of similarly situated executives in other companies, and to more closely link his long-term interests to those of shareholders.

 

The Company offers few perquisites or personal benefits, these include: Company subsidized automobile leases, discounts on Company cruises, annual executive physicals and spousal travel.

 

Impact of Tax and Accounting Treatment

 

Our 2000 Equity Plan complies with the requirements for “qualified performance based compensation” under Section 162(m) of the U.S. Internal Revenue Code.

 

Our EIP does not comply with Section 162(m), as it would require our EIP awards to be entirely formulaic and not allow for any discretion in determining individual performance. We believe our EIP is closely aligned to Company performance and should also have the ability to reward our NEOs for their individual contributions to our Company’s success. Even though our EIP is subject to the deduction limitations under Section 162(m), the financial impact of these limitations is immaterial.

 

 

 

 

 

 

 

 

 

The Company entered into new employment agreements with Messrs. Fain, Rice, Goldstein, and Kulovaara effective July 25, 2007. Our subsidiary, Celebrity Cruises Inc. (“Celebrity”), entered into a new employment agreement with Mr. Hanrahan effective July 25, 2007. These new agreements (the “Agreements”) are intended to enhance the retention and motivation of these key employees; ensure compliance with section 409(A) of the U.S. Internal Revenue Code and to include provisions protecting the Company such as a non-competition and non-solicitation clause. The Agreements do not change any of the underlying economic terms of the prior compensation agreements. The terms of the Agreements are summarized below and apply uniformly to all NEOs, except that Mr. Hanrahan’s employment agreement differs from that of the other NEOs by establishing Celebrity rather than the Company as his employer. In addition, under our employment agreement with Mr. Fain, we have agreed to make quarterly contributions to a trust in favor of Mr. Fain, in the amount of 10,086 shares of Company stock per quarter, until the earlier of the termination of Mr. Fain’s employment or June 2014 as described on page 37.

 

The term of the Agreements shall always be two years, unless sooner terminated as provided in the Agreements. The Agreements provide for an annual base salary which may be increased, but not decreased at any time during the term of the Agreement at the sole discretion of the Company. Each NEO is eligible to participate in any cash incentive compensation program available to similarly situated executives of the Company and is eligible to receive an annual cash incentive during the term of employment on the same basis and under substantially the same terms as similarly situated executives. Under the terms of the Agreement, the NEO is eligible to participate in any equity or long-term incentive plans available to similarly situated executives of the Company and is eligible to receive awards under such plans as determined by the Company in its sole discretion.

 

The NEOs’ employment can be terminated by the Company or by them at any time. If the Company terminates employment without cause or if the NEO resigns for “good reason” (as defined in the Agreement), they are entitled to receive: an amount equal to two times annual base salary; the target annual EIP award during the two years following termination; continued payment of health and medical benefits for a period of two years, or until such time that they commence employment with a new employer, whichever occurs first; and payment of reasonable professional search fees relating to outplacement. At the sole discretion of the Company, the NEO is also eligible to receive a one time termination bonus to be paid two years after the date of termination in an amount not to exceed 50% of base salary.

 

Each NEO has agreed not to compete with the Company or its affiliates during the term of employment and for two years following termination of employment and to refrain from (i) employing the Company or its affiliates’ employees during this period or (ii) soliciting employees, consultants, lenders, suppliers or customers from discontinuing, modifying or reducing the extent of their relationship with the Company during such period. During the term of the Agreement and subsequent to the termination of the Agreement, the NEO agrees not to disclose or use any confidential information.