Annual report pursuant to Section 13 and 15(d)

Stock-Based Compensation Plans

v2.4.0.8
Stock-Based Compensation Plans
 12 Months Ended
May 31, 2013
Stock-Based Compensation Plans [Abstract]  
Stock-Based Compensation Plans
Stock-Based Compensation Plans
The Paychex, Inc. 2002 Stock Incentive Plan, as amended and restated (the “2002 Plan”), effective on October 13, 2010 upon its approval by the Company’s stockholders, authorizes grants of up to 39.1 million shares of the Company’s common stock. As of May 31, 2013, there were 22.0 million shares available for future grants under the 2002 Plan.
All stock-based awards to employees are recognized as compensation costs in the consolidated financial statements based on their fair values measured as of the date of grant. These costs are recognized as an expense in the Consolidated Statements of Income and Comprehensive Income on a straight-line basis over the requisite service period and increase additional paid-in capital.
Stock-based compensation expense was $22.8 million, $22.9 million, and $24.8 million for fiscal years 2013, 2012, and 2011, respectively. Related income tax benefits recognized were $8.5 million, $8.3 million, and $8.4 million for the respective fiscal years. Capitalized stock-based compensation costs related to the development of internal use software for these same fiscal years were not significant.
As of May 31, 2013, the total unrecognized compensation cost related to all unvested stock-based awards was $47.1 million and is expected to be recognized over a weighted-average period of 2.9 years.
Black-Scholes fair value assumptions:    The fair value of stock option grants and performance stock options was estimated at the date of grant using a Black-Scholes option pricing model. The weighted-average assumptions used for valuation under the Black-Scholes model are as follows:
 
 
Year ended May 31,
 
 
2013
 
2012
 
2013
 
2012
 
2011
 
 
Performance stock options
 
Stock options
Risk-free interest rate
 
0.7
%
 
1.9
%
 
1.0
%
 
2.2
%
 
2.2
%
Dividend yield
 
4.1
%
 
4.2
%
 
4.3
%
 
4.2
%
 
4.2
%
Volatility factor
 
.22

 
.24

 
.23

 
.24

 
.24

Expected option life in years
 
4.8

 
5.8

 
6.4

 
6.4

 
6.5

Weighted-average grant-date fair value of stock options granted (per share)
 
$
3.55

 
$
4.35

 
$
3.77

 
$
4.46

 
$
4.02


Risk-free interest rates are yields for zero coupon U.S. Treasury notes maturing approximately at the end of the expected option life. The estimated volatility factor is based on a combination of historical volatility, using weekly stock prices over a period equal to the expected option life, and implied market volatility. The expected option life is based on historical exercise behavior.
The Company has determined that the Black-Scholes option pricing model, as well as the underlying assumptions used in its application, are appropriate in estimating the fair value of its stock option grants. The Company periodically assesses its assumptions as well as its choice of valuation model, and will reconsider use of this model if additional information becomes available in the future indicating that another model would provide a more accurate estimate of fair value, or if characteristics of future grants would warrant such a change.
Stock option grants:    Stock option grants entitle the holder to purchase, at the end of the vesting term, a specified number of shares of Paychex common stock at an exercise price per share set equal to the closing market price of the common stock on the date of grant. All stock option grants have a contractual life of ten years from the date of the grant and a vesting schedule as established by the Board of Directors (the “Board”). The Company issues new shares of common stock to satisfy stock option exercises. Non-qualified stock option grants to officers and outside directors are typically approved by the Board in July. Non-qualified stock option grants to officers and employees granted prior to July 2010 vest 20% per annum, while grants to the Board prior to October 2010 vest one-third per annum. Grants of non-qualified stock options to officers beginning in July 2010 vest 25% per annum. Grants to members of the Board beginning in October 2010 vest after one-year.
 The Company had granted stock options to virtually all non-management employees with at least ninety of service, and shares remain outstanding for the following broad-based stock option grants:
Date of broad-based grant
 
Shares
granted
(millions)
 
Exercise
price
per  share
 
Shares
outstanding as  of
May 31, 2013
(millions)
 
April 2004
 
1.7

 
$
37.72

 
0.6

 
October 2006
 
2.0

 
$
37.32

 
1.0

 

The following table summarizes stock option activity for the year ended May 31, 2013:
In millions, except per share amounts
 
Shares subject
to options
 
Weighted-average
exercise price
per share
 
Weighted-average
remaining
contractual term
(years)
 
Aggregate
 intrinsic value(1)
Outstanding as of May 31, 2012
 
10.0

 
$
33.88

 
 
 
 
Granted
 
1.0

 
$
31.73

 
 
 
 
Exercised
 
(2.4
)
 
$
31.91

 
 
 
 
Forfeited
 
(0.1
)
 
$
29.33

 
 
 
 
Expired
 
(0.5
)
 
$
35.70

 
 
 
 
Outstanding as of May 31, 2013
 
8.0

 
$
34.17

 
4.4
 
$
26.3

Exercisable as of May 31, 2013
 
6.1

 
$
35.29

 
3.2
 
$
13.8

   
(1) Market price of the underlying stock as of May 31, 2013 less the exercise price.
Other information pertaining to stock option grants is as follows:
 
 
Year ended May 31,
In millions, except per share amounts
 
2013
 
2012
 
2011
Total intrinsic value of stock options exercised
 
$
7.8

 
$
0.8

 
$
1.9

Total grant-date fair value of stock options vested
 
$
3.0

 
$
10.4

 
$
20.0


Performance stock options:    In July 2011, the Board approved a special award of performance-based stock options under a Long-Term Incentive Plan. Under this award, stock options were granted to officers with vesting dependent on achievement against long-term strategic and financial objectives. The awards will vest in full if performance targets for the fiscal year ending May 31, 2016 are achieved. Acceleration of vesting for up to one-half of the award will occur if performance targets for the fiscal year ending May 31, 2014 are achieved. There also is an opportunity to vest in one-half of the award at threshold performance, which is 95% of target.
The following table summarizes performance stock option activity for the year ended May 31, 2013:
In millions, except per share amounts
 
Shares subject
to options
 
Weighted-average
exercise price per
share
 
Weighted-average
remaining
contractual term
(years)
 
Aggregate intrinsic
value (2)
Outstanding as of May 31, 2012
 
2.6

 
$
30.80

 
 
 
 
Granted(1)
 
0.2

 
$
32.99

 
 
 
 
Exercised
 
—

 
$
—

 
 
 
 
Forfeited
 
(0.1
)
 
$
31.63

 
 
 
 
Expired
 
—

 
$
—

 
 
 
 
Outstanding as of May 31, 2013
 
2.7

 
$
30.95

 
8.3
 
$
16.8

Exercisable as of May 31, 2013
 
—

 
$
—

 
0.0
 
$
—

 
(1) 
Performance stock options granted assuming achievement of performance goals at target. Actual amount of shares to be earned may differ from this amount.
(2) 
Market price of the underlying stock as of May 31, 2013 less the exercise price.
Restricted stock units:    The Board grants restricted stock units (“RSUs”) to non-officer management. For each unit granted, the holder will receive one share of stock at the time of vesting. RSUs do not have voting rights or earn dividend equivalents during the vesting period. These awards vest 20% per annum over five years with a small population of awards vesting on the fourth anniversary of the grant date. The fair value of RSUs is equal to the closing market price of the underlying common stock as of the date of grant, adjusted for the present value of expected dividends over the vesting period.
The following table summarizes RSU activity for the year ended May 31, 2013:
In millions, except per share amounts
 
RSUs
 
Weighted-average
grant-date
fair value per
share
 
Weighted-average
remaining vesting
period (years)
 
Aggregate  intrinsic
value (1)
Nonvested as of May 31, 2012
 
1.6

 
$
25.49

 
 
 
 
Granted
 
0.7

 
$
28.59

 
 
 
 
Vested
 
(0.5
)
 
$
27.10

 
 
 
 
Forfeited
 
(0.2
)
 
$
25.96

 
 
 
 
Nonvested as of May 31, 2013
 
1.6

 
$
26.29

 
1.6
 
$
59.9

 
(1) 
An RSU is an agreement to issue shares at the time of vesting with no associated exercise cost. Therefore, intrinsic value for RSUs is the market price of the underlying stock as of May 31, 2013.
 
Other information pertaining to RSUs is as follows:
 
 
Year ended May 31,
In millions, except per share amounts
 
2013
 
2012
 
2011
Weighted-average grant-date fair value of RSUs granted
 
$
28.59

 
$
27.67

 
$
21.52

Total intrinsic value of RSUs vested
 
$
15.5

 
$
11.0

 
$
7.7

Total grant-date fair value of RSUs vested
 
$
13.4

 
$
9.5

 
$
8.5


Restricted stock awards:    The Board has approved grants of restricted stock awards to the Company’s officers and outside directors. All shares underlying awards of restricted stock are restricted in that they are not transferable until they vest. The recipients of the restricted stock have voting rights and earn dividends, which are paid to the recipient at the time of vesting of the awards. If the recipient leaves Paychex prior to the vesting date for any reason, the shares of restricted stock and the dividends accrued on those shares will be forfeited and returned to Paychex.
For restricted stock awards granted to officers prior to July 2010, the shares vest upon the fifth anniversary of the grant date provided the recipient is still an employee of the Company on that date. These awards have a provision for the acceleration of vesting based on achievement of performance targets established by the Board. If the established targets are met for a fiscal year, up to one-third of the award may vest. If all the targets are met for three consecutive years, the award will be fully vested. Beginning in July 2010, time-vested restricted stock awards were granted to officers, which vest one-third per annum over three years. For grants to outside directors prior to October 2010, the shares vest on the third anniversary of the grant date. Beginning in October 2010, restricted stock granted to outside directors vest on the one-year anniversary of the grant date. The fair value of restricted stock awards is equal to the closing market price of the underlying common stock as of the date of grant and is expensed over the requisite service period on a straight-line basis.
The following table summarizes restricted stock activity for the year ended May 31, 2013:
In millions, except per share amounts
 
Restricted
shares
 
Weighted-average
grant-date
fair value per
share
Nonvested as of May 31, 2012
 
0.2

 
$
29.35

Granted
 
0.1

 
$
31.76

Vested
 
(0.1
)
 
$
31.06

Forfeited
 
—

 
$
29.19

Nonvested as of May 31, 2013
 
0.2

 
$
29.83


Other information pertaining to restricted stock follows:
 
 
Year ended May 31,
In millions, except per share amounts
 
2013
 
2012
 
2011
Weighted-average grant-date fair value of restricted stock granted
 
$
31.76

 
$
30.69

 
$
26.40

Total grant-date fair value of restricted stock vested
 
$
2.1

 
$
3.2

 
$
2.2


 Performance shares:    Beginning in July 2010, the Board approved grants of restricted performance shares to officers. These awards have a two year performance period, after which the amount of restricted shares earned will be determined based on achievement against established performance targets. The restricted shares earned will then be subject to a one year service period. Performance shares do not have voting rights or earn dividend equivalents during the performance period. The fair value of performance shares is equal to the closing market price of the underlying common stock as of the date of grant, adjusted for the present value of expected dividends over the performance period.
The following table summarizes performance share activity for the year ended May 31, 2013:
In millions, except per share amounts
 
Performance
shares
 
Weighted-average
grant-date
fair value
per share
Nonvested as of May 31, 2012
 
0.2

 
$
26.83

Granted(1)
 
0.2

 
$
29.10

Forfeited
 
—

 
$
26.74

Nonvested as of May 31, 2013
 
0.4

 
$
27.89

 
(1) 
Performance shares granted assuming achievement of performance goals at target. Actual amount of shares to be earned may differ from this amount.
Non-compensatory employee benefit plan:    The Company offers an Employee Stock Purchase Plan to all employees under which the Company’s common stock can be purchased through a payroll deduction with no discount to the market price and no look-back provision. All transactions occur directly through the Company’s transfer agent and no brokerage fees are charged to employees, except for when stock is sold. The plan has been deemed non-compensatory and therefore, no stock-based compensation costs have been recognized for fiscal years 2013, 2012, or 2011 related to this plan.