<PAGE>
                                                                    EXHIBIT 10.2





                           Varco International Inc.
                      Director Deferred Compensation Plan





<PAGE>
 
                                     Varco
                      Director Deferred Compensation Plan

                               TABLE OF CONTENTS
                               -----------------

                                                                            Page
                                                                            ----
ARTICLE I......................................................................1
1.1 - Title....................................................................1
1.2 - Definitions..............................................................1
ARTICLE II.....................................................................4
2.1 - Participation............................................................4
ARTICLE III....................................................................5
3.1 - Elections to Defer Compensation..........................................5
3.2 - Investment Elections.....................................................6
ARTICLE IV.....................................................................7
4.1 - Deferral Account.........................................................7
4.2 - Employer Contributions Account...........................................7
ARTICLE V......................................................................9
5.1 - Deferral Account.........................................................9
5.2 - Employer Contributions Account...........................................9
ARTICLE VI....................................................................10
6.1 - Distribution of Deferred Compensation...................................10
6.2 - Forfeitures.............................................................11
6.3 - Nonscheduled In-Service Withdrawals.....................................11
6.4 - Hardship Withdrawals....................................................12
6.5 - Inability to Locate Participant.........................................12
6.6 - Pre-Retirement Death Benefit............................................12
6.7 - Trust...................................................................13
ARTICLE VII...................................................................14
ADMINISTRATION................................................................14
7.1 - Committee...............................................................14
7.2 - Committee Action........................................................14
7.3 - Powers and Duties of the Committee......................................14
7.4 - Construction and Interpretation.........................................15
7.5 - Information.............................................................15

                                       i
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7.6 - Compensation, Expenses and Indemnity....................................15
7.7 - Quarterly Statements....................................................16
7.8 - Disputes................................................................16
ARTICLE XIII..................................................................18
8.1 - Unsecured General Creditor..............................................18
8.2 - Restriction Against Assignment..........................................18
8.3 - Withholding.............................................................18
8.4 - Amendment, Modification, Suspension or Termination......................19
8.5 - Governing Law...........................................................19
8.6 - Receipt or Release......................................................19
8.7 - Payments on Behalf of Persons Under Incapacity..........................19
8.8 - Headings, etc. Not Part of Agreement....................................19

                                      ii
<PAGE>
 
                                     Varco

                      Director Deferred Compensation Plan

                        (Effective as of April 1, 1999)

        Varco International, Inc. (the "Company") hereby establishes the Varco 
Director Deferred Compensation Plan (the "Plan"), effective as of April 1, 1999,
to provide a tax-deferred capital accumulation opportunity to its non-employee 
directors through deferral of director fees.

                                   ARTICLE I

                             TITLE AND DEFINITIONS

1.1 - Title.
      -----

        This Plan shall be known as the Varco International, Inc. Director 
Deferred Compensation Plan.

1.2 - Definitions.
      -----------

        Whenever the following words and phrases are used in this Plan, with the
first letter capitalized, they shall have the meanings specified below.

        "Account" or "Accounts" shall mean a Participant's Deferral Account 
and/or Employer Contributions Account.

        "Beneficiary" or "Beneficiaries" shall mean the person or persons, 
including a trustee, personal representative or other fiduciary, last designated
in writing by a Participant in accordance with procedures established by the 
Committee to receive the benefits specified hereunder (other than those benefits
set forth in Section 6.6) in the event of the Participant's death. No 
beneficiary designation shall become effective until it is filed with the 
Committee, and no beneficiary designation of someone other than the 
Participant's spouse shall be effective unless such designation is consented to 
by the Participant's spouse on a form provided by and in accordance with 
procedures established by the Committee. If there is no Beneficiary designation 
in effect, or if there is no surviving designated Beneficiary, then the 
Participant's surviving spouse shall be the Beneficiary. If there is no 
surviving spouse to receive any benefits payable in accordance with the 
preceding sentence, the duly appointed and currently acting personal 
representative of the participant's estate (which shall include either the 
Participant's probate estate or living trust) shall be the Beneficiary. In any 
case where there is no such personal representative of the Participant's estate 
duly appointed and acting in that capacity within 90 days after the 
Participant's death (or such extended period as the Committee determines is 
reasonably necessary to allow such personal representative to be appointed, but 
not to exceed 180 days after

                                       1
<PAGE>
 
the Participant's death), then Beneficiary shall mean the person or persons who 
can verify by affidavit or court order to the satisfaction of the Committee that
they are legally entitled to receive the benefits specified hereunder. In the 
event any amount is payable under the Plan to a minor, payment shall not be made
to the minor, but instead be paid (a) to that person's living parent(s) to act 
as custodian, (b) if that person's parents are then divorced, and one parent is 
the sole custodial parent, to such custodial parent, or (c) if no parent of that
person is then living, to a custodian selected by the Committee to hold the 
funds for the minor under the Uniform Transfers or Gifts to Minors Act in effect
in the jurisdiction in which the minor resides. If no parent is living and the 
Committee decides not to select another custodian to hold the funds for the 
minor, then payment shall be made to the duly appointed and currently acting 
guardian of the estate for the minor or, if no guardian of the estate for the 
minor is duly appointed and currently acting within 60 days after the date the 
amount becomes payable, payment shall be deposited with the court having 
jurisdiction over the estate of the minor.

        "Board of Directors" shall mean the board of directors of the Company.

        "Code" shall mean the Internal Revenue Code of 1986, as amended.

        "Committee" shall mean the Committee appointed by the Board of Directors
to administer the Plan in accordance with Article VII.

        "Company" shall mean Varco International, Inc., any successor 
corporation and each corporation which is a member of a controlled group of 
corporations (within the meaning of Section 414(b) of the Code) of which Varco 
International, Inc. is a member.

        "Compensation" shall mean the Participant's Annual Retainer and Meeting 
Fees.

        "Deferral Account" shall mean the bookkeeping account maintained by the 
Committee for each Participant that is credited with amounts equal to (a) the 
portion of the Participant's Compensation that he or she elects to defer and (b)
earnings or losses pursuant to Section 4.1.

        "Distribution Subaccounts" shall mean subaccounts of a Participant's 
Deferral Account and Employer Contributions Account established to separately 
account for deferred Compensation and Employer Contribution Amounts (and 
earnings thereon) which are subject to different in-service distribution 
elections.

        "Earnings Rate" shall mean, for each Fund, an amount equal to the net 
rate of gain or loss on the assets of such Fund during each month.

                                       2
<PAGE>
 
        "Effective Date" shall mean April 1, 1999.

        "Eligible Director" shall mean each member of the Board of Directors who
is not an employee of the Company.

        "Employer Contributions Account" shall mean the bookkeeping account 
maintained by the Committee for each Participant that is credited with an amount
equal to the Employer Contribution Amount (if any) and earnings or losses 
pursuant to Section 4.2.

        "Employer Contribution Amount" shall mean an amount to equal to a
percentage of the amount of Compensation deferred by a Participant or such other
amount, which percentage or other amount, if any, shall be determined by the
Company, in its sole discretion, and which percentage or amount need not be the
same for each Participant.

        "Fund" or "Funds" shall mean one or more of the investment funds or 
portfolios selected by the Committee pursuant to Section 3.2(b).

        "Initial Election Period" for an Eligible Director shall mean the later 
of: (a) the thirty-day period ending March 31, 1999; or (b) the thirty-day 
period following the Eligible Director's appointment to the Board of Directors.

        "Participant" shall mean any Eligible Director who elects to defer 
Compensation in accordance with Section 3.1 and files a completed insurance 
application form in accordance with Section 2.1.

        "Payment Eligibility Date" shall mean the first day of the month 
following the end of the calendar quarter in which a Participant ceases to be a 
member of the Board of Directors for any reason.

        "Plan" shall mean the Varco Director Deferred Compensation Plan set 
forth herein, now in effect, or as amended from time to time.

        "Plan Year" shall mean the 12 consecutive month period beginning on 
January 1 and ending December 31.

                                       3
<PAGE>
 
                                  ARTICLE II
                                 PARTICIPATION

2.1 - Participation.
      -------------

        An Eligible Director shall become a Participant in the Plan by (a) 
electing to defer Compensation in accordance with Section 3.1, (b) filing a life
insurance application form along with his or her deferral election form and (c) 
satisfying any medical underwriting requirement established by the Committee.

                                       4
<PAGE>
 
                                  ARTICLE III
                              DEFERRAL ELECTIONS

3.1 - Elections to Defer Compensation.
      -------------------------------

        (a)  Initial Election Period. Subject to Section 2.1, each Eligible 
Director may elect to defer Compensation by filing with the Committee an 
election that conforms to the requirements of this Section 3.1, on a form 
provided by the Committee, no later than the last day of his or her Initial 
Election Period.

        (b)  General Rule. Subject to the minimum deferral provisions of Section
3.1(c) below, an Eligible Director may elect to defer any percentage of 
Compensation up to 100%; provided, however, that no election shall be effective 
to reduce the Compensation paid to an Eligible Director for a calendar year to 
an amount which is less than the amount that the Company is required to withhold
from such Eligible Director's Compensation for such calendar year for any reason
(other than contributions to this Plan).

        (c)  Minimum Deferrals. For each Plan Year during which an Eligible
Director is a Participant, the minimum amount that may be elected under Section
3.1(b) is $5,000. If the Compensation which the Participant has elected to defer
for a Plan Year includes a percentage of the Compensation payable in such Plan
Year and the actual amount of such Compensation to be deferred is less than
$5,000 for the Plan Year, then no portion of such Compensation shall be deferred
under this Plan and any Compensation previously deferred for such Plan Year
shall be refunded to the Participant without interest.

        (d)  Effect of Initial Election. An election to defer Compensation 
during the Initial Election Period shall be effective with respect to 
Compensation paid with respect to pay periods commencing after the end of the 
Initial Election Period.

        (e)  Elections other than Elections during the Initial Election Period. 
Subject to the requirement for filing a completed life insurance form pursuant 
to Section 2.1, any Eligible Director may participate for any Plan Year by 
filing an election, on a form provided by the Committee, to defer Compensation 
as described in paragraph (b) above. An election to defer Compensation for a 
Plan Year (other than the Plan Year beginning January 1, 1999) must be filed on 
or before December 15 of the preceding Plan Year and will be effective for 
Compensation earned during pay periods beginning on or after the following 
January 1. Each such election shall designate the time at which such deferred 
Compensation (and allocable earnings) shall be distributed to the Participant in
accordance with Article VI of this Plan.

                                       5
<PAGE>
 
        (f)  In-service Distributions. At the time of making an election to
defer Compensation for a Plan Year pursuant to this Section 3.1 (or by May 31,
1999 with respect to the election to defer Compensation for the Plan Year
commencing May 1, 1999), a Participant may elect to receive an in-service
distribution of the amount deferred under such election, together with any
Employer Contribution Amounts for the same Plan Year and earnings credited with
respect to such amounts pursuant to Article IV, in a lump sum in any year
beginning after the second anniversary of the last day of the Plan Year in which
the amount deferred was earned. A Participant may subsequently elect to defer
the year of such an in-service distribution to any subsequent year by filing a
written election with the Committee, on a form provided by the Committee, at
least one year prior to the first day of the previously elected in-service
distribution year. The election to defer the year of an in-service distribution
may be made no more than twice.

        (g)  Irrevocability. Any election filed pursuant to this Section 3.1 
shall be irrevocable except to the extent provided in subsection (f) hereof and 
Section 6.3.

3.2 - Investment Elections.
      --------------------

        (a)  At the time of making the deferral elections described in Section
3.1, the Participant shall designate, on a form provided by the Committee, which
of the types of investment funds or portfolios set forth in Appendix A the
Participant's Accounts will be deemed to be invested in for purposes of
determining the amount of earnings to be credited to each Account.
Notwithstanding the foregoing, with respect to deferral elections made during
the thirty-day period ending April 30, 1999, the Participant shall designate the
types of investment funds or portfolios set forth in Appendix A on or before May
31, 1999.

        (b)  In making the designation pursuant to this Section 3.2, the 
Participant must specify, in whole numbers, the percentage of his Deferral 
Account and Employer Contributions Account which shall be deemed to be invested 
in one or more of the types of investment funds or portfolios listed in Appendix
A. Effective as of the end of any month, a Participant may change the 
designation made under this Section 3.2 by filing an election, on a form 
provided by the Committee. If a Participant fails to elect a type of investment 
fund or portfolio under this Section 3.2, he or she shall be deemed to have 
elected the Money Market option.

        (c)  Although the Participant may designate the type of investment funds
or portfolios, the Committee shall select from time to time, in its sole 
discretion, a commercially available investment fund or portfolio of each of the
types described in Appendix A to be the Funds. The Earnings Rate of each such 
commercially available investment fund or portfolio shall be used to determine 
the amount of earnings or losses to be credited to Participants' Accounts under 
Article IV.

                                       6
<PAGE>
 
                                  ARTICLE IV
                                   ACCOUNTS
4.1 - Deferral Account.
      ----------------

        The Committee shall establish and maintain a Deferral Account for each 
Participant under the Plan. For each Participant who makes one or more 
in-service distribution elections pursuant to Section 3.1(f), the Deferral 
Account shall be divided into two or more Distribution Subaccounts as necessary 
to separately account for deferrals which are payable at different times. A 
Participant's Deferral Account shall be divided (or each Distribution Subaccount
of a Participant's Deferral Account shall be further divided) into separate 
subaccounts ("investment subaccounts"), each of which corresponds to an 
investment fund or portfolio elected by the Participant pursuant to Section 
3.2(a). A Participant's Deferral Account shall be credited as follows:

        (a)  No later than five business days after the end of each month, the
        Committee shall credit the investment subaccounts of the Deferral
        Account (or the appropriate Distribution Subaccount of the Participant's
        Deferral Account) with an amount equal to the Compensation deferred by
        the Participant during each pay period ending in that month in
        accordance with the Participant's election under Section 3.2(a); that
        is, the portion of the Participant's deferred Compensation that the
        Participant has elected to be deemed to be invested in a certain type of
        investment fund or portfolio shall be credited to the investment
        subaccount corresponding to that investment fund or portfolio; and

        (b)  As of the last day of each month, each investment subaccount of a
        Participant's Deferral Account (or Distribution Subaccount of the
        Participant's Deferral Account) shall be credited with earnings or
        losses in an amount equal to that determined by multiplying the balance
        credited to such investment subaccount as of the last day of the
        preceding month by the Earnings Rate for the corresponding Fund selected
        by the Committee pursuant to Section 3.2(b).

4.2 - Employer Contributions Account.
      ------------------------------

        The Committee shall establish and maintain an Employer Contributions 
Account for each Participant under the Plan. For each Participant who makes one 
or more in-service distribution elections pursuant to Section 3.1(f), the 
Participant's Employer Contributions Account shall be divided into two or more 
Distribution Subaccounts as necessary to separately account for Employer 
Contribution Amounts which are payable at different times. A

                                       7
<PAGE>
 
Participant's Employer Contributions Account shall be divided (or each 
Distribution Subaccount of a Participant's Employer Contributions Account shall 
be further divided) into separate investment subaccounts corresponding to the 
investment fund or portfolio elected by the Participant pursuant to Section 
3.2(a). A Participant's Employer Contributions Account shall be credited as 
follows:

        (a)  No later than five business days after the end of any calendar
        quarter or Plan Year for which the Company, in its sole discretion,
        decides to credit a Participant with an Employer Contribution Amount,
        the Committee shall credit the investment subaccounts of the Employer
        Contributions Account (or the appropriate Distribution Subaccount of the
        Participant's Employer Contributions Account) with an amount equal to
        the Employer Contribution Amount applicable to that Participant in
        accordance with the Participant's election under Section 3.2(a); that
        is, the portion of the Participant's Employer Contribution Amount which
        the Participant elected to be deemed to be invested in a certain type of
        investment fund or portfolio shall be credited to the corresponding
        investment subaccount; and

        (b)  As of the last day of each month, each investment subaccount of the
        Employer Contributions Account (or the appropriate Distribution
        Subaccount of the Participant's Employer Contributions Account) shall be
        credited with earnings or losses in an amount equal to that determined
        by multiplying the balance credited to such investment subaccount as of
        the last day of the preceding month by the Earnings Rate for the
        corresponding Fund selected by the Committee pursuant to Section 3.2(b).

                                       8
<PAGE>
 
                                   ARTICLE V
                                    VESTING

5.1 - Deferral Account.
      ----------------

        A Participant's Deferral Account shall be 100% vested at all times.

5.2 - Employer Contributions Account.
      ------------------------------

        (a)  A Participant's Employer Contributions Account shall vest at a rate
determined by the Company for each Participant. Each Participant's vesting 
schedule shall be set forth in a separate letter agreement between the 
Participant and the Company.

        (b)  Notwithstanding anything contained herein to the contrary, the 
Committee may, in its sole discretion, provide for 100% vesting of a 
Participant's Employer Contributions Account at any time.

                                       9
<PAGE>
 
                                  ARTICLE VI
                                 DISTRIBUTIONS

6.1 - Distribution of Deferred Compensation.
      -------------------------------------

        (a)  Distribution of the amount credited to a Distribution Subaccount of
the Participant's Deferral Account and Employer Contribution Account which was 
established with respect to an in-service distribution election shall be made in
a lump sum payment during January of the year elected by the Participant 
pursuant to Section 3.1(f), provided that the Participant is a member of the 
Board of Directors on January 1 or such year. In the event the Participant 
ceases to be a member of the Board of Directors for any reason prior to January 
1 of the year elected by the Participant pursuant to Section 3.1(f), the 
Participant's in-service distribution election(s) with respect to benefits not 
yet distributed shall no longer be effective and all of the amounts credited to 
his or her Deferral Account and Employer Contributions Account shall be 
distributed together as set forth in the following subsections of this Section 
6.1.

        (b)  In the event a Participant ceases to be a member of the Board of 
Directors for a reason other than death, the amount credited to his or her 
Deferral Account and the vested portion of the amount, if any, credited to his 
or her Employer Contributions Account shall be distributed in 60 quarterly 
installments commencing as soon as practicable following his or her Payment 
Eligibility Date. Notwithstanding the foregoing, a Participant may elect one of 
the following optional forms of distribution provided that his or her election 
is filed with the Committee at least one year prior to his or her last day as a 
member of the Board of Directors on a form to be provided by the Committee:

             (1)  A lump sum payment payable as soon as practicable after the
             Participant's Payment Eligibility Date, or

             (2)  Either 20 or 40 quarterly installments beginning as soon as
             practicable following the Participant's Payment Eligibility Date.

Notwithstanding anything contained herein to the contrary, in the event that the
sum of the amount credited to a Participant's Deferral Account and the vested 
portion of the amount, if any, credited to his or her Employer Contributions 
Account is $25,000 or less, such amount shall be paid in a cash lump sum payment
as soon as practicable following his or her Payment Eligibility Date.

        (c)  In the event a Participant ceases to be a member of the Board of 
Directors because of death, the amount credited to his or her Deferral Account 
and the vested and unvested

                                      10
<PAGE>
 
portion of the amount, if any, credited to his or her Employer Contributions 
Account shall be paid to his or her Beneficiary in the form of a cash lump sum 
payment as soon as practicable following the Participant's Payment Eligibility 
Date unless (1) prior to his or her death the Participant had elected on a form 
provided by and filed with the Committee that the distribution be made in 20, 
40 or 60 quarterly installments beginning as soon as practicable following the 
Participant's Payment Eligibility Date and (2) the sum of the amount credited to
the Participant's Deferral Account and the vested portion of the amount, if any,
credited to his or her Employer Contribution Account exceeds $25,000.

        (d)  The Participant's Accounts shall continue to be credited monthly 
with earnings pursuant to Section 4.1 of the Plan until all amounts credited to 
his or her Accounts under the Plan have been distributed.

        (e)  In the event that a former Participant dies while receiving 
installment payments under this Plan, any remaining installments shall be paid 
to the Participant's Beneficiary as such installments would have otherwise been 
due to the Participant.

6.2 - Forfeitures.
      -----------

        When a Participant (or, in the case of his or her death, the 
Participant's Beneficiary) receives a distribution of benefits under this Plan 
(regardless of whether such payment is a lump sum payment or the first 
installment payment), the portion of his or her Employer Contributions Account, 
if any, which is not vested shall be forfeited, and the Company shall have no 
obligation to the Participant (or Beneficiary) with respect to such forfeited 
amount.

6.3 - Nonscheduled In-Service Withdrawals.
      -----------------------------------

        At any time prior to his or her last day as a member of the Board of 
Directors, a Participant may elect to withdraw the entire amount credited to his
or her Deferral Account and the vested portion of the amount, if any, credited 
to his or her Employer Contributions Account, subject to a 10% withdrawal 
penalty. The Participant may make such an election by filing a written notice 
with the Committee on a form provided by the Committee. Within 90 days following
the Committee's receipt of such notice, an amount equal to the sum of 90% of the
amount credited to the Participant's Deferral Account and 90% of the vested 
portion of the amount, if any, credited to his or her Employer Contributions 
Account shall be paid to the amount, if any, credited to his or her Employer 
Contributions Account shall be paid to the Participant in a cash lump sum 
payment. Upon the payment of such withdrawal, (a) the remainder of the amounts 
credited to the Participant's Accounts shall be forfeited, (b) the Participant 
shall cease to participate in the Plan for the remainder of the Plan Year in 
which the withdrawal occurs and shall be ineligible to participate during the 
Plan Year immediately

                                      11
<PAGE>
 
following the Plan Year in which the withdrawal occurs, and (c) any deferral 
elections made by the Participant for such periods shall be terminated. A 
Participant may not make more than two withdrawals under this Section 6.3.

6.4 - Hardship Withdrawals.
      --------------------

        At any time prior to his or her last day as a member of the Board of 
Directors, a Participant may request a distribution for hardship without 
penalty. Such distribution for hardship shall be subject to approval by the 
Committee and may be made only to the extent necessary to satisfy the 
hardship. A distribution for hardship shall be granted only for one of the 
following reasons:

        (a)  A Participant's or dependent's illness or accident;

        (b)  Casualty loss with respect to a Participant's property; or

        (c)  Other circumstances arising out of events beyond the control of the
Participant, which the Committee finds are similar to the events described in 
Section 6.4(a) or (b).

6.5 - Inability to Locate Participant.
      -------------------------------

        In the event that the Committee is unable to locate a Participant or 
Beneficiary within two years following the Participant's Payment Eligibility 
Date, the amounts allocated to the Participant's Deferral Account and Employer 
Contributions Account shall be forfeited. If, after such forfeiture, the 
Participant or Beneficiary later claims such benefits, such benefits shall be 
reinstated without interest or earnings, provided that Section 6.2 shall still 
apply.

6.6 - Pre-Retirement Death Benefit.
      ----------------------------

        (a)  If a Participant dies while a member of the Board of Directors, in 
addition to the payment or payments to the Participant's Beneficiary under 
Section 6.1(c), a death benefit shall be paid to the Participant's beneficiary 
under a life insurance policy purchased by or transferred to the trustee of the 
Trust described in Section 6.7 to insure the life of the Participant (the 
"Policy"). The death benefit payable to the Participant's beneficiary shall be 
$300,000.

        (b)  The Participant shall have the right to designate and change such 
beneficiary (which need not be his or her Beneficiary under this Plan) at any 
time on a form provided by and filed with the insurance company. If no such form
is on file with the insurance company, the death benefit described in the 
preceding paragraph shall be paid to the Beneficiary.

                                      12
<PAGE>
 
        (c)  The death benefit payable pursuant to paragraph (a) shall not be 
paid if an insurance company has not issued a Policy on the life of the 
Participant at the time of his death and shall be subject to all conditions and 
exceptions set forth in the Policy.

        (d)  Notwithstanding any provision of this Plan or any other document to
the contrary, the pre-retirement death benefit provided under Section 6.6(a) 
shall be payable solely from the proceeds of the Policy, if any. In addition, no
Policy shall be allocated to any Account.

6.7 - Trust.
      -----

        (a)  The Company shall cause the payment of benefits under this Plan 
(excluding the amounts described in Section 6.6) to be made in whole or in part 
by the Trustee of the Varco Deferred Compensation Plan Trust (the "Trust") in 
accordance with the provisions of this Section 6.7. The Company shall contribute
to the Trust for each Participant an amount equal to the amount deferred by the 
Participant for the Plan Year and the Employer Contribution Amount for the 
Participant for the Plan Year, if any; the contributions shall be made no later 
than the Company's tax return due date for that Plan Year. The Company shall 
also contribute cash in amounts approximately equal to the "cost of insurance" 
(as defined in each Policy) for the death benefits described in Section 6.6 for 
each Participant, provided that such obligation shall not apply with respect to 
a Policy if the Participant is no longer a member of the Board of Directors. 
Notwithstanding the foregoing, if the Company acquires a Policy and subsequently
transfers it to the Trust, then, prior to the date the Policies are contributed 
to the Trust, the amounts described in the preceding two sentences shall be used
to pay premiums on the Policies, rather than contributed to the Trust.

        (b)  The Committee shall direct the Trustee to pay the Participant or 
his or her Beneficiary at the time in the amount described in Article VI 
(excluding amounts described in Section 6.6). In the event the amounts held 
under the Trust are not sufficient to provide the full amount (excluding amounts
described in Section 6.6) payable to the participant or his or her Beneficiary, 
the Company shall pay the remainder of such amount at the time(s) set forth in 
Article VI.

                                      13
<PAGE>
 
                                  ARTICLE VII
                                ADMINISTRATION

7.1 - Committee.
      ---------

        A committee shall be appointed by, and serve at the pleasure of, the 
Board of Directors. The number of members comprising the Committee shall be 
determined by the Board of Directors which may from time to time vary the number
of members, provided, however, that the Director of Human Resources for the 
Company and the Chief Financial Officer of the Company shall be members of the 
Committee. A member of the Committee may resign by delivering a written notice 
of resignation to the Board of Directors. The Board of Directors may remove any 
member by delivering a letter signed by each director notifying such member of 
his or her removal. Vacancies in the membership of the Committee shall be filled
promptly by the Board of Directors.

7.2 - Committee Action.
      ----------------

        The Committee shall act at meetings by affirmative vote of a majority of
the members of the Committee. Any action permitted to be taken at a meeting may 
be taken without a meeting if, prior to such action, a written consent to the 
action is signed by all members of the Committee and such written consent is 
filed with the minutes of the proceedings of the Committee. A member of the 
Committee shall not vote or act upon any matter which relates solely to himself 
or herself as a Participant. The Chairman or any other member or members of the 
Committee designated by the Chairman may execute any certificate or other 
written direction on behalf of the Committee.

7.3 - Powers and Duties of the Committee.
      ----------------------------------

        (a)  The Committee, on behalf of the Participants and their 
Beneficiaries, shall enforce the Plan in accordance with its terms, shall be 
charged with the general administration of the Plan, and shall have all powers 
necessary to accomplish its purposes, including, but not by way of limitation, 
the following:

             (1)  To select the funds or portfolios to be the Funds in 
accordance with Section 3.2(b) hereof;

             (2)  To construe and interpret the terms and provisions of this 
Plan;

                                      14
<PAGE>
 
             (3)  To compute and certify to the amount and kind of benefits
             payable to Participants and their Beneficiaries;

             (4)  To maintain all records that may be necessary for the
             administration of the Plan;

             (5)  To provide for the disclosure of all information and the
             filing or provision of all reports and statements to Participants,
             Beneficiaries or governmental agencies as shall be required by law;

             (6)  To make and publish such rules for the regulation of the Plan
             and procedures for the administration of the Plan as are not
             inconsistent with the terms hereof; and

             (7)  To appoint a plan administrator or any other agent, and to
             delegate to them such powers and duties in connection with the
             administration of the Plan as the Committee may from time to time
             prescribe.

7.4 - Construction and Interpretation.
      -------------------------------

        The Committee shall have full discretion to construe and interpret the 
terms and provisions of this Plan, which interpretation or construction shall be
final and binding on all parties, including but not limited to the Company and 
any Participant or Beneficiary. The Committee shall administer such terms and 
provisions in a uniform and nondiscriminatory manner and in full accordance with
any and all laws applicable to the Plan.

7.5 - Information.
      -----------

        To enable the Committee to perform its functions, the Company shall 
supply full and timely information to the Committee on all matters relating to 
the Compensation of all Participants, their death or other cause of termination,
and such other pertinent facts as the Committee may require.

7.6 - Compensation, Expenses and Indemnity.
      ------------------------------------

        (a)  The members of the Committee shall serve without compensation for 
their services hereunder.

                                      15
<PAGE>
 
        (b)  The Committee is authorized at the expense of the company to employ
such legal counsel as it may deem advisable to assist in the performance of its 
duties hereunder. Expenses and fees in connection with the administration of the
Plan shall be paid by the Company.

        (c)  To the extent permitted by applicable state law, the Company shall 
indemnify and save harmless the Committee and each member thereof, the Board of 
Directors and each member thereof, and delegates of the Committee who are 
employees of the Company against any and all expenses, liabilities and claims, 
including legal fees to defend against such liabilities and claims arising out 
of their discharge in good faith of responsibilities under or incident to the 
Plan, other than expenses and liabilities arising out of willful misconduct. 
This indemnity shall not preclude such further indemnities as may be available 
under insurance purchased by the Company or provided by the Company under any 
bylaw, agreement or otherwise, as such indemnities are permitted under state 
law.

7.7 - Quarterly Statements.
      --------------------

        Under procedures established by the Committee, a Participant shall 
receive a statement with respect to such Participant's Accounts as of the last 
day of each calendar quarter.

7.8 - Disputes.
      --------

        (a)  Claim.

        A person who believes that he or she is being denied a benefit to which 
he or she is entitled under this Plan (hereinafter referred to as "Claimant") 
may file a written request for such benefit with the Committee, setting forth 
his or her claim. The request must be addressed to the Committee at the 
Company's principal place of business.

        (b)  Claim Decision.

        Upon receipt of a claim, the Committee shall advise the Claimant that a 
reply will be forthcoming within ninety (90) days and shall, in fact, deliver 
such reply within such period. The Committee may, however, extend the reply 
period for an additional ninety (90) days for special circumstances.

        If the claim is denied in whole or in part, the Committee shall inform 
the Claimant in writing, using language calculated to be understood by the 
Claimant, setting forth: (1) the specified reason or reasons for such denial; 
(2) the specific reference to pertinent provisions of this Plan on which such 
denial is based; (3) a description of any additional material or information

                                      16
<PAGE>
 
necessary for the Claimant to perfect his or her claim and an explanation why 
such material or such information is necessary; (4) appropriate information as 
to the steps to be taken if the Claimant wishes to submit the claim for review; 
and (5) the time limits for requesting a review under subsection (c).

        (c)  Request for Review.

        Within sixty (60) days after the receipt by the Claimant of the written 
opinion described above, the Claimant may request in writing that the Committee 
review the determination. Such request must be addressed to the Committee, at 
the Company's principal place of business. The Claimant or his or her duly 
authorized representative may, but need not, review the pertinent documents and 
submit issues and comments in writing for consideration by the Committee. If the
Claimant does not request a review within such sixty (60) day period, he or she 
shall be barred and estopped from challenging the original determination.

        (d)  Review of Decision.

        Within sixty (60) days after the Committee's receipt of a request for 
review, after considering all materials presented by the Claimant, the Committee
will inform the Claimant in writing, in a manner calculated to be understood by 
the Claimant, of its decision setting forth the specific reasons for the 
decision and containing specific references to the pertinent provisions of this 
Plan on which the decision is based. If special circumstances require that the 
sixty (60) day time period be extended, the Committee will so notify the 
Claimant and will render the decision as soon as possible, but no later than one
hundred twenty (120) days after receipt of the request for review.

                                      17
<PAGE>
 
                                 ARTICLE XIII
                                 MISCELLANEOUS

8.1 - Unsecured General Creditor.
      --------------------------

        Participants and their Beneficiaries, heirs, successors, and assigns 
shall have no legal or equitable rights, claims, or interest in any specific 
property or assets of the Company. No assets of the Company shall be held under 
any trust, or held in any way as collateral security for the fulfilling of the 
obligations of the Company under this Plan. Any and all of the Company's assets 
shall be, and remain, the general unpledged, unrestricted assets of the Company.
The Company's obligation under the Plan shall be merely that of an unfunded and 
unsecured promise of the Company to pay money in the future, and the rights of 
the Participants and Beneficiaries shall be no greater than those of unsecured 
general creditors. It is the intention of the Company that this Plan (and the 
Trust described in Section 6.7) be unfunded for purposes of the Code.

8.2 - Restriction Against Assignment.
      ------------------------------

        The Company shall pay all amounts payable hereunder only to the person 
or persons designated by the Plan and not to any other person or corporation. No
part of a Participant's Accounts shall be liable for the debts, contracts, or 
engagements of any Participant, his or her Beneficiary, or successors in 
interest, nor shall a Participant's Accounts be subject to execution by levy, 
attachment, or garnishment or by any other legal or equitable proceeding, nor 
shall any such person have any right to alienate, anticipate, sell, transfer, 
commute, pledge, encumber, or assign any benefits or payments hereunder in any 
manner whatsoever. If any Participant, Beneficiary or successor in interest is 
adjudicated bankrupt or purports to anticipate, alienate, sell, transfer, 
assign, pledge, encumber or charge any distribution or payment from the Plan, 
voluntarily or involuntarily, the Committee, in its discretion, may cancel such 
distribution or payment (or any part thereof) to or for the benefit of such 
Participant, Beneficiary or successor in interest in such manner as the 
Committee shall direct.

8.3 - Withholding.
      -----------

        There shall be deducted from each payment made under the Plan or any 
other compensation payable to the Participant (or Beneficiary) all taxes which 
are required to be withheld by the Company in respect to such payment or this 
Plan. The Company shall have the right to reduce any payment (or other 
compensation) by the amount of cash sufficient to provide the amount of said 
taxes.

                                      18
<PAGE>
 
8.4 - Amendment, Modification, Suspension or Termination.
      --------------------------------------------------

        The Board of Directors may amend, modify, suspend or terminate the Plan 
in whole or in part, except that no amendment, modification, suspension or 
termination shall have any retroactive effect to reduce any amounts allocated to
a Participant's Accounts. (Neither the Policies themselves nor the death benefit
described in Section 6.6 shall be treated as allocated to Accounts.)

8.5 - Governing Law.
      -------------

        This Plan shall be construed, governed and administered in accordance 
with the laws of the State of California.

8.6 - Receipt or Release.
      ------------------

        Any payment to a Participant or the Participant's Beneficiary in 
accordance with the provisions of the Plan shall, to the extent thereof, be in 
full satisfaction of all claims against the Committee, and the Company. The 
Committee may require such Participant or Beneficiary, as a condition precedent 
to such payment, to execute a receipt and release to such effect.

8.7 - Payments on Behalf of Persons Under Incapacity.
      ----------------------------------------------

        In the event that any amount becomes payable under the Plan to a person 
who, in the sole judgement of the Committee, is considered by reason of physical
or mental condition to be unable to give a valid receipt therefor the Committee 
may direct that such payment be made to any person found by the Committee, in 
its sole judgement, to have assumed the care of such person. Any payment made 
pursuant to such determination shall constitute a full release and discharge of 
the Committee and the Company.

8.8 - Headings, etc. Not Part of Agreement.
      ------------------------------------

        Headings and subheadings in this Plan are inserted for convenience of 
reference only and are not to be considered in the construction of the 
provisions hereof.

                                      19
<PAGE>
 
        IN WITNESS WHEREOF, the Company, has executed this document this 30th 
                                                                        ------
day of March 1999.


                                Varco International, Inc.



                                By:          Donald Stichler
                                   ----------------------------------


                                Its:   Vice President, Controller--
                                    ---------------------------------
                                         Treasurer and Secretary


                                      20