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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

SCHEDULE 14A

(RULE 14a-101)

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

(Amendment No.      )

 

 

Filed by the Registrant  ☒                            Filed by a Party other than the Registrant  ☐

Check the appropriate box:

 

  Preliminary Proxy Statement
  Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
  Definitive Proxy Statement
  Definitive Additional Materials
  Soliciting Material Pursuant to §240.14a-12


Paychex, Inc.

(Name of Registrant as Specified In Its Charter)

        

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


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What It Means To Be Paychex

Our purpose, mission, and values are the guiding principles behind all we do for our clients, coworkers, shareholders, and communities. They’re who we are, what we work toward, and why we succeed as a company.

Our Purpose

We provide our customers the freedom to succeed.

Our Mission

We will be the leading provider of human resource, payroll, retirement, and employee benefit services by being an essential partner with businesses across the U.S. and Northern Europe.

Our Values

We act with uncompromising integrity.

We provide outstanding service and build trusted relationships.

We drive innovation in our products and services and continually improve our processes.

We work in partnership and support each other.

We’re personally accountable and deliver on our commitments.

We treat each other with respect and dignity.


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LOGO

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

 

WHEN

 

Thursday, October 15, 2020

10:00 a.m. Eastern Time

 

WHERE

 

Online at

www.virtualshareholdermeeting.com/PAYX2020

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE 2020 ANNUAL MEETING OF STOCKHOLDERS TO
BE HELD ON OCTOBER 15, 2020

 

Paychex has elected to use the Securities and Exchange Commission’s Notice and Access model, which allows us to make the proxy materials available on the Internet, as the primary means of furnishing proxy materials to stockholders. On or about September 4, 2020, we will mail to all stockholders a Notice of Internet Availability of Proxy Materials, which contains instructions for accessing our proxy materials on the Internet and voting by telephone or on the Internet. The Notice of Internet Availability of Proxy Materials also contains instructions for requesting a printed set of proxy materials. Paychex, Inc.’s Proxy Statement and Annual Report for the year ended May 31, 2020 are available at www.proxyvote.com and www.paychex.com/investors.

 

   

The principal business of the 2020 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 approve and amend the Paychex, Inc. 2002 Stock Incentive Plan;

 

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

 

5. 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. Due to the public health concerns resulting from the novel coronavirus (“COVID-19”) pandemic, we are holding our Annual Meeting in a virtual format to provide a safe and consistent experience for our stockholders and employees regardless of location. You will not be able to attend the Annual Meeting at a physical location.

 

Our Annual Meeting will be broadcast as a live webcast accessible at: www.virtualshareholdermeeting.com/PAYX2020. Stockholders of record at the close of business on August 17, 2020 will be entitled to notice of and to vote at the Annual Meeting and at any adjournments or postponements thereof. With the nature of our Annual Meeting being virtual, you will be able to vote and ask questions through the webcast by using your 16-digit control number.

 

For more information about the virtual meeting format, please see the “Frequently Asked Questions” section beginning on page 70 of the proxy statement.

 

By order of the Board of Directors

Stephanie L. Schaeffer

Corporate Secretary

 

September 4, 2020


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Welcome to the Paychex, Inc. 2020 Annual Meeting

of Stockholders

VOTE YOUR SHARES

HOW TO VOTE

Your vote is very important, and we hope that you will attend the Annual Meeting. You are eligible to vote if you were a stockholder of record at the close of business on August 17, 2020. Please read the proxy statement and vote right away using any of the following methods.

Stockholders of Record:

 

 

LOGO

    LOGO     LOGO
     

VOTE BY

INTERNET BEFORE OR

DURING THE MEETING

Visit the website listed

on your Notice of

Internet Availability of

Proxy Materials.

 

   

VOTE BY

TELEPHONE

Call 1-800-690-6903

to vote by phone.

   

VOTE BY MAIL

Sign, date, and return

your proxy card in the

enclosed envelope (this is

only available if you

requested a printed copy).

 

Beneficial Stockholders:

If you are a beneficial stockholder, you will receive instructions from your bank, broker, or other nominee that you must follow in order for your shares to be voted.


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PROXY STATEMENT SUMMARY     1  
PROPOSAL 1: ELECTION OF DIRECTORS FOR A ONE-YEAR TERM     3  
DIRECTOR COMPENSATION FOR THE FISCAL YEAR ENDED MAY 31, 2020     10  
BENEFICIAL OWNERSHIP OF PAYCHEX COMMON STOCK     13  
CORPORATE GOVERNANCE     15  

Board Leadership Structure

    15  

Board Oversight of Risk

    15  

Board Meetings and Committees

    16  

Nomination Process

    18  

Corporate Social Responsibility

    19  

Policy on Transactions with Related Persons

    19  

Governance and Compensation Committee Interlocks and Insider Participation

    20  

Communications with the Board of Directors

    21  
CODE OF BUSINESS ETHICS AND CONDUCT     21  
PROPOSAL 2: ADVISORY VOTE TO APPROVE NAMED EXECUTIVE OFFICER COMPENSATION     22  
COMPENSATION DISCUSSION AND ANALYSIS     24  

Executive Summary

    24  

Elements of Compensation

    33  

Compensation Decision Process

    41  

CEO Compensation

    44  

CEO Pay Ratio

    44  

Subsequent Events

    45  

Impact of the Internal Revenue Code

    45  

The Governance and Compensation Committee Report

    45  
NAMED EXECUTIVE OFFICER COMPENSATION     46  

Fiscal 2020 Summary Compensation Table

    46  

Grants of Plan-Based Awards for Fiscal 2020

    49  

Option Exercises and Stock Vested in Fiscal 2020

    51  

Outstanding Equity Awards as of May 31, 2020

    52  

Potential Payments upon Termination or Change in Control Fiscal 2020

    55  

Non-Qualified Deferred Compensation Fiscal 2020

    58  
PROPOSAL 3: TO APPROVE AND AMEND THE PAYCHEX, INC. 2002 STOCK INCENTIVE PLAN     60  
PROPOSAL 4: RATIFICATION OF SELECTION OF PRICEWATERHOUSECOOPERS LLP TO SERVE AS THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM     67  

Fees for Professional Services

    68  

Report of The Audit Committee

    69  
FREQUENTLY ASKED QUESTIONS     70  
Appendix A: PAYCHEX, INC. 2002 STOCK INCENTIVE PLAN (as amended and restated October 15, 2020)     A-1  
Appendix B: PAYCHEX, INC. NON-GAAP FINANCIAL MEASURES     B-1  
Appendix C: PAYCHEX, INC. RECONCILIATION OF PERFORMANCE MEASURES TO THOSE REPORTED IN THE COMPANY’S CONSOLIDATED FINANCIAL STATEMENTS     C-1  


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  Proxy Summary  

 

 

 

 

 

PROXY STATEMENT SUMMARY

This summary highlights information contained elsewhere in this proxy statement. This summary does not contain all of the information that you should consider, and you should read the entire proxy statement before voting. For more complete information regarding the performance of Paychex, Inc. (the “Company” or “Paychex”) for the fiscal year ended May 31, 2020 (“fiscal 2020”), please review the Company’s Annual Report on Form 10-K for fiscal 2020.

Paychex, Inc. 2020 Annual Meeting of Stockholders

 

         LOGO            

October 15, 2020

10:00 a.m., Eastern Time

               LOGO        

Virtual Meeting at:

www.virtualshareholdermeeting.com/PAYX2020

Meeting Agenda and Voting Matters

 

       
Item    Management Proposal   

Board Vote

Recommendation

   Page Reference
(for more detail)
       
Proposal 1        Election of directors for a one-year term    FOR each director nominee      3
       
Proposal 2    Advisory vote to approve named executive officer compensation    FOR    22
       
Proposal 3    To approve and amend the Paychex, Inc. 2002 Stock Incentive Plan    FOR    60
       
Proposal 4    Ratification of the selection of PricewaterhouseCoopers LLP to serve as our independent registered public accounting firm    FOR    67

Fiscal 2020 Business Highlights

 

     
      For the fiscal year ended May 31,         
   
$ in millions, except per share amounts    2020      2019      % Change  
       
Total revenue      $            4,041        $            3,773        7%  
       
Operating income      $            1,461        $            1,371        7%  
       
Net income      $            1,098        $            1,034        6%  
       
Stock price (high/low)(1)      $90.23/$50.39        $87.15/$61.64        4%/(18)%  
       
Stock price as of fiscal year end      $            72.28        $            85.79        (16)%  

 

(1)

Based on 52-week high and low sale prices as reported on the Nasdaq Global Select Market as of May 31, 2020 and 2019.

Paychex’s annual results were solid although the fourth quarter ended May 31, 2020, (“fiscal fourth quarter”) was impacted by COVID-19. Paychex has focused on returning value to our stockholders and continued with stockholder-friendly actions during fiscal 2020. The Company currently pays a quarterly dividend of $0.62 per share. The Company continued to repurchase its common stock to offset dilution and in the first quarter of fiscal 2020 repurchased 2.0 million shares for $171.9 million.

 

Paychex, Inc. 2020 Proxy Statement  1


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  Proxy Summary  

 

 

 

 

 

 

 

 

LOGO   LOGO

Pay-for-Performance

Key features of our executive compensation program that tie compensation to the Company’s performance are:

 

 

A significant portion of annual compensation is “at risk” based on performance. For the President and Chief Executive Officer (“CEO”), 89% of total target compensation is at risk. On average, for other named executive officers (“NEOs”), 77% 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 2020, results of performance measures were below target, resulting in payouts at 51% of target for our CEO and an average of 48% of target for the other NEOs.

For more information on compensation for our NEOs and how it ties to performance, refer to the Compensation Discussion and Analysis and Named Executive Officer Compensation sections of this proxy statement.

Additional Information

Please refer to the Frequently Asked Questions section beginning on page 70 for important information about proxy materials, voting, annual meeting procedures, company documents, communications, and the deadlines to submit stockholder proposals for the 2021 Annual Meeting of Stockholders. Additionally, questions may be directed to Investor Relations at (800) 828-4411 or by written request to 911 Panorama Trail South, Rochester, NY 14625, Attention: Investor Relations. General information regarding the meeting and links to key documents can be found on our Investor Relations web page at www.paychex.com/investors.

 

Paychex, Inc. 2020 Proxy Statement  2


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  Election of Directors  

 

 

 

 

 

PROXY STATEMENT

 

 

Paychex, Inc.

911 Panorama Trail South

Rochester, NY 14625

Paychex, Inc. (“Paychex,” the “Company,” “we,” “our,” or “us”), a Delaware corporation, is furnishing this proxy statement to stockholders in connection with the solicitation of proxies on behalf of the Board of Directors of the Company (the “Board”) for the 2020 Annual Meeting of Stockholders (the “Annual Meeting”). This proxy statement summarizes information concerning the matters to be presented at the Annual Meeting and related information to help stockholders make an informed vote. Distribution of this proxy statement and a form of proxy to stockholders is scheduled to begin on or about September 4, 2020.

 

PROPOSAL 1:

ELECTION OF DIRECTORS FOR A ONE-YEAR TERM

 

What am I voting on?

 

Voting Recommendation

 
Stockholders are being asked to elect nine director nominees for a one-year term. This section includes information about the Board and each director nominee.  

The Board recommends a vote FOR each of the nine director nominees.

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 ultimate decision-making body of the Company, except for those matters reserved to 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 acts as an advisor to senior management and ultimately monitors management’s performance.

Election Process

The Company’s By-Laws provide for the annual election of directors. The By-Laws provide that each director is elected by a majority of the votes cast for the director at any meeting held for the election of directors at which a quorum is present, and the director is running unopposed. If a nominee that is an incumbent director does not receive a required majority of the votes cast, the director must offer to tender his or her resignation to the Board. The Governance and Compensation Committee (the “G&C Committee”) then considers 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 G&C Committee’s recommendation and will determine whether to accept such offer. The Board will disclose its decision and the rationale behind it within 90 days of the certification of the election results.

2020 Nominees for Director

There are nine nominees for election as director, as listed on the following pages. Each of the nominees is a current member of the Board. The nine persons listed have been nominated for election to the Board by the Company’s G&C Committee. The nominees, except for Mr. Golisano and Mr. Mucci, are independent under the Nasdaq Stock Market (“Nasdaq”) director independence standards. If elected, each nominee will hold office until

 

Paychex, Inc. 2020 Proxy Statement  3


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  Election of Directors  

 

 

 

 

 

 

 

 

his or her successor is elected and has qualified or until his or her earlier resignation or removal. We believe that all the nominees will be available to serve as a director. However, if any nominee should become unable to serve, the named proxy holders may exercise discretionary authority to vote for substitute nominees proposed by the Board.

The Board believes that the combination of the various qualifications, skills, and experience of the 2020 director nominees will continue to contribute to an effective and well-functioning Board. We have provided biographical information on each of the nominees. Included within this information, we identify and describe the key experience, qualifications, and skills each director nominee brings to the Board that are important considering our business and structure.

 

 

The Board recommends the election of each of the director nominees identified on the following pages.

Unless otherwise directed, the named proxy holders will vote the proxy FOR the election

of each of these director nominees.

 

Summary of Director Nominees

Our Board is composed of accomplished professionals, with diverse areas of expertise, who are well-equipped to oversee the success of the business and effectively represent the interests of stockholders. The G&C Committee believes that all directors should: possess the highest personal and professional ethics; share the values of the Company; have relevant experience; be accomplished in their field; and show innovative and sound business judgment. The Board has identified qualifications, attributes, skills, and experience that are important to be represented on the Board as a whole, in light of the Company’s business and current needs. The Board believes the combination of the various qualifications, attributes, skills, and experience of the director nominees contribute to a well-functioning and effective Board. In addition, the Board voluntarily adopted a diversity search policy to consider the diversity of Board nominees in terms of the factors previously mentioned and other demographic factors.

 

 

LOGO

 

Paychex, Inc. 2020 Proxy Statement  4


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  Election of Directors  

 

 

 

 

 

 

B. Thomas Golisano

 

Founder and Chairman of the Board of Paychex, Inc.

 

 

Age 78

 

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 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 boards of Cognivue, Inc., Twinlab Consolidated Holdings, Inc., PostProcess Technologies, Inc., and Viridi Parente, Inc. and serves as a director of numerous other 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

 

Founder and Senior Counsel of The Bonadio Group

 

 

Age 71

 

Director since 2017

 

Board Committees:

•  Audit

•  Corporate Development Advisory

 

Current Public Company Directorships:

•  CurAegis Technologies, Inc.

  

 

Mr. Bonadio is the founder and senior counsel 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.

 

  
  

 

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.

 

  

 

Paychex, Inc. 2020 Proxy Statement  5


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  Election of Directors  

 

 

 

 

 

 

 

 

 

Joseph G. Doody

 

Former Vice Chairman of Staples, Inc.

 

 

Age 68

 

Director since 2010

 

Board Committees:

•  Audit

•  Investment

 

Current Public Company Directorships:

•  Casella Waste Systems, Inc.

•  Virtusa Corporation

  

 

Mr. Doody retired from Staples, Inc., an office products company, in September 2017. He previously served as Vice Chairman of Staples, Inc. 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.

 

  
     

 

David J.S. Flaschen

 

Investor and Advisor

 

 

Age 64

 

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. From 2005 to 2011, he was a partner with Castanea Partners, a private equity investment firm. Mr. Flaschen is a member of the National Association of Corporate Directors Blue Ribbon Commission on Adaptive Governance for Board Oversight of Disruptive Risks. Mr. Flaschen is also a director/advisor of various private companies. He also serves as a director and member of the audit committee for 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 Nielsen. 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.

 

  

 

Paychex, Inc. 2020 Proxy Statement  6


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  Election of Directors  

 

 

 

 

 

 

Pamela A. Joseph

 

Chief Executive Officer of Clearent, LLC

 

 

Age 61

 

Director since 2018

(previously served from 2005-2017, reappointed in 2018)

 

Board Committees:

•  G&C

•  Corporate Development Advisory

•  Investment (Chair)

 

Current Public Company Directorships:

•  TransUnion (Chair)

•  Adyen N.V. (Euronext)

  

 

Ms. Joseph currently serves as the CEO of Clearent, LLC, and as a member of its board. Clearent is a full-service payment-solutions provider and owner-independent software vendor in select vertical markets. She previously served as President, Chief Operating Officer, and Board Member of Total System Services, Inc. (“TSYS”), from May 2016 until September 2017. She was Vice Chair of U.S. Bancorp Payment Services and Chair of Elavon (formerly NOVA Information Systems, Inc.), a wholly owned subsidiary of U.S. Bancorp, from December 2004 until her retirement in June 2015. TSYS offers issuer services and merchant payment acceptance for credit, debit, prepaid, healthcare, and business solutions. U.S. Bancorp Payment Services and Elavon manage and facilitate consumer and corporate card issuing, as well as payment processing. Ms. Joseph also serves as Board Chairperson for TransUnion and as a member of the Board of Directors of Adyen N.V.

 

  
  

 

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 60

 

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 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 and senior leadership experience provide him with strong financial literacy.

 

  

 

Paychex, Inc. 2020 Proxy Statement  7


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  Election of Directors  

 

 

 

 

 

 

 

 

 

Joseph M. Tucci

 

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

 

 

Age 73

 

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 co-founder of GTY Technology Holdings, Inc., a special purpose acquisitions company founded in September 2016, and is a member of the board of directors. 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 (“EMC”), 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. 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.

 

  
     

 

Joseph M. Velli

 

Retired Financial Services and Technology Executive

 

 

Age 62

 

Director since 2007

 

Board committees:

•  Investment

•  Executive

•  Corporate Development Advisory (Chair)

•  G&C

 

Current Public Company Directorships:

•  Computershare Ltd.

    (Australian Stock Exchange)

•  Cognizant Technology Solutions Corp.

•  AssetMark Financial
Holdings

  

 

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. He serves on 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 Board of Directors of Foreside Financial Group, a private company in the investment management industry. In May 2020, Mr. Velli was also appointed to the Board of Directors of AssetMark Financial Holdings, Inc., an investment management and consulting firm serving independent financial advisors. 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 an advisory council member 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.

 

  

 

Paychex, Inc. 2020 Proxy Statement  8


Table of Contents

 

 

 

 

 

 

 

 

  Election of Directors  

 

 

 

 

 

 

Kara Wilson

 

Senior Advisor at KKR & Co. Inc.

 

 

Age 50

 

Director since 2017

 

Board committees:

•  Audit

•  Corporate Development Advisory

 

CurrentPublic Company Directorships:

•  None

  

 

Ms. Wilson currently serves as a Senior Advisor at KKR & Co. Inc., a global investment firm that manages multiple alternative asset classes, including private equity, energy, infrastructure, real estate and credit, with strategic partners that manage hedge funds. She currently serves on the Board of Directors for Corel Corp, a company with a wide portfolio of software solutions that deliver best-in-class capabilities to knowledge workers worldwide, and KnowBe4, a security awareness computer-based training firm that assists companies in strengthening their security through their employees. She was formerly Chief Marketing Officer at Rubrik, Inc., a cloud data management company, a role she held from June 2017 until May 2019. 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 Systems, SAP, SuccessFactors, PeopleSoft/Oracle, Okta, and FireEye, Inc. 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.

 

  

 

Paychex, Inc. 2020 Proxy Statement  9


Table of Contents

 

  Director Compensation  

 

 

 

 

 

 

 

 

 

DIRECTOR COMPENSATION

FOR THE FISCAL YEAR ENDED MAY 31, 2020

 

 

Director compensation is recommended by the G&C Committee and approved by the Board annually in July. The Board’s authority cannot be delegated to another party. The Company’s management does not play a role in setting director compensation. The Company compensates the independent directors of the Board using a combination of cash and equity-based compensation. Martin Mucci, President and CEO, receives no compensation for his services as a director. Rather, the compensation received by Mr. Mucci in his role as President and CEO is shown in the Fiscal 2020 Summary Compensation Table, contained in the Named Executive Officer Compensation section of this proxy statement.

The table below presents the total compensation received from the Company by all directors except Mr. Mucci for fiscal year ended May 31, 2020 (“fiscal 2020”).

 

         

Name

(a)

 

  

Fees Earned

or Paid in

Cash

(b)

 

    

Stock Awards

(c)

 

    

Option Awards

(d)

 

    

Total

 

 

 

B. Thomas Golisano

  

$

335,000

 

  

$

 

  

$

 

  

$

335,000

 

Thomas F. Bonadio

  

$

107,500

 

  

$

83,197

 

  

$

85,316

 

  

$

276,013

 

Joseph G. Doody

  

$

107,500

 

  

$

83,197

 

  

$

85,316

 

  

$

276,013

 

David J.S. Flaschen

  

$

144,250

 

  

$

83,197

 

  

$

85,316

 

  

$

312,763

 

Pamela A. Joseph

  

$

106,750

 

  

$

83,197

 

  

$

85,316

 

  

$

275,263

 

Joseph M. Tucci

  

$

122,500

 

  

$

83,197

 

  

$

85,316

 

  

$

291,013

 

Joseph M. Velli

  

$

118,500

 

  

$

83,197

 

  

$

85,316

 

  

$

287,013

 

Kara Wilson

  

$

107,500

 

  

$

83,197

 

  

$

85,316

 

  

$

276,013

 

Fees Earned or Paid in Cash (Column (b))

The amounts reported in this column reflect the annual cash compensation paid to the directors during fiscal 2020, whether or not such fees were deferred. Annual cash compensation for directors is comprised solely of annual retainers, which are paid in quarterly installments. These retainers are paid for participation on the Board with separate retainers for committee membership. In addition to their committee membership retainers, committee chairs (with the exception of the Executive Committee) receive additional retainers in recognition for their time contributed in preparation for committee meetings.

Approved in July 2019 and effective in October 2019, the annual cash retainer applicable to all independent directors was increased from $85,000 to $95,000, and the annual cash retainer for the Audit Committee Chair was increased from $22,000 to $25,000. Mr. Golisano, who is not an independent director, receives an annual retainer of $335,000, for his services as Chairman of the Board, paid in quarterly installments. The Board received competitive market data on director compensation of companies in our compensation peer group (as discussed beginning on page 43, “Peer Group”) from our independent consultants. Based on the G&C Committee’s review of this market data, it increased these annual retainers to better align total compensation for directors to the median of our Peer Group.

 

Paychex, Inc. 2020 Proxy Statement  10


Table of Contents

 

 

 

 

 

 

 

 

  Director Compensation  

 

 

 

 

 

The annual retainers, applicable to all independent directors, in effect for fiscal year 2020 (effective in October 2019) and the fiscal year ended May 31, 2019 (“fiscal 2019”) are as follows:

 

     

Compensation Element

  

2020

    

2019

 

Annual cash retainer

  

$

95,000

 

  

$

85,000

 

Audit Committee member annual retainer

  

$

10,000

 

  

$

10,000

 

G&C Committee member annual retainer

  

$

7,500

 

  

$

7,500

 

Investment Committee member annual retainer

  

$

5,000

 

  

$

5,000

 

Executive Committee member annual retainer

  

$

5,000

 

  

$

5,000

 

Corporate Development Advisory Committee member annual retainer

  

$

5,000

 

  

$

5,000

 

Audit Committee Chair annual retainer(1)

  

$

25,000

 

  

$

22,000

 

G&C Committee Chair annual retainer(1)

  

$

17,500

 

  

$

17,500

 

Corporate Development Advisory Committee Chair annual retainer(1)

  

$

2,000

 

  

$

2,000

 

Investment Committee Chair annual retainer(1)

  

$

2,000

 

  

$

2,000

 

 

(1)

The committee chair receives the chair annual retainer in addition to the respective committee member retainer.

Equity Awards: Stock Awards (Column (c)) and Option Awards (Column (d))

The amounts reported in these columns reflect the grant-date fair value of restricted stock awards and stock option awards, respectively, granted to each independent director, and do not reflect whether the recipient has actually received a financial gain from these awards (such as a lapse in the restrictions on a restricted stock award or by exercising stock options). For fiscal 2020, the equity-based compensation structure for independent directors was increased from a total value of approximately $160,000 per director to a total value of approximately $170,000 per director, with approximately 50% awarded in the form of stock options and 50% in the form of restricted stock. The increase for fiscal 2020 was designed to better align total compensation for directors to the median of our Peer Group. In July 2019, all independent directors received an annual equity award under the Paychex, Inc. 2002 Stock Incentive Plan, as amended and restated October 14, 2015 (the “2002 Plan”) as follows:

 

     
      Restricted Stock Awards    Option Awards

Grant Date

  

July 11, 2019

  

July 11, 2019

Exercise Price

  

N/A

  

$85.33

Quantity

  

975

  

7,929

Fair Value(1)

  

$85.33

  

$10.76

Vesting Schedule

  

On the first anniversary of the date of grant.

  

On the first anniversary of the date of grant.

Certain Restrictions        Shares may not be sold during the director’s tenure as a member of the Board, except as necessary to satisfy tax obligations.    N/A
Other(2)    Upon the discretion of the Board, unvested shares may be accelerated in whole or in part for certain events including, but not limited to, director retirement.    Unvested options outstanding upon the retirement of a Board member will be canceled.

 

(1)

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 11, 2019 fair value of $10.76 per share for these stock options were: risk-free interest rate of 2.2%; dividend yield of 3.3%; volatility factor of 0.18; and expected option term life of 8 years.

 

(2)

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

 

Paychex, Inc. 2020 Proxy Statement  11


Table of Contents

 

  Director Compensation  

 

 

 

 

 

 

 

 

As of May 31, 2020, each independent director had the following equity awards outstanding:

 

     

Director

 

  

Restricted
Stock
Outstanding
(Shares)

 

    

Stock
Options
Outstanding
(Shares)

 

 

Thomas F. Bonadio

  

 

975

 

  

 

30,589

 

Joseph G. Doody

  

 

975

 

  

 

36,405

 

David J.S. Flaschen

  

 

975

 

  

 

70,900

 

Pamela A. Joseph

  

 

975

 

  

 

18,730

 

Joseph M. Tucci

  

 

975

 

  

 

97,420

 

Joseph M. Velli

  

 

975

 

  

 

97,420

 

Kara Wilson

  

 

975

 

  

 

26,185

 

Deferred Compensation Plan

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. The Company does not contribute to this plan. 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 the Non-Qualified Deferred Compensation table and discussion within the Named Executive Officer Compensation section of this proxy statement for a listing of investment funds available to participants and the annual rates of return on those funds. During fiscal 2020, no independent directors deferred compensation under the plan.

Benefits

We reimburse each director for expenses associated with attendance at Board and committee meetings.

Stock Ownership Guidelines

In July 2019, the G&C Committee recommended and the Board approved stock ownership guidelines for our independent directors with a value of six times his or her annual Board retainer, not including any committee or committee chair retainers. The G&C Committee received competitive market data on director compensation of companies in our Peer Group from our independent consultants and used that data to align the stock ownership guidelines for our independent directors with the median of the Peer Group. 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 increased guideline. Directors must hold underlying stock received through restricted stock awards until their service on the Board is complete, except for those shares sold as necessary to satisfy tax obligations. For the purpose of achieving the ownership guideline, restricted stock awarded to the directors is included. All independent directors are currently compliant with the stock ownership guidelines.

Prohibition on Hedging or Speculating in Company Stock

Directors must adhere to strict standards with regards to trading in Paychex stock. Also, we prohibit directors from hedging Paychex stock. They may not, among other things:

 

 

speculatively trade in Paychex stock;

 

 

short sell any securities of the Company; or

 

 

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

 

Paychex, Inc. 2020 Proxy Statement  12


Table of Contents

 

 

 

 

 

 

 

 

  Beneficial Ownership  

 

 

 

 

 

Pledging of Company Stock

We maintain a pledging policy for all Paychex directors, officers, and employees. Prior to January 2020, a policy was in place that allowed pledging under certain circumstances, but not all. After January 2020, this policy was amended to prohibit new pledging of Company securities for any purpose. Our pledging policy is posted on our website at www.paychex.com/investors.

Subsequent Events

The COVID-19 pandemic began affecting our operations and employees, our clients’ businesses, and the markets we serve during the fourth quarter of fiscal 2020. In conjunction with other cost containment measures taken in response to the adverse impacts on our business, on July 8, 2020, our Board elected to temporarily take a 20% reduction in annual cash retainer fees, not including committee and chair retainers, from July 1, 2020 through December 31, 2020.

 

 

BENEFICIAL OWNERSHIP OF

PAYCHEX COMMON STOCK

 

 

The following table contains information, as of July 31, 2020, on the beneficial ownership of the Company’s common stock by:

 

 

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 NEOs; and

 

 

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

Under the rules of the Securities and Exchange Commission (“SEC”), “beneficial ownership” is deemed to include shares for which the individual, directly or indirectly, has or shares voting or disposition power, whether or not they are held for the individual’s benefit, and includes shares that may be acquired within 60 days by exercise of options. This information is based upon reports filed by such persons with the SEC.

 

Paychex, Inc. 2020 Proxy Statement  13


Table of Contents

 

  Beneficial Ownership  

 

 

 

 

 

 

 

 

           
Name   

Amount of

Shares Owned(1)

    

Non-vested

Shares
of Restricted

Stock(2)

    

Stock Options

Exercisable by

September 29,

2020(3)

     Total Shares
Beneficially
Owned
     Percent
of
Class
 

Principal Stockholders:

                                            

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

                

1 Fishers Road

                

Pittsford, NY 14534

     37,843,028   

 

 

  

 

 

  

 

37,843,028

  

 

10.4

BlackRock Inc.(9)

                

55 East 52nd Street

                

New York, NY 10055

     34,574,913   

 

 

  

 

 

  

 

34,574,913

  

 

9.5

Vanguard Group Inc.(10)

                

PO Box 2600 V26

                

Valley Forge, PA 19482-2600

     27,679,243   

 

 

  

 

 

  

 

27,679,243

  

 

7.6

Directors:

                                            

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

     37,843,028   

 

 

  

 

 

  

 

37,843,028

  

 

10.4

Thomas F. Bonadio

  

 

15,242

  

 

1,082

  

 

30,589

  

 

46,913

  

 

*

*

Joseph G. Doody(7)

     19,614   

 

1,082

  

 

36,405

  

 

57,101

  

 

*

*

David J.S. Flaschen(8)

     45,219   

 

1,082

  

 

70,900

  

 

117,201

  

 

*

*

Pamela A. Joseph

     6,737   

 

1,082

  

 

18,730

  

 

26,549

  

 

*

*

Martin Mucci

     371,710   

 

52,030

  

 

1,699,072

  

 

2,122,812

  

 

*

*

Joseph M. Tucci

     50,842   

 

1,082

  

 

97,420

  

 

149,344

  

 

*

*

Joseph M. Velli

     40,069   

 

1,082

  

 

97,420

  

 

138,571

  

 

*

*

Kara Wilson

     3,221   

 

1,082

  

 

26,185

  

 

30,488

  

 

*

*

Named Executive Officers:

                                            

Martin Mucci

     371,710   

 

52,030

  

 

1,699,072

  

 

2,122,812

  

 

*

*

Efrain Rivera

     95,302   

 

 

  

 

259,596

  

 

354,898

  

 

*

*

Mark A. Bottini

     76,756   

 

9,191

  

 

434,686

  

 

520,633

  

 

*

*

John B. Gibson

     23,313   

 

21,852

  

 

373,354

  

 

418,519

  

 

*

*

Michael E. Gioja

     81,739   

 

9,191

  

 

240,016

  

 

330,946

  

 

*

*

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

     38,776,446   

 

127,532

  

 

3,795,502

  

 

42,699,480

  

 

11.7

 

**

Indicates that percentage is less than 1%.

 

(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”).

 

(2)

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.

 

(3)

This column includes shares that may be acquired upon exercise of options, which are exercisable on or prior to September 29, 2020. Under SEC rules, shares that may be acquired within 60 days are included in beneficial ownership.

 

(4)

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 eight-member board of trustees. Mr. Golisano disclaims beneficial ownership of these shares, but does share voting and investment power.

 

(5)

Mr. Golisano has 7,671,875 shares pledged as security. Mr. Golisano’s pledge of these shares has been disclosed since 2007 and, as such, occurred well before the enactment of our new pledging policy in January 2020.

 

(6)

Included in shares beneficially owned are 56,108 shares held in the name of family members, trusts, or other entities of Mr. Golisano. Mr. Golisano shares voting and investment power of these shares.

 

(7)

Included in shares beneficially owned are 12,639 shares held in the name of a trust for which Mr. Doody is the trustee and beneficiary. Mr. Doody has sole voting and investment power of these shares.

 

(8)

Included in shares beneficially owned are 14,707 shares held in the name of family members, trusts, or other entities of Mr. Flaschen. Mr. Flaschen shares voting and investment power of these shares.

 

(9)

Beneficial ownership is based on information as of June 30, 2020, contained in the Form 13F filed with the SEC on August 14, 2020 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 30,907,925 shares and sole dispositive power as to 34,574,913 shares.

 

(10)

Beneficial ownership is based on information as of June 30, 2020, contained in the Form 13F filed with the SEC on August 14, 2020 by Vanguard Group Inc., including notice that it has sole dispositive power as to 26,049,639 shares, shared voting power as to 641,366 shares, and shared dispositive power as to 1,629,604 shares.

 

Paychex, Inc. 2020 Proxy Statement  14


Table of Contents

 

 

 

 

 

 

 

 

  Corporate Governance  

 

 

 

 

 

 

CORPORATE GOVERNANCE

 

 

The Board recognizes the fundamental principle that good corporate governance is critical to organizational success and the protection of stockholder value. As such, the Board has adopted a set of Corporate Governance Guidelines as a statement of principles guiding the Board’s conduct. These principles are intended to be interpreted in the context of all applicable laws and the Company’s Restated Certificate of Incorporation, By-Laws, as amended, and other governing documents. A copy of these guidelines can be found on our website at www.paychex.com/investors.

Board Leadership Structure

The Board’s current leadership structure is comprised of:

 

 

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.

The Board believes this structure provides a well-functioning and effective balance between strong Company leadership and appropriate safeguards and oversight by independent directors. The Board currently separates the role of Chairman of the Board from the CEO. We believe that the Company is best served by having a Chairman who has in-depth knowledge of the Company’s operations and the industry but is not involved in the day-to-day operations of the Company. Mr. Golisano’s extensive experience as our founder and former CEO qualifies him to lead the Board, particularly as it focuses on strategic risks and opportunities facing the Company.

Our Lead Independent Director has responsibility for conducting regularly scheduled executive sessions of the non-management or independent directors and such other responsibilities as the independent directors may assign. Regularly scheduled executive sessions of the members of the Board, without members of management present, are held at each regularly-scheduled Board meeting. As appropriate, matters presented to the Board by the G&C Committee are reviewed and discussed in executive session by the independent directors.

The Board and its standing committees that meet regularly conduct performance self-evaluations at least annually to assess the qualifications, attributes, skills, and experience represented on the Board and to determine whether the Board and its committees are functioning effectively. The Board has also determined that individual Board member assessments will be conducted annually.

Board Oversight of Risk

One of the most important functions of the Board is oversight of risks inherent in the operation of the Company’s business. Senior management is responsible for the day-to-day management of risks facing the Company. The Board implements its risk oversight function both as a whole and through delegation to Board committees. The Board is responsible for ensuring an appropriate culture of risk management exists within the Company, overseeing the Company’s aggregate risk profile, and monitoring how the Company addresses specific risks. The Board receives regular reports from officers on particular risks to the Company, reviews the Company’s strategic plan, and regularly communicates with its committees.

 

Paychex, Inc. 2020 Proxy Statement  15


Table of Contents

 

  Corporate Governance  

 

 

 

 

 

 

 

 

The Board committees, which meet regularly and report back to the full Board, play significant roles in carrying out the risk management function. In general, the committees oversee the following risks:

 

   
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

 

•  Risk related to the governance structure and processes including succession planning, director independence, and related person transactions.

 

   

 

Corporate Development Advisory Committee                

 

  

 

•  Risk related to the Company’s acquisition opportunities.

The Audit Committee receives quarterly updates from the Company’s Chief Information Security Officer regarding the Company’s cybersecurity risk management program. These updates include a status of current capabilities, ongoing initiatives, as well as the evolving cybersecurity threat landscape.

The G&C Committee regularly reviews the risks and rewards associated with our compensation programs. The programs are designed with features that mitigate risk without diminishing the incentive nature of the compensation. As part of its risk oversight, the G&C Committee conducts an annual assessment of risks arising from the Company’s compensation programs. The G&C Committee reviewed such programs with its independent compensation consultant. The G&C Committee’s assessment included identification of risk with the various forms of compensation, the inherent risk in performance-based compensation metrics, and existing risk mitigation controls. Risk mitigation includes, but is not limited to, the balance of fixed and variable compensation, the balance of short- and long-term compensation, stock ownership guidelines, level of oversight, and controls over financial reporting. Based on this review, the G&C Committee concluded that the Company’s compensation policies and procedures are not reasonably likely to have a material adverse effect on the Company.

Board Meetings and Committees

Our Corporate Governance Guidelines require that our Board meet at least four times per year. The Board held seven meetings in fiscal 2020. To the extent practicable, directors are expected to attend all Board meetings and meetings of the committees on which they serve. During fiscal 2020, the average attendance for the Board and committee meetings was approximately 97%. Each director attended at least 75% or more of the aggregate number of meetings of the Board and of the committees of the Board on which he or she served, where applicable, during fiscal 2020. Directors are expected to attend the Company’s Annual Meetings of Stockholders. All but one of our directors attended the 2019 Annual Meeting of Stockholders. All directors are independent within the meaning of applicable SEC and Nasdaq director independence standards, with the exception of Mr. Golisano and Mr. Mucci.

 

Paychex, Inc. 2020 Proxy Statement  16


Table of Contents

 

 

 

 

 

 

 

 

  Corporate Governance  

 

 

 

 

 

The Board has established five standing committees with the following responsibilities and director assignments:

 

 

Audit Committee

 

 

Committee Members:(1)

David J.S. Flaschen (Chair)(2)

Thomas F. Bonadio(2)

Joseph G. Doody

Kara Wilson

 

6 Meetings in fiscal 2020

  

 

•  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.

 

  

 

Executive Committee

 

 

Committee Members:

Martin Mucci (Chair)

B. Thomas Golisano

Joseph M. Tucci

Joseph M. Velli

 

0 Meetings in fiscal 2020

 

  

 

•  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.

  

 

Investment Committee

 

 

Committee Members:

Pamela A. Joseph (Chair)

David J.S. Flaschen

Joseph G. Doody

Joseph M. Velli

 

2 Meetings in fiscal 2020

 

  

 

•  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.

 

Paychex, Inc. 2020 Proxy Statement  17


Table of Contents

 

  Corporate Governance  

 

 

 

 

 

 

 

 

 

Governance and Compensation Committee

 

 

Committee Members:(3)

Joseph M. Tucci (Chair)

David J.S. Flaschen

Pamela A. Joseph

Joseph M. Velli

 

3 Meetings in fiscal 2020

  

 

•  Evaluate and determine compensation for the CEO and senior executive officers and recommend director compensation to the Board.

 

•  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 incentivize risks that are reasonably likely to have a material adverse effect on the Company.

 

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

 

•  Review annually the independence of directors.

 

 

 

Corporate Development Advisory Committee

 

 

Committee Members:

Joseph M. Velli (Chair)

Thomas F. Bonadio

David J.S. Flaschen

Pamela A. Joseph

Martin Mucci

Kara Wilson

 

2 Meetings in fiscal 2020

 

  

 

•  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.

 

(1)

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.

 

(2)

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

 

(3)

All members of the G&C Committee meet the Nasdaq independence criteria for compensation committee members and directors overseeing director nominations.

The Audit, Investment, G&C, and Corporate Development Advisory Committees’ responsibilities are more fully described in each committee’s charter adopted by the Board, which are accessible on the Company’s website at www.paychex.com/investors.

Nomination Process

The G&C Committee is responsible for recommending candidates to the full Board to either fill vacancies or stand for election at each annual meeting of stockholders. The committee follows the Board’s Nomination Policy, which is included in the G&C Committee Charter. 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 voluntarily adopted a Board and CEO diversity search policy to ensure the G&C committee considers the diversity of nominees in terms of the factors previously mentioned and other demographic factors. In July 2020, the Board amended the G&C Committee Charter and Nomination Policy to require that initial lists of independent director candidates to fill vacancies on the Board include racially/ethnically and gender diverse candidates and that any third-party search firm will be instructed to include such candidates in the initial lists they prepare.

 

Paychex, Inc. 2020 Proxy Statement  18


Table of Contents

 

 

 

 

 

 

 

 

  Corporate Governance  

 

 

 

 

 

In evaluating candidates for nomination to the Board, including candidates for nomination recommended by a stockholder, the Nomination Policy requires G&C Committee members to consider the contribution that a candidate for nomination would be expected to make to the Board and the Company. This is 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. When identifying candidates for nomination to fill vacancies created by the expiration of the term of any incumbent director, the Nomination Policy requires G&C 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 previously used a third-party search firm to identify director candidates and the G&C Committee is authorized by its charter to continue this practice.

The Nomination Policy requires the G&C Committee to consider candidates for nomination to the Board recommended by any reasonable source, including stockholders. Stockholders who wish to nominate candidates for director must comply with the procedures set forth in the By-Laws, including sending timely notice in writing to the Secretary of the Company that includes the information and disclosure required by the By-Laws. For more information, please see the subheading entitled “How do I submit a proposal for next year’s Annual Meeting?” in the Frequently Asked Questions section beginning on page 70.

Corporate Social Responsibility

Paychex is committed to good corporate citizenship, which is reflected in our company culture and guided by our Paychex values of integrity, service, innovation, partnership, accountability, and respect. Our Board is focused on the long-term sustainability of our business and in July 2020, the G&C Committee added oversight of the Company’s Corporate Social Responsibility (“CSR”) policies and programs to its charter. Our CSR efforts are focused on the following pillars:

 

       
Employees   Community   Environment   Ethics

Empowering employees through well-being, inclusion and diversity.

 

 

Making a positive impact in
our community.

 

 

Being good stewards
of the earth in everything
we do.

 

 

Doing business the right
way – for ourselves and our customers.

 

•  Total well-being of employees (physical, emotional, and financial health)

 

•  Training and development

 

•  Inclusion and diversity

 

•  Corporate giving

 

•  Employee grass-roots fundraising

 

•  Volunteerism

 

•  Improving energy efficiency

 

•  Reducing greenhouse gas emissions and carbon footprint

 

•  Recycling and eliminating waste

 

 

•  Good corporate governance practices

 

•  Cybersecurity

 

•  Physical Security

 

•  Code of Ethics

 

•  Vendor Code of Conduct

 

To learn more about our CSR efforts, including additional data and progress toward our goals, please see our CSR report at www.paychex.com/corporate/corporate-responsibility. The inclusion of any website address in this proxy statement does not incorporate by reference the information on or accessible through the website into this proxy statement.

Policy on Transactions with Related Persons

Related persons include our executive officers, directors, director nominees, and holders of more than 5% of the Company’s common stock, as well as their immediate family members. It is generally the Company’s practice 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-person 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 at www.paychex.com/investors.

 

Paychex, Inc. 2020 Proxy Statement  19


Table of Contents

 

  Corporate Governance  

 

 

 

 

 

 

 

 

Officers are required to disclose any potential conflicts of interest or related person transactions, which include: certain financial interests in or relationships with any supplier, customer, partner, subcontractor, or competitor; 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. Annually, officers and directors complete a Director’s and Officer’s Questionnaire, within which they provide information regarding whether they or any member of their immediate family had any interest in any actual or proposed transaction with the Company or any of its subsidiaries where the amount involved exceeded $120,000. The individuals are also asked about any other economic relationships that might be conflicts of interest. The responses are reviewed by our Financial Reporting and Legal Departments to determine if a conflict of interest exists related to any such transaction. 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 Chair of the G&C Committee any situation that involves, or may reasonably be expected to involve, a conflict of interest with the Company. This includes 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 Financial Reporting department annually reviews the Company’s listing of related persons for determination of potential related-person transactions that should be disclosed in the Company’s periodic reports to the SEC or under U.S. generally accepted accounting principles (“GAAP”) and SEC rules or proxy materials under SEC rules. The G&C 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. The factors considered by the G&C Committee in their review include: the business objective of the transaction; the individual’s involvement in the transaction; whether the transaction would impact the judgment of the officer or director to act in the best interest of the Company; and any other matters the G&C Committee deems appropriate. For fiscal 2020, no instances of conflict or non-compliance have occurred, and the Company did not identify any transactions with related persons in excess of $120,000. Should a conflict of interest be identified, relevant information and circumstances would be reviewed to determine if action is required relative to continuing the arrangement.

Governance and Compensation Committee Interlocks and Insider Participation

None of the members of the G&C Committee were at any time during fiscal 2020, or at any other time, an officer or employee of the Company. During fiscal 2020, none of the Company’s executive officers served on the board of directors or compensation committee of any other entity that had an executive officer that serves on the Company’s Board or G&C Committee.

No G&C Committee “interlocks,” generally means that no executive officer of our Company:

 

 

served as a member of the compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) of another entity which had an executive officer serving as a member of our G&C Committee;

 

 

served as a director of another entity which had an executive officer serving as a member of our G&C Committee; or

 

 

served as a member of the compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) of another entity which had an executive officer serving as a director of our Company.

 

Paychex, Inc. 2020 Proxy Statement  20


Table of Contents

 

 

 

 

 

 

 

 

  Corporate Governance  

 

 

 

 

 

Communications with the Board of Directors

The Board has established procedures to enable stockholders and other interested parties to communicate in writing with the Board, including the chair of any standing committee of the Board. Written communications should be clearly marked and mailed to:

Stockholder and Other Interested Parties — Board Communication

Paychex, Inc.

911 Panorama Trail South

Rochester, New York 14625-2396

Attention: Corporate Secretary

In the case of communications intended for committee chairs, 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.

 

 

CODE OF BUSINESS ETHICS AND CONDUCT

 

 

The Company has a Code of Business Ethics and Conduct that applies to all of its directors, officers, and employees. The Company requires all of its directors, officers, and employees to adhere to this code in addressing legal and ethical issues that they encounter in the course of doing their work. This code requires our directors, officers, and employees to avoid conflicts of interest, comply with all laws and regulations, conduct business in an honest and ethical manner, and otherwise act with integrity and in the Company’s best interest. All newly hired employees are required to certify that they have reviewed and understand this code. In addition, each year all employees are reminded of and asked to affirmatively acknowledge their obligation to follow the code. The Code of Business Ethics and Conduct is available for review on the Company’s website at www.paychex.com/investors. 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 Regulation S-K by posting such information on its website at the address specified above.

 

Paychex, Inc. 2020 Proxy Statement  21


Table of Contents

 

  Say-on-Pay Vote  

 

 

 

 

 

 

 

 

 

PROPOSAL 2:

 

ADVISORY VOTE TO APPROVE NAMED

EXECUTIVE OFFICER COMPENSATION

 

 

 

What am I voting on?

 

Voting Recommendation

 
Stockholders are being asked to approve, on an advisory basis, the compensation of our NEOs as described in the Compensation Discussion and Analysis (“CD&A”) and the Named Executive Officer Compensation sections of this proxy statement. At the 2019 Annual Meeting of Stockholders, approximately 95% of the total stockholder votes cast were in favor of the Company’s NEO compensation as presented in our 2019 proxy statement.  

The Board of Directors recommends a vote FOR the advisory vote approving the NEO compensation, as disclosed in this proxy statement.

We are asking our stockholders to provide advisory approval of the compensation of our NEOs as required by Section 14A of the Exchange Act. This proposal, commonly known as a “say-on-pay” proposal, gives our stockholders an opportunity to express their views on the overall compensation of our NEOs and the philosophy, policies, and practices as described in this proxy statement. Our stockholders are currently given the opportunity to vote, on a non-binding, advisory basis, on say-on-pay proposals annually, with the next opportunity to vote on such a proposal being the 2021 Annual Meeting of Stockholders. Before you vote, we encourage you to read the CD&A and Named Executive Officer Compensation sections of this proxy statement, which provide detailed information on the Company’s compensation policies and practices, and overall compensation of our NEOs.

Compensation Programs Highlights

Our executive compensation programs are designed to attract, motivate, and retain highly qualified NEOs, who are critical to our success. We strongly believe that our executive compensation — both pay opportunities and pay actually realized — should be tied to Company performance. Under our compensation programs, the NEOs are rewarded for the achievement of specific annual and longer-term strategic and financial goals of the Company. Some key aspects of our compensation programs that you should consider are:

 

 

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 combination of options, time-based restricted stock awards, and performance-based awards.

In addition, we have responsible compensation practices that ensure consistent leadership and decision-making, certain of which are intended to mitigate risk. These include:

 

 

Stock ownership guidelines designed to align the directors’ and executives’ long-term financial interests with those of our stockholders.

 

Paychex, Inc. 2020 Proxy Statement  22


Table of Contents

 

 

 

 

 

 

 

 

  Say-on-Pay Vote  

 

 

 

 

 

 

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

 

 

Prohibition of pledging Company stock as collateral.

 

 

A long-standing insider trading policy.

 

 

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, vested performance shares, or profits from exercises of options.

Results of the 2019 Say-on-Pay Vote

At the 2019 Annual Meeting of Stockholders held on October 17, 2019, approximately 95% of the total stockholder votes cast were in favor of the Company’s NEO compensation as presented in our 2019 proxy statement. The G&C Committee considered this favorable outcome and believed it conveyed our stockholders’ support of the committee’s decisions and the existing executive compensation programs. As we evaluated our compensation practices and talent needs throughout fiscal 2020, we remained mindful of the strong support for our compensation policies and practices communicated by our stockholders at the last annual meeting. As a result, the G&C Committee retained the core design of our executive compensation programs as it believes the program continues to attract, retain, and provide appropriate incentive for senior management.

Advisory Vote

The G&C Committee, along with the Board, believe that the policies, procedures, and amounts of compensation discussed here, and described further in this proxy statement, are effective in achieving the desired goals of aligning our executive compensation structure with the interests of our stockholders. To indicate approval of our NEO compensation, a majority of the shares entitled to vote on the proposal must be voted for the proposal in presence or by proxy at the Annual Meeting.

This say-on-pay vote is advisory and therefore is not binding on the Company, the G&C Committee, or our Board. Our Board values the opinions of our stockholders and, to the extent that there is any significant vote against the NEO compensation as disclosed in this proxy statement, we will consider our stockholders’ concerns and the G&C Committee will evaluate whether actions are necessary to address these concerns.

 

 

The Board recommends a vote FOR the proposal to approve the NEO compensation on an advisory basis, as
disclosed in this proxy statement.

 

 

Paychex, Inc. 2020 Proxy Statement  23


Table of Contents

 

  CD&A  

 

 

 

 

 

 

 

 

 

COMPENSATION DISCUSSION AND ANALYSIS

 

 

The CD&A provides you with a description of our executive compensation policies and programs, the decisions made by the G&C Committee regarding executive compensation, and the factors contributing to those decisions. This discussion focuses on the compensation of our NEOs for fiscal 2020, who were:

 

   

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

Executive Summary

Business and Financial Highlights

Our mission is to be the leading provider of human resource (“HR”), payroll, benefits, and insurance solutions by being an essential partner to small and medium-sized businesses across the U.S. and parts of Europe. We believe that success in this mission will lead to strong, long-term financial performance.

Our executive compensation is tied to financial and operational performance and is intended to drive sustained, long-term increases in stockholder value. Fiscal 2020 was on track to be a solid year, reflecting growth across our business. As we began our fiscal fourth quarter, COVID-19 caused worldwide business shutdowns directly affecting small and medium-sized businesses, which impacted our business sales and financial performance. Since the end of April, we have seen sequential improvement in our key business metrics across our lines of business. Reported financial results for fiscal 2020 and the respective growth percentages compared to fiscal 2019 were as follows:

 

     
     

For the fiscal year ended May 31,

        
   

$ in millions, except per share amounts

  

  2020  

    

  2019  

    

% Change(3)

 
       

Management Solutions

  

$

2,963

 

  

$

2,878

 

  

 

3

       

PEO and Insurance Solutions(1)

  

 

991

 

  

 

814

 

  

 

22

       

Total service revenue

  

 

3,954

 

  

 

3,692

 

  

 

7

       

Interest on funds held for clients

  

 

87

 

  

 

81

 

  

 

8

       

Total revenue

  

$

4,041

 

  

$

3,773

 

  

 

7

       

Operating income

  

$

1,461

 

  

$

1,371

 

  

 

7

       

Operating income, net of certain items(2)

  

$

1,374

 

  

$

1,290

 

  

 

7

       

Net income

  

$

1,098

 

  

$

1,034

 

  

 

6

       

Adjusted net income(2)

  

$

1,083

 

  

$

1,028

 

  

 

5

       

Diluted earnings per share

  

$

3.04

 

  

$

2.86

 

  

 

6

       

Adjusted diluted earnings per share(2)

  

$

3.00

 

  

$

2.84

 

  

 

6

       

Earnings before interest, taxes, depreciation and amortization (“EBITDA”)(2)

  

$

1,673

 

  

$

1,554

 

  

 

8

       

Operating cash flows

  

$

1,441

 

  

$

1,272

 

  

 

13

 

Paychex, Inc. 2020 Proxy Statement  24


Table of Contents

 

 

 

 

 

 

 

 

  CD&A  

 

 

 

 

 

(1)

Professional employer organization (“PEO”) and Insurance Solutions revenue for fiscal 2019 includes the results of Oasis Outsourcing Group Holdings, L.P. (“Oasis”) since its acquisition in December 2018.

 

(2)

Operating income, net of certain items, adjusted net income, adjusted diluted earnings per share, and EBITDA are not U.S. GAAP measures. Please refer to “Paychex, Inc. Non-GAAP Financial Measures” in Appendix B 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.

 

(3)

Percentage changes are calculated based on unrounded numbers.

Fiscal 2020 Actions Related to Long-Term Strategy: The table below discusses fiscal 2020 performance as it relates to the key areas of focus that comprise the Company’s long-term strategy.

 

   

Strategy Focus

  

Fiscal 2020 Summary of Accomplishments

   
Providing Industry-leading Integrated Technology   

We continue to invest significantly in our award-winning Paychex Flex® platform and mobility applications to increase efficiency and functionality for our clients and their employees. In fiscal 2020, we introduced the following new offerings and enhancements to Paychex Flex:

 

•  Paychex Integrations, which enables users to connect Paychex Flex with some of the world’s leading HR, accounting, point-of-sale, and productivity applications on the market;

 

•  Smartwatch Solution, which enables users to track time worked via their smartwatch;

 

•  Pay-on-Demand, which provides participating client employees the option to request access to a portion of earned pay before the scheduled pay date;

 

•  Real-Time Payments, which provides employers an efficient way to instantly pay their employees for time worked;

 

•  Help Center, which provides users access to training resources and how-to tutorials in written, video, and tour-like deliverables;

 

•  Enhancements to Flex Assistant, that provides a user with an in-app learning journey that aligns with their preferences as a verbal, visual, or physical learner and offers written how-to documents, tutorial-style video vignettes, or a guided interactive tour from in-app step-by-step messaging;

 

•  Document Management was enhanced to add electronic signature capabilities and the ability for customers to run on-demand reports that show the entire process, from initial log-in through signature event;

 

•  HR Conversations, a new tool that enables managers, employees, and HR staff to collaborate and capture day-to-day interactions; and

 

•  Other enhancements including, grid entry view capabilities and the ability for employees and administrative users to create a custom dashboard.

 

Paychex, Inc. 2020 Proxy Statement  25


Table of Contents

 

  CD&A  

 

 

 

 

 

 

 

 

   

Strategy Focus

  

Fiscal 2020 Summary of Accomplishments

   
Increasing Client Satisfaction   

Our flexible service model and technology-enabled service allows us to provide a personalized service experience for our clients and their employees.

 

During fiscal 2020, we continued to invest in artificial intelligence and machine learning and self-service capabilities to allow clients and their employees easy, intuitive, and flexible service how, when, and where they want it. Within Paychex Flex there is embedded technology to assist clients. The Paychex Flex Intelligence Engine includes the Flex Assistant, a client service chatbot that can answer over 200 commonly asked questions. During fiscal 2020, we continued to expand the questions answered by Flex Assistant. We also introduced enhancements to our Flex Intelligence Engine that allow clients to elect their preference for learning – via written how-to-documents, tutorial-style video vignettes, or a guided interactive tour. At any time, a live Paychex agent is just a click away, with the entire chat conversation available real-time to provide a better, more personalized service experience.

 

The platform embeds self-service capabilities that empower client employees to manage their HR and benefits information from any location, on any device. These self-service capabilities allow for greater access and convenience for client employees and greater productivity for clients.

 

During the fourth quarter of fiscal 2020, the economic impacts of COVID-19 and resulting legislation had a significant impact on small businesses. Throughout this challenging time, we provided information, webinars, and tools to help businesses navigate this environment. We issued a comprehensive Paycheck Protection Program payroll report to help small businesses apply for loans under the Coronavirus Aid, Relief, and Economic Security Act. Our HR professionals were proactive in helping clients. Our customer support interactions increased significantly. Through this, our client satisfaction and net promotor scores continued to increase. We ended fiscal 2020 with record levels of client retention exceeding 83% of the client base as of the beginning of the fiscal year.

   
Expanding our Leadership of HR   

We have a comprehensive suite of value-added HR Solutions for our clients and their employees. During fiscal 2020, we continued to expand our offerings with tools such as Document Management and HR Conversations that have allowed clients easier management of a remote workforce. Greater than half of our revenues are from HR and benefits solutions beyond payroll. We are currently the second largest provider of PEO services in the nation.

 

During COVID-19, our HR and compliance expertise was essential to helping our clients. Our 600+ HR professionals provided HR best practices and recommendations to our clients as they navigated challenging business conditions. In addition, our 200 compliance professionals were in real-time contact with tax agencies and regulators to understand newly enacted laws and regulations, and advocated for our clients’ interests.

   
Growing our Client
Base
  

We believe there is significant potential to grow within our current target markets. We have invested significantly in new demand generation and sales tools and expanding certain areas of our sales force. We continue to focus on sales productivity with the intent of expanding our market share across all our product lines.

 

During fiscal 2020, prior to COVID-19, we were showing solid results in both sales and client retention. While COVID-19 did impact sales in the fourth quarter, we still had year-to-date double-digit growth in the mid-market and SurePayroll areas. Through strong retention, our client base has grown from approximately 670,000 clients to greater than 680,000 clients during fiscal 2020.

   
Engaging in Strategic Acquisitions    In the past, we utilized acquisitions as a means to expand our portfolio, enter new markets or increase our scale. We continue to evaluate and monitor potential acquisitions and will utilize this when the acquisitions are in alignment with our overall strategy. During fiscal 2020, we progressed with the integration of the Oasis acquisition into our business. By the end of fiscal 2020, leadership, sales, and service teams were in place and fully staffed.

 

Paychex, Inc. 2020 Proxy Statement  26


Table of Contents

 

 

 

 

 

 

 

 

  CD&A  

 

 

 

 

 

Return to Stockholders: The value we return to our stockholders is very important to us. During fiscal 2020, we returned over $1 billion to our stockholders through dividends and repurchases of outstanding shares of our common stock.

 

       LOGO
   
   
   
   
   
   
   
   
   
   
 

 

The Company

has returned over

$4 billion to stockholders

over the past 5 years.

 

 
     LOGO
 
 
 
 
 
 
   
   
   
   
   
   
   
   
   
   
   

 

Dividend Payments: We continue to pay substantial dividends to our stockholders. The increase in the quarterly dividend to stockholders in the last three fiscal years was as follows:

 

       
    

Increase in    

Quarterly    

Dividend    

 

Quarterly    

Dividend    

Amount    

  % Change    

May 2019

 

$0.06    

 

$0.62    

 

11%      

April 2018

 

$0.06    

 

$0.56    

 

12%      

July 2017

 

$0.04    

 

$0.50    

 

  9%      

Share Repurchases: The Board has authorized the repurchase of common stock as follows:

 

  $350 million authorized in July 2016, which expired on May 31, 2019; and

 

  $400 million authorized in May 2019, which will expire on May 31, 2022.

Shares repurchased over the past three fiscal years were as follows:

 

     

(In millions)

 

  

Shares    

Repurchased    

 

 

Amount    

 

Fiscal 2020    2.0             $171.9      
Fiscal 2019    0.7             $  56.9      
Fiscal 2018    2.5             $143.1      
 

 

Paychex, Inc. 2020 Proxy Statement  27


Table of Contents

 

  CD&A  

 

 

 

 

 

 

 

 

The following graph shows how a $100 investment in our common stock on May 31, 2015 would have grown to $172 as of May 31, 2020, with dividends reinvested quarterly. The chart also compares the total stockholder return on our common stock to the same investment in the S&P 500 Index over the same period, with dividends reinvested quarterly. For us, this represents a cumulative return of 72%, or approximately 11% on an annualized basis.

 

 

LOGO

For more information about our fiscal 2020 business results, see the section of our fiscal 2020 Annual Report on Form 10-K (“Form 10-K”) titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

How Pay is Tied to Company Performance

Our executive compensation programs are designed to ensure that the interests of our senior leaders are appropriately aligned with those of its stockholders by rewarding performance that meets established business and individual goals. Key features of the program that tie to Company performance are:

 

 

A significant portion of our NEOs annual compensation is “at risk” based on performance. For fiscal 2020, variable pay represented 89% of total target compensation for our CEO, and 77% 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 generally 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 new business revenue and service revenue (our measures 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 B for a discussion of this measure and a reconciliation to the most comparable 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.

 

Paychex, Inc. 2020 Proxy Statement  28


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  CD&A  

 

 

 

 

 

 

In July 2016, the G&C Committee implemented 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 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.

The pay mix at target for our CEO and the average for other NEOs for fiscal 2020 is displayed below.

 

 

LOGO

The following illustrates the trend in Company performance, based on two of our key financial metrics utilized in performance-based compensation plans, and the total reported compensation of our CEO (excluding the LTIP awards) over the last three years.

 

 

LOGO

 

(1)

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 most comparable GAAP measure of operating income in Appendix B.

 

(2)

CEO total compensation as reflected in this chart is equal to the amounts reported in the Fiscal 2020 Summary Compensation Table included in the Named Executive Officer section of this and prior years’ proxy statements.

Amounts realized in fiscal 2020 related to performance-based compensation programs for fiscal 2020 and prior years included the following:

 

 

Payouts under the annual incentive program for fiscal 2020 were earned at 51% of target for the CEO and an average of 48% of target for the SVPs. Achievement was measured against financial targets established at the beginning of fiscal 2020.

 

Paychex, Inc. 2020 Proxy Statement  29


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  CD&A  

 

 

 

 

 

 

 

 

 

The two-year performance period for the annual grants of performance shares granted in July 2018 ended on May 31, 2020. The financial targets were set at the beginning of this two-year period. Achievement against these targets resulted in restricted shares earned at 117% of target.

 

 

The three-year performance period for Mr. Rivera’s special performance share award granted in September 2017 ended on May 31, 2020. The performance condition specified in the award was achieved and the shares vested in full in July 2020.

 

 

The four-year performance period for the LTIP performance-based restricted stock awards and non-qualified performance-based stock options granted in July 2016 ended on May 31, 2020. The financial targets were set at the beginning of this four-year period. Achievement against these targets resulted in performance-based restricted stock awards and non-qualified performance-based stock options earned at 115% of target. Board discretion was exercised in determining the achievement pursuant to terms of the 2002 Plan to account for the uncontrollable impacts of COVID-19 on the business during the fiscal fourth quarter. This discretion utilized an approach to exclude the period of COVID-19 and pro rate the payment. See further discussion under the discussion of “Elements of Compensation”, sub-section “Equity-Based Compensation”.

Refer to the section entitled “Elements of Compensation” and the subsections of “Annual Incentive Program” and “Equity-Based Compensation” within this CD&A for a more detailed discussion of variable compensation, performance targets established, and actual results against those targets.

A significant portion of reported compensation is an incentive for future performance and realizable only if the Company meets or exceeds the applicable performance measures or is based on the Company’s stock price performance. Long-term equity-based incentives make up the largest component of pay for the NEOs. For the CEO, Mr. Mucci, this accounts for 72% of his target compensation for fiscal 2020. The main difference between reported compensation in the Fiscal 2020 Summary Compensation Table and compensation realized is in the value of equity awards. In reported compensation, equity awards are included in the year granted at grant-date fair value. The amount that can be realized upon exercise of stock options or vesting of restricted stock awards can differ significantly from the amounts initially reported in the year of grant.

 

Paychex, Inc. 2020 Proxy Statement  30


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  CD&A  

 

 

 

 

 

The following table illustrates how the equity awards granted to Mr. Mucci in the last three fiscal years were tracking as of May 31, 2020. Values below reflect the impact to the stock price resulting from market volatility associated with COVID-19.

 

           
        Intrinsic Value as of May 31, 2020(3) Increase in
Realized and
Unrealized
Value Since
Grant Date
Fiscal
Year
Award Type Value
Reported at
Grant Date(1)
Value
Realized
Through
May 31,
2020(2)
Vested
Shares
Unvested
Shares(4)
Total Intrinsic
Value Not Yet
Realized

2018  

Stock Options

$

1,372,685

$

$

2,150,540

$

1,075,270

$

3,225,809

 

135

%

Restricted Stock

$

940,453

$

854,819

$

$

395,878

$

395,878

 

33

%

Performance Shares

$

2,353,659

$

$

$

3,128,543

$

3,128,543

 

33

%

2019  

Stock Options

$

1,582,257

$

$

163,663

$

327,320

$

490,983

 

-69

%

Restricted Stock

$

1,046,229

$

427,930

$

$

724,968

$

724,968

 

10

%

Performance Shares

$

2,618,791

$

$

$

3,398,264

$

3,398,264

 

30

%

2020  

Stock Options

$

1,891,759

$

$

$

$

 

-100

%

Restricted Stock

$

1,249,853

$

$

$

1,057,095

$

1,057,095

 

-15

%

Performance Shares

$

3,148,087

$

$

$

1,694,084

$

1,694,084

 

-46

%

 

(1)

The value reported at grant date represents the amounts reported in the Fiscal 2020 Summary Compensation Table for the respective fiscal year. These values were reported at grant-date fair value of the award.

 

(2)

The value realized through May 31, 2020 represents the value realized on stock option exercises or vesting of restricted stock and performance shares. Mr. Mucci has not exercised any stock options granted in fiscal 2018, fiscal 2019, and fiscal 2020. The value reflected for restricted stock is the stock price on the date shares vested multiplied by the number of shares that vested during the period between date of grant and May 31, 2020.

 

(3)

Intrinsic value not yet realized for stock options is based on the closing stock price of $72.28 per share as of May 31, 2020 less the exercise price for the respective grants. When the option exercise price is greater than the stock closing price, no value is reported. Intrinsic value for restricted stock and performance shares is based on the closing stock price of $72.28 per share as of May 31, 2020 multiplied by the number of shares not yet vested.

 

(4)

The intrinsic value of unvested shares remains at risk as these awards are currently not exercisable.

 

Paychex, Inc. 2020 Proxy Statement  31


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  CD&A  

 

 

 

 

 

 

 

 

Highlights of Executive Compensation Practices

The Board maintains governance standards and oversight of our executive compensation policies and practices. The following governance practices were in place during fiscal 2020, and these practices, among other elements of our compensation programs, aid in mitigating risk associated with our compensation programs.

 

 

WHAT WE DO

 

 

 

WHAT WE DON’T DO

 

 

  Pay for performance. A significant portion of executive pay is not guaranteed, but rather tied to key financial metrics that are disclosed to our stockholders.

 

 

×   No employment agreements. We do not have employment contracts for our NEOs. Employment of all of our executive officers is “at will.”

 

  Mitigate undue risk in compensation programs. The executive compensation program includes features that reduce the possibility of the NEOs, either individually or as a group, making excessively risky business decisions that could maximize short-term results at the expense of longer-term value.

 

 

×   No significant perquisites. The benefits our NEOs receive in the form of health insurance, life insurance, and Company matching contributions to the 401(k) Plan are the same benefits generally available to all of our employees.

  Balance of short-term and long-term incentives. Our incentive programs are designed to provide an appropriate balance of annual and longer-term incentives.

 

 

×   No hedging, pledging, or short sales transactions permitted. Our executive officers, including NEOs, and directors are prohibited from engaging in any hedging, pledging, or other similar types of transactions with respect to the Company’s common stock.

 

 

  Capped award payouts. Amounts or shares that can be earned under the annual incentive program, as well as under the longer-term performance share and LTIP performance-based stock option and restricted stock awards, are capped.

 

 

×   No dividends or dividend equivalents on unearned performance-based awards. Performance share awards and LTIP performance-based restricted stock awards do not earn or pay dividends until the shares are earned.

 

  Stock ownership guidelines. There are restrictions on sales of vested awards until a NEO has attained ownership of the Company’s stock as follows: CEO — six times base salary; SVPs — three times base salary; and Vice Presidents (“VPs”) — two times base salary.

 

 

 

  Include double-trigger change in control provisions. Our Change in Control Plan for officers is a “double-trigger” arrangement, requiring change in control and a subsequent termination of employment.

 

 

 

  Include recoupment, non-compete, and other forfeiture provisions in our annual incentive program and equity-based compensation agreements. Our annual incentive program and equity-based compensation agreements contain certain recoupment, non-compete, and other forfeiture provisions that will allow the Company to cancel all or any outstanding portion of equity awards and recover the payouts under the annual incentive program, gross value of any vested restricted shares, vested performance shares, or profits from exercises of options.

 

 

 

  Utilize an independent compensation consulting firm. The G&C Committee benefits from its utilization of an independent compensation consulting firm, which provides no other services to the Company.

 

 

 

Paychex, Inc. 2020 Proxy Statement  32


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Refer to the remainder of this CD&A for a detailed discussion of the overall compensation philosophy, practice, and analysis of elements of the compensation awarded to our NEOs as provided in the Fiscal 2020 Summary Compensation Table, included in the Named Executive Officer Compensation section of this proxy statement.

Elements of Compensation

We use a combination of compensation elements, including base salary, annual incentive program, and equity awards delivered under our 2002 Plan. Each element and the related compensation decisions and results for fiscal 2020 are discussed below.

Summary of Fiscal 2020 Elements of Compensation

 

                     

Compensation

Elements

       Salary          

Annual   

Incentive   

Program   

     

Stock   

Options   

     

Restricted   

Stock   

Awards   

     

Performance     

Shares(1)     

        

 

Fixed    

 

     

 

Variable, At-Risk    

 

        

 

 Recipients

 

      

 

All NEOs    

 

    

 

 When Granted

      

 

Reviewed    

annually    

 

     

 

Annually    

        

 

 Form of Delivery

      

 

Cash    

 

     

 

Equity    

 

      

 

 Type of

 Performance

 

      

 

Short-Term    

 

     

 

Long-Term    

 

      
 Performance Period        Ongoing           1 year          

Vest ratably  

over 3 years  

     

 

2-year    

performance    

period    

followed by 1-    

year service    

period(2)    

 

                    

 How Payout is

 Determined

      

G&C    

Committee    

judgment    

     

 

Quantitative  

based on  

achievement  

against  

targets;  

small portion  

qualitative  

 

     

Based on stock price on    

exercise/vest date    

     

Quantitative based    

on    

achievement against    

targets    

              

 Performance

 Metrics

       N/A      

 

Service  

revenue;  

operating  

income, net  

of certain  

items(3); and  

annualized  

new business  

revenue  

 

      N/A          

Service    

revenue; and    

operating    

income, net    

of certain    

items(3)    

 

(1)

The details for performance shares reflect the terms of the annual performance share awards.

 

(2)

Mr. Rivera received an award in fiscal 2019 that will vest immediately following the two-year performance period.

 

(3)

Operating income, net of certain items, is a non-GAAP measure. Refer to Appendix B for a discussion of this measure and a reconciliation to the most comparable U.S. GAAP measure of operating income.

 

Paychex, Inc. 2020 Proxy Statement  33


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Fiscal 2020 Compensation Results

Base Salary

We pay base salary to attract talented executives and to provide a fixed base of cash compensation. Base salaries are reviewed annually. Our practice is to make targeted base salary increases as determined necessary based on performance, market information, and scope of responsibilities. For fiscal 2020, all NEO’s received a base salary increase based on these factors, bringing them closer to the median of our Peer Group.

Annual Incentive Program

The annual incentive program was established to motivate NEOs to meet the financial goals set by the Company as presented to its stockholders, while maintaining alignment with stockholders’ interests. Upon achievement of the minimum eligible performance, payouts under our annual incentive program are determined based upon the satisfaction of certain quantitative and qualitative components.

The quantitative component consists of certain predetermined performance targets, which are established at the beginning of each fiscal year and are typically based on the Board-approved fiscal year financial plan. The targets for payout are established by the G&C Committee with consultation of management. The performance targets established are intended to provide a balance between growing revenue and managing expenses. Once a target is determined, it is set for the year and is normally not changed. For extraordinary circumstances, the G&C Committee reserves the right to apply discretion and make changes.

The qualitative component of the annual incentive program consists of individual-specific qualitative goals established at the beginning of the fiscal year based on functions and responsibilities unique to the individual. The CEO can potentially receive up to 20% of base salary and all other NEOs can potentially receive up to 10% of base salary. The assessment of these goals is subjective and is not always based on quantifiable financial measurements. The G&C Committee may determine, at its sole discretion, whether satisfactory achievement has occurred, regardless of achievement against the pre-established individual goals. At its discretion for fiscal 2020, the G&C Committee individually evaluated each NEO and determined the specific percentage of the qualitative portion to award each NEO as presented on the following page.

The weight given each quantitative performance target is determined by the G&C Committee when the targets are established, and this weight varies for each NEO based on the individual’s position. Each of the performance targets applicable to a NEO’s annual incentive program provide the NEO an opportunity to earn a percentage of their annualized base salary based on achievement at threshold, target, and maximum. The total percentage of base salary for all performance measures that the NEOs have the opportunity to earn are as follows:

 

     
      Quantitative Component  

Qualitative        

Component        

Position   

 

Threshold        

 

 

Target        

 

 

Maximum        

CEO

  

55.0%        

 

130.0%        

 

205.0%        

 

20.0%        

SVP-Sales

  

47.5%        

 

105.0%        

 

162.5%        

 

10.0%        

SVP-Other

  

40.0%        

 

  90.0%        

 

140.0%        

 

10.0%        

Thresholds are set as the floor with any achievement below threshold resulting in no payout for the respective performance metric. Maximums are set as a ceiling on the amount of payout a NEO can receive for each performance metric. For fiscal 2020, some of the quantitative component percentages of base pay for the CEO and SVPs were changed to better align with our strategic goals. For the CEO, the component percentages of base pay at threshold, target, and maximum increased from 50.0%, 120.0%, and 190.0% to 55.0%, 130.0%, and 205.0%, respectively. For the SVP-Sales, the component percentages of base pay at threshold, target and maximum increased from 45.0%, 100.0%, and 155.0% to 47.5%, 105.0%, and 162.5%, respectively. These changes were based on benchmarking analysis against our Peer Group and made to better align internal pay equity and adjust the compensation to market.

 

Paychex, Inc. 2020 Proxy Statement  34


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The performance metrics for the fiscal 2020 annual incentive program for the NEOs were established as follows:

 

       
    

Fiscal 2020 Year-over-Year

Growth Rates

  % of Plan Dollars     
   
Bonus Objectives(1)   Threshold       Target       Maximum       Threshold       Target       Maximum      

Achievement    

as a % of    

Target    

Service revenue

   

 

6.1

%    

   

 

10.5

%    

   

 

12.7

%    

   

 

96.0

%    

   

 

100.0

%    

   

 

102.0

%    

   

 

96.9

%    

Operating income, net of certain items(2)

   

 

4.5

%    

   

 

8.9

%    

   

 

11.1

%    

   

 

96.0

%    

   

 

100.0

%    

   

 

102.0

%    

   

 

97.7

%    

Annualized new business revenue(3)

   

 

2.2

%    

   

 

8.8

%    

   

 

11.8

%    

   

 

94.0

%    

   

 

100.0

%    

   

 

102.8

%    

     


            


(4)

 

 

(1)

The annual incentive program allows for certain adjustments to metrics as reported in our consolidated financial statements. The acquisition component of service revenue is included up to a maximum of 2% of service revenue at target.

 

(2)

Operating income, net of certain items, is a non-GAAP measure. Refer to Appendix B for a discussion of this measure and a reconciliation to the most comparable U.S. GAAP measure of operating income.

 

(3)

Annualized new business revenue is the approximate amount of revenue to be earned over the first twelve-month period, from the sale in the current fiscal year, of certain HR, payroll, and insurance services to new clients and new product sales to existing clients. This measure is not directly calculated from our audited financial statements, as reported service revenue also includes recurring revenue from pre-existing clients. This metric is set to provide incentive for executives to strive to exceed the target, given the relationship to recurring revenue.

 

(4)

Achievement was below threshold due to impacts of COVID-19 on the business during the fourth quarter.

Each performance objective, along with the target percentage of base salary that can be earned for that metric, and the actual payout percentage is set forth below, in accordance with calculations per the program.

 

       
     Mr. Mucci  

Mr. Rivera, Mr. Gibson,

and Mr. Gioja

  Mr. Bottini
   
Bonus Objectives  

% of Base    

Salary at    

Target    

 

% of Base    

Salary    

Achieved(1)    

 

% of Base    

Salary at    

Target    

 

% of Base    

Salary    

Achieved(1)    

 

% of Base    

Salary at    

Target    

 

% of Base    

Salary    

Achieved(1)    

Service revenue

   

 

37.5

%    

   

 

22.0

%    

   

 

30.0

%    

   

 

18.4

%    

   

 

25.0

%    

   

 

14.3

%    

Operating income, net of certain items(2)

   

 

55.0

%    

   

 

34.9

%    

   

 

35.0

%    

   

 

23.5

%    

   

 

25.0

%    

   

 

17.1

%    

Annualized new business revenue(3)

   

 

37.5

%    

   

 

%    

   

 

25.0

%    

   

 

%    

   

 

55.0

%    

   

 

%    

Total quantitative annual incentive

   

 

130.0

%    

   

 

56.9

%    

   

 

90.0

%    

   

 

41.9

%    

   

 

105.0

%    

   

 

31.4

%    

Qualitative(4)

   

 

20.0

%    

   

 

20.0

%    

   

 

10.0

%    

   

 

10.0

%    

   

 

10.0

%    

   

 

10.0

%    

Total

   

 

150.0

%    

   

 

76.9

%    

   

 

100.0

%    

   

 

51.9

%    

   

 

115.0

%    

   

 

41.4

%    

 

(1)

If the actual achievement under a given performance metric is between two thresholds (e.g. between threshold and target or between target and maximum), then the percentage of base salary achieved would be calculated based on a straight-line interpolation of the achievement level above threshold or target, as appropriate, for such performance metric.

 

(2)

Operating income, net of certain items, is a non-GAAP measure. Refer to Appendix B for a discussion of this measure and a reconciliation to the most comparable U.S. GAAP measure of operating income.

 

(3)

Annualized new business revenue is the approximate amount of revenue to be earned over the first twelve-month period, from the sale in the current fiscal year, of certain HR, payroll, and insurance services to new clients and new product sales to existing clients. This measure is not directly calculated from our audited financial statements, as reported service revenue also includes recurring revenue from pre-existing clients. This metric is set to provide incentive for executives to strive to exceed the target, given the relationship to recurring revenue.

 

(4)

The NEOs have an opportunity to earn a percentage of base salary based on individual-specific qualitative goals related to the functions and responsibilities unique to the individual. The G&C Committee may determine, at its sole discretion, whether satisfactory achievement has occurred, regardless of achievement against the pre-established individual goals.

 

Paychex, Inc. 2020 Proxy Statement  35


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  CD&A  

 

 

 

 

 

 

 

 

The actual achievement translated to the incentive payments for our NEOs is as follows:

 

           
     

Annualized        

Base        

Salary(1)        

 

Minimum        

Potential        

Payout(2)        

 

Maximum        

Potential        

Payout(2)        

 

% of Base        

Salary        

Achieved        

 

Actual Incentive        

Compensation        

Earned(3)        

Martin Mucci

    

$

1,000,000

          

   

$

            

   

$

2,250,000

        

   

 

76.9

%        

   

$

768,800

        

Efrain Rivera

    

$

525,000

        

   

$

        

   

$

787,500

        

   

 

51.9

%        

   

$

272,370

        

Mark A. Bottini

    

$

475,000

        

   

$

        

   

$

819,375

        

   

 

41.4

%        

   

$

196,840

        

John B. Gibson

    

$

500,000

        

   

$

        

   

$

750,000

        

   

 

51.9

%        

   

$

259,400

        

Michael E. Gioja

    

$

500,000

        

   

$

        

   

$

750,000

        

   

 

51.9

%        

   

$

259,400

        

 

(1)

This represents the NEO’s annualized base salary as of May 31, 2020. It may differ from base salary paid for fiscal 2020 reflected in the Fiscal 2020 Summary Compensation Table, contained in the Named Executive Officer Compensation section of this proxy statement, due to timing of salary increases, start dates, etc.

 

(2)

These columns represent the range of payout that each NEO has the opportunity to earn. The minimum potential payout indicates that no payout is earned if achievement is below threshold. The maximum potential payout is based on the percentage of base salary that each NEO can earn for maximum achievement.

 

(3)

Actual incentive compensation earned is calculated as annualized base salary multiplied by the percentage of base salary achieved and is provided in the Fiscal 2020 Summary Compensation Table, contained in the Named Executive Officer Compensation section of this proxy statement.

Equity-Based Compensation

To align our NEOs’ interests with the long-term interests of our stockholders, we grant equity awards under the 2002 Plan. Annual grants of equity awards to the NEOs are approved during the regularly scheduled meeting of the G&C Committee in July 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 G&C Committee anticipates continuing its granting practice. The G&C Committee may also grant equity awards to individuals upon hire or promotion to executive officer positions. These equity awards are not granted during any trading black-out periods. Recipients are notified shortly after G&C Committee approval of their grant, noting the number of stock options, shares of restricted stock, target performance shares and goals, the vesting schedule, and exercise price. Any sales restrictions or other terms of the award are also communicated at that time.

Annually, the G&C Committee reviews the NEO compensation of our Peer Group to determine the desired pay range for our officers. See the Compensation Decision Process section later in this CD&A for further information on the Committee’s process for determining total compensation, including equity awards. This review, along with each officer’s individual performance and potential, determine the total compensation. The quantity of equity awards is based on an estimated total value as determined by the G&C Committee in conjunction with their total compensation review and evaluation.

In July 2019, the G&C Committee made an annual equity grant to our NEOs that was a blend of stock options, time-vested restricted stock awards (restricted shares or restricted stock units), and performance stock awards (performance shares or performance stock units). The award value generally was split as follows:

 

 

LOGO

 

Paychex, Inc. 2020 Proxy Statement  36


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This annual distribution provides for 80% of the total equity-based compensation value to be performance-based, consistent with the G&C Committee’s total compensation determination. The value delivered may be adjusted by the G&C Committee at its discretion for individual performance and future potential considerations. For our July 2019 annual grants, the G&C Committee determined the estimated total value to be approximately: $6,000,000 for the CEO; $1,350,000 for the CFO; and $1,050,000 for the SVPs. The estimated total value of the equity-based compensation was increased in fiscal 2020 based on benchmarking analysis against our Peer Group and made to better align internal pay equity and adjust the compensation to market.

The following equity-based compensation was granted in July 2019 for all NEOs:

 

       
NEO   

Performance Shares        

or Performance        

Stock Units        

(at Target)(1)        

 

Stock        

Option        

Awards(2)        

 

Time-Based        

Restricted Shares        

Awards or Restricted        

Stock Units(3)        

Martin Mucci

  

39,063        

 

195,228        

 

14,625        

Efrain Rivera

  

  8,789        

 

  43,926        

 

  3,291        

Mark A. Bottini

  

  6,836        

 

  34,165        

 

  2,559        

John B. Gibson

  

  6,836        

 

  34,165        

 

  2,559        

Michael E. Gioja

  

  6,836        

 

  34,165        

 

  2,559        

 

(1)

Performance shares are subject to a two-year performance period and vest in full on the vesting date indicated on the award notice. Retirement eligible executives receive performance share units, which are also subject to a two-year performance period, and upon retirement these units will remain outstanding and vest in accordance with the terms of the award agreement. Retirement eligible means the executive is age 60 or older with 10 or more years of service.

 

(2)

Stock option awards vest one-third per year over three years and have a term of 10 years. For retirement eligible executives, in the event of retirement on or after the one-year anniversary of the grant date, the next installment scheduled to vest will vest in accordance with the terms of the award agreement. Retirement eligible means the executive is age 60 or older with 10 or more years of service.

 

(3)

Time-based restricted shares vest one-third per year over three years. Retirement eligible executives receive restricted stock units which also vest one-third per year over three years and upon retirement on or after the one-year anniversary of the grant date, the next installment scheduled to vest will vest in accordance with the terms of the award agreement. Retirement eligible means the executive is age 60 or older with 10 or more years of service.

Performance Stock Awards

Performance stock awards (performance shares or performance stock units) are designed to provide variable compensation that is focused on longer-term results. Annual performance stock awards have a two-year performance period to determine the number of restricted stock awards (restricted shares or restricted stock units) to be issued. The NEO generally must serve for one additional year for the restrictions to lapse. We began using performance stock units and restricted stock units in fiscal 2020 for NEOs who are retirement eligible, which means the NEO is age 60 or older with 10 or more years of service.

The performance targets as approved by the Board are based on service revenue and operating income, net of certain items, as projected in the strategic planning process. The G&C Committee established performance targets intended to be appropriately challenging at all levels, including the threshold level, but attainable with increasing difficulty for each level beyond threshold. The threshold level was expected to be appropriately challenging but achievable under normal circumstances. The target level would be achieved if the Company performed as expected under our strategic plan for the two-year period. The maximum level would be achievable only with exceptional performance.

 

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The two-year performance period for performance shares granted in July 2018 was completed at the end of fiscal 2020. The shares earned were based on achievement against pre-established targets for the performance period as follows:

 

     

Performance Goal

($ In Millions)

   Two-Year Performance Targets Established     Actual Achievement
  

Threshold    

   

Target    

   

Maximum    

   

($)    

    

% of Target    

Service revenue(1)

  

 

$6,919

     

 

 

$7,283

     

 

 

$7,502

     

 

 

$7,305

     

  

100%    

Operating income, net of certain items(2)

  

 

$2,452

     

 

 

$2,581

     

 

 

$2,659

     

 

 

$2,626

     

  

102%    

Percent of plan

  

 

95

%     

 

 

100

%     

 

 

103

%     

            

Payout as a percent of target

  

 

60

%     

 

 

100

%     

 

 

150

%     

          

117%    

 

(1)

Service revenue as calculated under the performance share agreement allows for 2% of total service revenue to be delivered from acquisitions during the grant period. Refer to Appendix C for a reconciliation of service revenue as calculated for the performance period to service revenue reported in our consolidated financial statements.

 

(2)

Operating income, net of certain items, is a non-GAAP measure. In addition, this measure as calculated under the performance share agreement excludes the impact of business acquisitions and other unusual items during the performance period. Refer to Appendix C for a description of this non-GAAP measure and a reconciliation of the amount for the performance period to the most comparable GAAP measure of operating income.

Achievement for service revenue was in line with target, while achievement for operating income, net of certain items, was slightly above target. As a result of their performance against these pre-established goals, in July 2020 our NEOs received restricted shares at a quantity of 117% of the target level. The restrictions on these shares will lapse after an additional one-year service period, with the exception of Mr. Rivera’s whose shares vest upon completion of the performance period. These performance shares, granted in July 2018, were reflected at grant-date fair value in the NEO compensation for fiscal 2019 in the Fiscal 2020 Summary Compensation Table, contained in the Named Executive Officer Compensation section of this proxy statement.

In September 2017, Mr. Rivera was granted a special performance share award with a performance condition that net income exceeded $500 million for each of the fiscal years 2018, 2019, and 2020. This performance condition was met and Mr. Rivera’s award for 21,089 shares vested in full in July 2020.

LTIP Non-Qualified Performance Stock Options and Performance-Based Restricted Stock

In July 2016, the NEOs, received a LTIP award in the form of non-qualified performance stock options and performance-based restricted shares. These stock options and restricted shares vested in July 2020 dependent on achievement against pre-established targets for fiscal 2020. The LTIP was granted to incentivize the executives to work toward achievement of longer-term strategic goals. The performance metrics were service revenue, operating income, net of certain items, and diluted earnings per share and were established based on our long-term strategic plan.

The options and shares earned were based on achievement against pre-established targets for the performance period as follows:

 

     

  Performance Goal

  ($ In Millions)

   Fiscal 2020 Performance Targets Established     Actual Achievement
  

Threshold    

   

Target    

   

Maximum    

   

($)    

    

% of Target    

Service revenue

  

 

$3,690

     

 

 

$3,844

     

 

 

$4,000

     

 

 

$3,954

     

  

103%    

Operating income, net of certain items(1)

  

 

$1,385

     

 

 

$1,443

     

 

 

$1,480

     

 

 

$1,374

     

  

  95%    

Diluted EPS

  

 

$  2.62

     

 

 

$  2.72

     

 

 

$  2.82

     

 

 

$  3.04

     

  

112%    

Performance % of Target—Revenue

  

 

96

%     

 

 

100

%     

 

 

104

%     

            

Performance % of Target—Operating income, net of certain items(1)

  

 

96

%     

 

 

100

%     

 

 

103

%     

            

Performance % of Target—Diluted EPS

  

 

96

%     

 

 

100

%     

 

 

104

%     

            

Payout as a percent of target

  

 

60

%     

 

 

100

%     

 

 

150

%     

            

 

(1)

Operating income, net of certain items, is a non-GAAP measure. Refer to Appendix B for a description of this non-GAAP measure and a reconciliation of the amount for the performance period to the most comparable U.S. GAAP measure of operating income.

 

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The LTIP provided for rewards based on our long-term financial performance over the four years ended May 31, 2020. Based on strong operating results through the first 45 months of the performance period ended February 29, 2020, the payout was tracking at 123% of target. In March 2020, the impact of COVID-19 on the U.S. economy, widespread corporate layoffs, and furloughs all negatively impacted the number of client paychecks processed. The result was that both our revenue and profit were negatively impacted beyond the ability of management to respond, causing plan performance to be impacted.

The Company’s 2002 Plan allows for the G&C Committee to exercise discretion to adjust payouts where deemed appropriate for extraordinary, unusual, or non-recurring items and make adjustments to the determination of achievement for performance-based awards. In light of the nature of the negative impact on performance and the strong performance for the first 45 months of the performance period, the G&C Committee, after careful and full deliberation, elected to apply discretion to recognize the success of management prior to February 29, 2020.

The G&C Committee determined it would be appropriate to pro-rate the award and performance period of the LTIP and base achievement on pro-rated results through February 29, 2020. In this manner, the Committee believes that the realized pay of participating executives aligned with our performance up through the start of the COVID-19 pandemic. The payout as a percent of target was pro-rated as follows:

 

   
      Fiscal 2020 Forecasted Achievement—Prior to COVID-19
   

  Performance Goal—Prorated Calculation

  ($ In Millions)

   ($)          % of Target         Payout %        

Weighted    

Average    

   

Payout    

Composition    

Service revenue

  

$

4,062

     

  

 

106%    

 

 

 

150%    

 

 

 

40%    

 

 

  60%    

Operating income, net of certain items(1)

  

$

1,418

     

  

 

  98%    

 

 

 

  83%    

 

 

 

40%    

 

 

  33%    

Diluted EPS

  

$

3.13

     

  

 

115%    

 

 

 

150%    

 

 

 

20%    

 

 

  30%    

Subtotal of payout composition

                                   

123%    

Proration(2)

                                   

  94%    

Payout as a percent of target

                                   

115%    

 

(1)

Operating income, net of certain items, is a non-GAAP measure. In addition, this measure as calculated under the performance share agreement excludes the impact of business acquisitions and other unusual items during the performance period. Refer to Appendix B for a description of this non-GAAP measure and a reconciliation of the actual fiscal 2020 amount for the performance period to the most comparable U.S. GAAP measure of operating income.

 

(2)

Percentage of the performance period up through February 29, 2020 (45 months divided by 48 months = .9375).

Stock Ownership Guidelines

The G&C Committee has established stock ownership guidelines, as follows:

 

   
Position    Requirement  

CEO

  

 

6X base salary

         

SVPs

  

 

3X base salary

         

VPs

  

 

2X base salary

         

For any awards granted after July 2011, there are restrictions on sales of such vested awards until the officer has attained the applicable stock ownership level. The ownership guidelines were established to provide long-term alignment with stockholders’ interests. For the purposes of achieving the ownership guidelines, unvested restricted stock awarded to the executive officers is included. All officers are currently compliant with the guidelines.

 

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Prohibition on Hedging or Speculating in Company Stock

NEOs, along with all employees, of the Company must also adhere to strict standards with regards to trading in Paychex stock. Also, we prohibit executive officers from hedging Paychex stock. They may not, among other things:

 

 

speculatively trade in the Company’s stock;

 

 

short sell any securities of the Company; or

 

 

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

Pledging of Company Stock

We maintain a pledging policy for all Paychex directors, officers, and employees. Prior to January 2020, a policy was in place that allowed pledging under certain circumstances, but not all. After January 2020, this policy was amended to prohibit new pledging of Company securities for any purpose. Our pledging policy is posted on our website at www.paychex.com/investors.

Recoupment, Non-Compete, and Other Forfeiture Provisions

We retain the right to claw back any incentive payment or award under any policy adopted by the Company implementing Section 10D of the Exchange Act and any regulations promulgated or national securities exchange listing conditions adopted with respect thereto. In the annual incentive program, we retain the right to recoup all or a portion of the payouts made under the annual incentive program if those payouts were based on financial statements that are subsequently subject to restatement and where fraud or misconduct was involved. We will, to the extent permitted by governing law, require reimbursement of a portion of any compensation received where:

 

 

the payment was predicated upon the achievement of certain financial results that were subsequently the subject of a substantial restatement;

 

 

the participant engaged in fraud or misconduct that caused or partially caused the need for the substantial restatement; and

 

 

a lower payment would have been made based upon the restated financial results.

In each such instance, we will, to the extent practicable, seek to recover the amount by which the individual participant’s compensation for the relevant period exceeded the lower payment that would have been made based on the restated financial results, plus a reasonable rate of interest.

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

 

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Perquisites

Our NEOs receive benefits in the form of vacation, health insurance, life insurance, Company matching contributions to the 401(k) Plan when such contributions are in effect, and other benefits, which are generally 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.

Deferred Compensation

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 limitations on the 401(k) Plan accounts placed 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 included in the Named Executive Officer Compensation section of this proxy statement for more information on how our deferred compensation plan functions.

Change in Control Plan

Executives of the Company are covered by a Change in Control Plan. Upon involuntary termination by the Company without cause or a voluntary termination by the participant for good reason, within 12 months following a change in control, the executive becomes entitled to certain severance benefits. Such severance benefits are conditioned upon the execution of a general release in favor of the Company.

Cause means the participant’s dereliction of duty to the Company, conviction for a felony, or willful misconduct that has a substantial adverse effect on the Company. Good reason means a significant change to the duties, authority, or position that were assigned immediately before the change in control including: the reduction in or removal of any material duties, authority, or position within the Company; assignment of duties inconsistent with the participant’s position, authorities, or responsibilities; material reduction to base salary, annual incentive, or other elements of total compensation; relocation of the participant’s principal workplace to an area outside of a 50-mile-radius, or the failure of a successor company to assume or adopt the Change in Control Plan. Refer to the Potential Payments upon Termination or Change in Control discussion within the Named Executive Office Compensation section of this proxy statement for further information.

Compensation Decision Process

Role of the Compensation Consultant

As outlined in its charter, the G&C Committee has the authority to retain consultants and advisers, at the Company’s expense, to assist in the discharge of the committee’s duties. The G&C Committee can retain and dismiss such consultants and advisers at any time. The consultants report directly to the committee and have direct access to the committee through the G&C Committee’s Chair. The G&C Committee requires that any consultant it retains cannot be utilized by management for other purposes. Although management, particularly the VP of Human Resources and Organizational Development, may work closely with the consultant, the consultant is ultimately accountable to the G&C Committee on matters related to executive compensation.

The G&C Committee retains the services of Steven Hall & Partners (“Steven Hall”) as its independent compensation consultant. Steven Hall has not provided any other services to the Company prior to or subsequent to being retained as the compensation consultant to the G&C Committee. The G&C Committee was solely responsible for the decision to retain Steven Hall as its consultant. Steven Hall advises the G&C Committee on matters of NEO compensation, assists with analysis and research, and provides updates on evolving best practices in compensation. While Steven Hall may express an opinion on compensation matters, the G&C Committee is solely responsible for setting the type and amount of compensation for NEOs.

The G&C Committee recognizes that it is essential to receive objective advice from its compensation consultant. The G&C Committee closely examines the procedures and safeguards that Steven Hall takes to ensure that the compensation consulting services are objective. The G&C Committee has assessed the independence of Steven

 

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Hall pursuant to SEC rules and concluded that Steven Hall’s work for the G&C Committee does not raise any conflict of interest. In making this assessment, the following factors were taken into consideration:

 

 

that the compensation consultant reports directly to the G&C Committee, and the G&C Committee has the sole power to terminate or replace its compensation consultant at any time;

 

 

the compensation consultant does not provide any other services to the Company;

 

 

whether aggregate fees paid by the Company to the compensation consultant, as a percentage of the total revenue of the compensation consultant, are material to the compensation consultant;

 

 

the compensation consultant’s policies and procedures designed to prevent conflicts of interest;

 

 

any business or personal relationships between the compensation consultant, on one hand, and any member of the G&C Committee or executive officer, on the other hand; and

 

 

whether the compensation consultant owns any shares of the Company’s stock.

Role of Governance and Compensation Committee and Management

As part of the G&C Committee’s responsibility to evaluate and determine NEO compensation, on an annual basis the G&C Committee:

 

 

reviews the companies in our Peer Group for any changes;

 

 

reviews base salaries for adjustments, if any;

 

 

establishes and approves the performance targets and payouts under incentive-based programs and awards; and

 

 

grants equity awards under our 2002 Plan.

The G&C Committee continues to review each of the elements of compensation annually to ensure that compensation is appropriate and competitive to attract and retain a high-performing executive team. The G&C Committee targets to maintain performance-based pay as a percentage of total target compensation of over 70% for the CEO and over 60% for the other NEOs. Additionally, the G&C Committee targets the value of long-term compensation to be approximately 70% for the CEO and 50% for the other NEOs.

The G&C Committee, in making its decisions, targets an equitable mix of compensation. It utilizes various sources of information to evaluate our NEO compensation, including, but not limited to:

 

 

compensation consultant reports and analysis;

 

 

benchmarking information with NEOs at Peer Group companies for all compensation elements; and

 

 

internal management reports including a three-year history of total compensation for all officers and a summary for the upcoming fiscal year of total cash compensation and equity awards for all officers.

The G&C Committee strives for our NEOs’ compensation to be in line with our Peer Group. The information provided by the compensation consultant 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.

Management reports are used to evaluate compensation recommendations and the impact to total compensation for each individual. They are also used to view a complete picture of the trend of compensation to executive officers, both as a team and as individuals. This facilitates discussion that more accurately details individual officer compensation, noting differences that reflect officer tenure, performance, and position in the management structure.

The G&C Committee uses these management updates along with peer information, where available, as tools to evaluate executive compensation. This information is reviewed in a subjective manner. There is no implied direct or formulaic linkage between peer information and the G&C Committee’s compensation decisions.

Our CEO and our VP of Human Resources and Organizational Development provide recommendations to the G&C Committee on design elements for compensation. These individuals, and from time to time invited guests including

 

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other officers, will attend the meetings of the G&C Committee to present and respond to questions on current or proposed plan design. Annually, our CEO reviews achievement of the recently completed fiscal year’s plan and presents recommendations regarding: salary for each of the NEOs (other than himself), the upcoming fiscal year’s annual incentive program structure, and equity awards. Management is excluded from executive sessions of the G&C 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 G&C Committee.

Peer Group

In addition to many other factors that affect compensation decisions, the G&C Committee takes into account the compensation practices of our Peer Group, where available, in formulating our compensation program. The G&C Committee assesses total compensation at the median of the Peer Group, even though Paychex performs above the median of its Peer Group in certain financial categories as shown in the charts that follow. Peer Group comparisons were available for the positions of CEO and CFO, and both Mr. Mucci and Mr. Rivera have total compensation that falls below the median total compensation of the Peer Group. For the remaining NEOs, compensation was compared to the average NEO compensation, excluding the CEO and CFO positions, for the Peer Group. These results were below the median total compensation of our Peer Group. Peer Group benchmarking is not the sole determining factor in the G&C Committee’s decisions on compensation, and the G&C Committee reserves the discretion to adjust compensation based on other factors as previously discussed. The Peer Group companies are not necessarily limited to the markets in which Paychex does business. The Peer Group companies were selected based upon the following criteria: comparable business model, company size including revenues and earnings, executive talent sources, competition for investor capital, companies considered by our investors to be our peers, and overall reasonableness. The Peer Group is comprised of the following industries or segments: a direct competitor in the HCM industry, financial transaction management companies, and business services and outsourcing companies.

Our Peer Group used for evaluating executive compensation for fiscal 2020 consisted of the following companies:

 

 
Peer Group

Alliance Data Systems Corporation

  

IHS Markit, Ltd.

Automatic Data Processing, Inc.

  

Intuit Inc.

Broadridge Financial Solutions, Inc.

  

Moody’s Corporation

The Dun & Bradstreet Corporation

  

TD AMERITRADE Holding Corporation

Equifax, Inc.

  

Total System Services, Inc.

Fiserv, Inc.

  

The Western Union Company

Global Payments Inc.

  

Worldpay, Inc.

H&R Block, Inc.

    

 

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LOGO

 

(1)

Based on the most recent completed fiscal year for each company in the Peer Group.

The G&C 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 the comparability of their metrics. The Peer Group may also be adjusted in the event of mergers, acquisitions, or other significant economic changes. The Peer Group was adjusted for fiscal 2020. DST Systems, Inc. and Robert Half International, Inc. were removed and replaced with IHS Markit Ltd. and Worldpay, Inc., as they are more closely aligned with our business.

CEO Compensation

It is the responsibility of the G&C Committee to evaluate Mr. Mucci’s performance annually and determine his total compensation. Mr. Mucci receives compensation based on his leadership role and the overall performance of the Company. Mr. Mucci’s compensation for fiscal 2020 as reflected in the Fiscal 2020 Summary Compensation Table, included in the Named Executive Officer Compensation section of this proxy statement, is as follows:

 

 

Base salary of $1,000,000. The increase in base salary was based on benchmarking analysis performed to bring him more in line with the median of our Peer Group;

 

 

Payout under the annual incentive program at 51% of target; and

 

 

Annual equity award grants comprised of 39,063 performance stock units at target, 195,228 stock options with vesting pro-rata over three years, and 14,625 shares of time-based restricted stock units with vesting pro-rata over three years.

Mr. Mucci’s total compensation for fiscal 2020 remained below the median when compared to that of the CEOs within our Peer Group.

CEO Pay Ratio

Pursuant to Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 402(u) of Regulation S-K, we are required to provide the ratio of the annual total compensation of Mr. Mucci, our CEO, to the annual total compensation of our median employee. These rules allow us to identify our median employee once every three years unless there has been a change in our employee population or employee compensation arrangements that we reasonably believe would result in a significant change in our pay ratio disclosure. Taking into consideration our acquisition of Oasis in December 2018 and due to a job promotion, we did not use the same median employee for fiscal 2020 as we did for fiscal 2019 and fiscal 2018.

 

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To identify the median employee for fiscal 2020, we took the following steps:

 

 

We identified the median employee by examining the previous 12-month period of total cash compensation for all U.S. employees, excluding our CEO, who were employed by us on March 1, 2020.

 

 

We included all U.S. employees, whether employed on a full-time, part-time or seasonal basis. As of March 1, 2020, the Company had approximately 15,300 employees, not including the CEO. This also excludes 174 employees located in Germany, 147 employees located in Denmark, and 218 employees located in India, as permitted by the SEC’s de minimis exemption. We did not make any assumptions, adjustments, or estimates with respect to the total cash compensation, and we did annualize the compensation for any full-time employees that were not employed by us for all of the previous 12-month period. We believe the use of total cash compensation for all U.S. employees is a consistently applied compensation measure because we do not widely distribute annual equity awards to U.S. employees. Approximately 14% of our employees received annual equity awards as of March 1, 2020.

 

 

We calculated annual total compensation for fiscal 2020 for the median employee using the same methodology we use for our NEOs as set forth in the Fiscal 2020 Summary Compensation Table later in this proxy statement.

The table below sets forth comparative information regarding: (A) the total compensation of our CEO for fiscal 2020; (B) the median of the total annual compensation of all other employees of the Company, excluding our non-U.S. employees and CEO, for fiscal 2020; and (C) the ratio of the CEO total annual compensation to the median of the total annual compensation of all other employees, excluding the non-U.S. employees and CEO:

 

   
Mr. Mucci, our CEO, total annual compensation (A)      $8,068,717  
   
Median employee total annual compensation, excluding non-U.S. employees and CEO (B)      $     59,642  
   
Ratio of CEO to median employee compensation (C)      135:1  

Subsequent Events

The COVID-19 pandemic began affecting our operations and employees, our clients’ businesses, and the markets we serve during our fourth quarter of fiscal 2020. In conjunction with other cost containment measures taken in response to the adverse impacts on our business, on June 18, 2020, our CEO and other NEOs elected to reduce their salaries for the fiscal year ending May 31, 2021 (“fiscal 2021”) by 20% from July 1, 2020 through December 31, 2020.

Impact of the Internal Revenue Code

Section 162(m) generally limits the deductibility of compensation for “covered employees,” which include our NEOs, to $1,000,000 per year. The G&C Committee reserves the right to award compensation that is not fully deductible under Section  162(m).

The Governance and Compensation Committee Report

The G&C Committee has reviewed and discussed the Compensation Discussion and Analysis included in the proxy statement with management. Based on such review and discussion, the G&C Committee recommends to the Board that the Compensation Discussion and Analysis be included in the proxy statement and the Company’s Form 10-K for fiscal 2020.

The Governance and Compensation Committee:

        Joseph M. Tucci, Chair

        David J. S. Flaschen

        Pamela A. Joseph

        Joseph M. Velli

 

Paychex, Inc. 2020 Proxy Statement  45


Table of Contents

 

  NEO Compensation  

 

 

 

 

 

 

 

 

 

NAMED EXECUTIVE OFFICER COMPENSATION

 

 

FISCAL 2020 SUMMARY COMPENSATION TABLE

The table below presents the total compensation for each of the NEOs.

 

                 

Name and Principal
Position

(a)

  Fiscal
Year
(b)
   

Salary

(c)

   

Bonus

(d)

   

Stock
Awards

(e)

   

Option
Awards

(f)

    Non-Equity
Incentive Plan
Compensation
(g)
    All Other
Compensation
(h)
   

Total

(i)

 

 

Martin Mucci

President and CEO

 

 

 

 

 

2020

 

 

 

 

 

 

$

 

 

992,885

 

 

 

 

 

 

 

 

$       —

 

 

 

 

 

 

$

 

 

4,397,940

 

 

 

 

 

$

 

 

1,891,759

 

 

 

 

 

 

 

 

$   768,800

 

 

 

 

 

 

 

 

$17,333

 

 

 

 

 

$

 

 

8,068,717

 

 

 

 

 

 

 

 

2019

 

 

 

 

 

 

$

 

 

950,000

 

 

 

 

 

 

 

 

$       —

 

 

 

 

 

 

$

 

 

3,665,020

 

 

 

 

$

 

1,582,257

 

 

 

 

 

 

 

$1,716,175

 

 

 

 

 

 

 

 

$17,068

 

 

 

 

 

$

 

 

7,930,520

 

 

 

 

 

 

 

 

2018

 

 

 

 

 

 

$

 

 

950,000

 

 

 

 

 

 

 

 

$       —

 

 

 

 

 

 

$

 

 

3,294,113

 

 

 

 

 

$

 

 

1,372,685

 

 

 

 

 

 

 

 

$1,106,750

 

 

 

 

 

 

 

 

$12,616

 

 

 

 

 

$

 

 

6,736,164

 

 

 

 

Efrain Rivera

Senior Vice President,

CFO, and Treasurer

 

 

 

 

 

2020

 

 

 

 

 

 

$

 

 

521,442

 

 

 

 

 

 

 

 

$       —

 

 

 

 

 

 

$

 

 

989,555

 

 

 

 

 

$

 

 

425,643

 

 

 

 

 

 

 

 

$   272,370

 

 

 

 

 

 

 

 

$12,797

 

 

 

 

 

$

 

 

2,221,807

 

 

 

 

 

 

 

 

2019

 

 

 

 

 

 

$

 

 

500,000

 

 

 

 

 

 

 

 

$       —

 

 

 

 

 

 

$

 

 

863,503

 

 

 

 

 

$

 

 

372,661

 

 

 

 

 

 

 

 

$   655,650

 

 

 

 

 

 

 

 

$12,722

 

 

 

 

 

$

 

 

2,404,536

 

 

 

 

 

 

 

 

2018

 

 

 

 

 

 

$

 

 

500,000

 

 

 

 

 

 

 

 

$       —

 

 

 

 

 

 

$

 

 

1,935,277

 

 

 

 

 

$

 

 

351,219

 

 

 

 

 

 

 

 

$   441,900

 

 

 

 

 

 

 

 

$  9,020

 

 

 

 

 

$

 

 

3,237,416

 

 

 

 

Mark A. Bottini

Senior Vice President

of Sales

 

 

 

 

 

2020

 

 

 

 

 

 

$

 

 

471,442

 

 

 

 

 

 

 

 

$62,560

 

 

 

 

 

$

 

 

769,605

 

 

 

 

 

$

 

 

331,059

 

 

 

 

 

 

 

 

$   196,840

 

 

 

 

 

 

 

 

$14,054

 

 

 

 

 

$

 

 

1,845,560

 

 

 

 

 

 

 

 

2019

 

 

 

 

 

 

$

 

 

450,000

 

 

 

 

 

 

 

 

$       —

 

 

 

 

 

 

$

 

 

647,414

 

 

 

 

 

$

 

 

279,496

 

 

 

 

 

 

 

 

$   573,660

 

 

 

 

 

 

 

 

$13,712

 

 

 

 

 

$

 

 

1,964,282

 

 

 

 

 

 

 

 

2018

 

 

 

 

 

 

$

 

 

450,000

 

 

 

 

 

 

 

 

$       —

 

 

 

 

 

 

$

 

 

632,164

 

 

 

 

 

$

 

 

263,418

 

 

 

 

 

 

 

 

$   321,480

 

 

 

 

 

 

 

 

$11,592

 

 

 

 

 

$

 

 

1,678,654

 

 

 

 

John B. Gibson

Senior Vice President

of Service

 

 

 

 

 

2020

 

 

 

 

 

 

$

 

 

492,885

 

 

 

 

 

 

 

 

$       —

 

 

 

 

 

 

$

 

 

769,605

 

 

 

 

 

$

 

 

331,059

 

 

 

 

 

 

 

 

$   259,400

 

 

 

 

 

 

 

 

$12,481

 

 

 

 

 

$

 

 

1,865,430

 

 

 

 

 

 

 

 

2019

 

 

 

 

 

 

$

 

 

450,000

 

 

 

 

 

 

 

 

$       —

 

 

 

 

 

 

$

 

 

647,414

 

 

 

 

 

$

 

 

279,496

 

 

 

 

 

 

 

 

$   590,085

 

 

 

 

 

 

 

 

$13,135

 

 

 

 

 

$

 

 

1,980,130

 

 

 

 

 

 

 

 

2018

 

 

 

 

 

 

$

 

 

446,154

 

 

 

 

 

 

 

 

$       —

 

 

 

 

 

 

$

 

 

632,164

 

 

 

 

 

$

 

 

263,418

 

 

 

 

 

 

 

 

$   397,710

 

 

 

 

 

 

 

 

$10,798

 

 

 

 

 

$

 

 

1,750,244

 

 

 

 

Michael E. Gioja

Senior Vice President

of Information

Technology and

Product Development

 

 

 

 

 

2020

 

 

 

 

 

 

$

 

 

496,442

 

 

 

 

 

 

 

 

$       —

 

 

 

 

 

 

$

 

 

769,605

 

 

 

 

 

$

 

 

331,059

 

 

 

 

 

 

 

 

$   259,400

 

 

 

 

 

 

 

 

$10,150

 

 

 

 

 

$

 

 

1,866,656

 

 

 

 

 

 

 

 

2019

 

 

 

 

 

 

$

 

 

471,442

 

 

 

 

 

 

 

 

$       —

 

 

 

 

 

 

$

 

 

647,414

 

 

 

 

 

$

 

 

279,496

 

 

 

 

 

 

 

 

$   622,868