Edgar Filing: PAYCHEX INC

DEF 14A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

SCHEDULE 14A

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Paychex, Inc.
(Name of Registrant as Specified In Its Charter)


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LOGO

Our Purpose

We provide our clients the freedom to succeed.

Our Mission

We will be the leading provider of payroll, human resource, and employee benefit services by being an essential partner with America’s businesses.

Our Values

We act with uncompromising integrity.

We provide outstanding service and build trusted relationships.

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

We work in partnership and support each other.

We are personally accountable and deliver on commitments.

We treat each other with respect and dignity.

LOGO

About Paychex

Paychex, Inc. (NASDAQ: PAYX) is a leading provider of integrated human capital management solutions for payroll, human resources, retirement, and insurance services. By combining its innovative software-as-a-service technology and mobility platform with dedicated, personal service, Paychex empowers small- and medium-sized business owners to focus on the growth and management of their business. Backed by more than 45 years of industry expertise, Paychex serves over 650,000 payroll clients as of May 31, 2018, across more than 100 locations in the U.S. and Europe, and pays one out of every 12 American private sector employees. Learn more about Paychex by visiting www.paychex.com, and stay connected on Twitter and LinkedIn.

LOGO

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS



ANNUAL MEETING INFORMATION		The principal business of the 2018 Annual Meeting of Stockholders (the “Annual Meeting”) will be: 1. To elect nine nominees to the Board of Directors for a one-year term; 2. To hold an advisory vote to approve named executive officer compensation; 3. To ratify the selection of PricewaterhouseCoopers LLP to serve as our independent registered public accounting firm; and 4. To transact such other business as may properly come before the meeting or any adjournment thereof. Stockholders are cordially invited to attend the Annual Meeting. Stockholders of record at the close of business on August 13, 2018 will be entitled to notice of and to vote at the Annual Meeting and at any adjournments or postponements thereof. If you are unable to attend the Annual Meeting, you will be able to listen to the meeting via the Internet. We will broadcast the Annual Meeting as a live webcast through our website. Please note that you will not be able to vote or ask questions through the webcast. The webcast will be accessible at www.paychex.com/investors under Events and Presentations and will remain available for replay for approximately one month following the Annual Meeting. By order of the Board of Directors Stephanie L. Schaeffer *Corporate Secretary* September 7, 2018
Thursday, October 11, 2018 10:00 a.m. Eastern Time* The Strong One Manhattan Square Rochester, NY 14607 * A continental breakfast will be available from 9:00 a.m. – 10:00 a.m. Eastern Time

Important notice regarding the availability of proxy materials for the

2018 Annual Meeting of Stockholders to be held on October 11, 2018:

Paychex, Inc.’s Proxy Statement and Annual Report for the year ended May 31, 2018 are available at

www.paychex.com/investors

Welcome to the Paychex, Inc. 2018 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 13, 2018. Please read the proxy statement and vote right away using any of the following methods.

Stockholders of Record:

LOGO

VOTE BY

INTERNET

Visit the website listed

on your proxy card.

VOTE BY

TELEPHONE

Call the telephone

number listed on your

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VOTE BY MAIL

Sign, date, and return

your proxy card in the

enclosed envelope.

VOTE VIA MOBILE

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Scan this QR code.

Make sure to have your proxy card or voting instruction card in hand and follow the instructions.

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. Many of these institutions offer telephone and online voting. If you wish to vote in person at the Annual Meeting, you will need to obtain a legal proxy from your bank, broker, or other nominee to present when voting.

Table of Contents

PROXY STATEMENT SUMMARY

PROXY STATEMENT

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

DIRECTOR COMPENSATION FOR THE FISCAL YEAR ENDED MAY 31, 2018

BENEFICIAL OWNERSHIP OF PAYCHEX COMMON STOCK

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

CORPORATE GOVERNANCE

Board Leadership Structure

Board Oversight of Risk

Board Meetings and Committees

Nomination Process

Policy on Transactions with Related Persons

Governance and Compensation Committee Interlocks and Insider Participation

Communications with the Board of Directors

CODE OF BUSINESS ETHICS AND CONDUCT

PROPOSAL 2: ADVISORY VOTE TO APPROVE NAMED EXECUTIVE OFFICER COMPENSATION

COMPENSATION DISCUSSION AND ANALYSIS

NAMED EXECUTIVE OFFICER COMPENSATION

Fiscal 2018 Summary Compensation Table

Grants of Plan-Based Awards for Fiscal 2018

Option Exercises and Stock Vested in Fiscal 2018

Outstanding Equity Awards as of May 31, 2018

Potential Payments upon Termination or Change In Control Fiscal 2018

Non-Qualified Deferred Compensation Fiscal 2018

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

Fees for Professional Services

Report of The Audit Committee

FREQUENTLY ASKED QUESTIONS

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

A-1

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

B-1

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, 2018 (“fiscal 2018”), please review the Company’s Annual Report on Form 10-K for fiscal 2018.

Paychex, Inc. 2018 Annual Meeting of Stockholders

LOGO

October 11, 2018

10:00 a.m., Eastern Time

LOGO

The Strong,
One Manhattan Square
Rochester, New York 14607

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	21
Proposal 3	Ratification of selection of PricewaterhouseCoopers LLP to serve as our independent registered public accounting firm	FOR	56

Fiscal 2018 Business Highlights


	For the fiscal year ended May 31,
$ in millions, except per share amounts	2018			2017			% Change
Total revenue		$	3,381		$	3,151		7	%
Operating income		$	1,288		$	1,240		4	%
Net income ⁽¹⁾		$	934		$	817		14	%
Stock price (high/low) ⁽²⁾		$	70.25/$54.24		$	63.03/$52.78		11%/3	%
Stock price as of fiscal year end		$	65.58		$	59.23		11	%

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

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

Paychex has focused on returning value to our stockholders and continued with stockholder-friendly actions during fiscal 2018. In July 2017, the Company increased its quarterly dividend by $0.04 per share, or 9%, to $0.50 per share. In April 2018, the Company increased its quarterly dividend by $0.06 per share, or 12%, to $0.56 per share. The Company continued to repurchase its common stock to offset dilution and in fiscal 2018 repurchased 2.5 million shares for $143.1 million.


		Paychex, Inc. 2018 Proxy Statement • 1

Proxy Summary


Returned to Stockholders in Fiscal 2018 Over $880 million		Annual Distributions to Stockholders ($millions)

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”), 86% of his total target compensation is at risk. On average, for other named executive officers (“NEOs”), 79% of their total target compensation is at risk.

•

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

•

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

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 59 for important information about proxy materials, voting, annual meeting procedures, Company documents, communications, and the deadlines to submit stockholder proposals for the 2019 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 Annual Meeting and links to key documents can be found at www.paychex.com/investors.


		Paychex, Inc. 2018 Proxy Statement • 2

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 2018 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 7, 2018.

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

Proposal Snapshot

What am I voting on?

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.

Voting Recommendation

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 shall be 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. If a nominee that is an incumbent director does not receive a required majority of the votes cast, the director shall offer to tender his or her resignation to the Board. The Governance and Compensation Committee (the “G&C Committee”) shall consider such offer and will make a recommendation to the Board on whether to accept or reject the resignation, or whether other action should be taken. The Board will consider the G&C Committee’s recommendation and will determine whether to accept such offer.

2018 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, with the exception of Mr. Golisano and Mr. Mucci, are independent under both the NASDAQ Stock Market (“NASDAQ”) and Securities and Exchange Commission (“SEC”) director independence standards. If elected, each nominee will hold office until his or her successor is elected and has qualified or until his or her earlier resignation or removal. We believe that all of the nominees will be available to serve as a director. However, if any nominee should become unable to serve, the persons named in the enclosed proxy may exercise discretionary authority to vote for substitute nominees proposed by the Board. Current Board members Mr. Horsley and Mr. Inman do not intend to stand for re-election at the Annual Meeting.


		Paychex, Inc. 2018 Proxy Statement • 3

Election of Directors

The Board believes that the combination of the various qualifications, skills, and experience of the 2018 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 in light of our business and structure.

The Board recommends the election of each of the director nominees identified on the following pages. Unless otherwise directed, the persons named in the enclosed proxy 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 particular 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.

Balance of Relevant Skills LOGO


		Paychex, Inc. 2018 Proxy Statement • 4

Election of Directors

B. Thomas Golisano

Founder and Chairman of the Board of Paychex, Inc.


Age 76 Director since 1979 *Board Committees:* • Executive *Current Public Company Directorships:* • Twinlab Consolidated Holdings, Inc.		Mr. Golisano founded Paychex in 1971 and is Chairman of the Board of the Company. He served as President and Chief Executive Officer (“CEO”) of the Company until October 2004. He serves on the board of trustees of the Rochester Institute of Technology. Mr. Golisano serves on the board of Twinlab Consolidated Holdings, Inc. and serves as a director of numerous non-profit organizations and private companies. He is founder and member of the board of trustees of the B. Thomas Golisano Foundation.
		*SPECIFIC QUALIFICATIONS AND SKILLS:* The Board has concluded that Mr. Golisano is qualified to lead the Board due to his relevant executive leadership experience and extensive knowledge of the operations of the Company. These skills were attained through his role of founder and former CEO of Paychex.


Thomas F. Bonadio Chief Executive Officer and Managing Partner of The Bonadio Group
Age 69 Director since 2017 *Board Committees:* • Audit • Corporate Development Advisory *Current Public Company Directorships:* • CurAegis Technologies, Inc.		Mr. Bonadio is the founder of The Bonadio Group, the largest independent provider of accounting, business advisory, and financial services in New York State outside of Manhattan. Mr. Bonadio has experience serving on community organizations and not-for-profit boards, as well as publicly traded boards. He is currently a director and chair of the audit committee for CurAegis Technologies, Inc. He also previously served as a director and audit committee chair for Conceptus, Inc., which is now a wholly owned subsidiary of Bayer AH of Germany, until June 2013.
		*SPECIFIC QUALIFICATIONS AND SKILLS:* The Board has concluded that Mr. Bonadio is qualified to serve as a director of the Company due to his strong background in finance and business, his entrepreneurial experience, and his knowledge of the Certified Public Accountant community. Mr. Bonadio is a successful entrepreneur whose experience building his own business is representative of many clients Paychex serves today. He also brings a high degree of financial literacy obtained from his years in the financial services industry, and his ability to assess financial performance of other companies through the review and understanding of financial statements. This financial expertise is a great benefit to the Board and its committees.


Joseph G. Doody Former Vice Chairman of Staples, Inc.
Age 66 Director since 2010 *Board Committees:* • Audit *Current Public Company Directorships:* • Casella Waste Systems, Inc. • Virtusa Corporation		Mr. Doody retired from Staples, Inc., an office products company, in September 2017 where he served as Vice Chairman since February 2014. Prior to that, he served as President, North American Commercial, from January 2013 until February 2014, and President, North American Delivery, from March 2002 to January 2013. Mr. Doody has experience serving on other public boards, including Casella Waste Systems, Inc. and Virtusa Corporation. Mr. Doody is a member of the Foundation Board at the College at Brockport.
		*SPECIFIC QUALIFICATIONS AND SKILLS:* The Board has concluded that Mr. Doody is qualified to serve as a director of the Company due to his significant leadership and international experience. His long tenure in management of a large division of a multinational company enables him to provide our Board with important operational expertise. In addition, his deep knowledge of small- to medium-sized businesses brings a thorough understanding of the risks and opportunities affecting the Company’s clients and potential clients. Mr. Doody also has extensive experience in strategic planning and business development, which allows him to provide valuable input into the Company’s plans for market growth.


		Paychex, Inc. 2018 Proxy Statement • 5

Election of Directors


David J.S. Flaschen Investor and Advisor
Age 62 Director since 1999 *Board Committees:* • Audit (Chair) • Investment • Corporate Development Advisory • G&C *Current Public Company* *Directorships:* • Informa plc (London Stock Exchange)		Mr. Flaschen is an investor and advisor to a number of private companies providing business, marketing, and information services. Mr. Flaschen is the co-founder of Regrub, LLC, a Smashburger franchisee group in the United States (“U.S.”). From 2005 to 2011, he was a partner with Castanea Partners, a private equity investment firm. Mr. Flaschen is a member of the 2018 National Association of Corporate Directors Blue Ribbon Commission on Adaptive Governance for Board Oversight of Disruptive Risks. Mr. Flaschen is a director/advisor of various private companies and of Informa plc, a Financial Times Stock Exchange 100 public company which is traded on the London Stock Exchange.
		*SPECIFIC QUALIFICATIONS AND SKILLS:* The Board has concluded that Mr. Flaschen is qualified to serve as a director of the Company as a result of his extensive executive experience in information and marketing services. Over the course of his career, Mr. Flaschen has worked internationally with a number of businesses, including Thomson Financial and AC Nielson. He also brings a high degree of financial literacy obtained from his years in the financial services industry, and his ability to assess financial performance of other companies through review and understanding of financial statements. This financial expertise is a great benefit to the Board and its committees.


Pamela A. Joseph Former President and Chief Operating Officer of Total System Services, Inc.
Age 59 Director since April 2018 *(previously served from* *2005-2017, reappointed* *in 2018)* *Board Committees:* • None *Current Public Company* *Directorships:* • TransUnion		Ms. Joseph served as President and Chief Operating Officer of Total System Services, Inc. (“TSYS”), from May 2016 until September 2017. TSYS offers issuer services and merchant payment acceptance for credit, debit, prepaid, healthcare, and business solutions. Previously, she served as a Vice Chairman of U.S. Bancorp Payment Services and Chairman of Elavon (formerly NOVA Information Systems, Inc.), a wholly owned subsidiary of U.S. Bancorp, from December 2004 until her retirement in June 2015. U.S. Bancorp Payment Services and Elavon manage and facilitate consumer and corporate card issuing, as well as payment processing. Ms. Joseph serves on the Board of Directors of TransUnion, and previously served on our Board from November 2005 until March 2017.
		*SPECIFIC QUALIFICATIONS AND SKILLS:* The Board has concluded that Ms. Joseph is qualified to serve as a director of the Company due to her extensive executive experience in the financial services and payment industries. Her wealth of technology experience brings insight to the Board and its committees. In addition, her experience with major acquisitions, board experience with the healthcare services field, and international expansion provides valuable input towards the Company’s growth plans.


		Paychex, Inc. 2018 Proxy Statement • 6

Election of Directors


Martin Mucci President and Chief Executive Officer of Paychex, Inc.
Age 58 Director since 2010 *Board Committees:* • Executive (Chair) • Corporate Development Advisory *Current Public Company Directorships:* • None		Mr. Mucci has served as President and CEO of the Company since September 2010. Mr. Mucci joined the Company in 2002 as Senior Vice President (“SVP”), Operations. Prior to joining Paychex, he held senior level positions with Frontier Communications, a telecommunications company, including President of Telephone Operations and CEO of Frontier Telephone of Rochester, over the course of his 20-year career. Mr. Mucci was a member of the Board of Directors of Cbeyond, Inc. until it was purchased by Birch Communications in July 2014. He is a member of the Upstate New York Regional Advisory Board of the Federal Reserve Bank of New York and is a Trustee Emeritus of St. John Fisher College.
		*SPECIFIC QUALIFICATIONS AND SKILLS:* The Board has concluded that Mr. Mucci is qualified to serve as a director of the Company because he provides day-to-day leadership as the current President and CEO of Paychex, giving him extensive knowledge of the Company, its operations, challenges, and opportunities. In addition, Mr. Mucci’s educational background provides him with strong financial literacy.


Joseph M. Tucci Founder, Co-Chief Executive Officer, and Co-Chairman of GTY Technology Holdings, Inc.
Age 71 Director since 2000 Lead Independent Director *Board committees:* • G&C (Chair) • Executive *Current Public Company Directorships:* • Motorola Solutions, Inc. • GTY Technology Holdings, Inc.		Mr. Tucci is the founder of GTY Technology Holdings, Inc., a special purpose acquisitions company, and has been its Co-CEO and Co-Chairman since September 2016. He has been Chairman of Bridge Growth Partners, LLC, a private equity firm based in New York, since October 2016. Mr. Tucci was the former Chairman of the Board of Directors and CEO of EMC Corporation, a provider of data-storage systems. He was EMC’s Chairman from January 2006 and CEO from January 2001 until September 2016, when Dell Technologies acquired the company. He was Chairman of the Board of Directors for VMWare, Inc. from 2007 through September 2016. He serves on the Board of Directors of Motorola Solutions, Inc., and on the boards of various academic and community organizations.
		*SPECIFIC QUALIFICATIONS AND SKILLS:* The Board has concluded that Mr. Tucci is qualified to serve as a director of the Company due to his extensive executive leadership experience as CEO of EMC Corporation. Mr. Tucci has spent over 40 years in the technology industry in senior roles at large, complex, and global technology companies. His experience leading EMC through a period of dramatic revitalization, growth and market share gains, and new product introductions enables him to share knowledge of the challenges a company faces due to rapid changes in the marketplace.


		Paychex, Inc. 2018 Proxy Statement • 7

Election of Directors


Joseph M. Velli Retired Financial Services and Technology Executive
Age 60 Director since 2007 *Board committees:* • Investment • Executive • Corporate Development Advisory (Chair) • G&C *Current Public Company Directorships: • Computershare Ltd. (Australian Stock Exchange) (Remuneration Committee Chair)* • Cognizant Technology Solutions Corp.		Mr. Velli currently serves on the Board of Directors of Computershare Limited, a global provider of corporate trust, stock transfer, employee share plan, and mortgage servicing services. In December 2017, Mr. Velli was appointed to the Board of Directors of Cognizant Technology Solutions Corp., a multinational corporation that provides Information Technology services, including digital, technology, consulting, and operations services. He also serves on the Boards of Directors of two private companies, Scivantage Inc. and Foreside Financial Corp. Mr. Velli previously served as Senior Executive Vice President of The Bank of New York and as a member of the Senior Policy Committee. During his 22-year tenure with The Bank of New York, Mr. Velli’s responsibilities included heading Global Issuer Services, Global Custody and related Investor Services, Global Liquidity Services, Pension and 401(k) Services, Consumer and Retail Banking, Correspondent Clearing, and Securities Services. Most recently, he served as Chairman and CEO of ConvergEx Group, LLC, a provider of brokerage, software products and technology services from 2006 to 2013, and continued to serve on the ConvergEx Board until 2014. Mr. Velli served on the Board of Directors of ETRADE Financial Corporation and ETRADE Bank until October 2014. Mr. Velli has been a member of the board of trustees for William Paterson University since June 2017. Mr. Velli acts as a Senior Advisor to Lovell Minnick Partners and, from time to time, he provides advisory services to other private equity firms.
		*SPECIFIC QUALIFICATIONS AND SKILLS:* The Board has concluded that Mr. Velli is qualified to serve as a director of the Company due to his extensive experience with securities servicing, capital markets, business to business, marketing, and mergers and acquisitions matters, as well as his public board experience. He plays a key role in the Board’s discussions of the Company’s investments and liquidity. Mr. Velli has extensive experience with acquisitions and business services, providing valuable insights on potential growth opportunities for the Company.


Kara Wilson Chief Marketing Officer of Rubrik, Inc.
Age 48 Director since 2017 *Board committees:* • Audit • Corporate Development Advisory *Current Public Company Directorships: • None*		Ms. Wilson is Chief Marketing Officer at Rubrik, Inc., a cloud data management company, since June 2017. She has over 20 years of experience in driving go-to-market strategies for large, medium, and hyper-growth start ups. She has held marketing leadership roles with some of the technology industry’s most influential companies, including Cisco, SAP, SuccessFactors, PeopleSoft/Oracle, Okta, and FireEye. Prior to Rubrik, from October 2016 to June 2017, Ms. Wilson was Executive Vice President and from August 2013 to June 2017, Chief Marketing Officer of cyber security company FireEye, where she helped launch FireEye’s initial public offering and was responsible for the company’s global marketing initiatives including corporate, product, and technical marketing, global communications, and field enablement.
		*SPECIFIC QUALIFICATIONS AND SKILLS:* The Board has concluded that Ms. Wilson is qualified to serve as a director of the Company due to her extensive experience in driving go-to-market strategies for enterprise technology companies. The Board can leverage Ms. Wilson’s marketing experience to help Paychex with the development and execution of go-to-market strategies to effectively differentiate the Company in a highly competitive and constantly evolving industry. Ms. Wilson has experience at global companies and can provide insight on any expansion of the Company’s global presence.


		Paychex, Inc. 2018 Proxy Statement • 8

Director Compensation

DIRECTOR COMPENSATION

FOR THE FISCAL YEAR ENDED MAY 31, 2018

Director compensation is set by the G&C Committee and approved by the Board. The Board’s authority cannot be delegated to another party. The Company’s management does not play a role in setting Board 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 2018 Summary Compensation Table, contained in the Named Executive Officer Compensation section of this proxy statement.

Board compensation is approved by the G&C Committee in January for the upcoming calendar year. Mr. Golisano, who is not an independent director, receives an annual retainer of $300,000 for his services as Chairman of the Board, paid in quarterly installments.

The table below presents the total compensation received from the Company by all directors except Mr. Mucci for fiscal year ended May 31, 2018 (“fiscal 2018”).

Name
(a)

Fees Earned
or Paid in
Cash

(b)

Stock Awards
(c)

Option Awards
(d)

Total

B. Thomas Golisano

300,000

—

300,000

Thomas F. Bonadio

95,000

65,151

63,555

223,706

Joseph G. Doody

90,000

65,151

63,555

218,706

David J.S. Flaschen

129,500

65,151

63,555

258,206

Phillip Horsley

92,500

65,151

63,555

221,206

Grant M. Inman

104,500

65,151

63,555

233,206

Pamela A. Joseph ⁽¹⁾

20,000

—

20,000

Joseph M. Tucci

107,000

65,151

63,555

235,706

Joseph M. Velli

104,500

65,151

63,555

233,206

Kara Wilson

92,500

65,151

63,555

221,206

(1)	Ms. Joseph was reappointed to the Board in April 2018.


		Paychex, Inc. 2018 Proxy Statement • 9

Director Compensation

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 2018, 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. The annual retainers, applicable to all independent directors, in effect for both calendar years 2018 and 2017 are as follows:

Compensation Element

Annual cash retainer

80,000

Audit Committee member annual retainer

10,000

G&C Committee member annual retainer

7,500

Investment Committee member annual retainer

5,000

Executive Committee member annual retainer

5,000

Corporate Development Advisory Committee member annual retainer

5,000

Audit Committee Chair annual retainer ⁽¹⁾

22,000

G&C Committee Chair annual retainer ⁽¹⁾

14,500

Corporate Development Advisory Committee Chair annual retainer ⁽¹⁾

2,000

Investment Committee Chair annual retainer ⁽¹⁾

2,000

(1)	The committee Chair receives the Chair annual retainer in addition to the respective committee 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 2018, the equity-based compensation structure for independent directors was based on a total value of approximately $130,000 per director, with approximately 50% awarded in the form of stock options and 50% in the form of restricted stock. In July 2017, all independent directors, with the exception of Ms. Joseph, 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 13, 2017	July 13, 2017
Exercise Price	N/A	$57.20
Quantity	1,139	9,615
Fair Value ⁽¹⁾	$57.20	$6.61
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 13, 2017 fair value of $6.61 per share for these stock options were: risk-free interest rate of 2.2%; dividend yield of 3.4%; volatility factor of 0.17; and expected option term life of 6.5 years.

(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. 2018 Proxy Statement • 10

Director Compensation

As of May 31, 2018, each independent director had the following equity awards outstanding:


Director	Restricted Stock Outstanding (Shares)		Stock Options Outstanding (Shares)
Thomas F. Bonadio		1,139		14,019
Joseph G. Doody		1,139		31,324
David J.S. Flaschen		1,139		94,786
Phillip Horsley		1,139		80,850
Grant M. Inman		1,139		88,536
Pamela A. Joseph⁽¹⁾		—		68,701
Joseph M. Tucci		1,139		101,036
Joseph M. Velli		1,139		94,786
Kara Wilson		1,139		9,615

(1)	Ms. Joseph was reappointed to the Board in April 2018.

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 2018, 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

The G&C Committee set stock ownership guidelines for our independent directors with a value of five times his or her annual Board retainer, not including any committee or committee chair retainers. The ownership guidelines were established to provide long-term alignment with stockholders’ interests. The independent directors are expected to attain the ownership guideline within five years after the later of first becoming a director or the initial adoption of the guideline. Directors must hold underlying stock received through restricted stock awards until their service on the Board is complete, with the exception of 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, the Company prohibits 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. 2018 Proxy Statement • 11

Director Compensation

Pledging of Company Stock

The Company has a pledging policy for all Paychex directors, officers, and employees. This policy prohibits pledging Company securities as collateral for a loan or a line of credit without obtaining prior Company approval. Approval may be granted when the individual clearly demonstrates the intent and financial capacity to satisfy the obligations without resort to the pledged securities and where the total pledge represents no more than 25% of the pledgor’s beneficial ownership interest in the Company. The Company’s pledging policy is posted at www.paychex.com/investors under Corporate Governance & Committees.


		Paychex, Inc. 2018 Proxy Statement • 12

Beneficial Ownership

BENEFICIAL OWNERSHIP OF PAYCHEX COMMON STOCK

The following table contains information, as of July 31, 2018, 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 named executive officers (“NEOs”); and

•

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

Under the rules of the 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.


Name	Amount of Shares Owned⁽¹⁾		Non-vested Shares of Restricted Stock ⁽²⁾		Stock Options Exercisable by September 29, 2018 ⁽³⁾		Total Shares Beneficially Owned		Percent of Class
Principal Stockholders:
B. Thomas Golisano ^(4),(5),(6) 1 Fishers Road Pittsford, NY 14534		37,927,596		—		—		37,927,596		10.4	%
Vanguard Group Inc.⁽⁷⁾ PO Box 2600 V26 Valley Forge, PA 19482-2600		24,873,438		—		—		24,873,438		6.8	%
BlackRock Inc. ⁽⁸⁾ 55 East 52^nd Street New York, NY 10055		24,771,984		—		—		24,771,984		6.8	%
Directors:
B. Thomas Golisano ^(4),(5),(6)		37,927,596		—		—		37,927,596		10.4	%
Thomas F. Bonadio		11,375		1,107		14,019		26,501		*	*
Joseph G. Doody		14,532		1,107		31,324		46,963		*	*
David J.S. Flaschen		41,137		1,107		87,536		129,780		*	*
Phillip Horsley ⁽⁶⁾^,(9)		110,090		—		80,850		190,940		*	*
Grant M. Inman ⁽⁶⁾^,(9)		223,749		—		69,382		293,131		*	*
Pamela A. Joseph		4,378		1,384		68,701		74,463		*	*
Martin Mucci		237,867		66,345		1,510,337		1,814,549		*	*
Joseph M. Tucci		48,760		1,107		94,786		144,653		*	*
Joseph M. Velli		25,934		1,107		94,786		121,827		*	*
Kara Wilson		1,139		1,107		9,615		11,861		*	*
Named Executive Officers:
Martin Mucci		237,867		66,345		1,510,337		1,814,549		*	*
Efrain Rivera		48,500		12,207		436,724		497,431		*	*
Mark A. Bottini		44,957		13,224		326,652		384,833		*	*
John B. Gibson		12,969		12,754		214,972		240,695		*	*
Michael E. Gioja		51,865		12,754		211,620		276,239		*	*
All directors, NEOs, and executive officers of the Company as a group (18 persons)		38,896,560		142,767		3,691,757		42,731,084		11.8	%


		Paychex, Inc. 2018 Proxy Statement • 13

Beneficial Ownership

**	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, 2018. 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 six-member board of trustees. Mr. Golisano disclaims beneficial ownership of these shares, but does share voting and investment power.

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

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

(7)

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

(8)

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

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

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act requires directors, executive officers, and beneficial owners of more than 10% of the Company’s common stock to file reports of their ownership and changes in their ownership of the Company’s equity securities with the SEC. Based solely on our review of information supplied to the Company and filings made with the SEC, the Company believes that during fiscal 2018, its directors, executive officers, and greater than 10% beneficial owners have complied in a timely manner with all applicable Section 16 filing requirements.


		Paychex, Inc. 2018 Proxy Statement • 14

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 at www.paychex.com/investors under Corporate Governance & Committees.

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 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.

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. 2018 Proxy Statement • 15

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

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

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 four meetings and one special Board conference call in fiscal 2018. To the extent practicable, directors are expected to attend all Board meetings and meetings of the committees on which they serve. During fiscal 2018, the average attendance for the Board and committee meetings was approximately 98%. 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 2018. Directors are expected to attend the Company’s Annual Meetings of Stockholders. All of our then-current directors attended the 2017 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.

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

Grant M. Inman ⁽³⁾

Kara Wilson ⁽⁴⁾

6 Meetings in fiscal 2018

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

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

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

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


		Paychex, Inc. 2018 Proxy Statement • 16

Corporate Governance

Executive Committee

Committee Members:

Martin Mucci (Chair)

B. Thomas Golisano

Joseph M. Tucci

Joseph M. Velli

0 Meetings in fiscal 2018

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

Investment Committee

Committee Members:

Grant M. Inman (Chair) ⁽³⁾

David J.S. Flaschen

Phillip Horsley ⁽³⁾

Joseph M. Velli

2 Meetings in fiscal 2018

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

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

Governance and Compensation Committee

Committee Members: ⁽⁵⁾

Joseph M. Tucci (Chair)

David J.S. Flaschen

Phillip Horsley ⁽³⁾

Grant M. Inman ⁽³⁾

Joseph M. Velli

5 Meetings in fiscal 2018

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

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

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

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

• Review annually the independence of directors.

Corporate Development Advisory Committee

Committee Members:

Joseph M. Velli (Chair)

Thomas F. Bonadio

David J.S. Flaschen

Martin Mucci

Kara Wilson ⁽⁴⁾

4 Meetings in fiscal 2018

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

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

(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 qualify as an “Audit Committee Financial Expert,” as defined by applicable SEC rules.

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

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

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


		Paychex, Inc. 2018 Proxy Statement • 17

Corporate Governance

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 at www.paychex.com/investors under Corporate Governance & Committees.

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 does not have a formal policy regarding diversity. However, 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.

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. In 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 has 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 do so may recommend candidates for nomination by identifying such candidates and providing relevant biographical information in written communications to the Chair of the G&C Committee in accordance with the policy described in the section entitled “Communications with the Board of Directors.”

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 under Corporate Governance & Committees.

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 the individual 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.


		Paychex, Inc. 2018 Proxy Statement • 18

Corporate Governance

Members of the Board are required to disclose to the Chair 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 2018, no instances of conflict or non-compliance have occurred. 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.

For fiscal 2018, the following transaction in excess of $120,000 were identified and communicated to the G&C Committee:

•

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

•

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

•

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

Governance and Compensation Committee Interlocks and Insider Participation

None of the members of the G&C Committee were at any time during fiscal 2018, or at any other time, an officer or employee of the Company. During fiscal 2018, no member of the G&C Committee or Board was an executive officer of another entity on whose Compensation Committee or Board of Directors an executive officer of Paychex served.

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.


		Paychex, Inc. 2018 Proxy Statement • 19

Code of Ethics

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 at www.paychex.com/investors under Corporate Governance & Committees. 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. 2018 Proxy Statement • 20

Say-on-Pay Vote

PROPOSAL 2: ADVISORY VOTE TO APPROVE NAMED EXECUTIVE OFFICER COMPENSATION

Proposal Snapshot

•

What am I voting on?

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 2017 Annual Meeting of Stockholders, approximately 96% of the total stockholder votes cast were in favor of the Company’s NEO compensation as presented in our 2017 proxy statement.

•

Voting Recommendation

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 2019 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 mix 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 for directors and executive officers, designed to align the director’s and executives’ long-term financial interests with those of our stockholders.

•

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

•

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

•

A long-standing insider trading policy.


		Paychex, Inc. 2018 Proxy Statement • 21

Say-on-Pay Vote

•

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

Results of the 2017 Say-on-Pay Vote

At the 2017 Annual Meeting of Stockholders held on October 11, 2017, approximately 96% of the total stockholder votes cast were in favor of the Company’s NEO compensation as presented in our 2017 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 2018, 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 present in person or by proxy and entitled to vote on the proposal at the Annual Meeting must be voted for the proposal.

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. 2018 Proxy Statement • 22

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 2018, 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

COMPENSATION DISCUSSION AND ANALYSIS TABLE OF CONTENTS

Executive Summary

Business and Financial Highlights

How Pay is Tied to Company Performance

Highlights of Executive Compensation Practices

Elements of Compensation

Summary of Fiscal 2018 Elements of Compensation

Fiscal 2018 Compensation Results

Stock Ownership Guidelines

Prohibition on Hedging or Speculating in Company Stock

Pledging of Company Stock

Recoupment, Non-Compete, and Other Forfeiture Provisions

Perquisites

Deferred Compensation

Change in Control Plan

Compensation Decision Process

Role of the Compensation Consultant

Role of Governance and Compensation Committee and Management

Peer Group

CEO Compensation

CEO Pay Ratio

Impact of the Internal Revenue Code

THE GOVERNANCE AND COMPENSATION COMMITTEE REPORT


		Paychex, Inc. 2018 Proxy Statement • 23

CD&A

Executive Summary

Business and Financial Highlights

Our mission is to be the leading provider of payroll, human resource (“HR”), and employee benefits services by being an essential partner with America’s businesses. We believe 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. We delivered solid financial results for fiscal 2018. Reported financial results for fiscal 2018 and the respective growth percentages compared to the fiscal year ended May 31, 2017 (“fiscal 2017”) were as follows:


	For the fiscal year ended May 31,
$ in millions, except per share amounts	2018			2017			% Change
Payroll service revenue		$	1,810		$	1,779		2%
Human Resource Services revenue			1,507			1,322		14%
Total service revenue			3,317			3,101		7%
Interest on funds held for clients			64			51		26%
Total revenue		$	3,381		$	3,152		7%

Operating income		$	1,288		$	1,240		4%
Operating income, net of certain items⁽¹⁾		$	1,257		$	1,189		6%
Net income⁽²⁾		$	934		$	817		14%
Adjusted net income⁽¹⁾		$	920		$	799		15%
Diluted earnings per share⁽²⁾		$	2.58		$	2.25		15%
Adjusted diluted earnings per share⁽¹⁾		$	2.55		$	2.20		16%
Operating cash flows		$	1,276		$	960		33%

(1)

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

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


		Paychex, Inc. 2018 Proxy Statement • 24

CD&A

Fiscal 2018 Actions Related to Long-Term Strategy: The table below discusses fiscal 2018 performance as it relates to the key areas of focus that comprise the Company’s long-term strategy.


Strategy Focus				Fiscal 2018 Summary of Accomplishments
Flexible, convenient service				We are committed to backing our integrated Human Capital Management (“HCM”) solutions with world-class service. The integration of flexible service options and leading-edge technology allows us to meet our clients’ diverse needs and empowers our clients to choose the way in which they would like to be serviced. Clients can decide when, where, and how they access our services including through online services, the traditional payroll specialist model, a 24/7 dedicated service center, our multi-product service center, or, for some of our larger clients, a customer relationship manager. Our service delivery remained strong as we continued to experience favorable client retention results and improvements in Net Promoter Score.
Solid sales execution				In fiscal 2018, we rolled out a new go-to-market strategy leveraging the capabilities of our virtual sales force. This strategy started off slowly in the first half of the fiscal year, but gained momentum as the year progressed. Our comprehensive HR outsourcing services, in particular our professional employer organization (“PEO”) business, performed well in both new sales and client retention.
Industry-leading, integrated technology				We have continued our focus on leading-edge technology, concentrating our efforts on the enhancement of Paychex Flex^®, our robust, cloud-based HCM platform, which allows direct client access to payroll, HR, and benefits information in a streamlined and integrated approach to workplace management. In fiscal 2018, we introduced the following: • AccountantHQ, a Paychex Flex platform-based offering, which provides access to authorized client payroll and HR data and key account contacts to assist a client’s accountant in driving greater efficiency; • InVision^TM Iris Time Clock, a biometric clock that scans the iris, providing fast and accurate time capture; • Do-It-Yourself online employee handbook (“DIY Handbook”); • Onboarding Essentials, which enables clients to onboard new hires quickly and in a completely paperless fashion; and • Netspend’s Tip Network^TM, which streamlines the process for paying tipped employees.
Comprehensive suite of value-added HCM services				We offer a complete suite of HCM services, which help manage the employer/employee relationship through all phases of the employee life cycle. During fiscal 2018, we introduced new product bundles, which now include DIY Handbook and Onboarding Essentials at no extra cost. We also introduced Paychex Promise, a first of its kind offering in the payroll and HR industry. It is a subscription-based service that delivers peace of mind to business owners through protection against payroll interruptions and solutions to address the routine challenges of running a successful business. The primary offering is Payroll Protection, which extends the collection period of payroll funds from a client’s bank account by seven days without interruption of service. We also announced a partnership with Workplace by Facebook to introduce a social collaboration tool to the Company’s HCM suite.
Continued service penetration				We continue to see client growth across the following HCM services: comprehensive HR outsourcing services, retirement services, insurance services, and our time and attendance solutions. Our largest HRS revenue stream is Paychex HR Services, which includes our administrative service organization and PEO. Demand for these services resulted in strong growth in the number of worksite employees served. We are constantly evolving to enhance our competitive position and focus on showcasing the value proposition of our full-suite of HCM solutions.


		Paychex, Inc. 2018 Proxy Statement • 25

CD&A

Strategy Focus

Fiscal 2018 Summary of Accomplishments

Strategic acquisitions

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

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

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

We are a significant beneficiary of the Tax Act, with the benefit of the lower federal statutory rate on current earnings along with the one-time benefit of revaluation of our deferred tax liabilities at the lower tax rate. The majority of the benefit is being returned to stockholders in the form of dividend payments and the repurchase of our outstanding shares of common stock. We are utilizing the remaining portion of this benefit to accelerate investments in the areas of product and technology, sales and marketing, and in our employees.


		Paychex, Inc. 2018 Proxy Statement • 26

CD&A

Return to Stockholders: The value we return to our stockholders is very important to us. During fiscal 2018, we returned over $880 million to our stockholders through dividends and repurchases of outstanding shares of our common stock.


									Annual Distributions to Stockholders ($million) Annual Dividends Per Common Share








		Since 2014, the
		Company has returned
		almost $4.0 billion
		to shareholders.

Dividend Payments: Paychex continues to pay substantial dividends to our stockholders, targeting approximately 80% of our net income. In April 2018, we increased our dividend for the second time during the fiscal year in order to return some of the benefit of the Tax Act 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
April 2018		$	0.06	$0.56		12	%
July 2017		$	0.04	$0.50		9	%
July 2016		$	0.04	$0.46		10	%
July 2015		$	0.04	$0.42		11	%

Share Repurchases: In May 2014, the Board authorized the repurchase of up to $350 million of our common stock, with authorization that expired on May 31, 2017. In July 2016, the Board authorized the repurchase of an additional $350 million with authorization expiring on May 31, 2019. Shares repurchased under these two plans over the past three fiscal years were as follows:


(In millions)	Shares Repurchased		Amount
Fiscal 2018		2.5		$	143.1
Fiscal 2017		2.9		$	166.2
Fiscal 2016		2.2		$	107.9


		Paychex, Inc. 2018 Proxy Statement • 27

CD&A

The following graph shows how a $100 investment in the Company’s common stock on May 31, 2013 would have grown to $206 as of May 31, 2018, with dividends reinvested quarterly. The chart also compares the total stockholder return on the Company’s common stock to the same investment in the S&P 500 Index over the same period, with dividends reinvested quarterly. For Paychex, this represents a cumulative return of 106%, or 16% on an annualized basis.

Total Return Performance LOGO

For more information about our fiscal 2018 business results, see the section of our fiscal 2018 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 the Company’s 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 2018, variable pay represented 86% of total target compensation for our CEO, and 79% of total target compensation on average for our other NEOs.

•

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

•

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

•

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

•

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

•

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


		Paychex, Inc. 2018 Proxy Statement • 28

CD&A

The pay mix at target for our CEO and the average for other NEOs for fiscal 2018 is displayed below.


CEO Pay Mix Target		Other NEOS Pay Mix at Target

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.

Service Revenue ($millions) Operating Income, Net of Certain Items (1) ($millions) CEO Total Reported Compensation (Excluding LTIP) (2) ($millions) 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 related GAAP measure of operating income in Appendix A.

(2)

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

Amounts realized in fiscal 2018 related to performance-based compensation programs for fiscal 2018 and prior years included the following:

•

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

•

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

Refer to the section entitled “Elements of Compensation” and the subsections of “Annual Officer Performance 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


		Paychex, Inc. 2018 Proxy Statement • 29

CD&A

equity-based incentives make up the largest component of pay for the NEOs. For the CEO, Mr. Mucci, this accounts for 68% of his target compensation for fiscal 2018. The main difference between reported compensation in the Summary Compensation Table and compensation realized is in the value of equity awards. In reported compensation, equity-based 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.

The following table illustrates how the equity-based awards granted to Mr. Mucci in the last three fiscal years were tracking as of May 31, 2018.


								Intrinsic Value as of May 31, 2018 ⁽³⁾
Fiscal Year	Awards	Value Reported at Grant Date⁽¹⁾			Value Realized Through May 31, 2018 ⁽²⁾			Vested Shares			Unvested Shares ⁽⁴⁾			Total Intrinsic Value Not Yet Realized			Increase/ (Decrease) in Realized and Unrealized Value Since Grant Date
2016
	Stock Options		$	1,069,161		$	—		$	1,888,084		$	1,888,102		$	3,776,186		253	%
	Restricted Stock		$	742,640		$	621,243		$	—		$	343,049		$	343,049		30	%
	Performance Shares		$	1,855,384		$	—		$	—		$	2,655,990		$	2,655,990		43	%
2017
	Stock Options		$	1,191,049		$	—		$	247,177		$	741,540		$	988,717		(17	%)
	Restricted Stock		$	874,697		$	273,057		$	—		$	628,519		$	628,519		3	%
	Performance Shares		$	2,209,835		$	—		$	—		$	2,331,713		$	2,331,713		6	%
	LTIP-Options		$	1,151,732		$	—		$	—		$	931,604		$	931,604		(19	%)
	LTIP-Shares		$	1,290,661		$	—		$	—		$	1,578,839		$	1,578,839		22	%
2018
	Stock Options		$	1,372,685		$	—		$	—		$	1,788,780		$	1,788,780		30	%
	Restricted Stock		$	940,453		$	—		$	—		$	1,077,479		$	1,077,479		15	%
	Performance Shares		$	2,353,659		$	—		$	—		$	2,896,472		$	2,896,472		23	%

(1)	The value reported at grant date represents the amounts reported in the 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, 2018 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 the fiscal years ended May 31, 2016 (“fiscal 2016”), fiscal 2017, and fiscal 2018. 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, 2018.

(3)

Intrinsic value not yet realized for stock options is based on the closing stock price of $65.58 per share as of May 31, 2018 less the exercise price for the respective grants. In those instances, when the outstanding options are out of the money (the option exercise price is greater than the closing price) no value is provided. Intrinsic value for restricted stock and performance shares is based on the closing stock price of $65.58 per share as of May 31, 2018 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. 2018 Proxy Statement • 30

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 2018, and these practices, among other elements of our compensation programs, aid in mitigating risk associated with our compensation programs.

WHAT WE DO

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

☑ 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.

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

☑ 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.

☑ Share ownership guidelines. There are restrictions on sales of vested awards until a NEO has attained ownership of the Company’s stock as follows: CEO — five 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 equity award agreements and Annual Incentive Program. 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, 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.

WHAT WE DON’T DO

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

☒ 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.

☒ No hedging, pledging, or short sales transactions permitted. Our executive officers, including NEOs, and directors are prohibited from engaging in any hedging or other similar types of transactions with respect to the Company’s common stock. Pledging is prohibited without prior Company approval and not for more than 25% of the pledgor’s total beneficial ownership.

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

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 2018 Summary Compensation Table, included in the Named Executive Officer Compensation section of this proxy statement.


		Paychex, Inc. 2018 Proxy Statement • 31

CD&A

Elements of Compensation

We use a combination of compensation elements, including base salary, Annual Incentive Program, and equity-based awards delivered under our 2002 Plan. Each element and the related compensation decisions and results for fiscal 2018 are discussed below.

Summary of Fiscal 2018 Elements of Compensation

Compensation Elements Salary Annual Incentive Program Stock Options Restricted Stock Awards Performance (1) Shares Recipients When Granted Form of Delivery Type of performance Performance Period How Payout is Determined Performance Metrics Fixed Variable, At-Risk ALL NEOs Reviewed annually Annually Cash Equity Short-Term Long-Term Incentives Ongoing 1 year Vest ratably over 3 years Vest ratably over 3 years 2-year performance period followed by 1-year service period 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 NA Service revenue; operating income, net of certain items(2); and annualized new business revenue NA NA Service revenue; and operating income, net of certain items Compensation Elements Salary Annual Incentive Program Stock Options Restricted Stock Awards Performance (1) Shares Recipients When Granted Form of Delivery Type of performance Performance Period How Payout is Determined Performance Metrics Fixed Variable, At-Risk ALL NEOs Reviewed annually Annually Cash Equity Short-Term Incentives Long-Term Incentives Ongoing 1 year Vest ratably over 3 years Vest ratably over 3 years 2-year performance period followed by 1-year service period 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 NA Service revenue; operating income, net of certain items(2); and annualized new business revenue NA NA Service revenue and operating income, net of certain items LOGO

(1)

The details for performance shares reflect the terms of the annual performance share awards. In fiscal 2018, Mr. Rivera also received a special, one-time performance-share award at the discretion of the G&C Committee with a three-year performance period based on net income targets during the performance period.

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


		Paychex, Inc. 2018 Proxy Statement • 32

CD&A

Fiscal 2018 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. In fiscal 2018, Mr. Gibson was given a 6% targeted increase in base salary based on benchmarking analysis performed to bring him more in line with the median of our Peer Group, a group of companies with comparable financial information or who are direct competitors of Paychex.

Annual Officer Performance 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. The G&C Committee set a goal for net income of $500 million for fiscal 2018 as the minimum performance hurdle for the NEOs to be eligible for payout under the program. The Company achieved this net income goal for fiscal 2018. The Annual Incentive Program is intended to comply with section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”) for NEOs affected by the $1 million limitation on deductible compensation. 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, which is not considered material to the overall compensation for each NEO. 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 2018, 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			Qualitative Component
CEO		45.0	%		110.0	%		175.0	%		20.0	%
SVP-Sales		45.0	%		100.0	%		155.0	%		10.0	%
SVP-Other		37.5	%		85.0	%		132.5	%		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.


		Paychex, Inc. 2018 Proxy Statement • 33

CD&A

The performance metrics for the fiscal 2018 Annual Incentive Program for the NEOs were established as follows:


	Fiscal 2018 Year-over-Year Growth Rates			% of Plan Dollars
Bonus Objectives ⁽¹⁾	Threshold	Target	Maximum	Threshold	Target			Maximum	Achievement as a % of Target
Service revenue	1%	5%	7%	96.0%		100.0	%	102.0%	101.7%
Operating income, net of certain items ⁽²⁾	2%	6%	9%	96.0%		100.0	%	102.0%	100.4%
Annualized new business revenue⁽³⁾	0%	7%	11%	93.5%		100.0	%	103.7%	See ⁽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 A for a discussion of this measure and a reconciliation to the related 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 payroll, HR, 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 for annualized new business revenue was below threshold attainment for fiscal 2018. Therefore, there was no payout related to this performance metric under the Annual Incentive Program.

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
and Mr. Gioja

Mr. Bottini

Mr. Gibson

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⁾

% of Base

Salary at

Target

% of Base

Salary

Achieved⁽¹⁾

Service revenue

30.0

47.0

27.5

42.4

25.0

36.7

30.0

44.9

Operating income, net of certain items ⁽²⁾

45.0

49.5

32.5

36.0

25.0

27.7

30.0

33.5

Annualized new business revenue ⁽³⁾

35.0

0.0

25.0

0.0

50.0

0.0

25.0

0.0

Total quantitative annual incentive

110.0

96.5

85.0

78.4

100.0

64.4

85.0

78.4

Qualitative ⁽⁴⁾

20.0

10.0

7.0

10.0

Total

130.0

116.5

95.0

88.4

110.0

71.4

95.0

88.4

(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 A for a discussion of this measure and a reconciliation to the related GAAP measure of operating income.

(3)

(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. 2018 Proxy Statement • 34

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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

950,000

—

1,852,500

116.5

1,106,750

Efrain Rivera

500,000

—

712,500

88.4

441,900

Mark A. Bottini

450,000

—

742,500

71.4

321,480

John B. Gibson

450,000

—

641,250

88.4

397,710

Michael E. Gioja

450,000

—

641,250

88.4

397,710

(1)

This represents the NEO’s annualized base salary as of May 31, 2018. It may differ from base salary paid for fiscal 2018 reflected in the 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 2018 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, the Company grants 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. Historically, the July meeting has been scheduled to occur approximately two weeks after the release of our fiscal year-end earnings and upcoming fiscal year financial guidance. Our trading black-out period normally lifts on the third business day following such release of information. The 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 2017, the G&C Committee made an annual equity grant that was a blend of stock options, time-vested restricted stock, and performance shares. The award value was split as follows:

Annual Equity Award Value Allocation LOGO


		Paychex, Inc. 2018 Proxy Statement • 35

CD&A

This annual distribution provides for 80% of the total equity 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 2017 annual grants, the G&C Committee determined the estimated total value to be approximately: $4,700,000 for the CEO; $1,200,000 for the CFO; and $900,000 for the SVPs. These estimated total values were 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 2017 for all NEOs:


NEO	Performance Shares (at Target)		Stock Option Awards ⁽¹⁾		Time-Based Restricted Stock Awards⁽²⁾
Martin Mucci		44,167		214,482		16,430
Efrain Rivera		11,301		54,878		4,204
Mark A. Bottini		8,476		41,159		3,153
John B. Gibson		8,476		41,159		3,153
Michael E. Gioja		8,476		41,159		3,153

(1)	Stock option awards vest one-third per year over 3 years and have a term of 10 years.

(2)	Time-based restricted stock awards vest one-third per year over 3 years.

In addition to his annual equity grants, Mr. Rivera also received a special, one-time performance share award on September 6, 2017. This award was for 21,089 shares that will vest if net income for fiscal 2018, for the fiscal year ended May 31, 2019 (“fiscal 2019”), and fiscal 2020 each exceed $500 million and Mr. Rivera continues to be employed as an executive of the Company through the date of the G&C Committee’s certification of achievement following the end of fiscal 2020. If the performance metric is not achieved in any of the given years in the performance period, the award shall be forfeited. This performance target for each fiscal year is considered to be achievable under normal circumstances. This equity award was granted to Mr. Rivera at the discretion of the G&C Committee as a means to encourage retention.

Performance Shares

Performance shares are designed to provide variable compensation that is focused on longer-term results. Annual performance share awards have a two-year performance period to determine the number of restricted shares to be issued. The NEO must serve for one additional year for the restrictions to lapse. 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.

The two-year performance period for performance shares granted in July 2016 was completed at the end of fiscal 2018. 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
Performance Goal ($ In Millions)	Threshold				Target				Maximum				($)			% of Target
Service revenue ⁽¹⁾		$	6,160			$	6,484			$	6,679			$	6,338		98	%
Operating income, net of certain items ⁽²⁾		$	2,333			$	2,456			$	2,530			$	2,460		100	%
Percent of plan			95	%			100	%			103	%
Payout as a percent of target			60	%			100	%			150	%					92	%

(1)

Service revenue as calculated under the performance award agreement excludes the impact of acquisitions occurring after the grant date. Refer to Appendix B 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 award 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 amount for the performance period to the related GAAP measure of operating income.


		Paychex, Inc. 2018 Proxy Statement • 36

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Achievement for service revenue was slightly below target, while achievement for operating income, net of certain items, was at target. As a result of their performance against these pre-established goals, in July 2018 our NEOs received restricted shares at a quantity of 92% of the target level. The restrictions on these shares will lapse after an additional one-year service period. These performance shares, granted in July 2016, were reflected at grant-date fair value in the NEO compensation for fiscal 2017 in the Summary Compensation Table, contained in the Named Executive Officer Compensation section of this proxy statement.

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

In July 2016, the NEOs, received an LTIP award in the form of non-qualified performance stock options and performance-based restricted stock. These stock options and restricted stock will vest dependent on achievement against pre-established targets for fiscal 2020. The LTIP was granted to incent the executives to work toward achievement of longer-term strategic goals. The performance metrics are service revenue, operating income, net of certain items, and diluted earnings per share and were established based on the Company’s long-term strategic plan. These grants were reflected as part of reported compensation for fiscal 2017 in the Summary Compensation Table contained in the Named Executive Officers Compensation section of this proxy statement.

Stock Ownership Guidelines

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


Position		Requirement
CEO		5X 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.

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, the Company prohibits 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

The Company maintains a pledging policy for all Paychex directors, officers, and employees. This policy prohibits pledging Company securities as collateral for a loan or a line of credit without obtaining prior Company approval. Approval may be granted when the individual clearly demonstrates the intent and financial capacity to satisfy the obligations without resort to the pledged securities and where the pledge represents no more than 25% of the pledgor’s beneficial ownership of the Company securities. The Company’s pledging policy is posted at www.paychex.com/investors under Corporate Governance & Committees.

Recoupment, Non-Compete, and Other Forfeiture Provisions

The Company retains the right to clawback on 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, the Company retains 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. The Company 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;


		Paychex, Inc. 2018 Proxy Statement • 37

CD&A

•

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

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 (“IRS”), 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.


		Paychex, Inc. 2018 Proxy Statement • 38

CD&A

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 G&C Committee’s 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 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;

•

grants equity awards under our 2002 Plan; and

•

considers the impact of section 162(m) of the Code.

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 60% 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;


		Paychex, Inc. 2018 Proxy Statement • 39

CD&A

•

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 other officers, will be in attendance at 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 also 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 graphs 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 generally 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 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 current Peer Group consists of the following companies:


Peer Group
Alliance Data Systems Corporation		Intuit Inc.
Automatic Data Processing, Inc.		Moody’s Corporation
Broadridge Financial Solutions, Inc.		Robert Half International Inc.
DST Systems, Inc.		TD AMERITRADE Holding Corporation
Equifax, Inc.		The Dun & Bradstreet Corporation
Fiserv, Inc.		The Western Union Company
Global Payments Inc.		Total System Services, Inc.
H&R Block, Inc.


		Paychex, Inc. 2018 Proxy Statement • 40

CD&A

Revenue (1) ($millions) Operating Income (1) ($millions) Operating Income Margin (1) ($millions) Paychex Peer Group Median 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. There were no changes to the Peer Group for fiscal 2018.

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 2018 as reflected in the Summary Compensation Table, included in the Named Executive Officer Compensation section of this proxy statement, is as follows:

•

base salary of $950,000;

•

payout under the Annual Incentive Program at 90% of target; and

•

annual equity award grants comprised of 44,167 performance shares at target, 214,482 stock options with vesting pro rata over three years, and 16,430 shares of time-based restricted stock with vesting pro rata over three years.

Mr. Mucci’s total compensation for fiscal 2018 remained below the median when compared to that of the CEOs within our Peer Group.

CEO Pay Ratio

In August 2015, pursuant to a mandate of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC adopted a rule requiring annual disclosure of the ratio of the total compensation of the CEO to the median employee’s annual total compensation.

Our CEO to median employee pay ratio is calculated in accordance with SEC rules and pursuant to Item 402(u) of Regulation S-K. 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, 2018. We included all U.S. employees, whether employed on a full-time, part-time, or seasonal basis. As of March 1, 2018, the Company had approximately 14,000 employees, not including the CEO, and 135 employees located in Germany. We did not make any assumptions, adjustments, or estimates with respect to the total cash compensation, and we did not annualize the compensation for any full-time


		Paychex, Inc. 2018 Proxy Statement • 41

CD&A

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 13% of our employees receive annual equity awards.

After identifying the median employee based on total cash compensation, we calculated annual total compensation for fiscal 2018 for that employee using the same methodology we use for our NEOs as set forth in the 2018 Summary Compensation Table in the Named Executive Officer section of this proxy statement.

The table below sets forth comparative information regarding: (A) the total compensation of the CEO for fiscal 2018 as reported in the 2018 Summary Compensation Table in the Named Executive Officer Compensation section of this proxy statement; (B) the total compensation for the median employee of the Company, excluding our non-U.S. employees and CEO, for fiscal 2018; and (C) the ratio of the CEO total compensation to the total compensation of the median employee, excluding the non-U.S. employees and CEO:


Mr. Mucci total annual compensation (A)	$	6,736,164
Median employee total annual compensation, excluding non-U.S. employees and CEO (B)	$	54,790
Ratio of CEO to median employee compensation (C)		123:1

Impact of the Internal Revenue Code

Under the Tax Act, the exception under Section 162(m) for performance-based compensation will no longer be available for our taxable year beginning June 1, 2018, subject to transition relief for certain grandfathered arrangements in effect as of November 2, 2017. In addition, the covered employees will be expanded to include our CFO, and once one of our NEOs is considered a covered employee, the NEO will remain a covered employee so long as he or she receives compensation from us. Further guidance from the IRS on the transition relief is anticipated; however, given the uncertainty associated with the taxability of arrangements in place as of November 2, 2017, the G&C Committee is not yet able to determine the full impact of the Tax Act changes to Section 162(m) on the Company and our compensation programs.

The G&C Committee has carefully considered the potential impact of this provision as one factor among others in structuring NEO compensation. At this time, it is the G&C Committee’s intention to continue to compensate all NEOs based on overall performance but makes no representation as to the deductibility of any item of NEO compensation.

THE GOVERNANCE AND COMPENSATION COMMITTEE REPORT

The Governance and Compensation 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 2018.

The Governance and Compensation Committee:

Joseph M. Tucci, Chairman

David J.S. Flaschen

Phillip Horsley

Grant M. Inman

Joseph M. Velli


		Paychex, Inc. 2018 Proxy Statement • 42

NEO Compensation

NAMED EXECUTIVE OFFICER COMPENSATION

FISCAL 2018 SUMMARY COMPENSATION TABLE

The table below presents the total compensation paid or earned by 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		2018		$	950,000		$	—		$	3,294,113		$	1,372,685		$	1,106,750		$	12,616		$	6,736,164
		2017		$	943,846		$	—		$	4,375,193		$	2,342,781		$	906,680		$	12,000		$	8,580,500
		2016		$	900,000		$	—		$	2,598,024		$	1,069,161		$	1,203,210		$	12,000		$	5,782,395
Efrain Rivera Senior Vice President, CFO, and Treasurer		2018		$	500,000		$	—		$	1,935,277		$	351,219		$	441,900		$	9,020		$	3,237,416
		2017		$	496,923		$	—		$	1,364,314		$	853,494		$	347,650		$	9,292		$	3,071,673
		2016		$	475,000		$	—		$	588,854		$	242,344		$	454,670		$	9,105		$	1,769,973
Mark A. Bottini Senior Vice President of Sales		2018		$	450,000		$	—		$	632,164		$	263,418		$	321,480		$	11,592		$	1,678,654
		2017		$	450,000		$	—		$	1,292,412		$	825,732		$	320,625		$	11,592		$	2,900,361
		2016		$	450,000		$	75,000		$	588,854		$	242,344		$	442,440		$	11,411		$	1,810,049
John B. Gibson Senior Vice President of Service		2018		$	446,154		$	—		$	632,164		$	263,418		$	397,710		$	10,798		$	1,750,244
		2017		$	425,000		$	—		$	1,256,464		$	811,851		$	287,003		$	11,236		$	2,791,554
		2016		$	421,923		$	—		$	588,854		$	242,344		$	406,810		$	8,976		$	1,668,907
Michael E. Gioja Senior Vice President of Information Technology and Product Development		2018		$	450,000		$	—		$	632,164		$	263,418		$	397,710		$	10,108		$	1,753,400
		2017		$	446,923		$	—		$	1,256,464		$	811,851		$	303,885		$	9,423		$	2,828,546
		2016		$	425,000		$	—		$	588,854		$	242,344		$	406,810		$	10,446		$	1,673,454

Salary (Column (c))

The amounts reported in this column reflect the base salary paid to the NEOs during the fiscal year.

Bonus (Column (d))

The amount reported in this column reflects a discretionary bonus of $75,000 to Mr. Bottini for fiscal 2016 for strong sales performance.

Stock Awards (Column (e))

The amounts in this column include the grant-date fair value of time-based restricted stock awards, performance share awards, and performance-based restricted stock (LTIP) granted during the respective fiscal year, and do not reflect whether the recipient has actually realized a financial gain from such awards (such as lapse in the restrictions on a restricted stock award).

Time-Based Restricted Stock Awards

The fair value of the time-based restricted stock awards is determined based on the closing price of the underlying common stock on the date of grant. The resulting fair values were $57.24 per share, $60.84 per share, and $47.32 per share for the restricted stock awards granted annually in July of fiscal 2018, 2017, and 2016, respectively. Refer to the Grants of Plan-Based Awards for Fiscal 2018 table included in this proxy statement for further information on restricted stock awards granted in fiscal 2018.


		Paychex, Inc. 2018 Proxy Statement • 43

NEO Compensation

Performance Shares

Performance share awards are reflected in the Summary Compensation Table assuming target achievement. The grant-date fair value of these awards at target achievement and at maximum achievement is as follows:


	Fiscal 2018						Fiscal 2017						Fiscal 2016
	Target			Maximum			Target			Maximum			Target			Maximum
Martin Mucci		$	2,353,659		$	3,530,489		$	2,209,835		$	3,314,782		$	1,855,384		$	2,783,098
Efrain Rivera⁽¹⁾		$	602,230		$	903,345		$	515,135		$	772,731		$	420,537		$	630,849
Mark A. Bottini		$	451,686		$	677,529		$	463,615		$	695,423		$	420,537		$	630,849
John B. Gibson		$	451,686		$	677,529		$	437,827		$	656,769		$	420,537		$	630,849
Michael E. Gioja		$	451,686		$	677,529		$	437,827		$	656,769		$	420,537		$	630,849

(1)

For Mr. Rivera, the fiscal 2018 amounts reflect his annual performance share grant in July 2017. These amounts do not include his special, one-time performance share grant in September 2017 as target achievement is equal to maximum achievement for that award, which allows for 21,089 shares to be earned or not earned only in total.

The annual performance share awards have a two-year performance period, followed by an additional year of service required. The fair value of these awards is determined based on the closing price of the underlying common stock on the date of grant, adjusted for the present value of expected dividends over the performance period, as dividends are not earned during the two-year performance period. The resulting fair values were $53.29 per share, $57.18 per share, and $43.98 per share for performance shares awarded in fiscal 2018, 2017, and 2016, respectively.

In addition to his annual performance share award in July 2017, Mr. Rivera received a special, one-time performance share award in September 2017 with a three-year performance period. The fair value for this one-time award was determined in the same manner as the annual performance share awards, and had a resulting fair value of $51.80 per share.

LTIP Performance-Based Restricted Stock

A LTIP grant was made in July 2016 in the form of performance-based restricted stock in order to encourage the executives in achieving longer-term strategic goals. These awards are reflected in the Summary Compensation Table for fiscal 2017 assuming target achievement. The grant-date fair value of these awards at target achievement and at maximum achievement is as follows:


	Fiscal 2017
	Target			Maximum
Martin Mucci		$	1,290,661		$	1,936,018
Efrain Rivera		$	645,304		$	967,982
Mark A. Bottini		$	645,304		$	967,682
John B. Gibson		$	645,304		$	967,682
Michael E. Gioja		$	645,304		$	967,682

These awards have a four-year performance period with achievement determined based on comparisons to pre-established targets for fiscal 2020. The fair value of these awards is determined based on the closing price of the underlying common stock on the date of grant, adjusted for the present value of expected dividends over the performance period, as dividends are not earned during the performance period. The resulting fair value was $53.61 per share for LTIP performance-based restricted stock awarded in fiscal 2017.


		Paychex, Inc. 2018 Proxy Statement • 44

NEO Compensation

Option Awards (Column (f))

The amounts in this column reflect the grant-date fair value for stock options granted during the respective fiscal years and do not reflect whether the recipient has actually realized a financial gain from such awards (such as by exercising stock options).

Stock Option Awards

The fair values for the annual grants of time-vested stock options were determined using a Black-Scholes option pricing model. The assumptions and resulting per share fair value for option grants included in the amounts disclosed are as follows:

July
2017

July
2016

July
2015

Risk-Free Interest Rate

2.1