September 3, 2009

 

Dear Paychex Stockholder:

 

The Board of Directors cordially invites you to attend our Annual Meeting of Stockholders (the “Annual Meeting”) on Tuesday, October 13, 2009 at 10:00 a.m. Eastern Time at the Rochester Riverside Convention Center, 123 East Main Street, Rochester, New York.

 

This booklet includes the formal Notice of Annual Meeting of Stockholders and the Proxy Statement. The Proxy Statement tells you about the agenda items and the procedures for the Annual Meeting. It also provides certain information about Paychex, Inc., its Board of Directors, and its named executive officers.

 

It is important that your shares be represented at the Annual Meeting. Whether or not you plan to attend the Annual Meeting, you are encouraged to vote. You may vote by Internet, telephone, written proxy, or written ballot at the Annual Meeting. We encourage you to use the Internet as it is the most cost-effective way to vote. If you elected to electronically access the Proxy Statement and Annual Report, you will not be receiving a proxy card and must vote via the Internet.

 

We hope you will be able to attend the Annual Meeting and would like to take this opportunity to remind you that your vote is important. If you need special assistance at the Annual Meeting, please contact the Secretary of the Company at (800) 828-4411, or write to Paychex, Inc., 911 Panorama Trail South, Rochester, New York 14625-2396, Attention: Corporate Secretary.

 

Sincerely,

 

 

Jonathan J. Judge

President and Chief Executive Officer

 

PAYCHEX, INC.

 

911 Panorama Trail South •  Rochester, New York 14625-2396

 

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

 

 

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE 2009 ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON OCTOBER 13, 2009

 

Paychex, Inc.’s Proxy Statement and Annual Report for the year ended May 31, 2009 are available at
http://investor.paychex.com/annual.aspx

 

TABLE OF CONTENTS

 

 

This Proxy Statement is being mailed to stockholders of Paychex, Inc. (“Paychex”, the “Company”, “we,” or “our”), a Delaware corporation, on or about September 3, 2009, in connection with the solicitation of proxies by the Board of Directors of the Company (the “Board”) to be voted at the 2009 Annual Meeting of Stockholders (the “Annual Meeting”). The Annual Meeting will be held on Tuesday, October 13, 2009 at 10:00 a.m. Eastern Time at the Rochester Riverside Convention Center, 123 East Main Street, Rochester, New York.

 

Paychex has one class of shares outstanding, designated common stock, $0.01 par value per share. The Board has fixed the close of business on August 14, 2009 as the record date for determining the holders of common stock entitled to notice of, and to vote at, the Annual Meeting. As of the record date, 361,757,338 shares of common stock were issued and outstanding. A majority of the outstanding shares (180,878,670 shares) present at the Annual Meeting in person or by proxy will constitute a quorum. A quorum is necessary to hold a valid meeting. Stockholders will be entitled to one vote for each share of common stock held as of the record date.

 

Your vote is very important and we hope that you will attend the Annual Meeting. However, whether or not you plan to attend the Annual Meeting, please vote by proxy in accordance with the instructions on your proxy card, voting instruction form (from your bank or broker), or the instructions that you received through electronic mail. There are three convenient ways to submit your vote by proxy:

 

 

The deadline for Internet or telephone voting is 11:59 p.m. Eastern Time on Monday, October 12, 2009. If you vote by telephone or the Internet, you do not need to return your proxy card.

 

Signing and returning your proxy card or submitting your proxy via the Internet or by telephone does not affect your right to vote in person if you attend the Annual Meeting and your shares are registered in your name. If your shares are held in the name of a bank, broker, or other holder of record, you must obtain a proxy, executed in your favor, from the holder of record to be able to vote in person at the Annual Meeting.

 

You can revoke your proxy at any time prior to it being voted at the Annual Meeting by:

 

 

All votes properly cast and not revoked will be voted at the Annual Meeting in accordance with the stockholder’s directions. Shares voted by proxy card received without choices specified will be voted FOR the seven nominees for election to the Board and FOR the ratification of the selection of the independent registered public accounting firm (the “independent accountants”).

 

Abstentions are counted for the purpose of establishing a quorum and will have the same effect as a vote against a proposal (other than the election of directors). Broker non-votes occur when a broker does not vote on a non-routine matter because the broker does not have discretionary voting power for that proposal and has not received instructions from the beneficial owner to vote. Broker non-votes will be counted for the purpose of determining the presence or absence of a quorum, but will not be counted for the purpose of determining the number of shares entitled to vote on a specific proposal and thus will not affect the outcome of the vote.

 

Our By-laws provide that each director shall be elected by a majority of the votes cast for the director at any meeting for the election of directors at which a quorum is present, provided that if the number of nominees exceeds the number of directors to be elected, the directors shall be elected by the vote of a plurality of the shares represented in person or by proxy at any such meeting and entitled to vote on the election of directors. A majority of the votes cast means that the number of shares voted “for” the election of a director nominee must exceed the number of votes cast “against” the nominee. If a nominee that is an incumbent director does not receive a required majority of the votes cast, the director shall offer to tender his or her resignation to the Board. The Governance and Compensation Committee of the Board shall consider such offer and will make a recommendation to the Board on whether to accept or reject the resignation, or whether other action should be taken. The Board will consider the committee’s recommendation and will determine whether to accept such offer.

 

The table below shows the vote required to approve each of the proposals described in this Proxy Statement, assuming the presence of a quorum at the Annual Meeting.

 

 

 

 

If a stockholder is a participant in the Paychex Employee Stock Ownership Plan Stock Fund (“ESOP”) of the Paychex 401(k) Incentive Retirement Plan (the “401(k) Plan”), the proxy card also will serve as a voting instruction for Fidelity Management Trust Company (the “Trustee”), where all accounts are registered in the same name. As a participant in the ESOP, the stockholder has the right to direct the Trustee, who is the holder of record, regarding how to vote the shares of common stock credited to the participant’s account at the Annual Meeting. The participant’s voting instructions will be tabulated confidentially. Only the Trustee and/or the tabulator will have access to the participant’s individual voting direction. If voting instructions for the shares of common stock in the ESOP are not received, those shares will be voted by the Trustee in the same proportions as the shares for which voting instructions were received from other participants in the ESOP. Voting by ESOP participants will close at 11:59 p.m. Eastern Time on October 7, 2009. The Trustee will then vote all shares of common stock held in the ESOP by the established deadline.

 

The following table sets forth information, based upon reports filed by such persons with the Securities and Exchange Commission (“SEC”), as of July 31, 2009, with respect to the beneficial ownership of common stock of the Company by: (i) any person (including any “group” as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) who is known by the Company to be the beneficial owner of more than 5% of the Company’s voting securities; (ii) each director and nominee for director of the Company; (iii) each of the named executive officers (“NEOs”) of the Company named in the Fiscal 2009 Summary Compensation Table on page 24 of this Proxy Statement; and (iv) all directors, NEOs, and executive officers of the Company as a group.

 

 

 

 

 

Stockholders annually elect directors to serve for one year and until the directors’ successors have been elected and qualified. The seven persons listed below, each of whom currently serves as a director, have been nominated for election to the Board by the Company’s Governance and Compensation Committee. Five of the seven nominees are neither employees nor former employees of the Company. If elected, each nominee will hold office until the 2010 Annual Meeting of Stockholders and until his or her successor is elected and has qualified. Although the Board believes that all of the nominees will be available to serve as a director, the persons named in the enclosed proxy may exercise discretionary authority to vote for substitute nominees proposed by the Board. Biographies are provided below setting forth certain information with respect to the nominees for election as directors of the Company, none of whom is related to any other nominee or executive officer.

 

 

The Board of Directors recommends the election of each of the nominees identified above. Unless otherwise directed, the persons named in the enclosed proxy will vote the proxy FOR the election of each of these seven nominees.

 

Retiring Director

 

Phillip Horsley, a member of the Board since 1982, has declined to stand for re-election to the Board.

 

Director compensation is set by the Governance and Compensation Committee, and approved by the Board. The Board’s authority cannot be delegated to another party. The Company compensates the independent directors of the Board using a combination of cash and equity-based compensation. The committee is advised on matters of Board compensation by their retained consultants, Watson Wyatt Worldwide (“Watson Wyatt”), whom are independent from management. The Company’s management does not play a role in setting Board compensation. Jonathan J. Judge, President and Chief Executive Officer (“CEO”) of the Company, receives no compensation for his services as a director. The compensation received by Mr. Judge in his role as CEO is shown in the Fiscal 2009 Summary Compensation Table on page 24 of this Proxy Statement.

 

In July 2008, the Board approved a change to the cash and equity-based compensation structure for independent directors by replacing the meeting fee with an annual retainer and changing the proportion of stock options and restricted stock awarded. In total, the value of the compensation to be realized by each director is substantially unchanged. However, the new structure is more in line with current market trends at companies within our peer group in terms of pay levels and composition. The peer group is a select group of comparable companies, and is discussed further on pages 18 and 19 of this Proxy Statement. Refer to the discussions below under Cash Compensation and Equity-Based Compensation regarding the impact to the respective compensation components.

 

Effective with the October 2008 Board meeting, the annual cash compensation paid to the independent directors is as follows:

 

 

The cash compensation component was revised, as noted above, to be solely annual retainers, which are paid in quarterly installments. The retainers for the chairmen of the Audit Committee and Governance and Compensation Committee were included to provide additional compensation for those Board members who contribute additional time in preparation for committee meetings. Prior to October 2008, the independent directors received a combination of annual retainers and meeting fees.

 

For the year ended May 31, 2009 (“fiscal 2009”), Mr. Golisano, who is not an independent director, received an annual salary of $140,000 for his services as Chairman of the Board. The Chairman does not receive any other director fees or equity-based compensation.

 

Equity-based compensation consists of a blend of stock options and restricted stock. In July 2008, each independent director received an award under the Company’s 2002 Stock Incentive Plan, as amended and restated effective October 12, 2005 (the “2002 Plan”), as follows:

 

 

 

 

The equity-based compensation structure for the independent directors was revised in July 2008, and became based on a total fixed value of $120,000 per director, with approximately 50% awarded in the form of stock options and 50% in the form of restricted stock. The quantity of equity awards granted varies based on the estimated fair value as of the grant date. Prior to July 2008, the independent directors received a fixed quantity of equity awards. The $120,000 fixed value used to determine the quantity of equity awards in July 2008 was consistent with the fair value of the equity awards awarded in July 2007, and was part of the total compensation change for the independent directors as previously discussed.

 

In July 2009, the Board granted each independent director 6,250 options to purchase shares of the Company’s common stock at an exercise price of $24.21 per share and 1,875 shares of restricted stock, with terms similar to the equity awards granted in July 2008. This award is consistent with the number of options and shares granted in July 2008 and has a calculated total value of approximately $75,000. This represents a reduction from the $120,000 fixed value utilized in the prior year. The Board determined that it was not in the best interest of the Company’s stockholders, in the current economic conditions, to base directors’ equity compensation on the established total fixed value of $120,000.

 

We maintain a non-qualified and unfunded deferred compensation plan in which all independent directors are eligible to participate. Directors may elect to defer up to 100% of their Board cash compensation. Gains and losses are credited based on the participant’s selection of a variety of designated investment choices, which the participant may change at any time. We do not match any participant deferral or guarantee a certain rate of return. The interest rates earned on these investments are not above-market or preferential. Refer to page 30 of this Proxy Statement for a listing of investment funds available to a participant and the annual rates of return on those funds. Mr. Flaschen defers 100% of his Board cash compensation under this plan. No other directors participate in the plan at this time.

 

We reimburse each director for expenses associated with attendance at Board and committee meetings. Mr. Golisano also receives access to the Company’s standard health and life insurance plans and receives Company matching contributions, when in effect for all employees, into his account in the 401(k) Plan.

 

The Governance and Compensation Committee set stock ownership guidelines for our independent directors with a value of four times his or her annual Board retainer, excluding any committee retainers. The ownership guidelines were established to provide long-term alignment with stockholders’ interests. The independent directors are expected to attain the ownership guideline within five years after the later of first becoming a director or the initial adoption of the guideline. For the purpose of achieving the ownership guideline, unvested restricted stock awarded to the directors is included.

 

Directors must adhere to strict standards with regards to trading in the Company’s stock. They may not, among other things:

 

 

The table below presents the total compensation received from the Company by all directors for fiscal 2009.

 

 

 

 

The Audit Committee has appointed the firm of Ernst & Young LLP as the Company’s independent accountants for the year ending May 31, 2010. Although action by stockholders in this matter is not required, the Audit Committee believes that it is appropriate to seek stockholder ratification of this appointment and to seriously consider stockholder opinion on this issue. If the stockholders do not ratify the appointment, the Audit Committee will review its future selection of the independent accountants, but may still retain them.

 

Representatives from Ernst & Young LLP, the Company’s independent accountants since 1983, will be present at the Annual Meeting, will be afforded the opportunity to make any statements they wish, and will be available to respond to appropriate questions from stockholders.

 

To ratify the appointment of Ernst & Young LLP, a majority of votes cast at the meeting must be voted for the proposal.

 

The Board of Directors recommends a vote FOR the proposal to ratify the appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm for the year ending May 31, 2010.

 

The following table shows the aggregate fees for professional services rendered for the Company by Ernst & Young LLP:

 

 

Audit fees for fiscal 2009 and for the fiscal year ended May 31, 2008 (“fiscal 2008”) were for professional services rendered for the audits of the Company’s annual consolidated financial statements, reviews of the financial statements included in the Company’s Quarterly Reports on Form 10-Q, and for the audits of the effectiveness of internal control over financial reporting.

 

Audit related fees for fiscal 2009 and fiscal 2008 were for employee benefit plan audits and other reports.

 

There were no tax or other non-audit related services provided by the independent accountants for fiscal 2009 and fiscal 2008.

 

The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by the independent accountants. The Audit Committee pre-approved all such audit and audit related services provided by the independent accountants during fiscal 2009 and fiscal 2008.

 

The Audit Committee of the Board of Directors oversees the Company’s financial reporting process on behalf of the Board and is composed entirely of independent directors. The Audit Committee is governed by a written charter and its primary responsibilities are highlighted in the Corporate Governance section of this Proxy Statement.

 

Paychex management is responsible for the preparation of the financial statements, the financial reporting process, and for the Company’s internal controls over financial reporting. Ernst & Young LLP, the Company’s independent accountants, is responsible for performing independent audits of the Company’s consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board. The independent accountants are also responsible for expressing an opinion on the effectiveness of the Company’s internal controls over financial reporting. The Audit Committee monitors and oversees these processes.

 

As part of the oversight processes, the Audit Committee regularly meets with management, the Company’s internal auditors, and the independent accountants. The Audit Committee meets with the internal auditors and independent accountants, with and without management present, to discuss the overall scope and plans for various audits, results of their examinations, their evaluations of the Company’s internal controls, and the overall quality and effectiveness of the Company’s financial reporting process and legal and ethical compliance programs, including the Company’s Code of Business Ethics and Conduct. The Audit Committee held six meetings during fiscal 2009 and had full access to each of the aforementioned parties.

 

In fulfilling its oversight responsibilities, the Audit Committee has reviewed and discussed with management and the independent accountants the consolidated financial statements for fiscal 2009, including a discussion on the quality and acceptability of the Company’s accounting policies, the reasonableness of significant judgments and estimates, and the clarity of disclosures in the consolidated financial statements. The Audit Committee also monitored the progress and results of testing of internal controls over financial reporting, reviewed reports from management and internal audit regarding design, operation, and effectiveness of internal controls over financial reporting, and reviewed the report from the independent accountants regarding the effectiveness of the Company’s internal control over financial reporting.

 

The Audit Committee has discussed with the independent accountants the matters required to be discussed by Statement on Auditing Standards No. 61, as amended. The independent accountants have provided the Audit Committee with written disclosures and the letter required by the Public Company Accounting Oversight Board regarding independent accountants’ communications with the audit committee concerning independence, and the Audit Committee has discussed with the independent accountants and management the accountants’ independence. There were no non-audit services provided to the Company by the independent accountants during fiscal 2009 that required consideration by the Audit Committee.

 

Based upon the reviews and discussions referred to above, the Audit Committee recommended and the Board approved that the audited consolidated financial statements be included in the Company’s Form 10-K for fiscal 2009 for filing with the SEC. The Audit Committee has recommended for approval by the Board the selection of the Company’s independent accountants.

 

The Audit Committee:

 

David J. S. Flaschen, Chairman

Grant M. Inman

Pamela A. Joseph

 

The Board is elected by the stockholders to oversee the overall success of the Company, review its operational and financial capabilities, and periodically assess its long-term strategic objectives. The Board serves as the final decision-making body of the Company, except for those matters for which authority is reserved for, or shared with, the stockholders. The Board selects and oversees the members of senior management, who are charged by the Board with conducting the day-to-day business of the Company.

 

The Board held four meetings during fiscal 2009. To the extent practicable, directors are expected to attend all Board meetings and meetings of the committees on which they serve. During fiscal 2009, each director attended more than 90% of the Board meetings and committee meetings on which the director served. Directors are encouraged to attend annual meetings of stockholders. All directors attended the 2008 Annual Meeting of Stockholders.

 

Regularly scheduled executive sessions of the independent members of the Board, without members of management, are held in conjunction with meetings of the Board. When required or as appropriate, matters presented to the Board by the Governance and Compensation Committee are discussed and decided upon by the independent directors, which in fiscal 2009 were all directors except for Mr. Golisano and Mr. Judge. The Board has selected Mr. Tucci to preside at all executive sessions of the independent directors.

 

The Board has established four standing committees with the following director assignments:

 

 

 

 

The Board has determined that all members of the Audit Committee meet the independence, experience, and other applicable NASDAQ listing requirements and applicable SEC rules regarding independence, and that Mr. Flaschen qualifies as an “Audit Committee Financial Expert,” as defined by applicable SEC rules. The Board has also determined that all members of the Governance and Compensation Committee meet the NASDAQ independence criteria.

 

Executive Committee.

 

The primary responsibility of the Executive Committee is to exercise all the powers and authority of the Board except as limited by law.

Audit Committee.  The primary responsibilities of the Audit Committee are to:

 

 

Investment Committee.  The primary responsibilities of the Investment Committee are to:

 

 

Governance and Compensation Committee.  The primary responsibilities of the Governance and Compensation Committee are to:

 

 

The Audit, Investment, and Governance and Compensation Committees’ responsibilities are more fully described in each committee’s charter adopted by the Board, which are accessible on the Company’s website, www.paychex.com at the Investor Relations section under “Corporate Governance.”

 

The Governance and Compensation Committee performs the function of our nominating committee. The Board has determined that it is necessary for the continued success of the Company to ensure that the Board is composed of individuals having a variety of complementary experience, education, training, and relationships relevant to the then-current needs of the Board and the Company. The Board’s Nomination Policy included in the Governance and Compensation Committee Charter is intended to achieve this result.

 

In evaluating candidates for nomination to the Board, the Nomination Policy requires Governance and Compensation Committee members to consider the contribution that a candidate for nomination would be expected to make to the Board and the Company, based upon the current composition and needs of the Board, and the candidate’s demonstrated business judgment, leadership abilities, integrity, prior experience, education, training, relationships, and other factors that the Board determines relevant. In identifying candidates for nomination to fill vacancies created by the expiration of the term of any incumbent director, the Nomination Policy requires Governance and Compensation Committee members to determine whether such incumbent director is willing to stand for re-election and, if so, to take into consideration the value to the Board and to the Company of their continuity and familiarity with the Company’s business. The Board has previously used a third-party search firm to identify director candidates and the charter authorizes the Governance and Compensation Committee to continue this practice.

 

The Nomination Policy requires the Governance and Compensation Committee to consider candidates for nomination to the Board recommended by any reasonable source, including stockholders. Stockholders who wish to do so may recommend candidates for nomination by identifying such candidates and providing relevant biographical information in written communications to the chairman of the Governance and Compensation

Committee in accordance with the policy described below in the section entitled “Communications with the Board of Directors.”

 

It is the Company’s policy to avoid transactions with related persons. However, there may be occasions when a transaction with a related person is in the best interest of the Company. The Company’s policies and procedures for review and approval of related persons transactions appear in the Company’s Standards of Conduct, Conflict of Interest, and Employment of Relatives Standards, which are internally distributed, and in the Company’s Code of Business Ethics and Conduct, which is posted on the Company’s website.

 

For all employees, these policies and procedures require the employee to disclose, and the Company to review and determine if a conflict of interest exists for specified transactions, which include certain financial interests in or relationships with any supplier, customer, partner, subcontractor, or competitor; serving on the board of non-profit organizations; and engaging in any activity that could create the appearance of a conflict of interest, including financial involvement or dealings with employees or representatives of the types of entities listed above. For officers, the Company’s Chief Financial Officer (“CFO”) oversees the review of such transactions.

 

Members of the Board are required to disclose to the Chairman of the Board or the Chairman of the Governance and Compensation Committee any situation that involves, or may reasonably be expected to involve, a conflict of interest with the Company, including engaging in any conduct or activities that would impair the Company’s relationship with any person or entity with which the Company has or proposes to enter into a business or contractual relationship.

 

The Company’s finance department annually reviews the Company’s listing of related parties for determination of potential related person transactions that would be disclosable in the Company’s periodic reports or proxy materials under United States generally accepted accounting principles (“GAAP”) and SEC rules.

 

The Governance and Compensation Committee is required to consider all questions of possible conflicts of interest of Board members and executive officers, including review and approval of transactions of the Company in excess of $120,000 in which a director, executive officer, or an immediate family member of a director or executive officer has an interest.

 

Mr. Tucci, a member of the Board, is the Chairman, President, and Chief Executive Officer of EMC Corporation. During fiscal 2009, the Company purchased through negotiated transactions approximately $4.5 million of data processing equipment and software from EMC Corporation. Mr. Golisano, Chairman of the Board, is the owner of Rochester Aviation, Inc. In fiscal 2009, the Company purchased approximately $8,000 of aviation services from Rochester Aviation, Inc. related to Mr. Golisano’s travel to attend Board meetings.

 

None of the members of the Governance and Compensation Committee were at any time during fiscal 2009, or at any other time, an officer or employee of the Company. Mr. Tucci, a member of the Board, is Chairman of the Governance and Compensation Committee and is also an executive of EMC Corporation. As noted above, the Company purchases data processing equipment and software from EMC Corporation. During fiscal 2009, no member of the Governance and Compensation Committee or Board was an executive officer of another entity on whose compensation committee or board of directors an executive officer of Paychex served.

 

The Board has established procedures to enable stockholders and other interested parties to communicate in writing with the Board, including the chairman of any standing committee of the Board. These procedures cover recommendations by stockholders of candidates for nomination for election to the Board. Written communications should be clearly marked “Stockholder and Other Interested Parties — Board Communication,” and be mailed to Paychex, Inc. at 911 Panorama Trail South, Rochester, New York, 14625-2396, Attention: Corporate Secretary. In the case of communications intended for committee chairmen, the specific committee must be identified. Any such communications that do not identify a standing committee will be forwarded to the Board. The Corporate Secretary

will promptly forward all stockholder and other interested party communications to the Board or to the appropriate standing committee of the Board, as the case may be.

 

Section 16(a) of the Exchange Act requires directors, executive officers, and beneficial owners of more than 10% of the Company’s common stock to file reports of their ownership and changes in their ownership of the Company’s equity securities with the SEC. Based solely on our review of information supplied to the Company and filings made with the SEC, the Company believes that during fiscal 2009, its directors, executive officers, and greater than 10% beneficial owners have complied in a timely manner with all applicable Section 16 filing requirements.

 

The Company has adopted a Code of Business Ethics and Conduct that applies to all of its directors, officers, and employees. The Code of Business Ethics and Conduct is available for review on the Company’s website at www.paychex.com at the Investor Relations section under “Corporate Governance.” The Company intends to disclose any amendment to, or waiver from, a provision of its Code of Business Ethics and Conduct that relates to any element of the code of ethics definition enumerated in Item 406 of SEC Regulation S-K by posting such information on its website at the address specified above.

 

The Company believes in a pay-for-performance approach to NEO compensation. The overall objectives of our officer compensation plan are to provide competitive opportunities when compared with companies of comparable size; attract, retain, and develop highly qualified NEOs; reward exceptional individual performance; tie compensation to our overall financial and strategic objectives; and align the interests of NEOs with the interests of stockholders.

 

To achieve these objectives, our officer compensation plan has been designed to:

 

 

As part of the committee’s responsibility to evaluate and determine NEO compensation, on an annual basis, the committee:

 

 

As outlined in its charter, the committee has the authority to retain consultants and advisors, at the Company’s expense, to assist in the discharge of the committee’s duties. The committee utilizes the compensation advisory services of Watson Wyatt, which reports directly to the committee and is independent from Paychex management. Management does not participate in the committee’s decision to retain Watson Wyatt as its consultant. Watson Wyatt advises the committee on matters of NEO compensation, assists the committee with analysis and research, and updates the committee on evolving best practices in compensation. Watson Wyatt is invited to attend all meetings and executive sessions of the committee. However, the committee is solely responsible for setting the type and amount of compensation.

 

Management retains the services of First Niagara Consulting as a compensation consultant to advise management on overall compensation strategy and plan design. Generally, compensation plans are developed and proposed by management, with analytical and research assistance by First Niagara Consulting. Watson Wyatt reviews reports from management and First Niagara Consulting, and offers the committee their opinions on the findings as the committee’s consultant.

 

Our CEO, along with our Vice President of Organizational Development, provides recommendations to the committee on design elements for compensation. These individuals, and from time to time the CFO, will be in attendance at the meetings of the committee to present plan design recommendations, evaluate current plan design, and respond to questions on current or recommended plan design. Annually, our CEO reviews achievement of the recently completed fiscal year’s plans, reviews salary recommendations for each of the NEOs (other than himself), recommends the upcoming fiscal year’s annual incentive program structure, and presents recommendations on equity awards. Management is excluded from executive sessions of the committee where final decisions on

compensation are made, particularly those on our CEO’s performance and compensation. Executive sessions occur at each meeting of the committee.

 

We use a combination of compensation elements, including annual base salary, annual incentive program, and equity awards under our 2002 Plan. The committee compares our CEO compensation plan and that of other NEOs with other similar companies. The committee reviews compensation consultants’ reports and market survey information as input to assess our cash compensation elements of annual base salary and annual incentive program. The committee strives for our NEOs’ compensation to be competitive with a select group of comparable companies (the “Peer Group”). The market survey information indicates whether our compensation package, if target performance is achieved, is comparable to the median compensation of our Peer Group, given current competitive practices, overall best practices, and other compensation and benefit trends. The committee continues to review each of the elements annually to ensure that compensation is appropriate and competitive to attract and retain a high-performing executive team. For fiscal 2009, NEO compensation packages averaged 50% in cash compensation and 50% in equity-based compensation, based on the value of equity awards as provided in the Fiscal 2009 Summary Compensation Table on page 24 of this Proxy statement.

 

Annually, the committee receives from management a summary of total cash compensation and equity awards with estimated future value, and total compensation for the upcoming fiscal year for all officer levels, from vice president to CEO. The summary is used to evaluate compensation recommendations and the impact to both total cash compensation and total compensation for each individual.

 

Management also provides the committee annually a three-year history of total compensation, including cash, annual incentive payout, and equity-based compensation, for all officers. This history provides a more complete picture of the internal trend of compensation to executive officers, both as a team and as individuals. This summary facilitates discussion in that it more accurately details individual officer compensation, noting differences that reflect officer tenure, performance, and position in the management hierarchy.

 

Compensation for our officers is most closely compared to our Peer Group. The committee targets total compensation at the median of the Peer Group, even though Paychex generally performs above the median. This is not the sole determining factor in the committee’s decisions on compensation, and the committee reserves the discretion to adjust compensation based on other factors. The Peer Group consists of fifteen companies with comparable revenue, net income, and total assets who are in a comparable industry, or who are direct competitors of Paychex. The Peer Group companies are not necessarily limited to the markets in which Paychex does business. The Peer Group is comprised of the following industries or segments: a direct competitor in the payroll industry; financial transaction management companies; business services and outsourcing companies; and a human resources outsourcing company.

Our current Peer Group consists of the following companies:

 

Paychex Peer Group

 

 

The committee annually reviews and approves the selection of Peer Group companies, adjusting the group from year to year based upon our business and changes in the Peer Group companies’ business or comparative metrics. The Peer Group may also be adjusted in the event of mergers, acquisitions, or other significant economic changes. During fiscal 2009, the committee took action to adjust the Peer Group. The committee was concerned that although Affiliated Computer Services (ACS) fit into the peer criteria in all other measures, it was no longer of similar size, based mainly on revenue comparison. The committee also determined that Convergys Corporation (CVG) was no longer an appropriate comparator in light of its current financial position. Due to these concerns, Affiliated Computer Services and Convergys Corporation were removed from the Peer Group. The companies were replaced with Broadridge Financial Solutions Inc. and Global Payments Inc., which are business services and transaction management companies, respectively, of similar size.

 

The annual base salaries of the NEOs are determined based on the responsibilities of their position and comparisons with base salaries paid to executive officers having similar responsibilities in comparable companies in the Peer Group. Annually, the base salaries are reviewed to determine what, if any, increase is required.

 

Our annual incentive program is a cash incentive plan in which payments are made upon the satisfaction of certain quantitative and qualitative components. The quantitative component consists of certain predetermined performance targets. The performance targets for the annual incentive program are established at the beginning of each fiscal year, typically based on the Board-approved fiscal year financial plan. The annual incentive program provides our NEOs the opportunity for additional cash compensation based primarily on our annual service revenue and operating income, net of certain items. The targets for payout are established by the committee with

consultation of management. The program was established to motivate our NEOs to meet the goals set by the Company as presented to its stockholders. Historically, the sole exclusion from operating income, net of certain items, has been interest on funds held for clients. However, at the discretion of the committee, certain items may also include items that are unusual and infrequent in nature. This metric is considered a non-GAAP measure. The performance targets of the annual incentive program have both financial and strategic objectives. For fiscal 2009, the performance targets established and actual results achieved were as follows:

 

 

Targets for the annual incentive program are set at specific financial goals, which are in alignment with stockholder interests. Once the target is determined, it is set for the year and is normally not changed. For extraordinary circumstances, the committee reserves the right to apply discretion.

 

For fiscal 2009, the annual incentive program applicable to the CEO and the NEOs was structured into two components – quantitative and qualitative, similar to recent past years. The quantitative component is intended to comply with section 162(m) of the Code for NEOs affected by the $1 million limitation. The CEO’s quantitative target percentage as reflected in his separate incentive award agreement is 105% of annual base salary. The quantitative target percentage for Senior Vice Presidents (“SVPs”) is 65% of annual base salary. For all other vice presidents, the quantitative target percentage is 40% of annual base salary. As the committee adjusts the allocation of total compensation, the intent is to increase the percentage of total compensation that is performance-based. Each NEO is also assigned a qualitative section under the annual incentive program, with the CEO potentially receiving 20% of base salary and all other NEOs potentially receiving 10% of base salary, the same at threshold, target and maximum.

 

Individual-specific qualitative goals are established at the beginning of the fiscal year based on functions unique to the individual. These goals are highly subjective and are not always based on quantifiable financial measurements. The committee may determine, at its sole discretion, whether satisfactory achievement has occurred, regardless of whether the officer has achieved the pre-established individual goals. We believe the qualitative component of the annual incentive program is immaterial to the overall compensation for each NEO.

 

To align our NEOs with the long-term interests of our stockholders, the Company grants equity awards under the 2002 Plan. Since 1998, annual grants of equity awards to the NEOs have been approved during the regularly scheduled meeting of the Board in July. The exercise price of the award is the closing market price on the date of the grant, except for the special grant in July 2009 as more fully described in “Subsequent Events” on page 22 of this Proxy Statement. Historically, the July Board meeting has been scheduled to occur approximately two weeks after the release of our fiscal year-end earnings and upcoming fiscal year financial guidance. Our trading black-out period normally lifts on the third business day following such release of information. The committee anticipates continuing its granting practice. In fiscal 2009, the Board also granted equity awards to individuals upon hire or promotion to executive officer positions. These equity awards were not granted during any trading black-out periods. Recipients are notified shortly after Board approval of their grant, noting the number of stock options or restricted stock granted, the vesting schedule, and exercise price. Any sales restrictions or other terms of the award are also communicated at that time.

 

The committee grants a blend of stock options and performance-accelerated restricted stock to provide pay for performance. A blend of stock options and restricted stock optimizes total equity awarded and balances risk and reward, aligning with stockholders’ interests over the long-term. The quantity of stock options and restricted stock awarded is based on an estimated total value, as determined by the committee. The baseline estimated total value was calculated from the July 2007 awards with total value now split 55% to stock options and 45% to restricted stock. The baseline estimated total value may be reduced by the committee at its discretion.

The grants of restricted stock awards have time-based vesting with performance-based acceleration to recognize all aspects of the NEOs’ contributions to the Company, and to motivate the NEOs to meet our annual and long-term financial targets. The restricted stock will vest for active employees on the fifth anniversary of the grant date, unless performance criteria are met for the acceleration of vesting. The performance criteria, similar to the criteria set for the annual incentive program, are established by the committee at the time of grant. If performance targets are met for a fiscal year, one-third of the award would vest at that time. If targets are met for three consecutive years, then the award would be fully vested.

 

Information regarding the stock options and restricted stock granted to the NEOs in fiscal 2009 and in prior years are detailed in the Named Executive Officer Compensation tables of this Proxy Statement.

 

It is the responsibility of the committee to evaluate Mr. Judge’s performance annually and determine his total compensation. Mr. Judge receives compensation based on his leadership role and the overall performance of the Company. A number of compensation elements, including his employment agreement, are provided to Mr. Judge as a means of retention. Mr. Judge receives a base salary comparable to the median of salaries for CEOs in our Peer Group. His annual incentive program, as described under “Annual Officer Performance Incentive Program,” is also comparable to the median of CEOs in our Peer Group, and is commensurate with his leadership role at the Company. Mr. Judge also receives equity awards under the 2002 Plan. During fiscal 2009, he received options to purchase 183,906 shares of common stock. He also received 45,740 shares of performance-accelerated restricted stock. The award quantities granted were based on an estimated value, as approved by the committee. Certain elements of Mr. Judge’s compensation are significantly higher than those of the SVPs due to the executive structure of the Company.

 

In addition to the above elements of compensation, Mr. Judge has a severance package, described in his employment agreement which was renewed on November 30, 2007 for an additional three years. No written or oral change of control or severance arrangements exist for our NEOs, except for this arrangement with Mr. Judge. The employment agreement provides for fixed annual base salary, participation in the annual incentive program, and grants of equity awards under the 2002 Plan. If Mr. Judge is terminated other than for cause or resigns for good reason, he is entitled to certain compensation as detailed further in the Change of Control and Severance Arrangement information on page 31 of this Proxy Statement.

 

The committee set stock ownership guidelines for our CEO (two times his annual base salary) and SVPs (one times annual base salary). The ownership guidelines were established to provide an additional element of retention and to provide long-term alignment with stockholders’ interests. For the purposes of achieving the ownership guideline, unvested restricted stock awarded to the executive officers is included.

 

NEOs of the Company must also adhere to strict standards with regards to trading in the Company’s stock. They may not, among other things:

 

 

Our equity-based compensation agreements state that following termination of employment, certain benefits (including equity-based compensation) will be forfeited if the NEO engages in activities adverse to the Company. These activities include competition with the Company during a specified period after termination of employment, solicitation of the Company’s clients or employees during a specified period after termination of employment, breach of confidentiality either during or after employment, or engaging in conduct which is detrimental to the Company during the NEO’s employment with the Company. Should any of these activities occur, the Company may

cancel all or any outstanding portion of the equity awards subject to this provision, and recover the gross value of any vested restricted shares, including all dividends. In the case of non-qualified stock options, the Company may suspend the NEO’s right to exercise the option and/or may declare the option forfeited. In addition, the Company may seek to recover all profits from certain prior exercises as liquidated damages and pursue other available legal remedies.

 

Our NEOs and directors do not receive benefits which are not otherwise available to all our employees. We do not provide our NEOs with pension arrangements, post-retirement health coverage, or other similar benefits with the exception of access to a non-qualified and unfunded deferred compensation plan.

 

We offer a non-qualified and unfunded deferred compensation plan to our NEOs. The deferred compensation plan is intended to supplement the NEO’s 401(k) Plan account. Due to the limitations on the 401(k) Plan account provided by the Internal Revenue Service, this plan allows for further savings toward retirement for the NEOs and functions similarly to the 401(k) Plan account. Refer to the Non-Qualified Deferred Compensation discussion on page 30 of this Proxy Statement for more information on how our deferred compensation plan functions.

 

In July 2009, the following equity-based compensation was granted to the NEOs.

 

 

The award quantities granted were determined based on an estimated fair value. The value for each NEO may have been adjusted for individual performance and retention considerations. All NEO options vest annually in 20% increments over five years, except for the special grant as noted below. NEO restricted shares have five-year cliff vesting, accelerating up to one-third in any one fiscal year if the performance targets for that fiscal year have been met or exceeded. The performance targets are operating income, net of certain items, and service revenue as set by the Board.

 

Beginning in fiscal 2009, the committee intended to deliver value as opposed to fixed quantities when determining equity award grants. The quantity of stock options in the July 2008 award was calculated based on an estimated Black-Scholes value. Subsequent to the committee’s approval of the July 2008 stock options, it was determined that the actual Black-Scholes value on the date of grant was lower than the estimated value, resulting in an option grant with a lower compensation value than the committee had approved. Therefore, a special grant was made on July 9, 2009 at an exercise price of $31.95 as listed in the table above. This exercise price is above the closing stock price of $24.21 on the date of grant, but consistent with the exercise price of the options granted in July 2008. In addition, the committee approved the acceleration of 20% of the award to vest on July 10, 2009. The remaining stock options in this award will continue to vest 20% per annum on each anniversary date as provided in the award agreement, and expire on July 9, 2018.

 

The targets for operating income, net of certain items, to accelerate the lapsing of outstanding restricted stock awards were not achieved for fiscal 2009, therefore no shares vested. The target for operating income, net of certain items, was $787.0 million to accelerate the July 2008 award, and $800.7 million to accelerate both the July 2006 and July 2007 restricted stock awards. Actual operating income, net of certain items, was $729.7 million for fiscal 2009.

 

No salary increases were provided to the NEOs in July 2009 due to a Company-wide merit increase suspension.

 

Section 162(m) of the Code generally limits the tax deductibility of annual compensation paid to certain officers to $1 million, unless specified requirements are met. The committee has carefully considered the impact of this provision. At this time, it is the committee’s intention to continue to compensate all NEOs based on overall performance. The committee expects that most compensation paid to NEOs will qualify as a tax-deductible expense. For fiscal 2009, our annual incentive program was designed to provide incentive compensation that would not count against the $1 million limitation, including the quantitative component of the NEOs’ annual performance incentive. However, within the NEOs’ annual incentive there is a portion of the payout which is qualitative and is not exempt from the application of section 162(m). As a result of this qualitative component, $1.0 million of compensation expenses did not qualify as a tax-deductible expense during fiscal 2009.

 

The Governance and Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis included in this Proxy Statement with management. Based on such review and discussion, the committee recommends to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement and the Company’s Form 10-K for fiscal 2009.

 

The Governance and Compensation Committee:

 

Joseph M. Tucci, Chairman
David J. S. Flaschen
Phillip Horsley
Grant M. Inman
Joseph M. Velli

 

The following NEO tables reflect the acceleration of Mr. Miley’s unvested stock options and restricted stock upon his death in May 2009.

 

The table below presents the total compensation paid or earned by each of the NEOs.

 

																		Non-Equity
Name and Principal		Fiscal								Stock				Option				Incentive Plan				All Other
Position		Year				Salary				Awards(1)				Awards(2),(3)				Compensation(4)				Compensation(5),(6)				Total
Jonathan J. Judge			2009			$	915,000			$	707,121			$	1,472,512			$	320,250			$	30,221			$	3,445,104
President and CEO			2008			$	908,606			$	834,991			$	1,787,943			$	1,055,388			$	39,652			$	4,626,580
			2007			$	868,144			$	362,534			$	2,394,083			$	1,030,979			$	17,304			$	4,673,044
John M. Morphy			2009			$	435,611			$	394,088			$	254,997			$	87,849			$	8,941			$	1,181,486
Senior Vice President,			2008			$	411,498			$	387,822			$	260,383			$	296,851			$	8,712			$	1,365,266
CFO, and Secretary			2007			$	393,243			$	72,509			$	295,082			$	268,362			$	7,134			$	1,036,330
Martin Mucci			2009			$	423,911			$	146,272			$	259,176			$	85,601			$	7,254			$	922,214
Senior Vice President,			2008			$	398,300			$	167,003			$	260,383			$	286,550			$	8,359			$	1,120,595
Operations			2007			$	386,968			$	72,509			$	308,103			$	264,079			$	6,537			$	1,038,196
Michael A. McCarthy			2009			$	274,649			$	70,726			$	122,269			$	97,631			$	8,159			$	573,434
Vice President,
Major Market Services Sales
William G. Kuchta			2009			$	303,796			$	70,726			$	126,795			$	53,465			$	10,169			$	564,951
Vice President,			2008			$	292,512			$	83,514			$	126,657			$	143,648			$	7,029			$	653,360
Organizational Development
Lynn J. Miley (deceased)			2009			$	250,246			$	295,718			$	448,515			$	44,100			$	10,177			$	1,048,756
Vice President, Eastern
Operations

 

 

 

 

 

The table below presents estimated possible payouts under the Company’s annual incentive program for fiscal 2009 based on achievement of performance objectives at various levels for the Company and individual NEOs. It also summarizes equity awards granted in fiscal 2009 to each of the NEOs. This information does not set forth the actual payout awarded to the NEOs for fiscal 2009.

 

 

 

 

The following table presents the equity awards made to NEOs which are outstanding as of May 31, 2009.