Title of each class of securities to which transaction applies:

Aggregate number of securities to which transaction applies:

Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

Proposed maximum aggregate value of transaction:

Amount Previously Paid:

Form, Schedule or Registration Statement No.:

Filing Party:

Date Filed:

ANNUAL MEETING INFORMATION

The principal business of the 2018 Annual Meeting of Stockholders (the “Annual Meeting”) will be:

1.     To elect nine nominees to the Board of Directors for a one-year term;

2.     To hold an advisory vote to approve named executive officer compensation;

3.     To ratify the selection of PricewaterhouseCoopers LLP to serve as our independent registered public accounting firm; and

4.     To transact such other business as may properly come before the meeting or any adjournment thereof.

Stockholders are cordially invited to attend the Annual Meeting. Stockholders of record at the close of business on August 13, 2018 will be entitled to notice of and to vote at the Annual Meeting and at any adjournments or postponements thereof.

If you are unable to attend the Annual Meeting, you will be able to listen to the meeting via the Internet. We will broadcast the Annual Meeting as a live webcast through our website. Please note that you will not be able to vote or ask questions through the webcast. The webcast will be accessible at www.paychex.com/investors under Events and Presentations and will remain available for replay for approximately one month following the Annual Meeting.

By order of the Board of Directors

Stephanie L. Schaeffer

Corporate Secretary

September 7, 2018

Thursday, October 11, 2018

10:00 a.m. Eastern Time*

The Strong

One Manhattan Square

Rochester, NY 14607

*  A continental breakfast will be available from 9:00 a.m. – 10:00 a.m. Eastern Time

PROXY STATEMENT SUMMARY

PROXY STATEMENT

3

PROPOSAL 1: ELECTION OF DIRECTORS FOR A ONE-YEAR TERM

3

DIRECTOR COMPENSATION FOR THE FISCAL YEAR ENDED MAY 31, 2018

9

BENEFICIAL OWNERSHIP OF PAYCHEX COMMON STOCK

13

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

14

CORPORATE GOVERNANCE

15

Board Leadership Structure

15

Board Oversight of Risk

15

Board Meetings and Committees

16

Nomination Process

18

Policy on Transactions with Related Persons

18

Governance and Compensation Committee Interlocks and Insider Participation

19

Communications with the Board of Directors

19

CODE OF BUSINESS ETHICS AND CONDUCT

20

PROPOSAL 2: ADVISORY VOTE TO APPROVE NAMED EXECUTIVE OFFICER COMPENSATION

21

COMPENSATION DISCUSSION AND ANALYSIS

23

NAMED EXECUTIVE OFFICER COMPENSATION

43

Fiscal 2018 Summary Compensation Table

43

Grants of Plan-Based Awards for Fiscal 2018

46

Option Exercises and Stock Vested in Fiscal 2018

48

Outstanding Equity Awards as of May 31, 2018

49

Potential Payments upon Termination or Change In Control Fiscal 2018

51

Non-Qualified Deferred Compensation Fiscal 2018

54

PROPOSAL 3: RATIFICATION OF SELECTION OF PRICEWATERHOUSECOOPERS LLP TO SERVE AS THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

56

Fees for Professional Services

56

Report of The Audit Committee

58

FREQUENTLY ASKED QUESTIONS

59

APPENDIX A: PAYCHEX, INC. NON-GAAP FINANCIAL MEASURES

A-1

APPENDIX B: PAYCHEX, INC. RECONCILIATION OF PERFORMANCE MEASURES TO THOSE REPORTED IN THE COMPANY’S CONSOLIDATED FINANCIAL STATEMENTS

B-1

October 11, 2018

10:00 a.m., Eastern Time

The Strong,
One Manhattan Square
Rochester, New York  14607

Item

Board Vote

Recommendation

Proposal 1  

Proposal 2  

Proposal 3  

$ in millions, except per share amounts

Total revenue

Operating income

Net income ⁽¹⁾

Stock price (high/low) ⁽²⁾

Stock price as of fiscal year end

Net income benefited from the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), which significantly reduced the statutory corporate income tax rate from 35% to 21%.

Based on 52-week high and low sale prices as reported on the NASDAQ Global Select Market as of May 31, 2018 and 2017.

Proxy Summary 

A significant portion of annual compensation is “at risk” based on performance. For the President and Chief Executive Officer (“CEO”), 86% of his total target compensation is at risk. On average, for other named executive officers (“NEOs”), 79% of their total target compensation is at risk.

Variable compensation is comprised of an annual cash incentive program and longer-term equity-based incentives. For the annual cash incentive for fiscal 2018, results for certain performance metrics were less than target, resulting in payouts at 90% of target for our CEO and 85% of target on average for the other NEOs.

Annual grants of performance shares in July 2016 reached the end of the two-year performance period in May 2018. Achievement was 92% of target. The shares earned are restricted for an additional one-year period.

Election of Directors 

B. Thomas Golisano

Founder and Chairman of the Board of Paychex, Inc.

Age 76

Director since 1979

Board Committees:

•   Executive

Current Public Company Directorships: 

•   Twinlab Consolidated Holdings, Inc.

Mr. Golisano founded Paychex in 1971 and is Chairman of the Board of the Company. He served as President and Chief Executive Officer (“CEO”) of the Company until October 2004. He serves on the board of trustees of the Rochester Institute of Technology. Mr. Golisano serves on the board of Twinlab Consolidated Holdings, Inc. and serves as a director of numerous non-profit organizations and private companies. He is founder and member of the board of trustees of the B. Thomas Golisano Foundation.

SPECIFIC QUALIFICATIONS AND SKILLS:

The Board has concluded that Mr. Golisano is qualified to lead the Board due to his relevant executive leadership experience and extensive knowledge of the operations of the Company. These skills were attained through his role of founder and former CEO of Paychex.

Thomas F. Bonadio

Chief Executive Officer and Managing Partner of The Bonadio Group

Age 69

Director since 2017

Board Committees:

•  Audit

•  Corporate Development Advisory

Current Public Company Directorships:

•  CurAegis Technologies, Inc.

Mr. Bonadio is the founder of The Bonadio Group, the largest independent provider of accounting, business advisory, and financial services in New York State outside of Manhattan. Mr. Bonadio has experience serving on community organizations and not-for-profit boards, as well as publicly traded boards. He is currently a director and chair of the audit committee for CurAegis Technologies, Inc. He also previously served as a director and audit committee chair for Conceptus, Inc., which is now a wholly owned subsidiary of Bayer AH of Germany, until June 2013.

SPECIFIC QUALIFICATIONS AND SKILLS:

The Board has concluded that Mr. Bonadio is qualified to serve as a director of the Company due to his strong background in finance and business, his entrepreneurial experience, and his knowledge of the Certified Public Accountant community. Mr. Bonadio is a successful entrepreneur whose experience building his own business is representative of many clients Paychex serves today. He also brings a high degree of financial literacy obtained from his years in the financial services industry, and his ability to assess financial performance of other companies through the review and understanding of financial statements. This financial expertise is a great benefit to the Board and its committees.

Joseph G. Doody

Former Vice Chairman of Staples, Inc.

Age 66

Director since 2010

Board Committees:

•  Audit

Current Public Company Directorships:

•  Casella Waste Systems, Inc.

•  Virtusa Corporation

Mr. Doody retired from Staples, Inc., an office products company, in September 2017 where he served as Vice Chairman since February 2014. Prior to that, he served as President, North American Commercial, from January 2013 until February 2014, and President, North American Delivery, from March 2002 to January 2013. Mr. Doody has experience serving on other public boards, including Casella Waste Systems, Inc. and Virtusa Corporation. Mr. Doody is a member of the Foundation Board at the College at Brockport.

SPECIFIC QUALIFICATIONS AND SKILLS:

The Board has concluded that Mr. Doody is qualified to serve as a director of the Company due to his significant leadership and international experience. His long tenure in management of a large division of a multinational company enables him to provide our Board with important operational expertise. In addition, his deep knowledge of small- to medium-sized businesses brings a thorough understanding of the risks and opportunities affecting the Company’s clients and potential clients. Mr. Doody also has extensive experience in strategic planning and business development, which allows him to provide valuable input into the Company’s plans for market growth.

Election of Directors 

David J.S. Flaschen

Investor and Advisor

Age 62

Director since 1999

Board Committees:

•  Audit (Chair)

•  Investment

•  Corporate Development Advisory

•  G&C

Current Public Company

Directorships:

•  Informa plc (London Stock Exchange)

Mr. Flaschen is an investor and advisor to a number of private companies providing business, marketing, and information services. Mr. Flaschen is the co-founder of Regrub, LLC, a Smashburger franchisee group in the United States (“U.S.”). From 2005 to 2011, he was a partner with Castanea Partners, a private equity investment firm. Mr. Flaschen is a member of the 2018 National Association of Corporate Directors Blue Ribbon Commission on Adaptive Governance for Board Oversight of Disruptive Risks. Mr. Flaschen is a director/advisor of various private companies and of Informa plc, a Financial Times Stock Exchange 100 public company which is traded on the London Stock Exchange.

SPECIFIC QUALIFICATIONS AND SKILLS:

The Board has concluded that Mr. Flaschen is qualified to serve as a director of the Company as a result of his extensive executive experience in information and marketing services. Over the course of his career, Mr. Flaschen has worked internationally with a number of businesses, including Thomson Financial and AC Nielson. He also brings a high degree of financial literacy obtained from his years in the financial services industry, and his ability to assess financial performance of other companies through review and understanding of financial statements. This financial expertise is a great benefit to the Board and its committees.

Pamela A. Joseph

Former President and Chief Operating Officer of Total System Services, Inc.

Age 59

Director since April 2018

(previously served from

2005-2017, reappointed

in 2018)

Board Committees:

•  None

Current Public Company

Directorships:

•  TransUnion

Ms. Joseph served as President and Chief Operating Officer of Total System Services, Inc. (“TSYS”), from May 2016 until September 2017. TSYS offers issuer services and merchant payment acceptance for credit, debit, prepaid, healthcare, and business solutions. Previously, she served as a Vice Chairman of U.S. Bancorp Payment Services and Chairman of Elavon (formerly NOVA Information Systems, Inc.), a wholly owned subsidiary of U.S. Bancorp, from December 2004 until her retirement in June 2015. U.S. Bancorp Payment Services and Elavon manage and facilitate consumer and corporate card issuing, as well as payment processing. Ms. Joseph serves on the Board of Directors of TransUnion, and previously served on our Board from November 2005 until March 2017.

SPECIFIC QUALIFICATIONS AND SKILLS:

The Board has concluded that Ms. Joseph is qualified to serve as a director of the Company due to her extensive executive experience in the financial services and payment industries. Her wealth of technology experience brings insight to the Board and its committees. In addition, her experience with major acquisitions, board experience with the healthcare services field, and international expansion provides valuable input towards the Company’s growth plans.

Martin Mucci

President and Chief Executive Officer of Paychex, Inc.

Age 58

Director since 2010

Board Committees:

•  Executive (Chair)

•  Corporate Development Advisory

Current Public Company   Directorships:

•  None

Mr. Mucci has served as President and CEO of the Company since September 2010. Mr. Mucci joined the Company in 2002 as Senior Vice President (“SVP”), Operations. Prior to joining Paychex, he held senior level positions with Frontier Communications, a telecommunications company, including President of Telephone Operations and CEO of Frontier Telephone of Rochester, over the course of his 20-year career. Mr. Mucci was a member of the Board of Directors of Cbeyond, Inc. until it was purchased by Birch Communications in July 2014. He is a member of the Upstate New York Regional Advisory Board of the Federal Reserve Bank of New York and is a Trustee Emeritus of St. John Fisher College.

SPECIFIC QUALIFICATIONS AND SKILLS:

The Board has concluded that Mr. Mucci is qualified to serve as a director of the Company because he provides day-to-day leadership as the current President and CEO of Paychex, giving him extensive knowledge of the Company, its operations, challenges, and opportunities. In addition, Mr. Mucci’s educational background provides him with strong financial literacy.

Joseph M. Tucci

Founder, Co-Chief Executive Officer, and Co-Chairman of GTY Technology Holdings, Inc.

Age 71

Director since 2000

Lead Independent Director

Board committees:

•  G&C (Chair)

•  Executive

Current Public Company Directorships:

•  Motorola Solutions, Inc.

•  GTY Technology

    Holdings, Inc.

Mr. Tucci is the founder of GTY Technology Holdings, Inc., a special purpose acquisitions company, and has been its Co-CEO and Co-Chairman since September 2016. He has been Chairman of Bridge Growth Partners, LLC, a private equity firm based in New York, since October 2016. Mr. Tucci was the former Chairman of the Board of Directors and CEO of EMC Corporation, a provider of data-storage systems. He was EMC’s Chairman from January 2006 and CEO from January 2001 until September 2016, when Dell Technologies acquired the company. He was Chairman of the Board of Directors for VMWare, Inc. from 2007 through September 2016. He serves on the Board of Directors of Motorola Solutions, Inc., and on the boards of various academic and community organizations.

SPECIFIC QUALIFICATIONS AND SKILLS:

The Board has concluded that Mr. Tucci is qualified to serve as a director of the Company due to his extensive executive leadership experience as CEO of EMC Corporation. Mr. Tucci has spent over 40 years in the technology industry in senior roles at large, complex, and global technology companies. His experience leading EMC through a period of dramatic revitalization, growth and market share gains, and new product introductions enables him to share knowledge of the challenges a company faces due to rapid changes in the marketplace.

Election of Directors 

Joseph M. Velli

Retired Financial Services and Technology Executive

Age 60

Director since 2007

Board committees:

•  Investment

•  Executive

•  Corporate Development  Advisory (Chair)

•  G&C

Current Public Company Directorships:

•  Computershare Ltd. (Australian Stock Exchange) (Remuneration Committee Chair)

•  Cognizant Technology Solutions Corp.

Mr. Velli currently serves on the Board of Directors of Computershare Limited, a global provider of corporate trust, stock transfer, employee share plan, and mortgage servicing services. In December 2017, Mr. Velli was appointed to the Board of Directors of Cognizant Technology Solutions Corp., a multinational corporation that provides Information Technology services, including digital, technology, consulting, and operations services. He also serves on the Boards of Directors of two private companies, Scivantage Inc. and Foreside Financial Corp. Mr. Velli previously served as Senior Executive Vice President of The Bank of New York and as a member of the Senior Policy Committee. During his 22-year tenure with The Bank of New York, Mr. Velli’s responsibilities included heading Global Issuer Services, Global Custody and related Investor Services, Global Liquidity Services, Pension and 401(k) Services, Consumer and Retail Banking, Correspondent Clearing, and Securities Services. Most recently, he served as Chairman and CEO of ConvergEx Group, LLC, a provider of brokerage, software products and technology services from 2006 to 2013, and continued to serve on the ConvergEx Board until 2014. Mr. Velli served on the Board of Directors of E*TRADE Financial Corporation and E*TRADE Bank until October 2014. Mr. Velli has been a member of the board of trustees for William Paterson University since June 2017. Mr. Velli acts as a Senior Advisor to Lovell Minnick Partners and, from time to time, he provides advisory services to other private equity firms.

SPECIFIC QUALIFICATIONS AND SKILLS:

The Board has concluded that Mr. Velli is qualified to serve as a director of the Company due to his extensive experience with securities servicing, capital markets, business to business, marketing, and mergers and acquisitions matters, as well as his public board experience. He plays a key role in the Board’s discussions of the Company’s investments and liquidity. Mr. Velli has extensive experience with acquisitions and business services, providing valuable insights on potential growth opportunities for the Company.

Kara Wilson

Chief Marketing Officer of Rubrik, Inc.

Age 48

Director since 2017

Board committees:

•  Audit

•  Corporate Development Advisory

Current Public Company Directorships:

•  None

Ms. Wilson is Chief Marketing Officer at Rubrik, Inc., a cloud data management company, since June 2017. She has over 20 years of experience in driving go-to-market strategies for large, medium, and hyper-growth start ups. She has held marketing leadership roles with some of the technology industry’s most influential companies, including Cisco, SAP, SuccessFactors, PeopleSoft/Oracle, Okta, and FireEye. Prior to Rubrik, from October 2016 to June 2017, Ms. Wilson was Executive Vice President and from August 2013 to June 2017, Chief Marketing Officer of cyber security company FireEye, where she helped launch FireEye’s initial public offering and was responsible for the company’s global marketing initiatives including corporate, product, and technical marketing, global communications, and field enablement.

SPECIFIC QUALIFICATIONS AND SKILLS:

The Board has concluded that Ms. Wilson is qualified to serve as a director of the Company due to her extensive experience in driving go-to-market strategies for enterprise technology companies. The Board can leverage Ms. Wilson’s marketing experience to help Paychex with the development and execution of go-to-market strategies to effectively differentiate the Company in a highly competitive and constantly evolving industry. Ms. Wilson has experience at global companies and can provide insight on any expansion of the Company’s global presence.

Name
(a)

Fees Earned      
or Paid in      
Cash      

(b)      

Stock Awards      
(c)      

Option Awards      
(d)      

Total      

B. Thomas Golisano

$

300,000      

$

—      

$

—      

$

300,000      

Thomas F. Bonadio

$

95,000      

$

65,151      

$

63,555      

$

223,706      

Joseph G. Doody

$

90,000      

$

65,151      

$

63,555      

$

218,706      

David J.S. Flaschen

$

129,500      

$

65,151      

$

63,555      

$

258,206      

Phillip Horsley

$

92,500      

$

65,151      

$

63,555      

$

221,206      

Grant M. Inman

$

104,500      

$

65,151      

$

63,555      

$

233,206      

Pamela A. Joseph ⁽¹⁾

$

20,000      

$

—      

$

—      

$

20,000      

Joseph M. Tucci

$

107,000      

$

65,151      

$

63,555      

$

235,706      

Joseph M. Velli

$

104,500      

$

65,151      

$

63,555      

$

233,206      

Kara Wilson

$

92,500      

$

65,151      

$

63,555      

$

221,206      

Ms. Joseph was reappointed to the Board in April 2018.

Director Compensation  

Compensation Element

Annual cash retainer

$

80,000    

Audit Committee member annual retainer

$

10,000    

G&C Committee member annual retainer

$

7,500    

Investment Committee member annual retainer

$

5,000    

Executive Committee member annual retainer

$

5,000    

Corporate Development Advisory Committee member annual retainer

$

5,000    

Audit Committee Chair annual retainer ⁽¹⁾

$

22,000    

G&C Committee Chair annual retainer ⁽¹⁾

$

14,500    

Corporate Development Advisory Committee Chair annual retainer ⁽¹⁾

$

2,000    

Investment Committee Chair annual retainer ⁽¹⁾

$

2,000    

The committee Chair receives the Chair annual retainer in addition to the respective committee retainer.

The fair value of restricted stock awards is determined based on the closing price of the underlying common stock on the date of grant. The fair value of stock option awards is determined using a Black-Scholes option pricing model. The assumptions used in determining the July 13, 2017 fair value of $6.61 per share for these stock options were: risk-free interest rate of 2.2%; dividend yield of 3.4%; volatility factor of 0.17; and expected option term life of 6.5 years.

Retirement eligibility for this purpose begins at age 55 or older with ten years of service as a member of the Board.

Restricted  

Stock  

Outstanding  

(Shares)  

Stock  

Options  

Outstanding  

(Shares)  

Ms. Joseph was reappointed to the Board in April 2018.

speculatively trade in Paychex stock;

short sell any securities of the Company; or

buy or sell puts or calls on the Company’s securities.

Director Compensation 

each principal stockholder known to be a beneficial owner of more than 5% of the Company’s common stock. This includes any “group” as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”);

each director and nominee for director;

each of the Company’s named executive officers (“NEOs”); and

all directors, NEOs, and executive officers of the Company as a group.

Amount of

    Shares Owned ⁽¹⁾   

    Non-vested   
Shares of 
Restricted 
Stock ⁽²⁾ 

    Stock Options   
Exercisable by 
September 29, 
2018 ⁽³⁾ 

    Total Shares  
Beneficially
Owned

    Percent  
of

Class

Principal Stockholders:

B. Thomas Golisano ^(4),(5),(6)

1 Fishers Road

Pittsford, NY 14534

Vanguard Group Inc. ⁽⁷⁾

PO Box 2600 V26

Valley Forge, PA 19482-2600

BlackRock Inc. ⁽⁸⁾

55 East 52^nd Street

New York, NY 10055

Directors:

B. Thomas Golisano ^(4),(5),(6)

Thomas F. Bonadio

Joseph G. Doody

David J.S. Flaschen

Phillip Horsley ^(6),(9)

Grant M. Inman ^(6),(9)

Pamela A. Joseph

Martin Mucci

Joseph M. Tucci

Joseph M. Velli

Kara Wilson

Named Executive Officers:

Martin Mucci

Efrain Rivera

Mark A. Bottini

John B. Gibson

Michael E. Gioja

All directors, NEOs, and executive officers of the Company as a group (18 persons)

Beneficial Ownership 

Indicates that percentage is less than 1%.

This column reflects shares held of record and Company shares owned through a bank, broker, or other holder of record. For executive officers, this also includes shares owned through the Paychex, Inc. 401(k) Incentive Retirement Plan (the “401(k) Plan”).

This column includes restricted stock awards to independent directors and executive officers that have not yet vested. These non-vested restricted stock awards have voting and dividend rights, and thus are included in beneficial ownership.

This column includes shares that may be acquired upon exercise of options, which are exercisable on or prior to September 29, 2018. Under SEC rules, shares that may be acquired within 60 days are included in beneficial ownership.

Included in shares beneficially owned for Mr. Golisano are 278,068 shares owned by the B. Thomas Golisano Foundation, of which Mr. Golisano is a member of the foundation’s six-member board of trustees. Mr. Golisano disclaims beneficial ownership of these shares, but does share voting and investment power.

Mr. Golisano has 7,750,295 shares pledged as security.

Included in shares beneficially owned are shares held in the names of family members, trusts, or other entities: Mr. Golisano — 62,256 shares; Mr. Horsley — 108,951 shares; and Mr. Inman — 136,949 shares.

Beneficial ownership is based on information as of June 30, 2018 contained in the Form 13F filed with the SEC on August 14, 2018 by Vanguard Group Inc., including notice that it has sole voting power as to 416,473 shares, sole dispositive power as to 24,351,403 shares, shared voting power as to 134,183 shares, and shared dispositive power as to 525,035 shares.

Beneficial ownership is based on information as of June 30, 2018 contained in the Form 13F filed with the SEC on August 9, 2018 by BlackRock, Inc., including notice that it has, along with certain institutional investment managers for which it is the parent holding company, sole voting power as to 21,925,764 shares and sole dispositive power as to 24,771,984 shares.

Mr. Horsley and Mr. Inman are not standing for re-election at the Annual Meeting, but will maintain their current Board positions until that date.

Chairman of the Board and non-independent director (Mr. Golisano);

the President and CEO as a non-independent director (Mr. Mucci);

an independent director serving as Lead Independent Director (Mr. Tucci); and

Audit, G&C, Corporate Development Advisory, and Investment committees led by independent directors.

Corporate Governance  

Committee

Primary Risk Oversight Area

Audit Committee

•  Risk related to financial statement accuracy and reporting;

•  Internal controls;

•  Legal, regulatory, and compliance risks;

•  Information security, technology, privacy and data protection; and

•  Other operational and fraud risks.

Investment Committee

•  Risk related to investing activities.

G&C Committee

•  Risks arising from the Company’s compensation policies and practices for all employees and non-employee directors; and

•  Governance structure and processes including succession planning, director independence, and related person transactions.

Committee Members: ⁽¹⁾

David J.S. Flaschen (Chair) ⁽²⁾

Thomas F. Bonadio ⁽²⁾

Joseph G. Doody

Grant M. Inman ⁽³⁾

Kara Wilson ⁽⁴⁾

6 Meetings in fiscal 2018

•  Serve as an independent and objective party to monitor the Company’s financial reporting process, internal control system, and financial risk management processes.

•  Review the performance and independence of the Company’s independent accountants and internal audit department.

•  Provide an open avenue of communication among the independent accountants, financial and senior management, the internal auditors, and the Board.

•  Review significant risk exposures and processes to monitor, control, and report such exposures, periodically reporting on such information to the Board.

Committee Members:

Martin Mucci (Chair)

B. Thomas Golisano

Joseph M. Tucci

Joseph M. Velli

0 Meetings in fiscal 2018

•  Exercise all the powers and authority of the Board, except as limited by law, between Board meetings and when the Board is not in session.

Committee Members:

Grant M. Inman (Chair) ⁽³⁾

David J.S. Flaschen

Phillip Horsley ⁽³⁾

Joseph M. Velli

2 Meetings in fiscal 2018

•  Review the Company’s investment policies and strategies, and the performance of the Company’s investment portfolios.

•  Determine that the investment portfolios are managed in compliance with the Company’s established investment policy.

Committee Members: ⁽⁵⁾

Joseph M. Tucci (Chair)

David J.S. Flaschen

Phillip Horsley ⁽³⁾

Grant M. Inman ⁽³⁾

Joseph M. Velli

5 Meetings in fiscal 2018

•  Evaluate and determine compensation for the directors, CEO, and senior executive officers.

•  Provide general oversight with respect to governance of the Board, including periodic review and assessment of corporate governance policies.

•  Evaluate compensation policies to determine if they have risk that is reasonably likely to have a material adverse effect on the Company.

•  Identify, evaluate, and recommend to the Board candidates for nomination for election to the Board.

•  Review annually the independence of directors.

Committee Members:

Joseph M. Velli (Chair)

Thomas F. Bonadio

David J.S. Flaschen

Martin Mucci

Kara Wilson ⁽⁴⁾

4 Meetings in fiscal 2018

•  Review and provide guidance to management and the Board with respect to the Company’s acquisition or divestiture opportunities, as appropriate, and review related strategy.

•  Authority to approve acquisitions or divestitures in accordance with the parameters set by the Board, to the extent permitted by law and the Company’s By-Laws.

All members of the Audit Committee, which was established in accordance with Section 3(a)58(A) of the Exchange Act, meet the independence, experience, and other applicable NASDAQ listing requirements and applicable SEC rules regarding independence.

Mr. Flaschen and Mr. Bonadio qualify as an “Audit Committee Financial Expert,” as defined by applicable SEC rules.

Mr. Horsley and Mr. Inman do not intend to seek re-election to the Board or any of its standing committees.

Ms. Wilson was appointed to the Audit Committee in July 2017 and the Corporate Development Advisory Committee in October 2017.

All members of the G&C Committee meet the NASDAQ independence criteria.

Corporate Governance  

Mr. Tucci, a member of our Board, was the Chairman of the Board, CEO, and President of EMC Corporation until September 2016. During fiscal 2018, the Company purchased through negotiated transactions approximately $0.5 million of data processing equipment and software from EMC Corporation. Mr. Tucci was not personally involved in the negotiation of these transactions.

Mr. Doody, a member of our Board, was the Vice Chairman of Staples, Inc. until September 2017. During fiscal 2018, the Company purchased through negotiated transactions approximately $2.7 million of office supplies from Staples, Inc. Mr. Doody was not personally involved in the negotiation of these transactions.

Mr. Velli, a member of our Board, was appointed to the Board of Cognizant Technology Solutions Corporation (“Cognizant”) in December 2017. During fiscal 2018, the Company purchased through negotiated transactions approximately $0.2 million of consulting services from Cognizant. Mr. Velli was not personally involved in the negotiation of these transactions.

Code of Ethics  

NEO compensation is evaluated and determined by our G&C Committee, which is entirely comprised of independent directors. This committee utilizes the services of an independent consultant to advise them on matters of executive compensation.

Our executive compensation program is designed to implement core compensation principles, including alignment with stockholders’ interests, long-term value creation, and pay-for-performance. A significant portion of pay is at risk where the amount realized will be dependent on achievement of financial targets or, in the case of certain time-vested equity awards, the value of the Company’s stock.

A mix of annual and long-term incentive programs creates a balance between short-term and long-term focus, reducing risk in the compensation programs.

Our equity-based, long-term incentive awards include a mix of options, time-based restricted stock awards, and performance-based awards.

Stock ownership guidelines for directors and executive officers, designed to align the director’s and executives’ long-term financial interests with those of our stockholders.

Prohibition of hedging of the Company’s stock for both directors and executive officers.

Prohibition of pledging Company stock as collateral without prior approval by the Company.

A long-standing insider trading policy.

Say-on-Pay Vote 

Certain recoupment, non-compete, and other forfeiture provisions within our Annual Officer Performance Incentive Program (the “Annual Incentive Program”) and equity-based compensation agreements. These allow the Company to cancel all or any outstanding portion of equity awards and recoup the gross value of any payouts under the Annual Incentive Program, vested restricted shares, or profits from exercises of options.

    Name

Title

    Martin Mucci

    President and Chief Executive Officer (principal executive officer)

    Efrain Rivera

    Senior Vice President, Chief Financial Officer, and Treasurer (principal financial officer)

    Mark A. Bottini

    Senior Vice President of Sales

    John B. Gibson

    Senior Vice President of Service

    Michael E. Gioja

    Senior Vice President of Information Technology and Product Development

COMPENSATION DISCUSSION AND ANALYSIS TABLE OF CONTENTS

Executive Summary

24

Business and Financial Highlights

24

How Pay is Tied to Company Performance

28

Highlights of Executive Compensation Practices

31

Elements of Compensation

32

Summary of Fiscal 2018 Elements of Compensation

32

Fiscal 2018 Compensation Results

33

Stock Ownership Guidelines

37

Prohibition on Hedging or Speculating in Company Stock

37

Pledging of Company Stock

37

Recoupment, Non-Compete, and Other Forfeiture Provisions

37

Perquisites

38

Deferred Compensation

38

Change in Control Plan

38

Compensation Decision Process

39

Role of the Compensation Consultant

39

Role of Governance and Compensation Committee and Management

39

Peer Group

40

CEO Compensation

41

CEO Pay Ratio

41

Impact of the Internal Revenue Code

42

THE GOVERNANCE AND COMPENSATION COMMITTEE REPORT

42

CD&A  

  For the fiscal year ended May 31,  

        2018        

        2017        

    % Change    

Payroll service revenue

Human Resource Services revenue

Total service revenue

Interest on funds held for clients

Total revenue

Operating income

Operating income, net of certain items ⁽¹⁾

Net income ⁽²⁾

Adjusted net income ⁽¹⁾

Diluted earnings per share ⁽²⁾

Adjusted diluted earnings per share ⁽¹⁾

Operating cash flows

Operating income, net of certain items, adjusted net income, and adjusted diluted earnings per share are not U.S. GAAP measures. Please refer to “Paychex, Inc. Non-GAAP Financial Measures” in Appendix A of this proxy statement for a discussion of these non-GAAP measures and a reconciliation to the most comparable GAAP measures of operating income, net income, and diluted earnings per share. Operating income, net of certain items, is a non-GAAP measure used as one of the performance metrics in the Company’s executive compensation program.

Net income and diluted earnings per share were impacted in fiscal 2018 by the passage of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The Tax Act significantly reduced the statutory corporate income tax rate from 35% to 21%.

Strategy Focus

Fiscal 2018 Summary of Accomplishments

Flexible, convenient service

We are committed to backing our integrated Human Capital Management (“HCM”) solutions with world-class service. The integration of flexible service options and leading-edge technology allows us to meet our clients’ diverse needs and empowers our clients to choose the way in which they would like to be serviced. Clients can decide when, where, and how they access our services including through online services, the traditional payroll specialist model, a 24/7 dedicated service center, our multi-product service center, or, for some of our larger clients, a customer relationship manager. Our service delivery remained strong as we continued to experience favorable client retention results and improvements in Net Promoter Score.

Solid sales execution

In fiscal 2018, we rolled out a new go-to-market strategy leveraging the capabilities of our virtual sales force. This strategy started off slowly in the first half of the fiscal year, but gained momentum as the year progressed. Our comprehensive HR outsourcing services, in particular our professional employer organization (“PEO”) business, performed well in both new sales and client retention.

Industry-leading, integrated technology

We have continued our focus on leading-edge technology, concentrating our efforts on the enhancement of Paychex Flex^®, our robust, cloud-based HCM platform, which allows direct client access to payroll, HR, and benefits information in a streamlined and integrated approach to workplace management. In fiscal 2018, we introduced the following:

•  AccountantHQ, a Paychex Flex platform-based offering, which provides access to authorized client payroll and HR data and key account contacts to assist a client’s accountant in driving greater efficiency;

•  InVision^TM Iris Time Clock, a biometric clock that scans the iris, providing fast and accurate time capture;

•  Do-It-Yourself online employee handbook (“DIY Handbook”);

•  Onboarding Essentials, which enables clients to onboard new hires quickly and in a completely paperless fashion; and

•  Netspend’s Tip Network^TM, which streamlines the process for paying tipped employees.

Comprehensive suite of value-added HCM services

We offer a complete suite of HCM services, which help manage the employer/employee relationship through all phases of the employee life cycle. During fiscal 2018, we introduced new product bundles, which now include DIY Handbook and Onboarding Essentials at no extra cost. We also introduced Paychex Promise, a first of its kind offering in the payroll and HR industry. It is a subscription-based service that delivers peace of mind to business owners through protection against payroll interruptions and solutions to address the routine challenges of running a successful business. The primary offering is Payroll Protection, which extends the collection period of payroll funds from a client’s bank account by seven days without interruption of service. We also announced a partnership with Workplace by Facebook to introduce a social collaboration tool to the Company’s HCM suite.

Continued service penetration

We continue to see client growth across the following HCM services: comprehensive HR outsourcing services, retirement services, insurance services, and our time and attendance solutions. Our largest HRS revenue stream is Paychex HR Services, which includes our administrative service organization and PEO. Demand for these services resulted in strong growth in the number of worksite employees served. We are constantly evolving to enhance our competitive position and focus on showcasing the value proposition of our full-suite of HCM solutions.

CD&A  

Strategy Focus

Fiscal 2018 Summary of Accomplishments

Strategic acquisitions

We continuously evaluate opportunities for acquisitions where there is a strategic fit. In fiscal 2018, we completed two important acquisitions that we believe helped to strengthen our position in the marketplace, while at the same time providing us with more opportunities for long-term growth:

•  In August 2017, we announced our acquisition of HR Outsourcing Holdings, Inc. (“HROI”), a national PEO serving small to medium-sized businesses in more than 35 states. This acquisition affirms our strong presence in the PEO industry and demonstrates our continued commitment to providing our clients with industry-leading HR solutions. HROI has been included in our financial results since the date of acquisition and its results have exceeded expectations.

•  In February 2018, we acquired Lessor Group (“Lessor”), a market-leading provider of payroll and HCM software solutions headquartered in Denmark and serving clients in Northern Europe. The acquisition of Lessor strengthens our international profile and provides us with additional opportunities for growth in Europe.

Annual Distributions to Stockholders ($million)

Annual Dividends Per Common Share

CD&A  

A significant portion of our NEOs annual compensation is “at risk” based on performance. For fiscal 2018, variable pay represented 86% of total target compensation for our CEO, and 79% of total target compensation on average for our other NEOs.

Variable compensation is comprised of an annual cash incentive program and longer-term equity-based incentives. Annual grants of performance shares provide the opportunity for restricted stock to be awarded if pre-established financial goals are met for a two-year performance period. Time-vested stock options and restricted stock awards provide value based on our stock price performance.

Target compensation for the annual incentive program and annual grants of performance shares is established at the beginning of the performance period by the G&C Committee. NEOs have an opportunity to earn actual compensation that varies from target based on achievement against pre-established performance metrics.

Performance targets incorporated into our executive compensation programs include the metrics of service revenue (a measure of business growth) and operating income, net of certain items (our measure of profitability) for our annual performance-based compensation. Operating income, net of certain items is a non-GAAP measure. Refer to Appendix A for a discussion of this measure and a reconciliation to the related GAAP measure of operating income.

The financial measures used as performance targets are linked directly to our annual and longer-term strategic business plans that are reviewed and approved by the Board.

In July 2016, the G&C committee approved special Long Term Incentive Plan (“LTIP”) awards in the form of non-qualified performance-based stock options and performance-based restricted stock. These awards were made to reward the executives for achieving long-term financial goals. The stock options and restricted stock vest after four years based on achievement against goals established for the fiscal year ending May 31, 2020 (“fiscal 2020”). These are special awards geared toward this long-term achievement and are not part of the annually recurring awards of long-term, equity-based compensation. The performance metrics for these LTIP awards are service revenue, operating income, net of certain items, and diluted earnings per share.

Operating income, net of certain items, is a non-GAAP measure. Refer to the discussion regarding this non-GAAP measure and a reconciliation to the related GAAP measure of operating income in Appendix A.

CEO total compensation as reflected in this chart is equal to the amounts reported in the Summary Compensation Table included in the Named Executive Officer section of this and prior years’ proxy statements, with the exception of the amount for fiscal 2017. For fiscal 2017, this chart excludes the impact of the special LTIP awards granted in July 2016 in the form of non-qualified performance stock options and performance-based restricted stock.

Payouts under the Annual Incentive Program for fiscal 2018 were earned at 90% of target for the CEO and an average of 85% of target for the SVPs. Achievement was measured against financial targets established at the beginning of fiscal 2018.

The two-year performance period for the annual grants of performance shares granted in July 2016 ended on May 31, 2018. The financial targets were set at the beginning of this two-year period. Achievement against these targets resulted in restricted shares earned at 92% of target.

CD&A  

Intrinsic Value as of May 31, 2018 ⁽³⁾

Fiscal
Year

Awards

Value  

Reported at  
Grant Date ⁽¹⁾  

Value

Realized  
Through  

May 31,  

2018 ⁽²⁾

Vested  

Shares  

Unvested  
Shares ⁽⁴⁾  

Total Intrinsic  
Value Not Yet  

Realized  

Increase/  

(Decrease) in  
Realized and  

Unrealized  

Value Since  

Grant Date