UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

SCHEDULE 14A

(RULE 14a-101)

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities

Exchange Act of 1934 (Amendment No.               )
Filed by the Registrant þ
Filed by a Party other than the Registrant o
Check the appropriate box:
   
o  Preliminary Proxy Statement  
o  Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
þ  Definitive Proxy Statement
o  Definitive Additional Materials
o  Soliciting Material Pursuant to §240.14a-12

Paychex, Inc.


(Name of Registrant as Specified In Its Charter)


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

Payment of Filing Fee (Check the appropriate box):

þNo fee required.
 
oFee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

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oCheck box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

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(PAYCHEX LOGO)
 
August 29, 2008September 3, 2009
 
Dear Paychex Stockholder:
 
The Board of Directors cordially invites you to attend our Annual Meeting of Stockholders (the “Annual Meeting”) on Tuesday, October 7, 200813, 2009 at 10:00 a.m. Eastern Time at the Rochester Riverside Convention Center, 123 East Main Street, Rochester, New York.
 
This booklet includes the formal Notice of Annual Meeting of Stockholders and the Proxy Statement. The Proxy Statement tells you about the agenda items and the procedures for the Annual Meeting. It also provides certain information about Paychex, Inc., its Board of Directors, and its named executive officers.
 
It is important that your shares be represented at the Annual Meeting. Whether or not you plan to attend the Annual Meeting, you are encouraged to vote. You may vote by Internet, telephone, written proxy, or written ballot at the Annual Meeting. We encourage you to use the Internet as it is the most cost-effective way to vote. If you elected to electronically access the Proxy Statement and Annual Report, you will not be receiving a proxy card and must vote via the Internet.
 
We hope you will be able to attend the Annual Meeting and would like to take this opportunity to remind you that your vote is important. If you need special assistance at the Annual Meeting, please contact the Secretary of the Company at(800) 828-4411, or write to Paychex, Inc., 911 Panorama Trail South, Rochester, New York14625-2396, Attention: Corporate Secretary.
 
Sincerely,
 
-s- Jonathan J. Judge
 
Jonathan J. Judge
President and Chief Executive Officer


PAYCHEX, INC.
 
911 Panorama Trail South •  Rochester, New York14625-2396
 
 
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
 
 
 
Date and Time:10:00 a.m. Eastern Time on Tuesday, October 7, 2008.13, 2009. Continental breakfast will be available from 9:00 a.m. to 10:00 a.m.
 
Location:Rochester Riverside Convention Center, 123 East Main Street Rochester, New York 14604
 
Items of Business:(1) To elect eightseven nominees to the Board of Directors for one-year terms.
 
(2) To ratify selection of the independent registered public accounting firm.
 
(3) To transact such other business as may properly come before the Annual Meeting, or any adjournment thereof.
 
Record Date:Stockholders of record as of the close of business on August 11, 2008,14, 2009, are entitled to notice of, and to vote at, the Annual Meeting.
 
Voting:Whether or not you plan to attend the Annual Meeting, it is important that your shares be represented and voted at the Annual Meeting. You may vote either by signing and returning the enclosed proxy card, via the internet,Internet, by telephone, or by telephone,written ballot at the Annual Meeting as more fully described in the Proxy Statement.
 
Annual Meeting Webcast:The Annual Meeting will be simultaneously broadcast over the Internet at 10:00 a.m. Eastern Time on October 7, 2008.13, 2009. It can be accessed at the Investor Relations page atwww.paychex.com, and will be archived and available for replay for approximately one month.
 
August 29, 2008September 3, 2009
By Order of the Board of Directors
John M. Morphy
Secretary
 
IMPORTANT NOTICE REGARDING THE AVAILIBILITYAVAILABILITY OF PROXY MATERIALS FOR THE 20082009 ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON OCTOBER 7, 2008
13, 2009
 
Paychex, Inc.’s Proxy Statement and Annual Report for the year ended May 31, 20082009 are available at
http://investor.paychex.com/annual.aspx


 

TABLE OF CONTENTS
 
     
  1 
  1 
  1 
  1 
  2 
  2 
  2 
    
  3 
    
  45 
    
6
Cash Compensation6
Equity-Based Compensation6
Deferred Compensation Plan for Directors2009  7 
Benefits  7 
Stock Ownership Guidelines7
Fiscal 2008 Director  8 
  8
Proposal 2 — Ratification of Selection of Independent Registered Public Accounting Firm  9 
Fees for Professional Services  9 
Audit Committee Policy on Pre-Approval of Services of Independent Accountants9
Report of The Audit Committee  10 
    
Corporate Governance  11 
Information About the Board of Directors and Corporate Governance  11 
Board  11 
Nomination Process  12
Policy on Transactions with Related Persons13
Communications with the Board of Directors13
Governance and Compensation Committee Interlocks and Insider Participation14
Section 16(a) Beneficial Ownership Reporting Compliance14
Code of Business Ethics and Conduct14 
    
Compensation Discussion13
13
13
14
  15 
Objectives of  15 
Role  15 
Elements of Compensation  16 
Annual Base Salary  17
Annual Officer Performance Incentive Program17
Equity Compensation18
CEO Compensation19
Stock Ownership Guidelines19
Non-Compete and Other Forfeiture Provisions19
Perquisites19
Deferred Compensation20
Compensation Received In Fiscal 200820
Subsequent Events21
Impact of the Internal Revenue Code21
The Governance and Compensation Committee Report2116 
    
Named Executive17
17
17
18
19
19
20
21
21
21
  22 
Fiscal 2008 Summary  22 
Grants of Plan-Based Awards In Fiscal 2008  2422 
Outstanding Equity Awards as  2523 
Option Exercises  26
Non-Qualified Deferred Compensation Fiscal 200827
Change of Control and Severance Arrangement Fiscal 20082823 
    
Other Matters24
24
26
27
  29 
30
31
33
34


 
PROXY STATEMENT
 
 
 
 
20082009 ANNUAL MEETING OF STOCKHOLDERS OF PAYCHEX, INC.
TO BE HELD ON OCTOBER 7, 200813, 2009
 
This Proxy Statement is being mailed to stockholders of Paychex, Inc. (“Paychex”, the “Company”, “we,” or the “Company”“our”), a Delaware corporation, on or about August 29, 2008,September 3, 2009, in connection with the solicitation of proxies by the Board of Directors of the Company (the “Board”) to be voted at the 20082009 Annual Meeting of Stockholders (the “Annual Meeting”). The Annual Meeting will be held on Tuesday, October 7, 200813, 2009 at 10:00 a.m. Eastern Time at the Rochester Riverside Convention Center, 123 East Main Street, Rochester, New York.
 
Stockholders Entitled to Vote; Outstanding Shares; Quorum
 
Paychex has one class of shares outstanding, designated common stock, $0.01 par value per share. The Board has fixed the close of business on August 11, 200814, 2009 as the record date for determining the holders of common stock entitled to notice of, and to vote at, the Annual Meeting. As of the record date, 360,996,074361,757,338 shares of common stock were issued and outstanding. A majority of the outstanding shares (180,498,038(180,878,670 shares) present at the Annual Meeting in person or by proxy will constitute a quorum. A quorum is necessary to hold a valid meeting. Stockholders will be entitled to one vote for each share of common stock held as of the record date.
 
How to Vote
 
Your vote is very important and we hope that you will attend the Annual Meeting. However, whether or not you plan to attend the Annual Meeting, please vote by proxy in accordance with the instructions on your proxy card, voting instruction form (from your bank or broker), or the instructions that you received through electronic mail. There are three convenient ways of submittingto submit your vote:vote by proxy:
 
 • Voting by Internet— You can vote via the Internet by visiting the website noted on your proxy card. Internet voting is available 24 hours a day. We encourage you to vote via the Internet, as it is the most cost-effective way to vote.
 
 • Voting by telephone— You can also vote your shares by telephone by calling the toll-free telephone number indicated on your proxy card and following the voice prompt instructions. Telephone voting is available 24 hours a day.
 
 • Voting by mail— If you choose to vote by mail, simply mark your proxy card, sign and date it, and return it in the enclosed postage-paid envelope. If you elected to electronically access the Proxy Statement and Annual Report, you will not be receiving a proxy card and must vote via the Internet.
 
The deadline for Internet or telephone voting is 11:59 p.m. Eastern Time on Monday, October 6, 2008.12, 2009. If you vote by telephone or the Internet, you do not need to return your proxy card.
Signing and returning your proxy card or submitting your proxy via the Internet or by telephone does not affect your right to vote in person if you attend the Annual Meeting and your shares are registered in your name. If your shares are held in the name of a bank, broker, or other holder of record, you must obtain a proxy, executed in your favor, from the holder of record to be able to vote in person at the Annual Meeting.
 
Revoking Your Proxy
 
You can revoke your proxy at any time prior to it being voted at the Annual Meeting by:
 
 • Providingproviding written notice of revocation to the Secretary of the Company;
 
 • Submittingsubmitting a later-dated proxy via the Internet, telephone, or mail; or
 
 • Votingvoting in person at the Annual Meeting.


1


 
General Information on Voting
 
All votes properly cast and not revoked will be voted at the Annual Meeting in accordance with the stockholder’s directions. Shares voted by proxy card received without choices specified will be votedFORthe eightseven nominees for election to the Board of the Company andFORthe ratification of the selection of the independent registered public accounting firm (the “independent accountants”).
 
Abstentions are counted for the purpose of establishing a quorum and will have the same effect as a vote against a proposal (other than the election of directors). Broker non-votes occur when a broker does not vote on a non-routine matter because the broker does not have discretionary voting power for that proposal and has not received instructions from the beneficial owner to vote. Broker non-votes will be counted for the purpose of determining the presence or absence of a quorum, but will not be counted for the purpose of determining the number of shares entitled to vote on a specific proposal and thus will not affect the outcome of the vote.
 
Vote Required
 
The Company’sOur By-laws provide that each director shall be elected by the vote of a majority of the votes cast with respect tofor the director at any meeting for the election of directors at which a quorum is present, provided that if the number of nominees exceeds the number of directors to be elected, the directors shall be elected by the vote of a plurality of the shares represented in person or by proxy at any such meeting and entitled to vote on the election of directors. A majority of the votes cast means that the number of shares voted “for” the election of a director nominee must exceed the number of votes cast “against” the nominee. If a nominee that is an incumbent director does not receive a required majority of the votes cast, the director shall offer to tender his or her resignation to the Board. The Governance and Compensation Committee of the Board shall consider such offer and will make a recommendation to the Board on whether to accept or reject the resignation, or whether other action should be taken. The Board will consider the committee’s recommendation and will determine whether to accept such offer.
 
The table below shows the vote required to approve each of the proposals described in this Proxy Statement, assuming the presence of a quorum at the Annual Meeting.
 
     
Proposal Number
 
Proposal Description
 
Vote Required
 
Proposal 1 Election of eightseven nominees to the Board of Directors Majority of the votes duly cast*
 
Proposal 2 Ratification of the selection of the independent registered public accounting firm Majority of the votes duly cast*
public accounting firm
 
 
*without regard to broker non-votes
 
Voting by Participants in the Paychex Employee Stock Ownership Plan Stock Fund
 
If a stockholder is a participant in the Paychex Employee Stock Ownership Plan Stock Fund (“ESOP”) of the Paychex 401(k) Incentive Retirement Plan (“401(k)(the “401(k) Plan”), the proxy card also will serve as a voting instruction for Fidelity Management Trust Company (the “Trustee”), where all accounts are registered in the same name. As a participant in the ESOP, the stockholder has the right to direct the Trustee, who is the holder of record, regarding how to vote the shares of common stock credited to the participant’s account at the Annual Meeting. The participant’s voting instructions will be tabulated confidentially. Only the Trusteeand/or the tabulator will have access to the participant’s individual voting direction. If voting instructions for the shares of common stock in the ESOP are not received, those shares will be voted by the Trustee in the same proportions as the shares for which voting instructions were received from other participants in the ESOP. Voting by ESOP participants will close at 11:59 p.m. Eastern Time on October 2, 2008.7, 2009. The Trustee will then vote all shares of common stock held in the ESOP by the established deadline.


2


 
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
The following table sets forth information, based upon reports filed by such persons with the Securities and Exchange Commission (“SEC”), as of July 31, 2008,2009, with respect to the beneficial ownership of common stock of the Company byby: (i) any person (including any “group” as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended)amended (the “Exchange Act”)) who is known by the Company to be the beneficial owner of more than 5% of the Company’s voting securities,securities; (ii) each director and nominee for director of the Company,Company; (iii) each of the named executive officers (“NEOs”) of the Company named in the Fiscal 20082009 Summary Compensation Table on page 2224 of this Proxy Statement,Statement; and (iv) all directors, NEOs, and executive officers of the Company as a group.
 
         
  Amount of Beneficial
  
  Ownership of
 Percent of
Name
 Common Stock(1) Class(1)
 
More than 5% owners:
        
B. Thomas Golisano(2),(3),(4)
  38,178,195   10.5%
1 Fishers Road        
Pittsford, NY 14534        
Capital World Investors  36,185,000   10.0%
333 South Hope Street        
Los Angeles, CA 90071        
Directors:
        
B. Thomas Golisano(2),(3),(4)
  38,178,195   10.5%
David J. S. Flaschen(5),(6)
  57,793   ** 
Phillip Horsley(5),(6)
  275,193   ** 
Grant M. Inman(4),(5),(6)
  222,492   ** 
Pamela A. Joseph(5),(6)
  13,043   ** 
Jonathan J. Judge(5),(6)
  784,958   ** 
Joseph M. Tucci(5),(6)
  45,543   ** 
Joseph M. Velli(5),(6)
  11,876   ** 
Named Executive Officers:
        
Jonathan J. Judge(5),(6)
  784,958   ** 
John M. Morphy(5),(6)
  137,275   ** 
Walter Turek(4),(5),(6)
  385,816   ** 
Martin Mucci(5),(6)
  142,592   ** 
William G. Kuchta(5),(6)
  79,727   ** 
All directors, NEOs, and executive officers of the Company as a group (13 persons)(4),(5),(6)
  40,362,419   11.1%
         
  Amount of Beneficial
  
  Ownership of
 Percent of
Name
 Common Stock(1) Class(1)
 
More than 5% owners:
        
B. Thomas Golisano(2),(3),(4)
  38,074,825   10.5%
1 Fishers Road        
Pittsford, NY 14534        
         
Capital World Investors(5)
  44,187,000   12.2%
333 South Hope Street        
Los Angeles, CA 90071        
         
Capital Research Global Investors(6)
  20,041,541   5.5%
333 South Hope Street        
Los Angeles, CA 90071        
         
The Growth Fund of America, Inc.(7)
  20,241,400   5.6%
P.O. Box 7650, One Market, Steuart Tower        
San Francisco, CA 94120        
         
Directors:
        
B. Thomas Golisano(2),(3),(4)
  38,074,825   10.5%
David J. S. Flaschen(8),(9)
  76,202   ** 
Phillip Horsley(8),(9)
  293,152   ** 
Grant M. Inman(4),(8),(9)
  240,451   ** 
Pamela A. Joseph(8),(9)
  21,002   ** 
Jonathan J. Judge(8),(9)
  1,210,798   ** 
Joseph M. Tucci(8),(9)
  86,002   ** 
Joseph M. Velli(8),(9)
  18,835   ** 
         
Named Executive Officers:
        
Jonathan J. Judge(8),(9)
  1,210,798   ** 
John M. Morphy(8),(9)
  208,566   ** 
Martin Mucci(8),(9)
  185,200   ** 
Michael A. McCarthy(8),(9)
  44,092   ** 
William G. Kuchta(8),(9)
  120,493   ** 
         
All directors, NEOs, and executive officers of the Company as a group (13 persons)(8),(9)
  40,585,311   11.2%
 
 
**Indicated percentage is less than 1%.
 
(1)Based upon the number of shares of common stock outstanding and deemed outstanding as of July 31, 2008.2009. 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. Lynn J. Miley, listed as a NEO in the Fiscal 2009 Summary Compensation Table on page 24, is not included in the beneficial ownership table due to his death in May 2009.
 
(2)Included in shares beneficially owned for Mr. Golisano are 494,568393,068 shares owned by the B. Thomas Golisano Foundation for which Mr. Golisano is a member of the foundation’s six-member board of trustees.
 
(3)Mr. Golisano has 12,574,618 shares pledged as security.


3


(4)Included in shares beneficially owned are shares held in the names of family members or other entities: Mr. Golisano — 74,38072,510 shares; and Mr. Inman — 136,949 shares; and Mr. Turek — 1,670 shares.
 
(5)Beneficial ownership information is based on information contained in the Form 13F filed with the SEC on May 15, 2009 by Capital World Investors. Capital World Investors, a division of Capital Research and Management Company (“CRMC”), is deemed to be the beneficial owner of 44,187,000 shares as a result of CRMC’s acting as investment advisor to various investment companies registered under Section 8 of the Investment Company Act of 1940, and that it has sole voting power over 5,865,000 of such shares and sole dispositive power over all of such shares.
(6)Beneficial ownership information is based on information contained in the Form 13F filed with the SEC on May 15, 2009 by Capital Research Global Investors. Capital Research Global Investors, a division of CRMC, is deemed to be the beneficial owner of 20,041,541 shares as a result of CRMC’s acting as investment advisor to various investment companies registered under Section 8 of the Investment Company Act of 1940, and that it has sole voting power over 11,125,141 of such shares and sole dispositive power over all of such shares.
(7)Beneficial ownership information is based on information contained in theForm N-Q filed with the SEC on July 29, 2009 by The Growth Fund of America, Inc., an investment company registered under the Investment Act of 1940, which is advised by CRMC. CRMC manages equity assets of various investment companies through two divisions, Capital Research Global Investors and Capital World Investors. These divisions generally function separately from each other with respect to investment research activities and they make investment decisions and proxy voting decisions for the investment companies on a separate basis. The Growth Fund of America, Inc. has sole voting power over all 20,241,400 shares.
(8)Included in shares beneficially owned are unvested restricted stock: Mr. Flaschen — 4,5435,084 shares; Mr. Horsley — 4,5435,084 shares; Mr. Inman — 4,5435,084 shares; Ms. Joseph — 4,5435,084 shares; Mr. Judge — 79,075127,093 shares; Mr. Tucci — 4,5435,084 shares; Mr. Velli — 3,8765,751 shares; Mr. Morphy — 45,816 shares; Mr. Turek — 13,47055,420 shares; Mr. Mucci — 16,66826,272 shares; Mr. McCarthy — 12,712 shares; Mr. Kuchta — 7,91012,712 shares; and all directors, NEOs, and executive officers as a group — 195,865270,073 shares.
 
(6)(9)Included in shares beneficially owned are shares that may be acquired upon exercise of options, which are exercisable on or prior to September 29, 2008:2009: Mr. Flaschen — 41,00057,084 shares; Mr. Horsley — 41,00057,084 shares; Mr. Inman — 41,00057,084 shares; Ms. Joseph — 6,00012,084 shares; Mr. Judge — 673,3341,048,436 shares; Mr. Tucci — 41,00079,584 shares; Mr. Velli — 3,0008,084 shares; Mr. Morphy — 78,000 shares; Mr. Turek — 93,000139,687 shares; Mr. Mucci — 118,000150,535 shares; Mr. McCarthy — 29,843 shares; Mr. Kuchta — 59,00094,843 shares; and all directors, NEOs, and executive officers as a group — 1,213,3341,734,348 shares.


34


 
PROPOSAL 1 •  ELECTION OF DIRECTORS FOR A ONE-YEAR TERM
 
Stockholders annually elect directors to serve for one year and until the directors’ successors have been elected and qualified. The eightseven persons listed below, each of whom currently serves as a director, have been nominated for election to the Board by the Company’s Governance and Compensation Committee. SixFive of the eightseven nominees are neither employees nor former employees of the Company. If elected, each nominee will hold office until the 20092010 Annual Meeting of Stockholders and until his or her successor is elected and has qualified.
Although the Board believes that all of the nominees will be available to serve as a director, the persons named in the enclosed proxy may exercise discretionary authority to vote for substitutessubstitute nominees proposed by the Board.
Biographies are provided below setting forth certain information with respect to the nominees for election as directors of the Company, none of whom is related to any other nominee or executive officer.
 
                  
   Director
 Position, Principal Occupation, Business
   Director
 Position, Principal Occupation, Business
Name
 Age Since 
Experience, and Directorships
 Age Since 
Experience, and Directorships
 
B. Thomas Golisano
  66   1979  Mr. Golisano founded Paychex, Inc. in 1971 and is Chairman of the Board of the Company. Until October 2004, he served as President and Chief Executive Officer of the Company. Mr. Golisano is a member of the board of directors of several private companies. He serves on the board of trustees of the Rochester Institute of Technology. He owns the Buffalo Sabres of the National Hockey League. Mr. Golisano has served as a member of the board of directors of numerous non-profit organizations, and is founder of the B. Thomas Golisano Foundation.  67   1979  Mr. Golisano founded Paychex in 1971 and is Chairman of the Board of the Company. Until October 2004, he served as President and Chief Executive Officer of the Company. He serves on the board of trustees of the Rochester Institute of Technology. He owns the Buffalo Sabres of the National Hockey League. Mr. Golisano serves as a member of the board of directors of numerous non-profit organizations and private companies, and is founder and member of the board of trustees of the B. Thomas Golisano Foundation.
           
David J. S. Flaschen
  52   1999  Mr. Flaschen has been an Operating Partner of Castanea Partners since 2005. Castanea Partners is a private equity investment firm targeting small- tomid-market companies in the publishing and information, human resource and business services, and the consumer product and specialty retail sectors. From 2000 to 2005, he was Managing Director of Flagship Ventures, a venture capital firm that focuses on life science, information technology, and communications companies. Mr. Flaschen is a member of the board of directors of various private companies.  53   1999  Mr. Flaschen is a Partner of Castanea Partners, having joined in 2005. Castanea Partners is a private equity investment firm targeting small- to mid-market companies in the publishing and information, human resource and business services, and consumer product and specialty retail sectors. From 2000 to 2005, he was Managing Director of Flagship Ventures, a venture capital firm that focuses on life science, information technology, and communications companies. Mr. Flaschen is a member of the board of directors of various private companies.
           
Phillip Horsley
  69   1982  Mr. Horsley is the founder and Managing Director of Horsley Bridge Partners, a leading manager of private equity investments for institutional clients since 1982.
Grant M. Inman
  67   1983  Mr. Inman is the founder and General Partner of Inman Investment Management, a private investment company formed in 1998. He is a member of the board of directors of Lam Research Corporation and several private companies. Mr. Inman is a trustee of the University of California, Berkeley Foundation.
           
Grant M. Inman
  66   1983  Mr. Inman is the founder and General Partner of Inman Investment Management, a private investment company formed in 1998. He is a member of the board of directors of Lam Research Corporation, Wind River Systems, Inc., and several private companies. Mr. Inman is a trustee of the University of California, Berkeley Foundation.
Pamela A. Joseph
  50   2005  Ms. Joseph is 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. U.S. Bancorp Payment Services and Elavon manage and facilitate payment processing. Ms. Joseph has been Vice Chairman of U.S. Bancorp since December 2004 and serves on its 13-member managing committee. From February 2000 to November 2004, she was President and Chief Operating Officer of NOVA Information Systems, Inc. Ms. Joseph is honorary chairman of Gift for a Child, a non-profit organization that assists foster children in finding permanent homes. She is also a member of the board of directors of Centene Corporation.


45


                  
   Director
 Position, Principal Occupation, Business
   Director
 Position, Principal Occupation, Business
Name
 Age Since 
Experience, and Directorships
 Age Since 
Experience, and Directorships
 
Pamela A. Joseph
  49   2005  Ms. Joseph is Chairman of U.S. Bancorp Payment Services and Chairman and Chief Executive Officer of Elavon (formerly NOVA Information Systems, Inc.), a wholly owned subsidiary of U.S. Bancorp. Elavon manages and facilitates payment processing. Ms. Joseph has been Vice Chairman of U.S. Bancorp since December 2004 and serves on its13-member managing committee. From February 2000 to November 2004, she was President and Chief Operating Officer of NOVA Information Systems, Inc. Ms. Joseph is honorary chairman of Gift for a Child, a non-profit organization that assists foster children in finding permanent homes. She is also a member of the board of directors for Centene Corporation.
 
Jonathan J. Judge
  54   2004  Mr. Judge has been President and Chief Executive Officer of the Company since October 2004. From October 2002 through December 2003, he served as President and Chief Executive Officer of Crystal Decisions, Inc., an information management software company. From 1976 to 2002, Mr. Judge worked for IBM in a variety of sales, marketing, and executive management positions, most recently as General Manager of IBM’s Personal Computing Division, a $10 billion business unit offering a broad range of products, services, and solutions, including IBM’s ThinkPad brand of mobile computers. Mr. Judge is a member of the board of directors of PMC-Sierra, Inc. and the Buffalo Branch of the Federal Reserve Bank of New York.  55   2004  Mr. Judge has been President and Chief Executive Officer of the Company since October 2004. From October 2002 through December 2003, he served as President and Chief Executive Officer of Crystal Decisions, Inc., an information management software company. From 1976 to 2002, Mr. Judge worked for IBM in a variety of sales, marketing, and executive management positions, most recently as General Manager of IBM’s Personal Computing Division, a $10 billion business unit offering a broad range of products, services, and solutions, including IBM’s ThinkPad brand of mobile computers. Mr. Judge serves as a member of the Upstate New York Regional Advisory Board (UNYRAB) of the Federal Reserve Bank of New York. He is also a member of the board of directors of PMC-Sierra, Inc. and Dun & Bradstreet Corporation.
           
Joseph M. Tucci
  61   2000  Mr. Tucci has been the Chairman of the Board of Directors of EMC Corporation, the world leader in information infrastructure technology and solutions, since January 2006. He has been Chief Executive Officer and President of EMC Corporation since January 2001, and President since January 2000. Mr. Tucci is also Chairman of the Board of Directors of VMware, Inc., the global leader in virtualization solutions.  62   2000  Mr. Tucci has been the Chairman of the Board of Directors of EMC Corporation, the world leader in information infrastructure technology and solutions, since January 2006. He has been Chief Executive Officer and President of EMC Corporation since January 2001, and President since January 2000. Mr. Tucci is also Chairman of the Board of Directors of VMware, Inc.
           
Joseph M. Velli
  50   2007  Mr. Velli has been Chairman and Chief Executive Officer of BNY ConvergEx Group, LLC, a leading global agency brokerage and technology company offering a comprehensive suite of investment services, since October 2006. Prior to the formation of BNY CovergEx Group, he was a Senior Executive Vice President of The Bank of New York since September 1998 and assumed the additional role of Chief Executive Officer of BNY Securities Group in October 2002.  51   2007  Mr. Velli has been Chairman and Chief Executive Officer of BNY ConvergEx Group, LLC, a leading global agency brokerage and technology company offering a comprehensive suite of investment services, since October 2006. Prior to the formation of BNY ConvergEx Group, he was a Senior Executive Vice President of The Bank of New York since September 1998 and assumed the additional role of Chief Executive Officer of BNY Securities Group in October 2002.
 
The Board of Directors recommends the election of each of the nominees identified above. Unless otherwise directed, the persons named in the enclosed proxy will vote the proxy FOR the election of each of these eightseven nominees.
Retiring Director
Phillip Horsley, a member of the Board since 1982, has declined to stand for re-election to the Board.

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DIRECTOR COMPENSATION
 
FOR THE FISCAL YEAR ENDED MAY 31, 20082009
 
Director compensation is set by the Governance and Compensation Committee, ofand approved by the Board. The Board’s authority cannot be delegated to another party. The Company compensates the outsideindependent directors of the Board using a combination of cash and equity-based compensation. The committee is advised on matters of Board compensation by their retained consultants, Watson Wyatt Worldwide (“Watson Wyatt”), whom are independent from management. The Company’s management does not play a role in setting Board compensation. Jonathan J. Judge, President and Chief Executive Officer (“CEO”) of the Company, receives no compensation for his services as a director. The compensation received by Mr. Judge in his role as CEO is shown onin the Fiscal 20082009 Summary Compensation Table on page 2224 of this Proxy Statement.
 
In July 2008, the Board approved a change to the cash and equity-based compensation structure for independent directors by replacing the meeting fee with an annual retainer and changing the proportion of stock options and restricted stock awarded. In total, the value of the compensation to be realized by each director is substantially unchanged. However, the new structure is more in line with current market trends at companies within our peer group in terms of pay levels and composition. The peer group is a select group of comparable companies, and is discussed further on pages 18 and 19 of this Proxy Statement. Refer to the discussions below under Cash Compensation and Equity-Based Compensation regarding the impact to the respective compensation components.
Cash Compensation
 
DuringEffective with the October 2008 Board meeting, the annual cash compensation paid to the independent directors is as follows:
     
Compensation Element
 Amount 
 
Annual Cash Retainer, applicable to all independent directors $45,000 
Audit Committee Member Annual Retainer $7,500 
Governance and Compensation Committee Member Annual Retainer $5,000 
Investment Committee Member Annual Retainer $5,000 
Executive Committee Member Annual Retainer $5,000 
Audit Committee Chairman Annual Retainer $15,000 
Governance and Compensation Committee Chairman Annual Retainer $7,500 
The cash compensation component was revised, as noted above, to be solely annual retainers, which are paid in quarterly installments. The retainers for the chairmen of the Audit Committee and Governance and Compensation Committee were included to provide additional compensation for those Board members who contribute additional time in preparation for committee meetings. Prior to October 2008, the independent directors received a combination of annual retainers and meeting fees.
For the year ended May 31, 20082009 (“fiscal 2008”2009”), outside directors receivedMr. Golisano, who is not an annual retainer of $25,000, paid in quarterly installments, plus $2,500 for each Board meeting attended. In addition, outside directors who served on a committee of the Board received $1,000 for each committee meeting attended. The Chairman of the Audit Committee, currently Mr. Flaschen, was paid an additional $1,000 for each Audit Committee meeting chaired. The combination of annual retainer and meeting fees provides compensation to those Board members contributing additional time through their participation at standing committee meetings.
In fiscal 2008, Mr. Golisanoindependent director, received an annual salary of $140,000 for his services as Chairman of the Board. The Chairman does not receive any other director fees or equity-based compensation.


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In July 2008, the Board approved a change to the cash and equity compensation structure for outside directors. In total, the compensation to be realized by each Board member is unchanged, however, the new structure is more in line with trends at other large market capitalization companies in terms of pay levels and composition. The annual retainer was increased to $45,000, to be paid in quarterly installments. Compensation for each Board and committee meeting attended has been eliminated, replaced with committee retainers of $7,500 annually for members of the Audit Committee and $5,000 annually for all other committees. These committee retainers will be paid in quarterly installments. Additionally, the compensation for each meeting attended by the Audit Committee chairman has been eliminated, replaced with an annual chairman retainer of $15,000. The Board also introduced an annual chairman retainer for the Governance and Compensation Committee in the amount of $7,500. Both chairman retainers will be paid in quarterly installments. The Board also approved a change in the proportion of options and restricted stock to be awarded annually to each outside director. The awards will be based on a total equity value of $120,000 with 50% to options and 50% to restricted stock.
Equity-Based Compensation
 
As the Company matures, the market for our common stock has matured and therefore, the Governance and Compensation Committee determined, during the year ended May 31, 2007 (“fiscal 2007”), it would be more appropriate to shift equity awards from 100% in options toEquity-based compensation consists of a blend of stock options and restricted stock.


6


In July 2007,2008, each outsideindependent director received an award under the Company’s 2002 Stock Incentive Plan, as amended and restated effective October 12, 2005 (the “2002 Plan”), as follows:
 
        
 
Stock Awards
 
Option Awards
 
Restricted Stock Awards
 
Option Awards
Grant Date July 17, 2007 July 17, 2007 July 10, 2008 July 10, 2008
Exercise Price NA $43.91 NA $31.95
Quantity(1)
 1,334 6,000 1,875 6,250
Vesting Schedule On the third anniversary of the date of grant One-third per annum over three years from the date of grant On the third anniversary of the date of grant. One-third per annum over three years from 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   Shares may not be sold during the director’s tenure as a member of the Board, except as necessary to satisfy tax obligations.  
Other Upon the discretion of the Governance and Compensation Committee, unvested shares may be accelerated in whole or in part for certain events, including, but not limited to director retirement(2) In the event of death or disability of a Board member, unvested options will vest in full and be immediately exercisable. Unvested options outstanding upon the retirement of a Board member will be canceled 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.(1) In the event of death or disability of a Board member, unvested options will vest in full and be immediately exercisable. Unvested options outstanding upon the retirement of a Board member will be canceled.
 
 
(1)Mr. Velli received an additional awards of 667 restricted shares and 3,000 options to purchase shares of the Company’s common stock, based on his service on the Board since January 2007.
(2)Retirement eligibility for directors for this purpose begins at age 55 or older with ten years of service as a member of the Board.
 
The equity-based compensation structure for the independent directors was revised in July 2008, and became based on a total fixed value of $120,000 per director, with approximately 50% awarded in the form of stock options and 50% in the form of restricted stock. The quantity of equity awards granted varies based on the estimated fair value as of the grant date. Prior to July 2008, the independent directors received a fixed quantity of equity awards. The $120,000 fixed value used to determine the quantity of equity awards in July 2008 was consistent with the fair value of the equity awards awarded in July 2007, and was part of the total compensation change for the independent directors as previously discussed.
In July 2008,2009, the Board granted each outsideindependent director except for Mr. Golisano, received 6,250 options to purchase shares of the Company’s common stock at an exercise price of $31.95$24.21 per share and 1,875 shares of restricted stock, with terms similar to the equity awards granted in July 2007.2008. This award is consistent with the number of options and shares granted in July 2008 and has a calculated total value of approximately $75,000. This represents a reduction from the $120,000 fixed value utilized in the prior year. The Board determined that it was not in the best interest of the Company’s stockholders, in the current economic conditions, to base directors’ equity compensation on the established total fixed value of $120,000.
 
Deferred Compensation Plan for Directors
 
The Company maintainsWe maintain a non-qualified and unfunded deferred compensation plan in which all outsideindependent directors are eligible to participate. Directors may elect to defer up to 100% of their Board cash compensation. Gains and losses are credited based on the participant’s electionselection of a variety of designated investment choices, which the participant may change at any time. The Company doesWe do not match any participant deferral or guarantee a certain rate of return. The interest rates earned on these investment choices isinvestments are not above-market or preferential. Refer to page 2730 of this Proxy Statement for a listing of investment funds available to a participant and the annual returnsrates of return on those funds. Mr. Flaschen defers 100% of his Board cash compensation under this plan. No other directors participate in the plan at this time.


8


 
Benefits
 
We reimburse each director for expenses associated with attendance at Board and committee meetings. Mr. Golisano also receives access to the Company’s standard health and life insurance plans and receives Company matching contributions, when in effect for all employees, into his account in the 401(k) Plan.
 
Stock Ownership Guidelines
The Governance and Compensation Committee set stock ownership guidelines for our independent directors with a value of four times his or her annual Board retainer, excluding any committee retainers. The ownership guidelines were established to provide long-term alignment with stockholders’ interests. The independent directors are expected to attain the ownership guideline within five years after the later of first becoming a director or the initial adoption of the guideline. For the purpose of achieving the ownership guideline, unvested restricted stock awarded to the directors is included.
 
Directors must adhere to strict standards with regards to trading in the Company’s stock. They may not, among other things:
 
 • 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.


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Fiscal 20082009 Director Compensation
 
The table below summarizespresents the total compensation received from the Company by all outside directors for fiscal 2008.2009.
 
                                        
 Fees Earned
     All Other
    Fees Earned
     All Other
   
 or Paid in
 Stock Awards
 Option Awards
 Compensation
 Total
  or Paid in
 Stock Awards
 Option Awards
 Compensation
 Total
 
Name
 Cash ($)(1) ($)(2),(4) ($)(3),(4) ($)(5) ($)  Cash ($)(1) ($)(2),(4) ($)(3),(4) ($)(5) ($) 
B. Thomas Golisano $140,000  $  $  $  9,990  $ 149,990  $140,000  $  $  $9,883  $149,883 
David J. S. Flaschen(6)
 $56,500  $ 33,416  $ 75,120  $  $165,036  $76,875  $53,668  $75,631  $  $206,174 
Phillip Horsley $40,000  $33,416  $75,120  $  $148,536  $53,000  $53,668  $75,631  $  $182,299 
Grant M. Inman $50,500  $33,416  $75,120  $  $159,036  $62,625  $53,668  $75,631  $  $191,924 
Pamela A. Joseph $42,500  $33,416  $46,404  $  $122,320  $51,125  $53,668  $62,823  $  $167,616 
Joseph M. Tucci $40,000  $33,416  $75,120  $  $148,536  $54,875  $53,668  $75,631  $  $184,174 
Joseph M. Velli $40,000  $25,574  $30,860  $  $96,434  $54,000  $47,042  $48,833  $  $149,875 
 
 
(1)The amounts in this column are as described abovepreviously under “Cash Compensation.”
 
(2)The amounts in this column reflect the value determined by the Company for accounting purposes of restricted stock awards and do not reflect whether the recipient has actually realized a financial value from these awards (such as lapse in a restricted stock award). The amounts in this column represent the dollar amount recognized as expense in the Company’s consolidated financial statements for fiscal 20082009 for the fair value of restricted stockthese awards in accordance with Statement of Financial Accounting StandardStandards (“SFAS”) No. 123 (revised) (“No. 123R”), “Share-Based Payment.” Pursuant to SEC rules, the amountamounts disclosed disregardsdisregard estimates of forfeitures of awards that have been included in the financial statement reporting for such awards. 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 resulting fair values were as follows: $31.95 per share for the July 10, 2008 grant; $43.91 per share for the July 17, 2007 grant; and $36.87 per share for the July 13, 2006 grant. Refer to Note C contained inof the Notes to Consolidated Financial Statements includedcontained in Item 8 of our fiscal 2009 Annual Report onForm10-K(“Form 10-K”) for fiscal 2008 for further discussion onof restricted stock awards.
 
(3)The amounts in this column reflect the value determined by the Company for accounting purposes of stock option awards and do not reflect whether the recipient has actually realized a financial value from these awards (such as by exercising stock options). The amounts in this column represent the dollar amount recognized as expense in the Company’s consolidated financial statements for fiscal 20082009 for the fair value of optionthese awards in accordance with SFAS No. 123R, and thus include amounts from awards granted prior to June 1, 2006. The fair value was determined using aBlack-Scholes option pricing model in accordance with SFAS No. 123R for grants since June 1, 2006. Grants prior to June 1, 2006 were valued using a Black-Scholes option pricing model in accordance with SFAS No. 123, “Accounting for Stock-Based Compensation.” Pursuant to SEC rules, the amountamounts disclosed disregardsdisregard estimates of forfeitures of awards that have been included in the financial statement reporting for such awards. Included in these amounts are grants of option awards in July 2003, July 2004, July 2005, July 2006, July 2007, and July 2007.2008. Refer to note 2 on page 22pages 24 and 25 of this Proxy Statement for the assumptions and resulting per share fair value for these option awards. Refer to Note C contained inof the Notes to Consolidated Financial Statements includedcontained in Item 8 of our fiscal 2009Form 10-K for fiscal 2008 for further discussion of option awards and the relevant assumptions used in the calculation of the grant date fair value.
 
(4)As of May 31, 2008,2009, Mr. Flaschen, Mr. Horsley, Mr. Inman, Ms. Joseph, and Mr. Tucci each had 2,6684,543 shares of unvested restricted stock, and Mr. Velli had 2,0013,876 shares of unvested restricted stock. As of May 31, 2008,2009, each director had the following number of options outstanding: Mr. Flaschen — 69,500;75,750; Mr. Horsley — 57,000;63,250; Mr. Inman — 57,000;63,250; Ms. Joseph — 12,000;18,250; Mr. Tucci — 79,500;85,750; and Mr. Velli — 9,000.15,250.
 
(5)All Other Compensation for Mr. Golisano includes $5,223$4,738 of Company-matching contributioncontributions under the 401(k) Plan and $4,767$5,145 in Company-provided benefits for standard health and life insurance.
 
(6)Mr. Flaschen defers 100% of thehis cash fees earned to our non-qualified and unfunded deferred compensation plan. During fiscal 2008, in accordance with the election requirements of section 409A of the Internal Revenue Code (“Code”), Mr. Flaschen received a distribution from the plan of $148,890.


810


 
PROPOSAL 2 •  RATIFICATION OF SELECTION OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
 
The Audit Committee has appointed the firm of Ernst & Young LLP as the Company’s independent registered public accounting firmaccountants for the year ending May 31, 2009.
2010. Although action by stockholders in this matter is not required, the Audit Committee believes that it is appropriate to seek stockholder ratification of this appointment and to seriously consider stockholder opinion on this issue. If the stockholders do not ratify the appointment, the Audit Committee will review its future selection of the independent accountants, but may still retain them.
 
Representatives from Ernst & Young LLP, which has served as the Company’s independent accountants since 1983, will be present at the Annual Meeting, will be afforded the opportunity to make any statements they wish, and will be available to respond to appropriate questions from stockholders.
 
To ratify the appointment of Ernst & Young LLP, a majority of votes cast at the meeting must be voted for the proposal.
 
The Board of Directors recommends a vote FOR the proposal to ratify the appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm for the year ending May 31, 2009.2010.
 
Fees For Professional Services
 
The following table shows the aggregate fees for professional services rendered for the Company by Ernst & Young LLP:
 
                
 Year Ended May 31,  Year Ended May 31, 
 2008 2007  2009 2008 
Audit fees $558,000  $544,000  $633,000  $558,000 
Audit related fees  164,000   359,000   165,000   164,000 
          
Total fees $722,000  $903,000  $798,000  $722,000 
          
 
Audit feesfor fiscal 2009 and for the fiscal year ended May 31, 2008 and 2007(“fiscal 2008”) were for professional services rendered for the audits of the Company’s annual consolidated financial statements, and reviews of the financial statements included in the Company’s Quarterly Reports onForm 10-Q, and for the audits of management’s assessment of the effectiveness of internal control over financial reporting for fiscal 2007 and the effectiveness of internal control over financial reporting for fiscal 2008.reporting.
 
Audit related feesfor fiscal 20082009 and 2007fiscal 2008 were for employee benefit plan audits and other reports.
 
There were no tax or other non-audit related services provided by the independent accountants for fiscal 20082009 and 2007.fiscal 2008.
 
Audit Committee Policy on Pre-Approval of Services of Independent Accountants
 
The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by the independent accountants. The Audit Committee pre-approved all such audit and audit related services provided by the independent accountants during fiscal 20082009 and 2007.fiscal 2008.


911


 
REPORT OF THE AUDIT COMMITTEE
 
The Audit Committee of the Board of Directors oversees the Company’s financial reporting process on behalf of the Board and is composed entirely of non-managementindependent directors. The Audit Committee is governed by a written charter and its primary responsibilities are highlighted in the Corporate Governance section of this Proxy Statement.
 
Paychex management is responsible for the preparation of the financial statements, the financial reporting process, and for the Company’s internal controls over financial reporting. Ernst & Young LLP, the Company’s independent accountants, is responsible for performing independent audits of the Company’s consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board. The independent accountants are also responsible for expressing an opinion on the effectiveness of the Company’s internal controls over financial reporting. The Audit Committee monitors and oversees these processes.
 
As part of the oversight processes, the Audit Committee regularly meets with management, the Company’s internal auditors, and the independent accountants. The Audit Committee meets with the internal auditors and independent accountants, with and without management present, to discuss the overall scope and plans for various audits, results of their examinations, their evaluations of the Company’s internal controls, and the overall quality and effectiveness of the Company’s financial reporting process and legal and ethical compliance programs, including the Company’s Code of Business Ethics and Conduct. The Audit Committee held sevensix meetings during fiscal 20082009 and had full access to each of the aforementioned parties.
 
In fulfilling its oversight responsibilities, the Audit Committee has reviewed and discussed with management and the independent accountants the consolidated financial statements for fiscal 2008,2009, including a discussion on the quality and acceptability of the Company’s accounting policies, the reasonableness of significant judgments and estimates, and the clarity of disclosures in the consolidated financial statements. The Audit Committee also monitored the progress and results of testing of internal controls over financial reporting, reviewed reports from management and internal audit regarding design, operation, and effectiveness of internal controls over financial reporting, and reviewed the report from the independent accountants regarding the effectiveness of the Company’s internal control over financial reporting.
 
The Audit Committee has discussed with the independent accountants the matters required to be discussed by Statement on Auditing Standards No. 61, as amended by Statement on Auditing Standard No. 90 (Communications With Audit Committees).amended. The independent accountants have provided the Audit Committee with written disclosures and the letter required by Independence Standardsthe Public Company Accounting Oversight Board Standard No. 1 (Independence Discussionsregarding independent accountants’ communications with Audit Committees),the audit committee concerning independence, and the Audit Committee has discussed with the independent accountants their firm’sand management the accountants’ independence. There were no non-audit services provided to the Company by the independent accountants during fiscal 20082009 that required consideration by the Audit Committee.
 
Based upon the reviews and discussions referred to above, the Audit Committee recommended and the Board approved that the audited consolidated financial statements be included in the Company’sForm 10-K for the year ended May 31, 2008fiscal 2009 for filing with the SEC. The Audit Committee has recommended for approval by the Board the selection of the Company’s independent accountants.
 
The Audit Committee:
 
David J. S. Flaschen,Chairman
Grant M. Inman
Pamela A. Joseph


1012


 
CORPORATE GOVERNANCE
 
Information About the Board of Directors and Corporate Governance
 
The Board is elected by the stockholders to oversee the overall success of the Company, review its operational and financial capabilities, and periodically assess its long-term strategic objectives. The Board serves as the final decision-making body of the Company, except for those matters for which authority is reserved for, or shared with, the stockholders. The Board selects and oversees the members of senior management, who are charged by the Board with conducting theday-to-day business of the Company.
 
The Board held four meetings during fiscal 2008.2009. To the extent practicable, directors are expected to attend all Board meetings and meetings of the committees on which they serve. During fiscal 2008,2009, each director attended more than 75%90% of the Board meetings and committee meetings on which the director served. Directors are encouraged to attend annual meetings of stockholders. Last year, allAll directors attended the 20072008 Annual Meeting of Stockholders, except for Mr. Horsley who was absent due to health reasons.Stockholders.
 
Regularly scheduled executive sessions of the independent members of the Board, without members of management, are held in conjunction with meetings of the Board. When required or as appropriate, matters presented to the Board by the Governance and Compensation Committee are discussed and decided upon by the independent directors, which in fiscal 2009 were all directors except for Mr. Golisano and Mr. Judge. The Board has selected Mr. Tucci to preside at all executive sessions of the independent directors.
 
Board of Directors Committees
 
The Board has established four standing committees with the following director assignments:
 
                    
         Governance and
         Governance and
   Executive
 Audit
 Investment
 Compensation
   Executive
 Audit
 Investment
 Compensation
Name
 Independence(1) Committee Committee Committee Committee Independence(1) Committee Committee Committee Committee
B. Thomas Golisano   X         X      
Jonathan J. Judge   Chairman         Chairman      
David J. S. Flaschen X   Chairman X X X   Chairman X X
Phillip Horsley X X   X X X X   X X
Grant M. Inman X   X Chairman X X   X Chairman X
Pamela A. Joseph X   X     X   X    
Joseph M. Tucci X       Chairman X       Chairman
Joseph M. Velli X     X X X     X X
Number of meetings held by committee during fiscal 2008   1 7 2 5
Number of meetings held by committee during fiscal 2009   0 6 2 6
 
 
(1)Directors are independent within the meaning of applicable SEC and The NASDAQ Stock Market® (“NASDAQ”) director independence standards.
 
The Board has determined that all members of the Audit Committee meet the independence, experience, and other applicable NASDAQ listing requirements and applicable SEC rules regarding independence, and that Mr. Flaschen qualifies as an “Audit Committee Financial Expert,” as defined by applicable SEC rules. The Board has also determined that all members of the Governance and Compensation Committee meet the NASDAQ independence criteria. Matters presented to the Board by the Governance and Compensation Committee are discussed and decided upon by the outside directors, which in fiscal 2008 were all directors except for Mr. Golisano and Mr. Judge.
 
Executive Committee.
 
The primary responsibility of the Executive Committee is to exercise all the powers and authority of the Board except as limited by law.


13


Audit Committee.  The primary responsibilities of the Audit Committee are to:
 
 • serve as an independent and objective party to monitor the Company’s financial reporting process and system of internal control;control system;


11


 • review the performance and independence of the Company’s independent accountants;
 
 • review and appraise the performance of the Company’s internal auditors;
 
 • review various legal and regulatory matters; and
 
 • provide an open avenue of communication among the independent accountants, financial and senior management, the internal auditors, and the Board.
 
Investment Committee.  The primary responsibilities of the Investment Committee are to:
 
 • review the Company’s investment policies and strategies, and the performance of the Company’s investment portfolios; and
 
 • determine that the investment portfolios are managed in compliance with the established investment policy.
 
Governance and Compensation Committee.  The primary responsibilities of the Governance and Compensation Committee are to:
 
 • evaluate and determine compensation for the directors, CEO, and executive officers;
 
 • provide general oversight with respect to governance of the Board, including periodic review and assessment of corporate governance policies;
 
 • identify, evaluate, and recommend to the Board candidates for nomination for election to the Board; and
 
 • review annually the independence of directors.
 
The Audit, Investment, and Governance and Compensation Committees’ responsibilities are more fully described in each committee’s charter adopted by the Board, which isare accessible on the Company’s website,www.paychex.com at the Investor Relations section under “Corporate Governance.”
 
Nomination Process
 
The Governance and Compensation Committee performs the function of our nominating committee. The Board has determined that it is necessary for the continued success of the Company to ensure that the Board is composed of individuals having a variety of complementary experience, education, training, and relationships relevant to the then-current needs of the Board and the Company. The Board’s Nomination Policy included in the Governance and Compensation Committee Charter is intended to achieve this result.
 
In evaluating candidates for nomination to the Board, the Nomination Policy requires Governance and Compensation Committee members to consider the contribution that a candidate for nomination would be expected to make to the Board and the Company, based upon the current composition and needs of the Board, and the candidate’s demonstrated business judgment, leadership abilities, integrity, prior experience, education, training, relationships, and other factors that the Board determines relevant. In identifying candidates for nomination to fill vacancies created by the expiration of the term of any incumbent director, the Nomination Policy requires Governance and Compensation Committee members to determine whether such incumbent director is willing to stand for re-election and, if so, to take into consideration the value to the Board and to the Company of their continuity and familiarity with the Company’s business. The Board has previously used a third partythird-party search firm to identify director candidates and the charter authorizes the Governance and Compensation Committee to continue this practice.
 
The Nomination Policy requires the Governance and Compensation Committee to consider candidates for nomination to the Board recommended by any reasonable source, including stockholders. Stockholders who wish to do so may recommend candidates for nomination by identifying such candidates and providing relevant biographical information in written communications to the chairman of the Governance and Compensation


14


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


12


 
Policy on Transactions with Related Persons
 
It is the Company’s policy to avoid transactions with related persons. However, there may be occasions when a transaction with a related person is in the best interest of the Company. The Company’s policies and procedures for review and approval of related persons transactions appear in the Company’s Standards of Conduct, Conflict of Interest, and its Employment of Relatives Standards, which are internally distributed, and in the Company’s Code of Business Ethics and Conduct, which is posted on the Company’s website.
 
For all employees, these policies and procedures require the employee to disclose, and the Company to makereview and determine if a conflict of interest review and determinationexists for specified transactions, which include certain financial interests in or relationships with any supplier, customer, partner, subcontractor, or competitor; serving on the board of non-profit organizations; and engaging in any activity that could create the appearance of a conflict of interest, including financial involvement or dealings with employees or representatives of the types of entities listed above. For officers, the Company’s Chief Financial Officer (“CFO”) oversees the review and determination of such transactions.
 
Members of the Board are required to disclose to the Chairman of the Board or the Chairman of the Governance and Compensation Committee any situation that involves, or may reasonably be expected to involve, a conflict of interest with the Company, including engaging in any conduct or activities that would impair the Company’s relationship with any person or entity with which the Company has or proposes to enter into a business or contractual relationship.
 
The Company’s human resources department determines whether employment of an employee’s relative is appropriate. The Company’s management, in consultation with the human resources department, is required to resolve any conflict regarding employment of an employee’s relative.
The Company’s financial accountingfinance department annually reviews the Company’s listing of related parties for determination of potential related person transactions that would be disclosable in the Company’s periodic reports or proxy materials under U.S.United States generally accepted accounting principles (“GAAP”) and SEC rules.
 
The Governance and Compensation Committee is required to consider all questions of possible conflicts of interest of Board members and executive officers, including review and approval of transactions of the Company in excess of $120,000 in which a director, executive officer, or an immediate family member of a director or executive officer has an interest. An immediate family member, as defined under Item 404 (a) of SECRegulation S-K, includes any child, stepchild, parent, stepparent, spouse, sibling,mother-in-law,father-in-law,son-in-law,daughter-in-law,brother-in-law, orsister-in-law of such director or officer, and any person (other than a tenant or employee) sharing the household of such director or executive officer.
 
Mr. Tucci, who is a member of the Board, is the Chairman, President, and Chief Executive Officer of EMC Corporation. During fiscal 2008,2009, the Company purchased through negotiated transactions approximately $4.4$4.5 million of data processing equipment and software from EMC Corporation. Mr. Golisano, Chairman of the Board, is the owner of Rochester Aviation, Inc. In fiscal 2008,2009, the Company purchased approximately $19,654$8,000 of aviation services from Rochester Aviation, Inc. related to Mr. Golisano’s travel to attend Board meetings.
Governance and Compensation Committee Interlocks and Insider Participation
None of the members of the Governance and Compensation Committee were at any time during fiscal 2009, or at any other time, an officer or employee of the Company. Mr. Tucci, a member of the Board, is Chairman of the Governance and Compensation Committee and is also an executive of EMC Corporation. As noted above, the Company purchases data processing equipment and software from EMC Corporation. During fiscal 2009, no member of the Governance and Compensation Committee or Board was an executive officer of another entity on whose compensation committee or board of directors an executive officer of Paychex served.
 
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 chairman of any standing committee of the Board. These procedures cover recommendations by stockholders of candidates for nomination for election to the Board. Written communications should be clearly marked “Stockholder and Other Interested Parties — Board Communication,” and be mailed to Paychex, Inc. at 911 Panorama Trail South, Rochester, New York,14625-2396, Attention: Corporate Secretary. In the case of communications intended for committee chairmen, the specific committee must be identified. Any such communications that do not identify a standing committee will be forwarded to the Board. The Corporate Secretary


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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.


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Governance and Compensation Committee Interlocks and Insider Participation
None of the members of the Governance and Compensation Committee were at any time during fiscal 2008, or at any other time, an officer or employee of the Company. Mr. Tucci, a member of the Board, is Chairman of the Governance and Compensation Committee and is also an executive of EMC Corporation. As noted above, the Company purchases data processing equipment and software from EMC Corporation. During fiscal 2008, no member of the Governance and Compensation Committee or Board was an executive officer of another entity on whose compensation committee or board of directors an executive officer of Paychex served.
 
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
 
Section 16(a) of the Securities Exchange Act of 1934, as amended, 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 2008,2009, its directors, executive officers, and greater than 10% beneficial owners have complied in a timely manner with all applicable Section 16 filing requirements.
 
CODE OF BUSINESS ETHICS AND CONDUCT
 
The Company has adopted a Code of Business Ethics and Conduct that applies to all of its directors, officers, and employees. The Code of Business Ethics and Conduct is available for review on the Company’s website atwww.paychex.com at the Investor Relations section under “Corporate Governance.” The Company intends to disclose any amendment to, or waiver from, a provision of its Code of Business Ethics and Conduct that relates to any element of the code of ethics definition enumerated in Item 406 of SECRegulation S-K by posting such information on its website at the address specified above.


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COMPENSATION DISCUSSION AND ANALYSIS
 
Objectives of Compensation Program
 
The Company believes in a pay for performancepay-for-performance approach to NEO compensation. The overall objectives of our officer compensation plan are to provide competitive opportunities when compared with companies of comparable size; attract, retain, and develop highly qualified NEOs; reward exceptional individual performance; tie compensation to our overall financial and strategic objectives; and align the interests of NEOs with the interests of stockholders.
 
To achieve these objectives, our NEOofficer compensation plan has been designed to:
 
 • be closely linked to, and deliver pay opportunities based on, Company performance and the individuals’ performance;
 
 • have incentives based on a focused set of financial, operational, and strategic goals;
 
 • provide the appropriate mix of individualized base salary, variable compensation, and short- and long-term incentives based on the NEO’s role and responsibilities. This provides considerable opportunitiesto deliver additional compensation opportunity for superior performance and downside risk ifreduced compensation opportunity in periods where performance goals are not achieved; and
 
 • be clearly communicated to NEOs, stockholders, and other key parties.
 
Role Ofof Governance and Compensation Committee
 
As part of the committee’s responsibility to evaluate and determine NEO compensation, on an annual basis, the committee:
 
 • reviews base salaries for increases, if any;
 
 • resets the annual officer performance incentive program (the “annual incentive program”);
 
 • approves the prior year payouts under the annual incentive program;
 
 • grants equity awards under our 2002 Plan; and
 
 • considers the impact of section 162(m) of the Code.Internal Revenue Code (the “Code”).
 
As outlined in its charter, the committee has the authority to retain consultants and advisors, at the Company’s expense, to assist in the discharge of the committee’s duties. The committee utilizes the compensation advisory services of Watson Wyatt, Worldwide, reportingwhich reports directly to the committee and purposefullyis independent from Paychex management. Management does not participate in the committee’s decision to retain Watson Wyatt as its consultant. Watson Wyatt advises the committee on matters of NEO compensation, assists the committee with analysis and research, and updates the committee on evolving best practices in compensation. Watson Wyatt is invited to attend all meetings and executive sessions of the committee. However, the committee is solely responsible for setting the type and amount of compensation.
 
Management retains the services of First Niagara Consulting as a compensation consultant to advise management on overall compensation strategy and plan design. They do not provide advice on individual NEOs’ compensation. Generally, compensation plans are developed and proposed by management, with analytical and research assistance by First Niagara Consulting. Watson Wyatt the committee’s consultant, will reviewreviews reports from management and First Niagara Consulting, and offeroffers the committee their opinions on the findings.findings as the committee’s consultant.
 
Our CEO, along with theour Vice President of Organizational Development, makesprovides recommendations to the committee on the design of elements offor compensation. These individuals, and from time to time the CFO, will be in attendance at the meetings of the committee to present plan design recommendations, evaluate current plan design, and respond to questions on current or recommended plan design. OurAnnually, our CEO annually, will reviewreviews achievement toof the priorrecently completed fiscal year’s plan, reviewplans, reviews salary recommendations for each of the NEOs (other than himself), recommendrecommends the upcoming fiscal year’s annual incentive program structure, and presentpresents recommendations on equity awards.


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Management is excluded from executive sessions of the committee where final decisions on


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compensation elements are made, particularly those on our CEO’s performance and compensation. Executive sessions occur at each meeting of the committee.
 
Elements of Compensation
 
We use a combination of compensation elements, including annual base salary, annual incentive program, and equity awards under our 2002 Plan. The committee compares our CEO compensation plan and that of other NEOs with other similar companies. The committee reviews variouscompensation consultants’ reports and market survey information as input to assess our cash compensation elements of annual base salary and annual incentive program. The committee strives for our NEOs’ cash compensation to be competitive with a select group of comparable companies (the “Peer Group”). The market survey information indicates whether our compensation package, if target performance is achieved, is comparable to the median compensation of our Peer Group, given current competitive practices, overall best practices, and other compensation and benefit trends. The committee continues to review each of the elements annually to ensure that compensation is appropriate and competitive to attract and retain a high performinghigh-performing executive team. For fiscal 2008,2009, NEO compensation packages averaged 51%50% in cash compensation and 49%50% in equityequity-based compensation, based on the value of equity awards as provided in the Fiscal 20082009 Summary Compensation Table on page 2224 of this Proxy statement.
 
Annually, the committee receives from management a summary of total cash compensation and equity awards with estimated future value, and total compensation for the upcoming fiscal year for all officer levels, from vice president to CEO. The summary is used to evaluate compensation recommendations and the impact to both total cash compensation and total compensation for each individual.
 
Management also provides the committee annually a five-yearthree-year history of total compensation, including cash, annual incentive payout, and equityequity-based compensation, for all officers. This history provides a more complete picture of the internal trend of rewardscompensation to executive officers, both as a team and as individuals. This summary facilitates discussion in that it more accurately details individual officer compensation, noting differences that reflect officer tenure, performance, and relative degree of importance ofposition in the position.management hierarchy.
 
As indicated above, compensationCompensation for our officers is most closely compared to a group of companies known as theour Peer Group. While theThe committee targets total compensation at the median of the Peer Group, thiseven though Paychex generally performs above the median. This is not the sole determining factor in the committee’s decisions on compensation, and the committee reserves the discretion to adjust compensation based on other factors. The Peer Group consists of fifteen companies with comparable revenue, net income, market capitalization, and earnings per share within ourtotal assets who are in a comparable industry, or who are direct competitors of Paychex. This group includes our direct competitor in the payroll industry, Automatic Data Processing, Inc., several firms in the financial transaction management arena, business process outsourcing companies, and more recently added companies in human resources outsourcing. The Peer Group companies are not necessarily limited to the markets in which Paychex does business. The committee also receives data on CEO compensation at other large, Rochester-based public companies. This information, by itself, does not necessarily triggerPeer Group is comprised of the following industries or segments: a change of our CEO’s compensation. direct competitor in the payroll industry; financial transaction management companies; business services and outsourcing companies; and a human resources outsourcing company.


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Our current Peer Group consists of the following companies:
 
Affiliated Computer Services, Inc. (ACS)Hewitt Associates, Inc. (HEW)
Automatic Data Processing, Inc. (ADP)Intuit Inc. (INTU)
Convergys Corporation (CVG)Iron Mountain Inc. (IRM)
DST Systems, Inc. (DST)Metavante Technologies, Inc. (MV)
The Dun & Bradstreet Corporation (DNB)Moody’s Corporation (MCO)
Equifax Inc. (EFX)Robert Half International Inc. (RHI)
Fiserv, Inc. (FISV)Total System Services, Inc. (TSS)
H&R Block, Inc. (HRB)
Paychex Peer Group
                   
    Reported
          
$ In Millions
   Fiscal Year
        Total
 
Company Name
 Ticker End  Revenues  Net Income  Assets 
 
Direct Competitor Payroll
                  
Automatic Data Processing, Inc.  ADP  Jun-09  $8,867  $1,333  $25,352 
Financial Transaction Management
                  
Fiserv, Inc.  FISV  Dec-08  $4,739  $569  $9,331 
Metavante Technologies, Inc.  MV  Dec-08  $1,707  $147  $3,157 
Total System Services, Inc.  TSS  Dec-08  $1,939  $250  $1,550 
Global Payments Inc.  GPN  May-09  $1,602  $37  $1,677 
Business Services and Outsourcing
                  
DST Systems, Inc.  DST  Dec-08  $2,285  $243  $2,509 
Dun & Bradstreet Corp.  DNB  Dec-08  $1,726  $311  $1,586 
Equifax Inc.  EFX  Dec-08  $1,936  $273  $3,260 
Broadridge Financial Solutions, Inc.  BR  Jun-09  $2,149  $223  $2,775 
Robert Half International Inc.  RHI  Dec-08  $4,601  $250  $1,412 
Intuit Inc.  INTU  Jul-09  $3,183  $447  $4,826 
Iron Mountain Incorporated IRM  Dec-08  $3,055  $82  $6,357 
Moody’s Corporation MCO  Dec-08  $1,755  $458  $1,773 
H&R Block Inc.  HRB  Apr-09  $4,084  $486  $5,360 
Human Resources Outsourcing
                  
Hewitt Associates, Inc.  HEW  Sep-08  $3,228  $188  $2,993 
                   
Paychex, Inc. 
 PAYX  May-09  $2,083  $534  $5,127 
Paychex Percentile Rank        41%  90%  75%
 
The committee annually reviews and approves the selection of Peer Group companies. They may varycompanies, adjusting the group from year to year based upon changes in our business and industry relative to other companies.changes in the Peer Group companies’ business or comparative metrics. The Peer Group willmay also change forbe adjusted in the event of mergers, acquisitions, or other financial restructurings.significant economic changes. During fiscal 2008, First Data2009, the committee took action to adjust the Peer Group. The committee was concerned that although Affiliated Computer Services (ACS) fit into the peer criteria in all other measures, it was no longer of similar size, based mainly on revenue comparison. The committee also determined that Convergys Corporation Ceridian(CVG) was no longer an appropriate comparator in light of its current financial position. Due to these concerns, Affiliated Computer Services and Convergys Corporation and The BISYS Group, Inc. were removed from the Peer Group as these companies are no longer publicly held and therefore compensation information is not readily available.Group. The companies were replaced


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with Iron MountainBroadridge Financial Solutions Inc. and Global Payments Inc., Moody’s Corporation and Total System Services, Inc. as these companieswhich are business to business providersservices and transaction management companies, respectively, of similar size and clients served. T. Rowe Price Group, Inc. was replaced with Metavante Technologies, Inc. as T. Rowe Price Group, Inc. is purely an investment company with clients much larger than our client base.size.
 
Annual Base Salary
 
The annual base salaries of the NEOs are determined based on the responsibilities of their position and comparisons with base salaries paid to executive officers having similar responsibilities in comparable companies.companies in the Peer Group. Annually, the base salaries are reviewed to determine what, if any, increase is required. Newly promoted officers will often have pay progression at a somewhat faster rate than more tenured officers. In fiscal 2007, the committee changed the cash compensation mix, as noted below under the Annual Officer Performance Incentive Program section.
 
Annual Officer Performance Incentive Program
 
Our annual incentive program is a cash incentive plan in which payments are made upon the satisfaction of certain quantitative and qualitative components. The quantitative component consists of certain predetermined performance targets. The performance targets for the annual incentive program are established at the beginning of each fiscal year, typically based on the Board-approved fiscal year financial plan, and provideplan. The annual incentive program provides our NEOs the opportunity for additional cash compensation based primarily on our annual service revenue and operating income, growth.net of certain items. The targets for payout are established by the committee with


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consultation of management. The program was established to motivate our NEOs to meet the goals set by the Company as presented to its stockholders. These goals are closely aligned with our stated long-term objectives of 12% annual service revenue growth and 15% annual operating income growth, net of certain items. Historically, the sole exclusion from operating income, net of certain items, has been interest on funds held for clients. However, at the discretion of the committee, certain items have and may also include items that are unusual and infrequent in nature. During fiscal 2007, the operating income metric excluded interest on funds held for clients and the expense charge of $38 million to increase the litigation reserve. This metric is considered a non-GAAP measure. The performance targets of the annual incentive program have both financial and strategic objectives including:objectives. For fiscal 2009, the performance targets established and actual results achieved were as follows:
 
• annual service revenue growth;
• annual operating income growth, net of certain items; and
• operating income, net of certain items, as a percentage of service revenue.
                 
  Performance Targets Established  Actual Results
 
$ In Millions
 Threshold  Target  Maximum  Achieved 
 
Annual Service Revenue $2,075  $2,139  $2,167  $2,007 
Annual Operating Income, Net of Certain Items $756  $787  $801  $730 
Annual Operating Income, Net of Certain Items, as a Percentage of Annual Service Revenue  36.0%  36.8%  37.0%  36.4%
The Senior Vice President (“SVP”) of Sales and Marketing is measured on new business revenue instead of annual service revenue growth, as he has greater influence on the results in that area.
 
Targets for the annual incentive program are set at specific financial goals, which are in alignment with stockholder interests, and which require all aspects of our business to function well in order to attain. The goals are achievable and difficult to overachieve. In fact, the annual incentive program has never achieved a maximum payout. In 2001, executive officers received no payout when the plan missed one element of achievement. We believe the rigor of the annual incentive program is one of the reasons for the consistency of the Company’s financial performance.interests. Once the target is determined, it is set for the year and is normally not changed. For extraordinary circumstances, the compensation committee reserves the right to apply discretion.
 
For fiscal 2008,2009, the annual incentive program applicable to the CEO and the NEOs was structured into two components  quantitative and qualitative.qualitative, similar to recent past years. The quantitative component is intended to comply with section 162(m) of the Code.Code for NEOs affected by the $1 million limitation. The CEO’s quantitative target percentage as reflected in his separate incentive award agreement is 100%105% of annual base salary. The quantitative target percentage for SVPsSenior Vice Presidents (“SVPs”) is 65% of annual base salary. For all other vice presidents, the quantitative target percentage is 40% of annual base salary. As the committee adjusts the allocation of total compensation, it increasesthe intent is to increase the percentage of total compensation that is performance-based. Each NEO is also assigned a qualitative section under the annual incentive program, with the CEO potentially receiving 20% of base salary and all other NEOs potentially receiving 10% of base salary, the same at boththreshold, target and maximum. Qualitative targets
Individual-specific qualitative goals are established annually, oftenat the beginning of the fiscal year based on functions unique to the individual. These goals are highly subjective and are not always based on quantifiable financial measurements. The committee may determine, at its sole discretion, whether satisfactory achievement has occurred, regardless of whether the officer has achieved the pre-established individual goals. We believe the qualitative portioncomponent of the annual incentive program also allows focus on singular, critical,officer-level projects.is immaterial to the overall compensation for each NEO.


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EquityEquity-Based Compensation
 
To align our NEOs with the long-term interests of our stockholders, the Company grants equity awards under the 2002 Plan. The committee has provided guidance to management regarding the aggregate amount of equity-based compensation to be utilized while also considering the financial impact of such grants. Management believes this is a prudent use of equity grants, which aligns the interests of both NEOs and stockholders.
Since 1998, annual grants of equity awards to the NEOs have been approved during the regularly scheduled meeting of the Board in July. The exercise price of the award is the closing market price on the date of the grant.grant, except for the special grant in July 2009 as more fully described in “Subsequent Events” on page 22 of this Proxy Statement. Historically, the July Board meeting has been scheduled to occur approximately two weeks after the release of our fiscal year-end earnings and upcoming fiscal year financial guidance. Our trading black-out period normally lifts on the third business day following such release of information. The committee anticipates continuing its granting practice. In fiscal 2009, the Board also granted equity awards to individuals upon hire or promotion to executive officer positions. These equity awards were not granted during any trading black-out periods. Recipients are notified shortly after Board approval of their grant, noting the number of awardsstock options or restricted stock granted, the vesting schedule, and exercise price. Any restrictivesales restrictions or unusualother terms of the award are also communicated at that time.
 
As the Company matures, the market for its common stock has matured and, therefore, theThe committee determined it would be more appropriate to shift equity awards from 100% in options togrants a blend of stock options and restricted stock. Beginning in fiscal 2007, the committee approved the granting of performance-accelerated restricted stock awards to NEOs. The grants were made subject to the 2002 Plan and were issued to provide pay for performance. The performance-acceleratedA blend of stock options and restricted stock provides the committee with the best vehicle at this time to align NEOs’ interestsoptimizes total equity awarded and balances risk and reward, aligning with stockholders’ interests over the long term.
long-term. The blendquantity of stock options and restricted stock optimizedawarded is based on an estimated total value, as determined by the committee. The baseline estimated total value was calculated from the July 2007 awards while maintaining expense levels similar in mannerwith total value now split 55% to stock options and 45% to restricted stock. The baseline estimated total value may be reduced by the previous grants of solely options. The granting of performance-accelerated restricted stock awards occurred for the following reasons:committee at its discretion.


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• We believe the granting of performance-accelerated awards provides better alignment with stockholders’ interests.
• It affords the opportunity for increased equity ownership by NEOs.
• The use of restricted stock moderates the negative impact of external stock market factors outside the control of management.
The grants of restricted stock awards have time-based vesting with performance-based acceleration to recognize all aspects of the NEOs’ contributions to the Company, and to motivate the NEOs to meet our annual and long-term financial targets. The restricted stock will vest for active employees on the fifth anniversary of the grant date, unless performance criteria are met for the acceleration of vesting. The performance criteria, forsimilar to the acceleration of the vesting of the restricted stock were based on the Company’s stated long-term objective of 15% annual operating income growth, net of certain items, to remain consistent withcriteria set for the annual incentive program, targets. The fiscal 2008 awardare established by the committee at the time of grant. If performance targets are met for acceleration of one-third in any onea fiscal year, one-third of the award would vest at that time. If targets are operating income, net of certain items, as follows:
     
In millions
  
Fiscal Year
 Operating Income, Net of Certain Items
 
2008 $696.3 
2009 $800.7 
2010 $920.8 
2011 $1,058.9 
met for three consecutive years, then the award would be fully vested.
 
During fiscal 2008, a one-time grant of 30,000Information regarding the stock options and restricted shares that vest one-third per year beginning in October 2010 was awardedstock granted to the CFO. The award was granted to provide incentive for long-term retention forNEOs in fiscal 2009 and in prior years are detailed in the CFO.
The value of equity awards for the NEOs is detailed on the Fiscal 2008 SummaryNamed Executive Officer Compensation Table, page 22tables of this Proxy Statement.


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CEO Compensation
 
It is the responsibility of the committee to evaluate Mr. Judge’s performance annually and determine his total compensation. Mr. Judge receives compensation based on his leadership role and the overall performance of the Company. A number of compensation elements, particularlyincluding his employment agreement, are provided to Mr. Judge as a means of retention. Mr. Judge receives a base salary comparable to the median of salaries for CEOs in our Peer Group. His annual incentive program, as described under “Annual Officer Performance Incentive Program”Program,” is also comparable to the median of CEOs in our Peer Group, and is commensurate with his leadership role at the Company. Mr. Judge also receives equity awards under the 2002 Plan. During fiscal 2008,2009, he received options to purchase 150,000183,906 shares of common stock. He also received 33,33445,740 shares of performance-accelerated restricted shares.stock. The equity awards are provided to motivate all NEOs, including Mr. Judge, to meet our long-term financial targets.award quantities granted were based on an estimated value, as approved by the committee. Certain elements of Mr. Judge’s compensation are significantly higher than those of the SVPs due to the executive structure of the Company.
 
In addition to the above elements of compensation, Mr. Judge has a severance package, described in his employment agreement which was renewed on November 30, 2007 for an additional three years. No written or oral change of control or severance arrangements exist for our NEOs, except for this arrangement with Mr. Judge. The employment agreement provides for fixed annual base salary, participation in the annual incentive program, and grants of equity awards under the 2002 Plan. If Mr. Judge is terminated other than for cause or resigns for good reason, he is entitled to certain compensation as detailed further in the Change of Control and Severance Arrangement tableinformation on page 2831 of this Proxy Statement.
 
Stock Ownership Guidelines
 
In furtherance of the long-term alignment with stockholders, theThe committee set stock ownership guidelines for our CEO (two times his annual base salary) and CFO and other SVPs (one times annual base salary). The ownership guidelines were established to provide an additional element of retention and to provide long-term alignment with stockholders’ interests. For the purposes of achieving the ownership guideline, unvested restricted stock awarded to the executive officers is included.
 
NEOs of the Company must also adhere to strict standards with regards to trading in the Company’s stock. They may not, among other things:
 
 • 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.
 
Non-Compete and Other Forfeiture Provisions
 
A principle component of our equityOur equity-based compensation isagreements state that following termination of an NEO’s employment, certain benefits (including equity basedequity-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


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cancel all or any outstanding portion of the equity awards subject to this principle,provision, and recover the gross value of any vested restricted shares, including all dividends, or individends. In the case of non-qualified stock options, the Company may suspend the NEO’s right to exercise the optionand/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 and directors do not receive benefits which are not otherwise available to all our employees. We do not provide our NEOs with pension arrangements, post-retirement health coverage, or other similar benefits with the exception of access to a non-qualified and unfunded deferred compensation plan.


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Deferred Compensation
 
We offer a non-qualified and unfunded deferred compensation plan to our NEOs and directors.NEOs. The deferred compensation plan is an extension ofintended to supplement the NEO’s 401(k) Plan account. Due to the limitations on the 401(k) Plan account provided by the Internal Revenue Service, this plan allows for further savings toward retirement for the NEOs and functions similarly to the 401(k) Plan account. Refer to the Non-Qualified Deferred Compensation tablediscussion on page 2730 of this Proxy Statement for more information on how our deferred compensation plan functions.
 
Compensation Received In Fiscal 2008
In reviewing the Company’s NEO compensation, it is important to note the opportunities Paychex provided to its NEOs in fiscal 2008. The increasing complexity of the standards of financial accounting and reporting related to stock-based compensation has made it difficult for investors to assess this information and has, at times, caused confusion between what might be called “reported” pay, as required to be disclosed in the Fiscal 2008 Summary Compensation Table on page 22 of this Proxy Statement, versus “received” pay, or the amount of compensation received by an NEO. Therefore, provided below is an additional compensation table designed to highlight the compensation that reflects what an NEO has received.
The table below shows the actual compensation received by each of the NEOs for fiscal 2008. This table includes salary, incentive bonus, net value realized from the exercise of options and lapsing of restricted stock, and all other compensation received during fiscal 2008. The table below excludes the complex accounting valuations for equity awards as required in the Fiscal 2008 Summary Compensation Table on page 22 of this Proxy Statement.
                         
     Fiscal 2008 Compensation Received by NEOs    
  Annual
  Annual
  Option
  Restricted
  All Other
    
  Base Salary(1)  Incentive(1)  Exercises  Stock Lapse  Compensation(2)  Total 
 
Jonathan J. Judge,
President and CEO
 $  908,606  $ 1,030,979  $  $ 460,440  $     28,852  $ 2,428,877 
John M. Morphy,
Senior Vice President,
CFO, and Secretary
 $411,498  $268,362  $333,640  $92,080  $8,712  $1,114,292 
Walter Turek,
Senior Vice President,
Sales and Marketing
 $ 405,659  $257,390  $ 1,480,391  $92,080  $25,560  $2,261,080 
Martin Mucci,
Senior Vice President,
Operations
 $398,300  $264,079  $374,565  $92,080  $8,359  $ 1,137,383 
William G. Kuchta,
Vice President,
Organizational Development
 $292,512  $127,394  $  $46,040  $7,029  $472,975 
(1)Included in the annual base salary and annual incentive are amounts deferred under the Company’snon-qualified and unfunded deferred compensation plan as shown in the “Executive Contributions” column of the Non-Qualified Deferred Compensation table on page 27 of this Proxy Statement.
(2)Refer to notes 4 and 5 of the Fiscal 2008 Summary Compensation Table on page 22 of this Proxy Statement for information on these amounts.


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Subsequent Events
 
In July 2008,2009, the following equityequity-based compensation was granted to the NEOs.
 
            
 Option Awards
 Restricted Stock
 
         (at exercise price per share) Awards 
 Option Awards Restricted Stock Awards  $24.21 $31.95   
Jonathan J. Judge  183,906   45,740   316,447   58,275   48,018 
John M. Morphy  36,781   9,148   63,290   11,655   9,604 
Walter Turek  27,344   6,802 
Martin Mucci  40,000   10,000   63,290   12,675   9,604 
Michael A. McCarthy  31,647   5,828   4,802 
William G. Kuchta  18,391   4,575   31,647   5,828   4,802 
 
The exercise priceaward quantities granted were determined based on an estimated fair value. The value for the options is $31.95.each NEO may have been adjusted for individual performance and retention considerations. All NEO options vest annually in 20% increments over five years.years, except for the special grant as noted below. NEO restricted shares have five-year cliff vesting, accelerating up to one-third in any one fiscal year whenif the targetperformance targets for that fiscal year hashave been met or exceeded. The target isperformance targets are operating income, net of certain items, and forservice revenue as set by the years ending May 31, 2009, 2010, 2011, and 2012 is $787.0 million, $905.1 million, $1,040.8 million, and $1,197.0 million, respectively.Board.
 
InBeginning in fiscal 2009, the committee intended to deliver value as opposed to fixed quantities when determining equity award grants. The quantity of stock options in the July 2008 one-thirdaward was calculated based on an estimated Black-Scholes value. Subsequent to the committee’s approval of the July 2006 and one-third2008 stock options, it was determined that the actual Black-Scholes value on the date of grant was lower than the estimated value, resulting in an option grant with a lower compensation value than the committee had approved. Therefore, a special grant was made on July 9, 2009 at an exercise price of $31.95 as listed in the table above. This exercise price is above the closing stock price of $24.21 on the date of grant, but consistent with the exercise price of the options granted in July 2007 restricted2008. In addition, the committee approved the acceleration of 20% of the award to vest on July 10, 2009. The remaining stock options in this award were accelerated basedwill continue to vest 20% per annum on meetingeach anniversary date as provided in the target set. award agreement, and expire on July 9, 2018.
The targettargets for fiscal 2008 was operating income, net of certain items, to accelerate the lapsing of $696.3 million. Mr. Judge vestedoutstanding restricted stock awards were not achieved for fiscal 2009, therefore no shares vested. The target for operating income, net of certain items, was $787.0 million to accelerate the July 2008 award, and $800.7 million to accelerate both the July 2006 and July 2007 restricted stock awards. Actual operating income, net of certain items, was $729.7 million for fiscal 2009.
No salary increases were provided to the NEOs in 22,222 shares, Messrs. Morphy, Mucci, and Turek each vested in 4,444 shares and Mr. Kuchta in 2,222 shares.July 2009 due to a Company-wide merit increase suspension.


22


 
Impact of the Internal Revenue Code
 
Section 162(m) of the Code generally limits the tax deductibility of annual compensation paid to certain officers to $1 million, unless specified requirements are met. The committee has carefully considered the impact of this provision. At this time, it is the committee’s intention to continue to compensate all NEOs based on overall performance. The committee expects that most compensation paid to NEOs will qualify as a tax-deductible expense. For fiscal 2008,2009, our annual incentive program was designed to provide incentive compensation that would not count against the $1 million limitation, including the quantitative component of the NEOs’ annual performance incentive. However, within the NEOs’ annual incentive there is a portion of the payout which is qualitative and wouldis not be exempt from the application of section 162(m). Therefore, the committee authorizedAs a result of this qualitative component, $1.0 million of compensation that was not deductible resulting in $1.4 million for fiscal 2008 thatexpenses did not qualify foras a tax deduction.tax-deductible expense during fiscal 2009.
 
THE GOVERNANCE AND COMPENSATION COMMITTEE REPORT
 
The Governance and Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis included in this Proxy Statement with management. Based on such review and discussion, the committee recommends to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement and the Company’sForm 10-K for fiscal 2008.2009.
 
The Governance and Compensation Committee:
 
Joseph M. Tucci,Chairman
David J. S. Flaschen
Phillip Horsley
Grant M. Inman
Joseph M. Velli


2123


 
NAMED EXECUTIVE OFFICER COMPENSATION
 
The following NEO tables reflect the acceleration of Mr. Miley’s unvested stock options and restricted stock upon his death in May 2009.
FISCAL 20082009 SUMMARY COMPENSATION TABLE
 
The table below summarizespresents the total compensation paid or earned by each of the NEOs.
 
                                                
         Non-Equity
             Non-Equity
    
Name and Principal
 Fiscal
   Stock
 Option
 Incentive Plan
 All Other
   Fiscal
   Stock
 Option
 Incentive Plan
 All Other
  
Position
 Year Salary Awards(1) Awards(2) Compensation(3) Compensation(4),(5) Total Year Salary Awards(1) Awards(2),(3) 
Compensation(4)
 
Compensation(5),(6)
 Total
Jonathan J. Judge  2008  $ 908,606  $ 834,991  $ 1,787,943  $ 1,055,388  $ 28,852  $ 4,615,780   2009  $ 915,000  $ 707,121  $ 1,472,512  $ 320,250  $ 30,221  $ 3,445,104 
President and CEO  2007  $868,144  $362,534  $2,394,083  $1,030,979  $  $4,655,740   2008  $908,606  $834,991  $1,787,943  $1,055,388  $39,652  $4,626,580 
  2006(6) $817,884  $  $3,114,262  $814,385  $69,654  $4,816,185   2007  $868,144  $362,534  $2,394,083  $1,030,979  $17,304  $4,673,044 
John M. Morphy  2008  $411,498  $387,822  $260,383  $296,851  $8,712  $1,365,266   2009  $435,611  $394,088  $254,997  $87,849  $8,941  $1,181,486 
Senior Vice President,  2007  $393,243  $72,509  $295,082  $268,362  $7,134  $1,036,330   2008  $411,498  $387,822  $260,383  $296,851  $8,712  $1,365,266 
CFO, and Secretary  2006(6) $383,878  $  $391,830  $215,013  $6,354  $997,075   2007  $393,243  $72,509  $295,082  $268,362  $7,134  $1,036,330 
Walter Turek  2008  $405,659  $167,003  $252,757  $247,228  $25,560  $1,098,207 
Senior Vice President,  2007  $397,426  $72,509  $271,756  $257,390  $6,715  $1,005,796 
Sales and Marketing  2006(6) $387,962  $  $343,026  $233,277  $5,927  $970,192 
Martin Mucci  2008  $398,300  $167,003  $260,383  $286,550  $8,359  $1,120,595   2009  $423,911  $146,272  $259,176  $85,601  $7,254  $922,214 
Senior Vice President,  2007  $386,968  $72,509  $308,103  $264,079  $6,537  $1,038,196   2008  $398,300  $167,003  $260,383  $286,550  $8,359  $1,120,595 
Operations  2006(6) $377,752  $  $408,422  $211,582  $6,401  $1,004,157   2007  $386,968  $72,509  $308,103  $264,079  $6,537  $1,038,196 
Michael A. McCarthy  2009  $274,649  $70,726  $122,269  $97,631  $8,159  $573,434 
Vice President,                     
Major Market Services Sales                     
William G. Kuchta  2008  $292,512  $83,514  $126,657  $143,648  $7,029  $653,360   2009  $303,796  $70,726  $126,795  $53,465  $10,169  $564,951 
Vice President,
Organizational Development
                     
Vice President,  2008  $292,512  $83,514  $126,657  $143,648  $7,029  $653,360 
Organizational Development                     
Lynn J. Miley (deceased)  2009  $250,246  $295,718  $448,515  $44,100  $10,177  $1,048,756 
Vice President, Eastern                     
Operations                     
 
 
(1)The amounts in this column reflect the value determined by the Company for accounting purposes for restricted stock awards and do not reflect whether the recipient has actually realized a financial value from such awards (such as lapse in a restricted stock award). The amounts in this column represent the dollar amount recognized as expense in the Company’s consolidated financial statements for the related fiscal year for the fair value of restricted stockthese awards in accordance with SFAS No. 123R. Pursuant to SEC rules, the amountamounts disclosed disregardsdisregard estimates of forfeitures of awards that have been included in the financial statement reporting for such awards. 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 resulting fair values were as follows: $31.95 per share for the July 10, 2008 grant; $43.91 per share for the July 17, 2007 grant; and $36.87 per share for the July 13, 2006 grant. Refer to Note C contained inof the Notes to Consolidated Financial Statements includedcontained in Item 8 of our fiscal 2009Form 10-K for fiscal 2008 for further discussion onof restricted stock awards. Refer to the Grants of Plan-Based Awards in Fiscal 2009 table on page 2426 of this Proxy Statement for further information on restricted stock awards granted in fiscal 2008.2009.
 
(2)The amounts in this column reflect the value determined by the Company for accounting purposes for stock option awards and do not reflect whether the recipient has actually realized a financial value from such awards (such as by exercising stock options). The amounts in this column represent the dollar amount recognized as expense in the Company’s consolidated financial statements for the related fiscal year for the fair value of optionthese awards in accordance with SFAS No. 123R and, therefore, include amounts for awards granted prior to June 1, 2006. Amounts presented for the year ended May 31, 2006 (“fiscal 2006”) represent the dollar amount reflected in the Company’s pro-forma disclosure in the Notes to Consolidated Financial Statements in accordance with SFAS No. 123 for the fair value of option awards. The fair value was determined using a Black-Scholes option pricing model in accordance with SFAS No. 123R for grants since June 1, 2006. Grants prior to June 1, 2006 were valued using a Black-Scholes option pricing model in accordance with SFAS No. 123. Pursuant to SEC rules, the amountamounts disclosed disregardsdisregard estimates of forfeitures of awards that have been included in the financial statement reporting for such awards. Refer to Note C contained inof the Notes to Consolidated Financial Statements includedcontained in Item 8 of our fiscal 2009Form 10-K for fiscal 2008 for further discussion of option awards and the relevant assumptions used in the calculation of


24


the grant date fair value. The assumptions and resulting per share fair value for option grants included in the amounts disclosed are as follows:
 
                                                                        
 July
 July
 July
 October
 July
 July
 November
 July
 July
  July
 July
 July
 July
 October
 July
 July
 November
 July
 
 2007 2006 2005 2004 2004 2003 2002 2002 2001  2008 2007 2006 2005 2004 2004 2003 2002 2002 
Risk-Free Interest Rate  5.0%  5.1%  4.0%  3.5%  3.7%  2.5%  2.9%  3.8%  4.8%  3.5%  5.0%  5.1%  4.0%  3.5%  3.7%  2.5%  2.9%  3.8%
Dividend Yield  2.7%  1.7%  1.5%  1.7%  1.5%  1.5%  1.5%  1.6%  1.1%  3.3%  2.7%  1.7%  1.5%  1.7%  1.5%  1.5%  1.5%  1.6%
Volatility Factor  .27   .32   .31   .31   .32   .34   .35   .35   .35   .28   .27   .32   .31   .31   .32   .34   .35   .35 
Expected Option Life in Years  6.5   6.5   6.5   5.0   5.0   5.0   5.0   5.0   5.0 
Expected Option Term Life in Years  6.5   6.5   6.5   6.5   5.0   5.0   5.0   5.0   5.0 
Fair Value $11.77  $12.88  $11.02  $8.45  $9.26  $8.66  $8.83  $8.98  $14.09  $7.29  $11.77  $12.88  $11.02  $8.45  $9.26  $8.66  $8.83  $8.98 


22


(3)The amounts in this column represent the expense recognized in the Company’s consolidated financial statements for all option awards. As of May 31, 2009, the intrinsic value for all NEO options expensed in fiscal 2009 is zero, as the closing price of the Company’s common stock as of May 29, 2009 of $27.34 is less than the respective exercise prices.
(4)The amounts in this column are the amounts earned under the annual incentive program. These amounts were paid in July following the applicable fiscal year.
 
(4)(5)Included in All Other Compensation for Mr. Judge are amounts of $18,050, $28,104, and $17,304 for fiscal 2009, fiscal 2008 are compensationand the fiscal year ended May 31, 2007, respectively. These amounts relatedrelate to attendance by senior management at certain sales recognition events to recognize top performers in sales, not to exceed 2% of $17,304 and $17,167 on behalf of Mr. Judge and Mr. Turek, respectively. During fiscal 2006, the Company incurred amounts on behalf of Mr. Judge of $48,200 in relocation expenses and $21,454 in taxgross-up for the relocation expenses.sales force.
 
(5)(6)The amounts in this column consist of the Company’s matching contributions under the 401(k) Plan, except as noted in (4)footnote (5) above.
(6)Amounts for the year ended May 31, 2006 were calculated in accordance with the SEC’s rules adopted in fiscal 2007.


2325


 
GRANTS OF PLAN-BASED AWARDS IN FISCAL 20082009
 
The table below summarizespresents estimated possible payouts under the Company’s annual incentive program for fiscal 20082009 based on achievement of performance objectives at various levels for the Company and individual NEOs. It also summarizes equity awards granted in fiscal 2009 to each of the NEOs. This information does not set forth the actual payout awarded to the NEOs for fiscal 2008. The actual payout is reported in the Fiscal 2008 Summary Compensation Table on page 22 of this Proxy Statement, under the column entitled “Non-Equity Incentive Plan Compensation.” The table below also summarizes equity awards granted in fiscal 2008 to each of the NEOs.2009.
 
                                                                    
             All Other
                 All Other
    
           All Other
 Option
   Grant
           All Other
 Option
   Grant
           Stock
 Awards:
 Exercise
 Date Fair
           Stock
 Awards:
 Exercise
 Date Fair
           Awards:
 Number of
 or Base
 Value of
           Awards:
 Number of
 or Base
 Value of
     Estimated Possible Payouts Under
 Number of
 Securities
 Price of
 Stock and
     Estimated Possible Payouts Under
 Number of
 Securities
 Price of
 Stock and
     Non-Equity Incentive Plan Awards(1) Shares of
 Underlying
 Option
 Option
     Non-Equity Incentive Plan Awards(1) Shares of
 Underlying
 Option
 Option
 Grant
 Grant
 Threshold
 Target
 Maximum
 Stock or
 Options
 Awards
 Awards
 Grant
 Grant
 Threshold
 Target
 Maximum
 Stock or
 Options
 Awards
 Awards
Name
 Type Date ($) ($) ($) Units (#)(2) (#)(3) ($/Sh) ($)(4) Type Date ($) ($) ($) Units (#)(2) (#)(3) ($/Sh) ($)(4)
Jonathan J. Judge Cash  7/12/2007  $ 457,500  $ 1,098,000  $ 1,830,000              Cash  7/10/2008  $ 457,500  $ 1,143,750  $ 1,830,000             
 Restricted Stock  7/17/2007            33,334        $ 1,463,696  Restricted Stock  7/10/2008            45,740        $1,461,393 
 Stock Option  7/17/2007               150,000  $ 43.91  $1,765,500  Stock Option  7/10/2008               183,906  $31.95  $1,340,675 
John M. Morphy Cash  7/12/2007  $124,315  $310,787  $352,225              Cash  7/10/2008  $131,774  $329,434  $373,358             
 Restricted Stock  7/17/2007            6,667        $292,748  Restricted Stock  7/10/2008            9,148        $292,279 
 Restricted Stock(5)  7/17/2007            30,000        $1,317,300  Stock Option  7/10/2008               36,781  $31.95  $268,133 
 Stock Option  7/17/2007               30,000  $43.91  $353,100 
Walter Turek Cash  7/12/2007  $122,048  $305,119  $345,801             
Martin Mucci Cash  7/10/2008  $128,401  $321,002  $363,803             
 Restricted Stock  7/17/2007            6,667        $292,748  Restricted Stock  7/10/2008            10,000        $319,500 
 Stock Option  7/17/2007               30,000  $43.91  $353,100  Stock Option  7/10/2008               40,000  $31.95  $291,600 
Martin Mucci Cash  7/12/2007  $120,001  $300,002  $340,003             
Michael A. McCarthy Cash  7/10/2008  $69,144  $138,287  $165,944             
 Restricted Stock  7/17/2007            6,667        $292,748  Restricted Stock  7/10/2008            4,575        $146,171 
 Stock Option  7/17/2007               30,000  $43.91  $353,100  Stock Option  7/10/2008               18,391  $31.95  $134,070 
William G. Kuchta Cash  7/12/2007  $73,441  $146,882  $176,258              Cash  7/10/2008  $76,378  $152,757  $183,308             
 Restricted Stock  7/17/2007            3,334        $146,396  Restricted Stock  7/10/2008            4,575        $146,171 
 Stock Option  7/17/2007               15,000  $43.91  $176,550  Stock Option  7/10/2008               18,391  $31.95  $134,070 
Lynn J. Miley (deceased) Cash  7/10/2008  $63,000  $126,000  $151,200             
 Restricted Stock  7/10/2008            4,575        $146,171 
 Stock Option  7/10/2008               18,391  $31.95  $134,070 
 
 
(1)The amounts in these columns consist of possible annual incentive payouts under our annual incentive program for fiscal 2008.2009. The amounts actually earned by each NEO in fiscal 20082009 are reported as Non-Equity Incentive Plan Compensation in the Fiscal 20082009 Summary Compensation Table on page 2224 of this Proxy Statement.
 
(2)The amounts in this column consist of restricted stock awards granted in fiscal 20082009 under the 2002 Plan. All shares underlying these awards are restricted in that they are not transferable until they vest. These shares other than the CFO’s one-time grant, vest on the five-yearfifth anniversary of the grant date, provided the NEO is an employee of the Company on that date. Vesting of these shares will accelerate to one-third of the grant for each fiscal year in which a pre-established dollar target for operating income, net of certain items, as detailed in the Compensation Discussion and Analysis, is achieved. Upon death or disability these shares fully vest. The NEOs have voting rights and earn dividends on the underlying shares. Dividends are paid at the time of vesting, and will be forfeited if the NEO forfeits the related restricted stock award.
 
(3)The amounts in this column consist of options to purchase shares of the Company’s common stock option awards granted in fiscal 20082009 under the 2002 Plan. These option grants have an exercise price equal to the closing stock price on the date of grant and have a term of ten years. The options vest 20% per annum over a five-year period. Upon death or disability, all unvested options fully vest.
 
(4)The amounts in this column represent the aggregate grant date fair value of stock and option awards granted in fiscal 20082009 under the 2002 Plan. The fair value of restricted stock awards of $43.91$31.95 per share was equal to the price of the underlying common stock on the date of grant. The fair value of stock options of $11.77$7.29 per share was determined using a Black-Scholes option pricing model in accordance with SFAS No. 123R. Refer to Note C contained inof the Notes to Consolidated Financial Statements includedcontained in Item 8 of our fiscal 2009Form 10-K for fiscal 2008 for further discussion of the relevant assumptions used in the calculation of the grant date fair value.
(5)The shares of this one-time grant to the CFO vest one-third per year beginning in October 2010, provided the CFO is an employee of the Company on that date.


2426


 
OUTSTANDING EQUITY AWARDS AS OF MAY 31, 20082009
 
The following table summarizespresents the equity awards made to NEOs which are outstanding as of May 31, 2008.2009.
 
                                                            
Option Awards Stock Awards(3)
 Option Awards Stock Awards(3),(4)
             Number
             Number
  
   Number of
 Number of
       of Shares
     Number of
 Number of
     of Shares
 Total
   Securities
 Securities
     Total
 or Units
 Market Value
   Securities
 Securities
     or Units
 Market Value
   Underlying
 Underlying
     Potential
 of Stock
 of Shares or
   Underlying
 Underlying
     of Stock
 of Shares or
   Unexercised
 Unexercised
     Realizable
 That Have
 Units of Stock
   Unexercised
 Unexercised
     That Have
 Units of Stock
 Option
 Options
 Options
 Option
 Option
 Value of
 Not
 That Have Not
   Options
 Options
 Option
 Option
 Not
 That Have Not
 Grant
 (Exercisable)
 (Unexercisable)
 Exercise
 Expiration
 Outstanding
 Vested
 Vested
 Grant
 (Exercisable)
 (Unexercisable)
 Exercise
 Expiration
 Vested
 Vested
Name
 Date (#) (#)(1) Price ($) Date Options(2) (#)(4) ($)(4),(5) Date (#)(1) (#)(1),(2) Price ($) Date (#) ($)(5)
Jonathan J. Judge  10/01/2004   433,334   216,666  $30.68   10/01/2014        $   07/10/2008      183,906  $31.95   07/09/2018       
  07/07/2005   100,000   150,000  $33.68   07/07/2015        $   07/17/2007   30,000   120,000  $43.91   07/17/2017       
  07/13/2006   30,000   120,000  $36.87   07/13/2016        $   07/13/2006   60,000   90,000  $36.87   07/13/2016       
  07/17/2007      150,000  $43.91   07/17/2017  $2,733,000     $   07/07/2005   150,000   100,000  $33.68   07/07/2015       
                    55,557  $1,919,494   10/01/2004   650,000     $30.68   10/01/2014       
                 79,075  $2,161,911 
John M. Morphy  07/13/2000   15,000     $42.69   07/13/2010        $   07/10/2008      36,781  $31.95   07/09/2018       
  07/12/2001   15,000     $40.86   07/12/2011        $ 
  07/08/2004   20,000   10,000  $31.79   07/08/2014        $ 
  07/07/2005   20,000   30,000  $33.68   07/07/2015        $ 
  07/13/2006   6,000   24,000  $36.87   07/13/2016        $ 
  07/17/2007      30,000  $43.91   07/17/2017  $126,300     $ 
                    41,112  $1,420,420 
Walter Turek  07/09/1998   20,250     $19.00   07/09/2008        $ 
  07/08/1999   9,000     $21.46   07/08/2009        $ 
  07/12/2001   20,000     $40.86   07/12/2011        $ 
  07/11/2002   10,000     $28.14   07/11/2012        $   07/17/2007   6,000   24,000  $43.91   07/17/2017       
  07/10/2003   10,000     $29.55   07/10/2013        $   07/13/2006   12,000   18,000  $36.87   07/13/2016       
  07/08/2004   16,667   8,333  $31.79   07/08/2014        $   07/07/2005   30,000   20,000  $33.68   07/07/2015       
  07/07/2005   20,000   30,000  $33.68   07/07/2015        $   07/08/2004   30,000     $31.79   07/08/2014       
  07/13/2006   6,000   24,000  $36.87   07/13/2016        $   07/12/2001   15,000     $40.86   07/12/2011       
  07/17/2007      30,000  $43.91   07/17/2017  $659,313     $   07/13/2000   15,000     $42.69   07/13/2010       
                    11,112  $383,920                  45,816  $1,252,609 
Martin Mucci  07/11/2002   15,000     $28.14   07/11/2012        $   07/10/2008      40,000  $31.95   07/09/2018       
  07/10/2003   25,000     $29.55   07/10/2013        $   07/17/2007   6,000   24,000  $43.91   07/17/2017       
  07/13/2006   12,000   18,000  $36.87   07/13/2016       
  07/07/2005   30,000   20,000  $33.68   07/07/2015       
  07/08/2004   30,000     $31.79   07/08/2014       
  07/10/2003   25,000     $29.55   07/10/2013       
  07/11/2002   15,000     $28.14   07/11/2012       
                 16,668  $455,703 
Michael A. McCarthy  07/10/2008      18,391  $31.95   07/09/2018       
  07/08/2004   20,000   10,000  $31.79   07/08/2014        $   07/17/2007   3,000   12,000  $43.91   07/17/2017       
  07/07/2005   20,000   30,000  $33.68   07/07/2015        $   07/13/2006   3,000   9,000  $36.87   07/13/2016       
  07/13/2006   6,000   24,000  $36.87   07/13/2016        $   07/07/2005   4,000   8,000  $33.68   07/07/2015       
  07/17/2007      30,000  $43.91   07/17/2017  $347,450     $   07/08/2004   5,000     $31.79   07/08/2014       
                    11,112  $383,920                  7,910  $216,259 
William G. Kuchta  07/09/1998   20,250     $19.00   07/09/2008        $   07/10/2008      18,391  $31.95   07/09/2018       
  07/08/1999   13,500     $21.46   07/08/2009        $   07/17/2007   3,000   12,000  $43.91   07/17/2017       
  07/13/2000   12,000     $42.69   07/13/2010        $   07/13/2006   6,000   9,000  $36.87   07/13/2016       
  07/12/2001   8,000     $40.86   07/12/2011        $   07/07/2005   15,000   10,000  $33.68   07/07/2015       
  07/11/2002   15,000     $28.14   07/11/2012        $   07/08/2004   12,000     $31.79   07/08/2014       
  07/10/2003   8,000     $29.55   07/10/2013        $   07/10/2003   8,000     $29.55   07/10/2013       
  07/08/2004   8,000   4,000  $31.79   07/08/2014        $   07/11/2002   15,000     $28.14   07/11/2012       
  07/07/2005   10,000   15,000  $33.68   07/07/2015        $   07/12/2001   8,000     $40.86   07/12/2011       
  07/13/2006   3,000   12,000  $36.87   07/13/2016        $   07/13/2000   12,000     $42.69   07/13/2010       
  07/17/2007      15,000  $43.91   07/17/2017  $682,645     $                  7,910  $216,259 
Lynn J. Miley (deceased)  07/10/2008   18,391     $31.95   05/21/2012       
                    5,557  $191,994   07/17/2007   15,000     $43.91   05/21/2012       
  07/13/2006   15,000     $36.87   05/21/2012       
  07/07/2005   25,000     $33.68   05/21/2012       
  07/08/2004   20,000     $31.79   05/21/2012       
                   $ 
 
(1)As of May 31, 2009, the total potential realizable value for all options, exercisable or unexercisable, is zero as the closing price of the Company’s common stock as of May 29, 2009 of $27.34 is less than the respective exercise prices.


27


(2)The option awards displayed in this column vest at various times20% per annum over periods of up to five yearsa five-year period from the date of grant. The following table provides information with respect to the future vesting of each NEO’s outstanding options:
 
                                            
 Number of Securities Vesting (#)  Number of Securities Vesting (#) 
 July
 October
 July
 July
 July
 July
  July
 July
 July
 July
 July
 
 2008 2008 2009 2010 2011 2012  2009 2010 2011 2012 2013 
Jonathan J. Judge  110,000   216,666   110,000   110,000   60,000   30,000   146,781   146,781   96,781   66,781   36,782 
John M. Morphy  32,000      22,000   22,000   12,000   6,000   29,356   29,356   19,356   13,356   7,357 
Walter Turek  30,333      22,000   22,000   12,000   6,000 
Martin Mucci  32,000      22,000   22,000   12,000   6,000   30,000   30,000   20,000   14,000   8,000 
Michael A. McCarthy  13,678   13,678   9,678   6,678   3,679 
William G. Kuchta  15,000      11,000   11,000   6,000   3,000   14,678   14,678   9,678   6,678   3,679 
 
(2)The total potential realizable value is based on the difference between $34.55, the closing price of the Company’s common stock on May 30, 2008, and the option exercise price multiplied by all outstanding options


25


whether exercisable or unexercisable. 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.
(3)Total dividends and interest accrued on the restricted stock awards that have not vested as of May 31, 2008 for2009 were as follows: Mr. Judge was $86,076, for— $148,475; Mr. Morphy was $53,732, for— $103,797; Mr. TurekMucci — $30,756; Mr. McCarthy — $14,853; and Mr. Mucci was $17,216 each, and for Mr. Kuchta was $8,610.— $14,853.
 
(4)The stock awards in these columns represent awards on July 13, 2006, and July 17, 2007, and July 10, 2008, and may have their restrictions lapse over three years if the performance criteria for acceleration isare met, as detailed in the table below. SharesNo shares vested onin July 10, 2008 based on2009, as the Board’s approvalestablished targets for operating income, net of attainment of performance targets.certain items, were not met. If performance criteria isare not met for all years, unvested shares from the July 2006 grant vest on July 13, 2011, and unvested shares from the July 2007 grant vest on July 17, 2012, and unvested shares from the July 2008 grant vest on July 10, 2013, assuming the NEO is an employee of the Company on those dates.
 
                                                
 Number of Securities Vesting (#)  Number of Securities Vesting (#) 
 July
 July
 July
 October
 October
 October
  July
 October
 July
 October
 July
 October
 
 2008 2009 2010 2010 2011 2012  2010 2010 2011 2011 2012 2012 
Jonathan J. Judge  22,222   22,223   11,112            37,469      26,359      15,247    
John M. Morphy  4,444   4,445   2,223   10,000   10,000   10,000   7,494   10,000   5,272   10,000   3,050   10,000 
Walter Turek  4,444   4,445   2,223          
Martin Mucci  4,444   4,445   2,223            7,778      5,556      3,334    
Michael A. McCarthy  3,748      2,637      1,525    
William G. Kuchta  2,222   2,223   1,112            3,748      2,637      1,525    
 
In July 2007, Mr. Morphy received a one-time grant to provide incentive for long-term retention. The award vests one-third per year beginning in October 2010.
(5)The market value displayed is based on the number of shares that have not vested multiplied by $34.55,$27.34, the closing price of the Company’s common stock onas of May 30, 2008.29, 2009.


28


 
OPTION EXERCISES AND STOCK VESTED IN FISCAL 20082009
 
The following table provides information about the value realized by the NEOs upon the exercise of options and the lapsing of restricted stock awards during fiscal 2008.2009. Certain columns in this table and the presentation of information on an award by award basis are not required by the rules relating to executive compensation disclosures and is not a substitute for the information required by Item 402 of SECRegulation S-K, but rather is intended to provide additional information that stockholders may find useful.
 
                            
                 Option Awards Stock Awards 
 Option Awards Stock Awards    Number of
       Number of
   
 Number of Shares
 Value Realized on
 Number of Shares
 Value Realized on
  Date of
 Shares Acquired
 Exercise
 Value Realized on
 Date of
 Shares Acquired
 Value Realized on
 
Name
 Acquired on Exercise (#) Exercise ($)(1) Acquired on Lapsing (#) Lapse ($)(2)  Grant on Exercise (#) Price ($) Exercise ($)(1) Grant on Lapsing (#) Lapse ($)(2) 
Jonathan J. Judge    $   11,111  $    460,440               07/13/2006   11,111  $354,996 
                  07/17/2007   11,111  $354,996 
 
John M. Morphy  23,400  $333,640   2,222  $92,080               07/13/2006   2,222  $70,993 
Walter Turek  50,625  $  1,480,391   2,222  $92,080 
                  07/17/2007   2,222  $70,993 
 
Martin Mucci  25,000  $374,565   2,222  $92,080               07/13/2006   2,222  $70,993 
William G. Kuchta    $   1,111  $46,040 
                  07/17/2007   2,222  $70,993 
 
Michael A. McCarthy              07/13/2006   1,111  $35,496 
                  07/17/2007   1,111  $35,496 
 
William G. Kuchta(3)
  07/09/1998   20,250  $19.00  $251,754   07/13/2006   1,111  $35,496 
  07/08/1999   13,500  $21.46  $83,670   07/17/2007   1,111  $35,496 
 
Lynn J. Miley (deceased)              07/13/2006   2,223  $65,031 
                  07/17/2007   3,334  $94,539 
                  07/10/2008   4,575  $121,512 
 
 
(1)Amounts in this column represent the difference between the market price and the exercise price of a share of the Company’s common stock as of the date of exercise for all options exercised.
 
(2)Amounts in this column represent the closing stock price of the Company’s common stock of $31.95 as of the date theJuly 10, 2008, for restricted stock lapsed on that date. This restricted stock lapsed based on achievement of pre-set performance targets. For Mr. Miley, his lapse on July 10, 2008 consisted of 1,111 shares on each grant dated July 13, 2006 and July 17, 2007. All other shares for allMr. Miley lapsed shares.on his date of death at the closing stock price of $26.56.
(3)Option exercises due to approaching expiration of the10-year term for stock options.


2629


 
NON-QUALIFIED DEFERRED COMPENSATION
 
FISCAL 20082009
 
We offer a non-qualified and unfunded deferred compensation plan to our NEOs. The plan has been designed to comply with the current guidelines of section 409A of the Code. Eligible employees are able to defer up to 50% of their annual base salary and bonus. Gains and losses are credited based on the participant’s electionselection of a variety of designated investment choices. The NEO has sole control as to which of the designated funds to invest in, and earns the resulting return on such investment. We do not match any participant deferral or guarantee a certain rate of return. Distributions are paid at one of the following dates selected by the participant: the participant’s termination date; the date the participant retires from any active employment; or a designated specific date. Payments can be either in a lump sum or in annual installments over a period not to exceed ten years. There were no withdrawals by or distributions to any NEOIn fiscal 2009, certain NEOs made a one-time election for a distribution from the plan under our plan during fiscal 2008.the 409A transition rules.
 
The following table summarizes our NEOs benefits under the plan.
 
                            
     Aggregate
  Fiscal 2009 Aggregate
 
 Fiscal 2008 Balance as of
    Aggregate
   Balance as of
 
 Executive
 Aggregate
 May 31,
  Executive
 Earnings
 Aggregate
 May 31, 2009
 
Name
 Contributions($)(1) Earnings($)(2) 2008($)(3),(4)  Contributions($)(1) ($)(2) Distributions($)(3) ($)(4),(5) 
Jonathan J. Judge $  393,675  $(47,882) $ 1,171,236  $316,155  $(561,214) $(926,178) $ 
John M. Morphy $  $ (14,408) $376,371  $  $(46,763) $(254,245) $75,363 
Walter Turek $92,836  $(3,852) $202,975 
Martin Mucci $67,320  $3,471  $281,496  $79,202  $(16,037) $  $344,661 
Michael A. McCarthy $136,776  $(243,581) $  $424,886 
William G. Kuchta $49,006  $(8,723) $254,345  $38,784  $(81,967) $  $211,162 
Lynn J. Miley(6) (deceased)
 $48,632  $(59,422) $(39,495) $170,540 
 
 
(1)Amounts in this column are included in the amounts shown in the “Salary” and “Non-Equity Incentive Plan Compensation” columnsreflected in the Fiscal 20082009 Summary Compensation Table on page 2224 of this Proxy Statement. Amounts do not include amounts shownStatement in the “Non-Equity Incentive Plan Compensation” column for fiscal 2008 as thoseyear in which the amounts were paid after May 31, 2008.received.
 
(2)Amounts in this column include both realized and unrealized earnings. They are not included in the Fiscal 20082009 Summary Compensation Table on page 2224 of this Proxy Statement as the earnings on these investments are not considered to be “above-market” earnings.
 
(3)Amounts in this column represent one-time election for distribution from the plan in calendar 2009.
(4)Amounts in this column are included in the “Salary” and “Non-Equity Incentive Plan Compensation” amounts reported in current and previous years in the Fiscal 20082009 Summary Compensation Table on page 22.24.
 
(4)(5)The investment funds managed at Legg Mason available to NEOs and the funds’ annual rate of return as of May 31, 20082009 are as follows:
 
                    
 Rate of
   Rate of
  Rate of
   Rate of
 
Name of Fund
 
Return
 
Name of Fund
 
Return
  
Return
 
Name of Fund
 
Return
 
Appreciation Fund Class A  1.82%  Aggressive Growth Fund Class A  (7.12%)  (27.75%) Aggressive Growth Fund Class A  (34.34%)
Diversified Strategic Income Fund Class A  (3.72%) Capital and Income Fund Class A  (2.68%)  (6.74%) Capital and Income Fund Class A  (29.00%)
Fundamental Value Fund Class A  (8.44%) Investment Grade Bond Fund Class A  (1.03%)  (32.66%) Corporate Bond Fund Class A  (13.89%)
Mid Cap Core Fund Class A  (5.12%) Government Securities Fund Class A  3.91%   (29.81%) Government Securities Fund Class A  3.60% 
Small Cap Growth Opportunities Class A  (0.38%) Money Market Fund Class A  4.26% 
Small Cap Growth Class A  (33.44%) Money Market Fund Class A  1.61% 
International All Cap Opportunity Fund Class A  (6.56%) Large Cap Growth Fund Class A  (6.08%)  (34.75%) Large Cap Growth Fund Class A  (23.98%)
(6)The estate of Mr. Miley received a full distribution of the deferred compensation plan balance in July 2009.


2730


 
CHANGE OF CONTROL AND SEVERANCE ARRANGEMENT
 
FISCAL 20082009
CEO Change in Control and Severance Arrangement
 
Our CEO, Mr. Judge, is the only NEO with a severance arrangement, described in his employment agreement which was renewed on November 30, 2007. Refer to agreement filed as Exhibit 10.1 to the Current Report onForm 8-K filed with the SEC in November 2007. If Mr. Judge is terminated other than for cause or resigns for good reason, he is entitled to:
 
 • one year’s annual base salary;
 
 • a severance payment equal to his annual incentive bonus determined at the same percentage of plan as for the immediately preceding fiscal year (without proration);
 
 • any unvested equity awards made prior to July 1, 2007 shall immediately vest and become exercisable; and
 
 • twelve months of health insurance premiums.
 
If the termination other than for cause or resignation for good reason occurs within one year of a change of control, in addition to the previously mentioned compensation, all unvested equity awards, regardless of when granted, shall immediately vest and become exercisable. “Cause” when usedis defined in reference to the termination of the CEO shall meanMr. Judge’s employment agreement as dereliction of duty (after notice and a reasonable opportunity to cure), conviction for a felony, willful misconduct, or failure to follow a lawful directive from the Board (after notice and a reasonable opportunity to cure). “Good reason” when usedis defined in reference to the resignation of the CEO shall meanMr. Judge’s employment agreement as failure of the Company to make any payments or equity grants to the CEO or any other material breach by the Company of its obligations to the CEO within 30 days after the same shall be due, and any material reduction in the CEO’s duties, authority, or responsibilities. “Change of Control” is defined in Mr. Judge’s employment agreement as: the acquisition by any person or entity of at least 50% of the voting shares of Paychex; a consolidation or merger involving Paychex in which Paychex is not the surviving entity; the sale, lease, or exchange of all or substantially all of the Company’s assets; or shareholder approval of a plan of liquidation or dissolution of Paychex.
 
                 
           Termination Other
 
  Voluntary
        Than for Cause/
 
  Resignation/
     Termination Other
  Resignation for
 
  Termination for
     Than for Cause/
  Good Reason within
 
  Cause or
  Death or
  Resignation for
  One Year of Change
 
Jonathan J. Judge
 Retirement  Disability  Good Reason  of Control 
 
Compensation:
                
Base Salary $               —  $  $915,000  $915,000 
Annual Incentive Bonus        1,055,388   1,055,388 
Option Awards(1)
     968,997   968,997   968,997 
Restricted Stock Awards(2)
     1,919,494   767,805   1,919,494 
Benefits:
                
Health Insurance Premiums        7,342   7,342 
                 
Total
 $  $    2,888,491  $    3,714,532  $      4,866,221 
                 
All Other NEOs
NEOs, with the exception of Mr. Judge, do not have severance arrangements. However, for all NEOs, upon death or disability, all unvested stock options and restricted stock awards become fully vested under the terms of the award agreements under the 2002 Plan.


31


Potential Benefits Upon Separation from Company
The following table presents the compensation and benefits to the NEOs upon separation from employment with the Company for the various reasons specified.
                 
           Termination Other
 
  Voluntary
        Than for Cause/
 
  Resignation/
     Termination Other
  Resignation for
 
  Termination for
     Than for Cause/
  Good Reason within
 
  Cause or
  Death or
  Resignation for
  One Year of Change
 
  
Retirement
  
Disability
  
Good Reason
  
of Control
 
 
Jonathan J. Judge
                
Compensation:
                
Base Salary $       —  $  $915,000  $915,000 
Annual Incentive Bonus        320,250   320,250 
Options Awards(1)
            
Restricted Stock Awards(2)
     2,161,911   303,802   2,161,911 
Benefits:
                
Health Insurance Premiums        12,469   12,469 
                 
Total
 $  $2,161,911  $1,551,521  $3,409,630 
                 
                 
                 
John M. Morphy
                
Options Awards(1)
 $  $  $  $ 
Restricted Stock Awards(2)
     1,252,609       
                 
Total
 $  $1,252,609  $  $ 
                 
                 
                 
Martin Mucci
                
Options Awards(1)
 $  $  $  $ 
Restricted Stock Awards(2)
     455,703       
                 
Total
 $  $455,703  $  $ 
                 
                 
                 
Michael A. McCarthy
                
Options Awards(1)
 $  $  $  $ 
Restricted Stock Awards(2)
     216,259       
                 
Total
 $  $216,259  $  $ 
                 
                 
                 
William G. Kuchta
                
Options Awards(1)
 $  $  $  $ 
Restricted Stock Awards(2)
     216,259       
                 
Total
 $  $216,259  $  $ 
                 
Total for all NEOs
 $  $4,302,741  $1,551,521  $3,409,630 
                 
 
 
(1)The value of the unvested options is determined by the difference in the closing price of the Company’s common stock of $34.55$27.34 on May 30, 200829, 2009 and the exercise price multiplied by the number of unvested options. 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.
 
(2)The value of the unvested stock is based upon the closing price of the Company’s common stock of $34.55$27.34 on May 30, 2008.29, 2009.


2832


ALTERNATE FORM OF PRESENTATION OF COMPENSATION RECEIVED IN FISCAL 2009
In reviewing the Company’s NEO compensation, it is important to note the actual amounts Paychex provided to its NEOs in fiscal 2009. The table below is an alternate form of presentation of NEO compensation that shows the actual compensation received by each of the NEOs for fiscal 2009. This table is not required by the rules relating to executive compensation disclosures and is not a substitute for information required by Item 402 of SECRegulation S-K, but rather it is intended to provide additional information that stockholders may find useful. This table includes salary, incentive payout, net value realized from the exercise of options and lapsing of restricted stock, and all other compensation received during fiscal 2009. The main differences between this form of presentation and the Fiscal 2009 Summary Compensation Table on page 24 of this Proxy Statement are as follows:
• The annual incentive program payout is the amount actually received in July 2008, which was earned based on fiscal 2008 actual results. The annual incentive amounts disclosed in the Fiscal 2009 Summary Compensation Table on page 24 of this Proxy Statement are the amounts earned for fiscal 2009 that were paid in July 2009.
• Amounts disclosed for option exercises includes option activity that the individual initiated rather than the expense reflected in the Fiscal 2009 Summary Compensation Table on page 24 of this Proxy Statement.
• Amounts disclosed for restricted stock lapses are the value of shares that lapsed during fiscal 2009 rather than the expense reflected in the Fiscal 2009 Summary Compensation Table on page 24 of this Proxy Statement.
                         
  Fiscal 2009 Compensation Received by NEOs 
           Restricted
       
  Annual
  Annual
  Option
  Stock
  All Other
    
  Base Salary(1)  Incentive(1)  Exercises(2)  Lapse(2)  Compensation(3)  Total 
 
Jonathan J. Judge $915,000  $1,055,388  $  $709,992  $30,221  $2,710,601 
John M. Morphy $435,611  $296,851  $  $141,986  $8,941  $883,389 
Martin Mucci $423,911  $286,550  $  $141,986  $7,254  $859,701 
Michael A. McCarthy $274,649  $110,603  $  $70,992  $8,159  $464,403 
William G. Kuchta $303,796  $143,648  $335,424  $70,992  $10,169  $864,029 
Lynn J. Miley (deceased) $250,246  $120,199  $  $281,082  $10,177  $661,704 
(1)Included in the annual base salary and annual incentive are amounts deferred under the Company’s non-qualified and unfunded deferred compensation plan as shown in the “Executive Contributions” column of the Non-Qualified Deferred Compensation table on page 30 of this Proxy Statement.
(2)Refer to the Option Exercises and Stock Vested in Fiscal 2009 table on page 29 for further information on these amounts.
(3)Refer to notes 5 and 6 of the Fiscal 2009 Summary Compensation Table on page 25 of this Proxy Statement for information on these amounts.


33


 
OTHER MATTERS AND INFORMATION
 
Proposals for Next Year’s Annual Meeting
 
Stockholder proposals, which are intended to be presented at the 20092010 Annual Meeting of Stockholders, for inclusion in the Company’s Proxy Statement pursuant to SECRule 14a-8, must be received by the Company at its executive offices on or before May 3, 2009.6, 2010. Any such proposals must be submitted in accordance with applicable SEC rules and regulations.
 
Stockholder proposals, which are intended to be presented at the 20092010 Annual Meeting of Stockholders and which are submitted and not included in the Company’s Proxy Statement other than in accordance with the procedures specified in SECRule 14a-8, will be considered untimely if not received by the Company’s Secretary on or before July 17, 2009.20, 2010.
 
Other Actions at the Annual Meeting
 
As of the date of this Proxy Statement, management does not intend to present, and has not been informed that any other person intends to present, any matter for action at the Annual Meeting other than those described in this Proxy Statement. If any other matters properly come before the Annual Meeting, the persons named in the enclosed proxy will vote on such matters in accordance with their judgment.
 
Cost of Solicitation of Proxies
 
Solicitation of proxies is made on behalf of the Company and the Company will pay the cost of solicitation of proxies. The Company will reimburse any banks, brokers and other custodians, nominees, and fiduciaries for their expenses in forwarding proxies and proxy solicitation material to the beneficial owners of the shares held by them. In addition to solicitation by use of the mail or via the Internet, directors, officers, and regular employees of the Company, without extra compensation, may solicit proxies personally or by telephone or other communication means.
 
Electronic Access to Proxy Materials and Annual Report
 
The Notice of Annual Meeting of Stockholders, Proxy Statement, and Annual Report are also available on the Company’s website atwww.paychex.com at the Investor Relations section under “Annual Reports and Proxy Statements.” As an alternative to receiving paper copies of the Proxy Statement and Annual Report in the mail, stockholders can elect to receive ane-mail message, which will provide a link to these documents on the Internet. Opting to receive your proxy materials online saves the Company the cost of producing and mailing bulky documents and reduces the volume of duplicate information received by you. To give your consent to receive future documents via electronic delivery, please vote your proxy via the Internet and follow the instructions to register for electronic delivery.
 
Delivery of Proxy Materials and Annual Report
 
The Notice of Annual Meeting of Stockholders, Proxy Statement, Proxy Card, and Annual Report are being mailed to stockholders on or about August 29, 2008.September 3, 2009. You may also obtain a copy of ourForm 10-K filed with the SEC, without charge, upon written request submitted to Paychex, Inc., 911 Panorama Trail South, Rochester, New York14625-2396, Attention: Investor Relations.
 
In accordance with notices previously sent to stockholders, the Company is delivering one Annual Report and Proxy Statement in one envelope addressed to all stockholders who share a single address unless they have notified the Company that they wish to revoke their consent to the program known as “householding.” Householding is intended to reduce the Company’s printing and postage costs.


2934


You may revoke your consent at any time by calling toll-free(800) 542-1061 or by writing to Broadridge Investor Communications Services, Attention: Broadridge Householding Department, 51 Mercedes Way, Edgewood, New York, 11717. If you revoke your consent, you will be removed from the householding program within 30 days of receipt of your revocation, and each stockholder at your address will receive individual copies of the Company’s disclosure documents.
 
The Company hereby undertakes to deliver upon oral or written request a separate copy of its Proxy Statement and Annual Report to a security holder at a shared address to which a single copy was delivered. If such stockholder wishes to receive a separate copy of such documents, please contact Terri Allen, Investor Relations, either by calling toll-free(800) 828-4411 or by writing to Paychex, Inc., 911 Panorama Trail South, Rochester, New York14625-2396, Attention: Investor Relations.
 
If you own Paychex stock beneficially through a bank or broker, you may already be subject to householding if you meet the criteria. If you wish to receive a separate Proxy Statement and Annual Report in future mailings, you should contact your bank or broker.


3035


(PAYCHEX LOGO)

911 PANORAMA TRAIL SOUTH
ROCHESTER, NY 14625-2396
(PAYCHEX LOGO)
INSTRUCTIONS FOR SUBMITTING PROXY:
VOTE BY INTERNET -www.proxyvote.com
VOTE BY INTERNET - www.proxyvote.com
Use the Internet to transmit your voting instructions and for electronic delivery of information up until 11:59 P.M. Eastern Time the day before the cut-off date or meeting date. Have your proxy card in hand when you access the web site and follow the instructions to obtain your records and to create an electronic voting instruction form.
VOTE BY TELEPHONE - 1-800-690-6903
Use any touch-tone telephone to transmit your voting instructions up until 11:59 P.M. Eastern Time the day before the cut-off date or meeting date. Have your proxy card in hand when you call and then follow the instructions.
VOTE BY MAIL
Mark, sign and date your proxy card and return it in the postage-paid envelope we have provided or return it to Paychex, Inc., c/o Broadridge, 51 Mercedes Way, Edgewood, NY 11717.
ELECTRONIC DELIVERY OF FUTURE STOCKHOLDER COMMUNICATIONS
If you would like to reduce the costs incurred by Paychex, Inc. in mailing proxy materials, you can consent to receiving all future proxy statements, proxy cards and annual reports electronically via e-mail or the Internet. To sign up for electronic delivery, please follow the instructions above to vote using the Internet and, when prompted, indicate that you agree to receive or access stockholder communications electronically in future years.
YOUR VOTE IS IMPORTANT
Do not return this proxy card if you vote by telephone or Internet.


TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS:
  
VOTE BY TELEPHONE - 1-800-690-6903
Use any touch-tone telephone to transmit your voting instructions up until 11:59 P.M. Eastern Time the day before the cut-off date or meeting date. Have your proxy card in hand when you call and then follow the instructions.
VOTE BY MAIL
Mark, sign and date your proxy card and return it in the postage-paid envelope we have provided or return it to Paychex, Inc., c/o Broadridge, 51 Mercedes Way, Edgewood, NY 11717.
ELECTRONIC DELIVERY OF FUTURE STOCKHOLDER COMMUNICATIONS
If you would like to reduce the costs incurred by Paychex, Inc. in mailing proxy materials, you can consent to receiving all future proxy statements, proxy cards and annual reports electronically via e-mail or the Internet. To sign up for electronic delivery, please follow the instructions above to vote using the Internet and, when prompted, indicate that you agree to receive or access stockholder communications electronically in future years.
YOUR VOTE IS IMPORTANT
Do not return this proxy card if you vote by telephone or Internet.
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS:PACHX1M16664-P84586 KEEP THIS PORTION FOR YOUR RECORDS
 
    DETACH AND RETURN THIS PORTION ONLY
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
PAYCHEX, INC.
                 
                
Proposals - The Board of Directors recommends a vote FOR each of the nominees listed in Item 1
and FOR Item 2.
ForAgainstAbstain
1.
ELECTION OF DIRECTORS            
                 
1.
      1a. B. Thomas GolisanooELECTION OF DIRECTORS   oFor Against oAbstain     
                 
       1b. David J. S. Flaschen1a. B. Thomas Golisano oo o   o
   o  
THIS PROXY IS SOLICITED ON BEHALF OF THE COMPANY’S BOARD OF DIRECTORS. PLEASE MARK, SIGN, DATE AND RETURN IT IN THE ENCLOSED ENVELOPE. IF NOT OTHERWISE MARKED, THE SHARES REPRESENTED BY THIS PROXY SHALL BE VOTED “FOR” EACH OF THE NOMINEES IN PROPOSAL 1 AND “FOR” PROPOSAL 2.
  1b. David J. S. Flaschen ooo
            
  1c. Phillip HorsleyoGrant M. Inman   o o o 
            
  1d. Grant M. InmanoPamela A. Joseph   o o o 
     1e. Pamela A. Josephooo
SHARES ISSUED TO OR HELD FOR THE ACCOUNT OF THE UNDERSIGNED UNDER THE ESOP STOCK FUND WILL BE VOTED AS DIRECTED. IF NO DIRECTION IS MADE, IF THE CARD IS NOT SIGNED, OR IF THE CARD IS NOT RECEIVED BY OCTOBER 2, 2008, THE SHARES ISSUED TO OR HELD FOR THE ACCOUNT OF THE PARTICIPANT WILL BE VOTED BY THE ESOP STOCK FUND TRUSTEE IN THE SAME PROPORTION AS ESOP SHARES FOR WHICH INSTRUCTIONS HAVE BEEN RECEIVED.
     1f. Jonathan J. Judgeooo
     1g. Joseph M. Tucciooo
     1h. Joseph M. Velliooo     
            
SHARES ISSUED TO OR HELD FOR THE ACCOUNT OF THE UNDERSIGNED UNDER THE ESOP WILL BE VOTED AS DIRECTED. IF NO DIRECTION IS MADE, IF THE CARD IS NOT SIGNED, OR IF THE CARD IS NOT RECEIVED BY OCTOBER 7, 2009, THE SHARES ISSUED TO OR HELD FOR THE ACCOUNT OF THE PARTICIPANT WILL BE VOTED BY THE ESOP TRUSTEE IN THE SAME PROPORTION AS ESOP SHARES FOR WHICH INSTRUCTIONS HAVE BEEN RECEIVED.
1e. Jonathan J. Judgeooo
       
1f. Joseph M. Tucciooo
1g. Joseph M. Velliooo
2. 
RATIFICATION OF THE AUDIT COMMITTEE’S SELECTION OF ERNST & YOUNG LLP AS THE COMPANY’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.
 o o o     
 
                 
Please sign exactly as your name appears on this proxy. If the shares are issued in the name of two or more persons, all such persons must sign the proxy.            
   
              
            
 
Signature [PLEASE SIGN WITHIN BOX]Date     Signature (Joint Owners)Date  


(PAYCHEX LOGO)
(PAYCHEX LOGO)
August 29, 2008September 3, 2009
Dear Paychex Stockholder:
The Board of Directors cordially invites you to attend our Annual Meeting of Stockholders (the “Annual Meeting”) on Tuesday, October 7, 200813, 2009 at 10:00 a.m. Eastern Time at the Rochester Riverside Convention Center, 123 East Main Street, Rochester, New York.
The accompanying booklet includes the formal Notice of Annual Meeting of Stockholders and the Proxy Statement. The Proxy Statement tells you about the agenda items and the procedures for the Annual Meeting. It also provides certain information about Paychex, Inc., its Board of Directors, and its named executive officers.
It is important that these shares be represented at the Annual Meeting. Whether or not you plan to attend the Annual Meeting, you are encouraged to vote. You may vote by Internet, telephone, written proxy, or written ballot at the Annual Meeting. We encourage you to use the Internet because it is the most cost-effective way to vote. If you elected to electronically access the Proxy Statement and Annual Report, you will not be receiving a proxy card and must vote via the Internet.
We hope you will be able to attend the Annual Meeting and would like to take this opportunity to remind you that your vote is important. If you need special assistance at the Annual Meeting, please contact the Secretary of the Company at (800) 828-4411, or write to Paychex, Inc., 911 Panorama Trail South, Rochester, New York 14625-2396, Attention: Corporate Secretary.
Sincerely,
-s- Jonathan J. Judge
-s- Jonathan J. Judge
Jonathan J. Judge
President and
Chief Executive Officer
Important Notice Regarding Internetthe Availability of Proxy Materials for the Annual Meeting:
The Notice and Proxy Statement and Annual Report are available at www.proxyvote.com.
 


M16665-P84586          

(PAYCHEX LOGO)(PAYCHEX LOGO)
Proxy Solicited on Behalf of the Board of Directors

of Paychex, Inc. for the Annual Meeting, October 7, 200813, 2009
PROXY
The undersigned hereby appoints JONATHAN J. JUDGE and JOHN M. MORPHY, or either one of them, with full power of substitution, attorneys and proxies to represent the undersigned at the Annual Meeting of Stockholders to be held on October 7, 200813, 2009 (“Annual Meeting”), and at any adjournment thereof, with all the powers which the undersigned would possess if personally present to vote all shares of stock which the undersigned may be entitled to vote at said Annual Meeting.The shares represented by this proxy will be voted as instructed by you and in the discretion of the proxies on all other matters. If not otherwise specified, shares will be voted in accordance with the recommendations of the Board of Directors.
If shares of Paychex, Inc. Common Stock are issued to or held for the account of the undersigned under the Paychex Employee Stock Ownership Plan Stock Fund (“ESOP”) Stock Fund,of the Paychex, Inc. 401(k) Incentive Retirement Plan, then the undersigned hereby directs the fiduciarytrustee of the ESOP Stock Fund to vote all shares of Paychex, Inc. Common Stock in the undersigned’s name and/or account under such Planplan in accordance with the instructions given herein, at the Annual Meeting and at any adjournment thereof, on all matters properly coming before the Annual Meeting, including but not limited to the matter set forth on the reverse side.