DEF 14A
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

(Amendment No.    )

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

Check the appropriate box:

 

 

Preliminary Proxy Statement

 

Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

 

Definitive Proxy Statement

 

Definitive Additional Materials

 

Soliciting Material Pursuant to §240.14a-12

H&R BLOCK, 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):

 

 

No fee required.

 

 

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

 

  1)

Title of each class of securities to which transaction applies:

 

  

 

  2)

Aggregate number of securities to which transaction applies:

 

  

 

  3)

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

 

  

 

  4)

Proposed maximum aggregate value of transaction:

 

  

 

 

  5)

Total fee paid:

 

  

 

 

 

Fee paid previously with preliminary materials.

 

 

Check 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.

 

  1)

Amount Previously Paid:

 

  

 

  2)

Form, Schedule or Registration Statement No.:

 

  

 

  3)

Filing Party:

 

  

 

  4)

Date Filed:

 

  

 

 

 

 


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LOGO

One H&R Block Way

Kansas City, Missouri 64105

 

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

TO BE HELD SEPTEMBER 14, 2017

 

 

The annual meeting of shareholders of H&R Block, Inc., a Missouri corporation (the “Company”), will be held at the H&R Block Center located at One H&R Block Way (corner of 13th and Main Streets), Kansas City, Missouri, on Thursday, September 14, 2017, at 9:00 a.m. Central Time. Shareholders attending the meeting are asked to park in the H&R Block Center parking garage located beneath the H&R Block Center (enter the parking garage from either Main or Walnut Street). The meeting will be held for the following purposes:

 

  1.

Election of the nine nominees for director named in this proxy statement (See page 5);

 

  2.

Ratification of the appointment of Deloitte & Touche LLP as the Company’s independent registered public accounting firm for the fiscal year ending April 30, 2018 (See page 63);

 

  3.

Advisory approval of the Company’s named executive officer compensation (See page 64);

 

  4.

Advisory approval of the frequency of holding future advisory votes on the Company’s named executive officer compensation (See page 65);

 

  5.

Approval of the 2018 Long Term Incentive Plan (See page 66);

 

  6.

One shareholder proposal regarding revisions to the Company’s proxy access bylaw, if properly presented at the meeting (See page 77); and

 

  7.

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

The foregoing items of business are more fully described in the proxy statement accompanying this notice. The Board of Directors has fixed the close of business on July 14, 2017 as the record date for determining shareholders of the Company entitled to receive notice of and vote at the meeting and any adjournment or postponement thereof.

WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING, WE URGE YOU TO VOTE YOUR SHARES VIA THE TOLL-FREE TELEPHONE NUMBER OR OVER THE INTERNET, AS PROVIDED IN THE ENCLOSED MATERIALS. IF YOU REQUESTED A PROXY CARD BY MAIL, YOU MAY SIGN, DATE, AND MAIL THE PROXY CARD IN THE ENVELOPE PROVIDED.

By Order of the Board of Directors,

 

LOGO

SCOTT W. ANDREASEN

Vice President and Secretary

Kansas City, Missouri

August 2, 2017

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON SEPTEMBER 14, 2017.

The Notice of Annual Meeting, Proxy Statement and Annual Report on Form 10-K for the fiscal year ended

April 30, 2017 are available at www.proxyvote.com.


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LOGO

August 2, 2017

Dear Fellow Shareholder,

I would be remiss if I did not begin this year’s letter by thanking Bill Cobb, our recently retired President and CEO, for his outstanding service to the Company and its stakeholders for the past six years. He has earned an important place in our Company’s history and will be missed. A key member of our team, Tom Gerke, General Counsel and Chief Administrative Officer, is serving as Interim CEO while the Board proceeds with its search for Bill’s successor.

Fiscal 2017 was a good year for our Company. Despite the fact that fewer Americans filed tax returns this year, we outperformed the overall U.S. market, achieved market share gains in the do-it-yourself (primarily online) category, and served approximately 23 million clients worldwide.

Our financial results were strong. We maintained revenue at just over $3.0 billion, operating expenses declined by approximately $85 million and, as a result, net income from continuing operations grew 10%. We shared our success directly with you, our shareholders, by recently increasing the dividend by 9% (to an annual $0.96 per share) and making $317 million of share repurchases during the fiscal year.

Our core value – “We do the right thing” – is evidenced by, among other things, a “pay-for-performance” compensation policy that closely aligns our executives’ compensation with the financial interests of our shareholders. We continue to be pleased that you have strongly supported this approach as reflected by your strong support (approximately 97% of the shares last year) for our “say-on-pay” proposal. Given such support, and the success of our compensation program in properly motivating our management team, we have retained its core elements going forward.

On behalf of the entire Board, I’d like to thank you for your support. We are optimistic about H&R Block’s future from both an operational and a leadership perspective. As we pursue the opportunities that lie ahead, we are honored by the confidence you have shown through your ownership of our shares.

 

LOGO

Robert A. Gerard

Chairman of the Board


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TABLE OF CONTENTS   

 

LOGO

 

 

 

QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING AND VOTING

    1  

PROPOSAL 1 – ELECTION OF DIRECTORS

    5  

DIRECTOR NOMINATION PROCESS

    6  

SELECTING AND EVALUATING OUR NOMINEES

    6  

DIRECTOR NOMINEES

    8  

ADDITIONAL INFORMATION CONCERNING THE BOARD OF DIRECTORS

    13  

BOARD OF DIRECTORS’ MEETINGS AND COMMITTEES

    13  

DIRECTOR COMPENSATION

    15  

DIRECTOR COMPENSATION TABLE

    17  

CORPORATE GOVERNANCE

    18  

BOARD LEADERSHIP STRUCTURE AND ACCOUNTABILITY

    20  

COMMUNICATIONS WITH THE BOARD

    20  

DIRECTOR ATTENDANCE AT ANNUAL MEETINGS OF SHAREHOLDERS

    20  

BOARD’S ROLE IN RISK OVERSIGHT

    20  

COMPENSATION DISCUSSION AND ANALYSIS

    22  

EXECUTIVE SUMMARY

    22  

EXECUTIVE COMPENSATION PRACTICES

    27  

EXECUTIVE COMPENSATION PROGRAM SUMMARY

    28  

EXECUTIVE COMPENSATION PROGRAM COMPONENTS

    29  

COMPENSATION “CLAWBACK” POLICY AND RESTRICTIVE COVENANTS

    42  

COMPENSATION PHILOSOPHY AND BENCHMARKING

    42  

TERMINATION OF EMPLOYMENT, SEVERANCE AND TRANSITION ARRANGEMENTS

    46  

COMPENSATION COMMITTEE REPORT

    47  

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

    48  

RISK ASSESSMENT IN COMPENSATION PROGRAMS

    48  

EXECUTIVE COMPENSATION

    49  

SUMMARY COMPENSATION TABLE

    49  

GRANTS OF PLAN-BASED AWARDS TABLE

    50  

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE

    51  

OPTION EXERCISES AND STOCK VESTED TABLE

    52  

NONQUALIFIED DEFERRED COMPENSATION TABLE

    52  

H&R BLOCK DEFERRED COMPENSATION PLAN FOR EXECUTIVES

    52  

EMPLOYMENT AGREEMENTS, CHANGE IN CONTROL AND OTHER ARRANGEMENTS

    53  

POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL

    58  

POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL TABLE

    58  

EQUITY COMPENSATION PLANS

    61  

AUDIT COMMITTEE REPORT

    61  

AUDIT FEES

    62  
PROPOSAL 2 – RATIFICATION OF APPOINTMENT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM     63  
PROPOSAL 3 – ADVISORY APPROVAL OF THE COMPANY’S NAMED EXECUTIVE OFFICER COMPENSATION     64  


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PROPOSAL 4 – ADVISORY APPROVAL OF THE FREQUENCY OF HOLDING FUTURE ADVISORY VOTES ON THE COMPANY’S EXECUTIVE COMPENSATION     65  
PROPOSAL 5 – APPROVAL OF THE 2018 LONG TERM INCENTIVE PLAN     66  

SUMMARY

    66  

FEATURES OF THE 2018 PLAN PROMOTING GOOD COMPENSATION GOVERNANCE PRACTICES

    67  

BACKGROUND AND DETERMINATION OF SHARE AMOUNTS

    67  

DESCRIPTION OF THE 2018 PLAN

    69  

NEW PLAN BENEFITS

    74  

FEDERAL INCOME TAX CONSEQUENCES

    74  

INFORMATION ABOUT OTHER EQUITY COMPENSATION PLANS

    76  
PROPOSAL 6 – SHAREHOLDER PROPOSAL REGARDING REVISIONS TO THE COMPANY’S PROXY ACCESS BYLAW     77  
INFORMATION REGARDING SECURITY HOLDERS     80  

SECURITY OWNERSHIP OF DIRECTORS AND MANAGEMENT

    80  

PRINCIPAL SECURITY HOLDERS

    81  
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE     81  
REVIEW OF RELATED PERSON TRANSACTIONS     81  
SHAREHOLDER PROPOSALS AND NOMINATIONS     82  
APPENDIX A – 2018 LONG TERM INCENTIVE PLAN  


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H&R BLOCK, INC.

PROXY STATEMENT

FOR THE 2017 ANNUAL MEETING OF SHAREHOLDERS

  

LOGO

 

 

 

QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING AND VOTING

This proxy statement is furnished in connection with the solicitation of proxies by the Board of Directors (the “Board of Directors” or “Board”) of H&R Block, Inc., a Missouri corporation (“H&R Block” or the “Company” or “we”), for use at the 2017 annual meeting of shareholders of the Company (the “Annual Meeting”) to be held on Thursday, September 14, 2017 at 9:00 a.m. Central Time, at the H&R Block Center located at One H&R Block Way (corner of 13th and Main Streets), Kansas City, Missouri. References to the Annual Meeting in this proxy statement include any adjournment or postponement thereof. This proxy statement contains information about the matters to be voted on at the meeting and the voting process, as well as information about our directors and executive officers.

WHY DID I RECEIVE A NOTICE IN THE MAIL REGARDING THE INTERNET AVAILABILITY OF PROXY MATERIALS INSTEAD OF A FULL SET OF PRINTED PROXY MATERIALS?

Pursuant to rules adopted by the Securities and Exchange Commission (“SEC”), we are making this proxy statement and our 2017 Annual Report available to shareholders electronically via the internet. Unless you have already requested to receive a printed set of proxy materials, you will receive an “Important Notice Regarding the Availability of Proxy Materials for the Shareholder Meeting to be held on September 14, 2017” (the “Notice”), which contains instructions on how to access proxy materials and vote your shares via the internet or, if you prefer, to request a printed set of proxy materials at no cost to you. On or about August 2, 2017, we mailed the Notice or, for shareholders who have already requested to receive a printed set of proxy materials, this proxy statement, an accompanying proxy card, and our 2017 Annual Report, to our shareholders of record. All shareholders will be able to access this proxy statement and our 2017 Annual Report on the website referred to in the Notice or request to receive printed copies of the proxy materials.

HOW CAN I ELECTRONICALLY ACCESS THE PROXY MATERIALS?

The Notice provides you with instructions on how to view our proxy materials for the Annual Meeting on the internet. The website on which you will be able to view our proxy materials will also allow you to choose to receive future proxy materials electronically, which will save us the cost of printing and mailing documents to you. If you choose to receive future proxy materials electronically, you will receive an email next year with instructions containing a link to the proxy voting site. Your election to receive proxy materials electronically will remain in effect until you terminate it.

HOW CAN I OBTAIN A FULL SET OF PRINTED PROXY MATERIALS?

The Notice will provide you with instructions on how to request to receive printed copies of the proxy materials. You may request printed copies up until one year after the date of the meeting.

WHAT AM I VOTING ON?

You are voting on six items of business at the Annual Meeting:

 

   

Election of the nine nominees for director named in this proxy statement (Proposal 1);

 

   

Ratification of the appointment of Deloitte & Touche LLP as the Company’s independent registered public accounting firm for the fiscal year ending April 30, 2018 (Proposal 2);

 

   

Advisory approval of the Company’s named executive officer compensation (Proposal 3);

 

   

Advisory approval of the frequency of holding future advisory votes on the Company’s named executive officer compensation (Proposal 4);

 

   

Approval of the 2018 Long Term Incentive Plan (Proposal 5); and

 

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One shareholder proposal regarding revisions to the Company’s proxy access bylaw, if properly presented at the meeting (Proposal 6).

WHO IS ENTITLED TO VOTE?

Shareholders of record as of the close of business on July 14, 2017 are entitled to vote at the Annual Meeting. Each share of H&R Block common stock is entitled to one vote.

WHAT IS THE DIFFERENCE BETWEEN HOLDING SHARES AS A SHAREHOLDER OF RECORD AND AS A BENEFICIAL OWNER?

If your shares are registered directly in your name with the Company’s transfer agent, Wells Fargo Shareowner Services (“Wells Fargo”), you are considered a “registered shareholder” and are considered, with respect to those shares, the “shareholder of record.” If you are a shareholder of record, the Notice or proxy materials were sent to you directly by the Company, and you may vote by any of the methods described below under “How Do I Vote?”.

If your shares are registered in the name of a stock brokerage account or by a broker, bank, or other nominee on your behalf (referred to as being held in “street name”) or if you hold shares through the H&R Block Retirement Savings Plan, you are considered a “beneficial owner” of shares held in street name, and the broker, bank, or other nominee forwarded the Notice or proxy materials to you. As the beneficial owner, you have the right to direct your broker, bank, or other nominee holding your shares how to vote and you are also invited to attend the Annual Meeting. However, since you are not a shareholder of record, you may not vote these shares in person at the Annual Meeting unless you bring with you a legal proxy from the shareholder of record.

WHAT ARE THE VOTING RECOMMENDATIONS OF THE BOARD OF DIRECTORS AND THE VOTING REQUIREMENTS?

Our Board of Directors recommends that you vote your shares as follows:

 

Proposal

 

 

  Board
Recommendation

 

  More
Information

 

  Broker
Discretionary
Voting Allowed?

 

  Votes Required
for Approval

 

  Abstentions
and Broker
Non-Votes

 

1.  Election of Directors.

 

 

FOR each
Nominee

  Page 5

 

  No

 

  The affirmative
vote of a
majority of
shares present
in person or
represented by
proxy, and
entitled to vote
on the matter,
is necessary for
election or
approval of
each of the
proposals.
  Abstentions
have the
same effect
as votes
AGAINST
the relevant
proposal.
For
Proposal 4,
an
abstention
will not be
counted as
a vote for
any option.

 

Broker
non-votes
have no
impact on
the
outcome of
the vote for
any of the
proposals.

2.  Ratification of the appointment of Deloitte & Touche LLP as the Company’s independent registered public accounting firm for the fiscal year ending April 30, 2018.

 

  FOR   Page 63   Yes    

3.  Advisory approval of the Company’s named executive officer compensation.

 

  FOR   Page 64   No    

4.  Advisory approval of the frequency of holding future advisory votes on the Company’s named executive officer compensation.

 

  ONE YEAR   Page 65   No    

5.  Approval of the 2018 Long Term Incentive Plan.

 

  FOR   Page 66   No    

6.  Shareholder proposal regarding revisions to the Company’s proxy access bylaw.

 

  AGAINST   Page 77   No    

 

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Broker Discretionary Voting

Brokers, banks, and other nominees holding shares on behalf of beneficial owners are prohibited from exercising discretionary voting authority for beneficial owners who have not provided voting instructions on “non-routine” proposals, resulting in so-called “broker non-votes.” Brokers, banks, and other nominees may vote without instruction only on “routine” proposals. Proposal 2, the ratification of Deloitte & Touche LLP as the Company’s independent registered public accounting firm, is the only routine proposal on the ballot for the Annual Meeting and the only proposal on the ballot for which broker discretionary voting is permitted. All other proposals are non-routine. If you hold your shares with a broker, bank, or other nominee, your shares will not be voted on non-routine proposals unless you give voting instructions to such nominee.

Voting Requirements and Effect of Abstentions and Broker Non-Votes

For each matter to be voted upon at the Annual Meeting, shareholders may vote “for,” “against,” or “abstain,” except for Proposal 4, for which shareholders may vote “one year,” “two years,” “three years,” or “abstain.”

For each of the proposals, the affirmative vote of a majority of shares present in person or represented by proxy, and entitled to vote on the matter, is necessary for election or approval. For Proposal 4, the option of one year, two years, or three years that receives the affirmative vote of a majority of shares present in person or represented by proxy, and entitled to vote thereon, will be the frequency for the advisory vote that has been recommended by the shareholders. In the event that no option receives such majority vote, the Company will consider the option that receives the most votes to be the option selected by shareholders. The votes on Proposals 3 and 4, the approval of the Company’s named executive officer compensation and the approval of the frequency of future advisory votes on the Company’s named executive officer compensation, are non-binding advisory votes only.

Shares represented in person or by a proxy that directs that the shares abstain from voting are deemed to be represented at the meeting as to that particular matter, and have the same effect as a vote against the proposals, except for Proposal 4, for which an abstention will not be counted as a vote for any option. Broker non-votes have no impact on the proposals.

If a submitted proxy does not specify how to vote, the shares represented by that proxy will be considered to be voted FOR each of the director nominees included in Proposal 1, FOR Proposals 2, 3, and 5, AGAINST Proposal 6, and for ONE YEAR for Proposal 4.

HOW DO I VOTE?

If you are a registered shareholder, there are four different ways you can vote:

 

   

By Internet – You can vote via the internet at www.proxyvote.com by following the instructions provided (you will need the Control Number from the Notice or proxy card you received);

 

   

By Telephone – You can vote by telephone by calling the toll-free telephone number indicated on your proxy card or voting instruction card (you will need the Control Number from the Notice or proxy card you received);

 

   

By Mail – If you received your proxy materials by mail, you can vote by signing, dating and returning the accompanying proxy card; or

 

   

In Person – You can vote in person by written ballot at the Annual Meeting.

When your proxy is properly submitted, your shares will be voted as you indicate. If you do not indicate your voting preferences, the appointed proxies (Thomas A. Gerke and Scott W. Andreasen) will vote your shares FOR each of the director nominees included in Proposal 1, FOR Proposals 2, 3, and 5, AGAINST Proposal 6, and for ONE YEAR for Proposal 4. If your shares are owned in joint names, all joint owners must vote by the same method, and if joint owners vote by mail, all of the joint owners must sign the proxy card. The deadline for voting by telephone or via the internet, except with respect to shares held through the H&R Block Retirement Savings Plan as described below, is 11:59 p.m. Eastern Time on September 13, 2017.

If you are a beneficial owner of shares held in street name, you may vote by following the voting instructions provided by your broker, bank, or other nominee, and your broker, bank, or other nominee should vote your shares as you have directed. You must have a legal proxy from the shareholder of record in order to vote the shares in person at the Annual Meeting.

 

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If your shares are held through the H&R Block Retirement Savings Plan, you may also vote as set forth above, except that Plan participants may not vote their Plan shares in person at the Annual Meeting. If you provide voting instructions via the internet, by telephone or by written proxy card, Fidelity Management Trust Company, the Plan’s Trustee, will vote your shares as you have directed. If you do not provide specific voting instructions, the Trustee will vote your shares in the same proportion as shares for which the Trustee has received instructions. Please note that you must submit voting instructions to the Trustee no later than September 11, 2017 at 11:59 p.m. Eastern Time in order for your shares to be voted by the Trustee at the Annual Meeting. Your voting instructions will be kept confidential by the Trustee.

MAY I ATTEND THE MEETING?

All shareholders, properly appointed proxy holders, and invited guests of the Company may attend the Annual Meeting. Shareholders who plan to attend the meeting may be required to present valid photo identification. If you hold your shares in street name, please also bring proof of your share ownership, such as a broker’s statement showing that you beneficially owned shares of the Company on the record date of July 14, 2017, or a legal proxy from your broker, bank, or other nominee (a legal proxy is required if you hold your shares in street name and you plan to vote in person at the Annual Meeting). Shareholders of record will be verified against an official list available at the registration area. The Company reserves the right to deny admittance to anyone who cannot adequately show proof of share ownership as of the record date.

MAY I CHANGE MY VOTE?

After your initial vote, you may revoke your proxy and change your vote (i) any time prior to the voting deadline via the internet or by telephone (only your latest internet or telephone proxy submitted prior to the voting deadline for the Annual Meeting will be counted), (ii) by signing and returning a new proxy card or voting instruction card with a later date prior to the Annual Meeting, or (iii) by attending the Annual Meeting and voting in person. However, your attendance at the Annual Meeting will not automatically revoke your proxy unless you vote again at the Annual Meeting or specifically request in writing that your prior proxy be revoked. If your shares are held in street name by a broker, bank, or other nominee, you must contact that nominee to change your vote.

DO SHAREHOLDERS HAVE CUMULATIVE VOTING RIGHTS WITH RESPECT TO THE ELECTION OF DIRECTORS?

No, shareholders do not have cumulative voting rights with respect to the election of directors.

WHAT CONSTITUTES A QUORUM?

As of the record date, 209,056,056 shares of the Company’s common stock were issued and outstanding. A majority of the outstanding shares entitled to vote at the Annual Meeting, represented in person or by proxy, will constitute a quorum. Abstentions and broker non-votes will be counted as present and entitled to vote for purposes of determining a quorum.

WHAT DOES IT MEAN IF I RECEIVE MORE THAN ONE “IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE SHAREHOLDER MEETING TO BE HELD ON SEPTEMBER 14, 2017”?

It means your shares are held in more than one account. You should vote all of your shares.

WHAT IS HOUSEHOLDING?

As permitted by the SEC, we are delivering only one copy of this proxy statement to shareholders residing at the same address, unless the shareholders have notified us of their desire to receive multiple copies of the proxy statement. This practice is known as householding.

The Company will promptly deliver, upon request, a separate copy of the proxy statement to any shareholder residing at an address to which only one copy was mailed. Requests for additional copies for the current year or future years should be directed to the Corporate Secretary, H&R Block, Inc., One H&R Block Way, Kansas City, Missouri 64105, or by telephone at (816) 854-4288.

 

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Shareholders of record residing at the same address and currently receiving multiple copies of the proxy statement may contact our registrar and transfer agent, Wells Fargo, to request that only a single copy of the proxy statement be mailed in the future. You can contact Wells Fargo by phone at (888) 213-0968 or (651) 450-4064, or by mail at 1110 Centre Point Curve, Suite 101, Mendota Heights, Minnesota 55120-4100.

WHO WILL BEAR THE COST OF THIS SOLICITATION AND HOW WILL PROXIES BE SOLICITED?

The Company is making this solicitation on behalf of the Company’s Board of Directors and will pay the entire cost of this proxy solicitation, including the expense of preparing the proxy solicitation materials for the Annual Meeting and mailing the Notice and, as applicable, the proxy solicitation materials for such meeting. Following the mailing of these materials, directors, officers, and employees of the Company may solicit proxies by telephone, email, or other personal contact; such individuals will not receive compensation or reimbursement for these activities. Additionally, the Company has retained Georgeson LLC to assist in the solicitation of proxies on behalf of the Board for a fee of $30,000 plus reimbursement of reasonable expenses. Further, brokers and other custodians, nominees, and fiduciaries will be requested to forward the Notice and printed proxy materials to their principals, and the Company will reimburse them for the expense of doing so.

WHAT IS THE COMPANY’S INTERNET ADDRESS?

The Company’s internet address is www.hrblock.com. The Company’s filings with the SEC are available free of charge via the “Investor Relations” link at this website (click on the “SEC Filings” link under the “Financial Info” heading), and may also be found at the SEC’s website, www.sec.gov.

WILL ANY OTHER MATTERS BE VOTED ON?

As of the date of this proxy statement, we know of no other matter that will be presented for consideration at the Annual Meeting other than those matters discussed in this proxy statement. If any other matters properly come before the meeting and call for a vote of the shareholders, the appointed proxies may use their discretion to vote on any such matters.

 

 

 

LOGO

PROPOSAL 1 – ELECTION OF DIRECTORS

The Company’s Amended and Restated Articles of Incorporation (the “Articles”) and Amended and Restated Bylaws (the “Bylaws”) provide that the number of directors to constitute the Board of Directors shall not be fewer than 7 nor more than 12, with the exact number to be fixed by a resolution adopted by the affirmative vote of a majority of the entire Board. The Board of Directors currently consists of ten directors who are elected annually. Nine members of the Board are standing for re-election; of the eleven members of the Board who stood for election at the 2016 annual meeting of shareholders, one has retired and one will not be standing for re-election. As previously disclosed, William C. Cobb retired from his positions as President, Chief Executive Officer, and director of the Company effective July 31, 2017. Also as previously disclosed, James F. Wright informed the Board on February 13, 2017 of his decision not to stand for re-election following the completion of his term at the Annual Meeting. Pursuant to our Bylaws, the Board has set the number of directors that shall constitute the Board at nine, effective upon the commencement of the Annual Meeting.

     The Articles and Bylaws also provide that all of the directors shall be elected at each annual meeting of shareholders. Under the Bylaws, each director holds office until the earlier of the election and qualification of such director’s successor or the director’s death, resignation, retirement, disqualification, disability, or removal from office. Any vacancy on the Board may be filled by a majority of the surviving or remaining directors then in office. The Company’s Bylaws provide that any incumbent director who is not elected by a majority of shares entitled to vote on his or her election and represented in person or by proxy shall promptly tender his or her irrevocable resignation to the Company’s Board, subject only to the condition that the Board accept the resignation. The Board and the Governance and Nominating Committee must consider and act on the resignation, as more fully described under “Corporate Governance – Mandatory Director Resignation Policies,” on page 18. To be eligible to be a nominee as a director, whether nominated by the Board or a shareholder, a person must deliver to the Company a written agreement that such person will abide by this director resignation requirement.

 

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There are nine nominees for election to the Board at the Annual Meeting of shareholders to be held on September 14, 2017. Each of the nine nominees, if elected, will hold office until the earlier of the election and qualification of such director’s successor or the director’s death, resignation, retirement, disqualification, disability, or removal from office. The Board has nominated Angela N. Archon, Paul J. Brown, Robert A. Gerard, Richard A. Johnson, David Baker Lewis, Victoria J. Reich, Bruce C. Rohde, Tom D. Seip, and Christianna Wood for election as directors of the Company. Each nominee has consented to be named in this proxy statement and to serve as director if elected. If any of the nominees becomes unavailable for election for any reason, the Board may provide for a lesser number of directors or designate substitute nominees, and the proxies will be voted for the remaining nominees and any substitute nominees, unless otherwise instructed by a shareholder.

DIRECTOR NOMINATION PROCESS

The entire Board of Directors is responsible for nominating members for election to the Board and for filling vacancies on the Board that may occur between annual meetings of shareholders. The Governance and Nominating Committee is responsible for identifying, screening, and recommending candidates for Board membership to the entire Board. The Governance and Nominating Committee works with the Board to determine the appropriate characteristics, skills, and experience for the Board as a whole and its individual members. In evaluating the suitability of individual Board members, the Board takes into account many factors, which are described in further detail below. The Board evaluates each individual in the context of the Board as a whole with the objective of retaining a group of directors with diverse and relevant experience that can best perpetuate the Company’s success and represent shareholder interests through sound judgment.

The Governance and Nominating Committee may seek the input of other members of the Board or management in identifying candidates who meet the criteria outlined above. In addition, the Governance and Nominating Committee may use the services of consultants or a search firm. The Governance and Nominating Committee will consider recommendations by the Company’s shareholders of qualified director candidates for possible nomination by the Board. Shareholders may recommend qualified director candidates by writing to the Company’s Corporate Secretary at H&R Block, Inc., One H&R Block Way, Kansas City, Missouri 64105. Submissions should include information regarding a candidate’s background, qualifications, experience, and willingness to serve as a director. Based on a preliminary assessment of a candidate’s qualifications, the Governance and Nominating Committee may conduct interviews with the candidate or request additional information from the candidate. The Governance and Nominating Committee uses the same process for evaluating all candidates for nomination by the Board, including those recommended by shareholders. The Bylaws permit persons to be nominated as directors directly by shareholders under certain conditions. To do so, shareholders must comply with the advance notice requirements under the Bylaws as outlined in the “Shareholder Proposals and Nominations” section of this proxy statement. The Company did not receive notice from any shareholder prior to the deadline for submitting notice of an intention to nominate any additional persons for election as directors at the Annual Meeting.

Diversity

Both the Board and the Governance and Nominating Committee believe that diversity of skills, perspectives, and experiences among Board members, in addition to the factors discussed above, improves the Board’s oversight and evaluation of management on behalf of the shareholders and produces more creative thinking and better strategic solutions by the Board. Although we do not have a formal policy concerning diversity of director nominees, the Governance and Nominating Committee considers, though not exclusively, the distinctive skills, perspectives, and experiences that candidates who are diverse in gender, ethnic background, geographic origin, and professional experience have to offer.

SELECTING AND EVALUATING OUR NOMINEES

When evaluating potential director nominees, the Governance and Nominating Committee considers each individual’s professional experience, areas of expertise, and educational background in addition to his or her general qualifications. The Governance and Nominating Committee works with the Board to determine the appropriate mix of experiences, areas of expertise, and educational backgrounds in order to establish and maintain a Board that is strong in its collective knowledge and that has the skillsets necessary to fulfill the Board’s responsibilities, meet the future needs of the Company to perpetuate our long term success, and represent the interests of our shareholders.

 

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The Governance and Nominating Committee regularly communicates with the Board to identify professional experiences, areas of expertise, educational backgrounds, and other qualifications that impact our business or that our business may need in the future that are particularly desirable for our directors to possess in order to help meet specific Board needs, including:

 

   

Financial industry knowledge, which is vital in understanding and reviewing our strategy, including the acquisition of businesses that offer complementary products or services;

 

   

Operating experience as current or former executives, which gives directors specific insight into, and expertise that will foster active participation in, the development and implementation of our operating plan and business strategy;

 

   

Executive leadership experience, which gives directors who have served in significant leadership positions strong abilities to motivate and manage others and to identify and develop leadership qualities in others;

 

   

Accounting and financial expertise, which enables directors to analyze our financial statements, capital structure and complex financial transactions and oversee our accounting and financial reporting processes;

 

   

Enterprise risk management experience, which contributes to oversight of management’s risk monitoring and risk management programs, and establishment of risk appetite aligned with our strategy; and

 

   

Public company board and corporate governance experience, which provides directors a solid understanding of their extensive and complex oversight responsibilities and furthers our goals of greater transparency, accountability for management and the Board, and protection of our shareholders’ interests.

The following chart highlights each director nominee’s specific skills, knowledge, and experience that the Governance and Nominating Committee and Board relied upon when determining whether to nominate the individual for election. A particular nominee may possess other valuable skills, knowledge or experience even though they are not indicated below.

 

Name    Financial
Industry
Knowledge
   Operating
Experience
   Executive
Leadership
   Accounting or
Financial
   Enterprise Risk
Management
  

Public

Company
Governance

Angela N. Archon                  
Paul J. Brown                  
Robert A. Gerard                  
Richard A. Johnson                  
David Baker Lewis                  
Victoria J. Reich                  
Bruce C. Rohde                  
Tom D. Seip                  
Christianna Wood                  

The Board believes that all the director nominees are highly qualified. As the chart shows, the director nominees have significant leadership experience, knowledge, and skills that qualify them for service on our Board, and, as a group, represent diverse views, experiences, and backgrounds. All director nominees satisfy the criteria set forth in our Corporate Governance Guidelines and possess the personal characteristics that are essential for the proper and effective functioning of the Board. Each nominee’s biography below contains additional information regarding his or her experiences, qualifications and skills.

The number of shares of common stock, share units, and share equivalents beneficially owned by each nominee for director is listed under the heading “Security Ownership of Directors and Management” on page 80.

 

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DIRECTOR NOMINEES

There are nine nominees for election to the Board at the Annual Meeting. As described above, the Board has set the number of directors that shall constitute the Board at nine, effective upon the commencement of the Annual Meeting. All Board members are subject to annual election. The following pages present information regarding each director nominee, including information about each nominee’s professional experience, areas of expertise, educational background, and qualifications that led the Board to nominate him or her for election. The following also includes information about all public company directorships each nominee currently holds.

 

  Director Nominees

 

 

LOGO

 

Angela N. Archon

Director since 2016

Age 57

 

Committees:

    Audit

 

Professional Experience

 

Ms. Archon is currently Vice President, Operations, in the Watson Health business unit of International Business Machines Corporation (“IBM”), a provider of business and information technology products and services. Just prior, Ms. Archon served as Vice President, Transformation and Chief Operating Officer with Watson Health from February 2015 to October 2016. Previously, Ms. Archon served as Vice President, Corporate Strategy from May 2013 to February 2015, and Vice President of Worldwide Client Care, Systems & Technology Group, from August 2010 to May 2013. She also served in a variety of other roles with IBM, including Vice President of Intellectual Property Licensing and Business Development, Systems & Technology Group; Director of Global Sourcing Procurement – Enterprise Services; and Director of Global Services Procurement – Strategy, Operations & Alliances.

 

Education

 

Ms. Archon holds two degrees from the University of Texas at Austin, a Bachelor of Science degree in Chemical Engineering and a Master of Science degree in Systems Engineering.

 

Other Boards and Appointments

 

Ms. Archon serves on the Chemical Engineering Advisory Board at the University of Texas at Austin and is a Board Liaison for the National Action Council for Minorities in Engineering.

 

Director Qualifications

 

Ms. Archon brings to the Board strong management, operating, engineering, and leadership skills developed throughout her business career at IBM, as well as her significant experience with technology, strategy development, driving change and innovation, and business transformation.

 

 

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LOGO

 

Paul J. Brown

Director since 2011

Age 50

 

Committees:

    Governance and   Nominating   (Chair)

 

Professional Experience

 

Mr. Brown has served as the Chief Executive Officer of Arby’s Restaurant Group, Inc., a privately held company and the second largest quick-service sandwich chain in the U.S., since May 2013. He served as President, Brands and Commercial Services for Hilton Worldwide, a global hospitality company, from 2008 to April 2013. Prior to that, he was with Expedia Inc., for four years, most recently serving as President, Expedia North America and Expedia Inc. Partner Services Group. From 2001 through 2005, Mr. Brown was a Partner with McKinsey & Co. in their London and Atlanta offices. Earlier in his career, he was Senior Vice President of Brand Services for Intercontinental Hotels Group, a Manager with the Boston Consulting Group, Inc., and a Senior Consultant with Andersen Consulting.

 

Education

 

Mr. Brown received a Bachelors degree in Management from the Georgia Institute of Technology and a Masters of Business Administration degree from the Kellogg Graduate School of Management, Northwestern University.

 

Other Boards and Appointments

 

Mr. Brown is also a member of the board of directors of Lindblad Expedition Holdings, J. C. Penney Company, Inc., and FOCUS Brands, Inc., a privately held company. He also serves as a member of the Board of Trustees for the Georgia Tech Foundation, The Woodruff Arts Center, the Buckhead Coalition, and Atlanta200. He has also served as an executive-in-residence at the Cornell University School of Hotel Administration.

 

Director Qualifications

 

Mr. Brown brings to the Board significant executive leadership, operations, financial management, e-commerce, brand management, and enterprise risk management experience.

 

 

LOGO

 

Robert A. Gerard

Chairman of the

Board of Directors

 

Director since 2007

Age 72

 

Committees:

    Finance (Chair)

    Governance and   Nominating

 

 

Professional Experience

 

Mr. Gerard is the General Partner and investment manager of GFP, L.P., a private investment partnership. From 2004 to 2011, Mr. Gerard was Chairman of the Management Committee and Chief Executive Officer of Royal Street Communications, LLC, a licensee, developer, and operator of telecommunications networks in Los Angeles and Central Florida. From 1977 until his retirement in 1991, Mr. Gerard held senior executive positions with investment banking firms Morgan Stanley & Co., Dillon Read & Co., and Bear Stearns. From 1974 to 1977, Mr. Gerard served in the United States Department of the Treasury, completing his service as Assistant Secretary for Capital Markets and Debt Management.

 

Education

 

Mr. Gerard is a graduate of Harvard College and holds a Masters of Arts degree and a Juris Doctor degree from Columbia University.

 

Other Boards and Appointments

 

Mr. Gerard served as a director of Gleacher & Company, Inc. from 2009 through May 2013, where he most recently served as Chair of the Executive Compensation Committee and was a member of the Committee on Directors and Corporate Governance.

 

Director Qualifications

 

Mr. Gerard brings to the Board extensive experience in the financial services industry and many years of business experience in senior management and finance, as well as experience serving on the boards of other public companies.

 

 

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LOGO

 

Richard A. Johnson

Director since 2015

Age 59

 

Committees:

    Audit

    Compensation

 

Professional Experience

 

Mr. Johnson has served as the Chief Executive Officer and President of Foot Locker, Inc., a leading global athletic footwear and apparel retailer, since December 1, 2014, and was elected Chairman of the Board in May 2016. Prior to becoming Chief Executive Officer and President, he served in a variety of other roles with Foot Locker, Inc. including Executive Vice President and Chief Operating Officer, Executive Vice President/Group President – Retail Stores, Chief Executive Officer and President of Foot Locker U. S./Lady Foot Locker/Kids Foot Locker/Footaction, Chief Executive Officer and President at Foot Locker Europe B.V., Foot Locker’s European headquarters in the Netherlands, President and Chief Executive Officer of Footlocker.com/Eastbay, and prior to that, held various executive positions at Eastbay, Inc. From 1990 to 1993, Mr. Johnson was a transportation economics manager at Graebel Van Lines, Inc. Earlier in his career, he worked for Electronic Data Systems, an IT services company, as a systems engineer.

 

Education

 

Mr. Johnson received a Bachelor of Arts degree in Business Administration and Accountancy from the University of Wisconsin, Eau Claire.

 

Other Boards and Appointments

 

Mr. Johnson has served as director and member of the Executive Committee of Foot Locker, Inc. since 2014, and was elected Chairman of the Board in May 2016. During 2013, he served as a director of Maidenform Brands, Inc.

 

Director Qualifications

 

Mr. Johnson brings to the Board extensive knowledge of brick and mortar and digital/dot.com retail operations, as well as significant leadership, operations, financial management, and enterprise risk management experience.

 

 

LOGO

 

David Baker Lewis

Director since 2004

Age 73

 

Committees:

    Compensation

    Governance and   Nominating

 

 

Professional Experience

 

Mr. Lewis currently serves as Of Counsel to Lewis & Munday, a Detroit-based legal firm with additional offices in New York City and Washington, D.C. Mr. Lewis is a co-founder of the firm, which was established in 1972, and previously served as the firm’s Chairman and CEO.

 

Education

 

Mr. Lewis received a Bachelor of Arts degree from Oakland University in Rochester, Michigan, a Masters of Business Administration degree from University of Chicago, and a Juris Doctor degree from University of Michigan School of Law.

 

Other Boards and Appointments

 

Mr. Lewis is also a director of STERIS Corp., where he is a member and chairman of the Audit Committee and a member of the Governance and Nominating Committee. He was previously a director of The Kroger Company until June 23, 2016, and Conrail, Inc., LG&E Energy Corp., M.A. Hanna, TRW, Inc., and Comerica, Inc., all prior to 2007.

 

Director Qualifications

 

Mr. Lewis brings to the Board experience from serving on the boards of other public companies, including service as the current or former chair of five public company audit committees (the Company, STERIS Corp., The Kroger Company, LG&E Energy Corp., and Conrail, Inc.), expertise derived from his law practice and business background, and knowledge of finance and financial services.

 

 

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LOGO

 

Victoria J. Reich

Director since 2011

Age 59

 

Committees:

    Audit (Chair)

    Finance

 

Professional Experience

 

Ms. Reich served as the Senior Vice President and Chief Financial Officer of United Stationers Inc. (now known as Essendant, Inc.), a wholesale distributor of business products, from June 2007 until July 2011. Prior to that, Ms. Reich spent ten years with Brunswick Corporation, a manufacturer of sporting and fitness equipment, where she most recently was President of Brunswick European Group from 2003 until 2006. She served as Brunswick’s Senior Vice President and Chief Financial Officer from 2000 to 2003 and as Vice President and Controller from 1996 until 2000. Before joining Brunswick, Ms. Reich spent 17 years at General Electric Company where she held various financial management positions.

 

Education

 

Ms. Reich holds a Bachelor of Science degree in Applied Mathematics and Economics from Brown University.

 

Other Boards and Appointments

 

Ms. Reich is a director of Ecolab Inc., where she is Chairman of the Audit Committee and a member of the Safety, Health and Environment Committee. She is also a director of Ingredion Incorporated, where she is Chairman of the Audit Committee.

 

Director Qualifications

 

Ms. Reich brings to the Board extensive financial management experience, operational experience, and executive leadership abilities.

 

 

LOGO

 

Bruce C. Rohde

Director since 2010

Age 68

 

Committees:

    Compensation   (Chair)

    Governance and   Nominating

 

 

Professional Experience

 

Mr. Rohde served in multiple roles with ConAgra Foods, Inc. (now known as Conagra Brands Inc.), a packaged foods company, beginning in 1984, including General Counsel, President, Vice Chairman, Chairman and Chief Executive Officer, before retiring in 2005 as Chairman and CEO Emeritus. Mr. Rohde currently serves as the Managing Partner of Romar Capital Group, a private entity. He holds many court admissions and also holds a certified public accountant certificate.

 

Education

 

Mr. Rohde holds two degrees from Creighton University, a Bachelor of Science degree in Business Administration and a Juris Doctor degree, cum laude.

 

Other Boards and Appointments

 

Mr. Rohde is a director of the Preventive Medicine Research Institute. Mr. Rohde retired as Trustee Emeritus of Creighton University on June 30, 2017, after 28 years of service. Mr. Rohde formerly served as a director of Gleacher & Company, Inc. from 2009 through May 2013, where he most recently served as Lead Director and Chair of the Governance and Nominating Committee, as well as a member of the Audit and Executive Compensation Committees. He was previously a director of ConAgra Foods, Inc. and Valmont Industries Inc., both prior to 2007.

 

Director Qualifications

 

Mr. Rohde brings to the Board significant senior executive leadership experience from a large public company perspective, including service in multiple executive roles as described above. He also has substantial experience as a board member at several public companies, including service as the chair of a wide variety of board committees, Chairman, Vice Chairman and Lead Director. Over the course of his career, Mr. Rohde’s diverse background has given him abundant experience in law, finance, accounting, tax, and operational management.

 

 

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LOGO

 

Tom D. Seip

Director since 2001

Age 67

 

Committees:

    Compensation

    Governance and   Nominating

 

Professional Experience

 

Mr. Seip currently serves as the managing member of Way Too Much Stuff LLC, and through December 2015 served as the managing member of Ridgefield Farm LLC, both private investment vehicles. Mr. Seip was employed by Charles Schwab & Co., Inc., San Francisco, California, from January 1983 until June 1998 in various positions, including Chief Executive Officer of Charles Schwab Investment Management, Inc. from 1997 until June 1998 and Executive Vice President – Retail Brokerage from 1994 until 1997.

 

Education

 

Mr. Seip received a Bachelor of Arts degree from Pennsylvania State University and participated in the Doctoral Program in Developmental Psychology at the University of Michigan.

 

Other Boards and Appointments

 

Mr. Seip is Chairman of the Board of Trustees of the Neuberger Berman Mutual Funds, New York.

 

Director Qualifications

 

Mr. Seip brings to the Board useful financial insight and skills based on his extensive experience in investment management, financial product development, and management of branch office networks and back office operations. Mr. Seip also has significant experience with the governance of public companies.

 

 

LOGO

 

Christianna Wood

Director since 2008

Age 57

 

Committees:

    Audit

     Finance

 

 

Professional Experience

 

Ms. Wood is the Chief Executive Officer of Gore Creek Capital Ltd., an investment management consulting company based in Golden, Colorado. Ms. Wood served as the Chief Executive Officer of Capital Z Asset Management, the largest dedicated sponsor of hedge funds, from 2008 through July 2009. Previously, she was the Senior Investment Officer for the Global Equity unit of the California Public Employees’ Retirement System (“CalPERS”) for five years. Prior to her service for CalPERS, Ms. Wood served as a Principal of several investment management organizations. She is also a chartered financial analyst and a chartered alternative investment analyst.

 

Education

 

Ms. Wood obtained a Bachelor of Arts degree, cum laude, from Vassar College and a Masters of Business Administration degree in Finance from New York University.

 

Other Boards and Appointments

 

Ms. Wood is a member of the Board of Trustees of Vassar College where she serves on the Investment, Audit, and Budget and Finance Committees and as Chair of the Investor Responsibility Committee. Ms. Wood is also a member of the boards of Grange Insurance and The Merger Fund. Additionally, Ms. Wood serves as Chairman of the Board of The Global Reporting Initiative. She was previously a member of the Public Company Accounting Oversight Board Standard Advisory Group (2006-2008) and the International Auditing and Assurance Standards Board Consultative Advisory Group (2006-2009). Ms. Wood was also a member of the Board of Governors of the International Corporate Governance Network from June 2008 until June 2012, serving as Chairman of the Board from June 2009 until June 2012, and served on the Board of Directors of the International Securities Exchange from 2010 to 2016.

 

Director Qualifications

 

Ms. Wood brings to the Board a broad finance and corporate governance background, including experience as a senior investment officer for a large retirement fund and as Chairman of the Board of Governors of the International Corporate Governance Network. She has significant experience in accounting and financial matters. Through her prior service as an investment manager, Ms. Wood has had significant experience in the application of portfolio risk management techniques.

 

 

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Unless otherwise instructed, the appointed proxies will vote the shares represented by the proxy cards received by them for each of the nominees named above. All nominees have consented to serve if elected. The Board of Directors has no reason to believe that any of the nominees would be unable to accept the office of director if elected. If any of the nominees becomes unavailable for election for any reason, the Board may provide for a lesser number of directors or designate substitute nominees, and proxies will be voted for the remaining nominees and any substitute nominees, unless otherwise instructed by the shareholder.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE ELECTION OF EACH OF THE NINE NOMINEES FOR DIRECTOR IN THIS PROPOSAL 1.

 

 

ADDITIONAL INFORMATION CONCERNING THE BOARD OF DIRECTORS

BOARD OF DIRECTORS’ MEETINGS AND COMMITTEES

The Board of Directors is responsible for overseeing and providing policy guidance on the Company’s business and affairs. The Board reviews significant developments affecting the Company and acts on matters requiring Board approval. During the 2017 fiscal year, the Board of Directors held seven meetings. During the 2017 fiscal year, each of the incumbent directors attended at least 75% of the aggregate total number of meetings of the Board of Directors and Board committees of which he or she was a member (or portion of the fiscal year during which he or she served as a director or committee member). On average, our directors attended over 95% of the Board of Directors meetings and applicable Board committee meetings held during the 2017 fiscal year (or portion of the fiscal year during which he or she served as a director or committee member).

The standing committees of the Board are the Audit Committee, the Compensation Committee, the Governance and Nominating Committee, and the Finance Committee. The Company’s Corporate Governance Guidelines, Code of Business Ethics and Conduct, the Board of Directors Independence Standards (the “Independence Standards”), and charters for each of the standing committees may be accessed on the Company’s website at www.hrblock.com by clicking the “Investor Relations” link and then clicking the “Corporate Governance” link under the “Company” tab. These documents are also available in print to shareholders upon written request to the Corporate Secretary, H&R Block, Inc., One H&R Block Way, Kansas City, Missouri 64105.

In addition to the standing committees of the Board, the Board has formed a CEO Search Committee consisting entirely of independent non-employee directors to oversee the search for a permanent President and Chief Executive Officer. The CEO Search Committee is authorized to, among other things, review lists and qualifications of potential CEO candidates, conduct initial screenings and interviews of CEO candidates, and recommend to the Board one or more CEO candidates.

Set forth below is a description of the primary duties of each of the standing committees of the Board and its members as of the date of this proxy statement.

 

  Audit Committee

  Committee Members

  Ms. Reich (Chair)

  Ms. Archon

  Mr. Johnson

  Ms. Wood

 

 

  5 meetings in fiscal year 2017

  

  

Approves the appointment of the Company’s independent registered public accounting firm

  

  

Evaluates the independence and performance of such firm

  

  

Reviews the scope of the annual audit

  

  

Reviews and evaluates the effectiveness of the Company’s internal audit function

  

  

Ensures that the Company has established a system to enforce the H&R Block Code of Business Ethics and Conduct

  

  

Reviews and discusses with management and the independent registered public accounting firm the audited financial statements and accounting principles

  

 

See the “Audit Committee Report” on page 61. All of the members of the Audit Committee are independent under regulations adopted by the SEC, New York Stock Exchange (“NYSE”) listing standards, and the Independence Standards. The Board has determined that each member of the Audit Committee is financially literate under NYSE guidelines and that Mr. Johnson, Ms. Reich, and Ms. Wood are each an audit committee financial expert pursuant to the criteria prescribed by the SEC.

 

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  Compensation Committee

  Committee Members

  Mr. Rohde (Chair)

  Mr. Johnson

  Mr. Lewis

  Mr. Seip

  Mr. Wright*

 

 

  9 meetings in fiscal year 2017

  

  

Reviews and approves the Company’s overall executive compensation philosophy, including compensation of the executive officers of the Company and its subsidiaries

  

  

Reviews and formally evaluates the CEO’s performance against corporate goals and objectives and approves the CEO’s compensation

  

  

Reviews risks related to the Company’s compensation policies and practices

  

  

Administers the Company’s short term and long term incentive compensation plans

  

 

See the “Compensation Discussion and Analysis” beginning on page 22. The Compensation Committee has the sole discretion to retain or obtain the advice of any compensation consultant, legal counsel or other advisor to assist in the Compensation Committee’s evaluation of executive compensation, including the sole authority to approve fees for any such advisor. The Compensation Committee is also responsible for assessing the independence of any such advisor. All of the members of the Compensation Committee are independent under NYSE listing standards and the Independence Standards.

 

*

Mr. Wright will cease serving on the Compensation Committee upon his departure from the Board effective as of the Annual Meeting.

 

  Governance and Nominating Committee

  Committee Members

  Mr. Brown (Chair)

  Mr. Gerard

  Mr. Lewis

  Mr. Rohde

  Mr. Seip

 

 

  4 meetings in fiscal year 2017

  

  

Reviews and oversees corporate governance matters

  

  

Initiates recommendations of nominations for election as a director of the Company

  

  

Evaluates the performance of the Board of Directors

  

  

Determines the compensation of the non-employee directors of the Company

  

 

All of the members of the Governance and Nominating Committee are independent under NYSE listing standards and the Independence Standards.

 

 

  Finance Committee

  Committee Members*

  Mr. Gerard (Chair)

  Ms. Reich

  Ms. Wood

 

 

  3 meetings in fiscal year 2017

  

  

Provides advice to management and the Board of Directors concerning:

      -     

Financial structure of the Company

      -     

Share repurchases, dividends, and other capital allocation decisions

      -     

Funding of operations of the Company and its subsidiaries

      -     

Investment of Company funds

      -     

Reviewing and making recommendations to the Board regarding capital allocation and proposed acquisitions, dispositions, mergers, joint ventures, investments, and similar transactions

 

*

Mr. Cobb served on the Finance Committee until his departure from the Company as of July 31, 2017.

 

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DIRECTOR COMPENSATION

The Board considers and determines non-employee director compensation each year, taking into account recommendations from the Governance and Nominating Committee. The Governance and Nominating Committee formulates its recommendation based on its review of director compensation practices at a specific group of peer companies, based on publicly disclosed information (more discussion of our process for determining our peer group of companies can be found beginning on page 42). The Governance and Nominating Committee may delegate its authority to such subcommittees as it deems appropriate in the best interests of the Company and our shareholders. Management, in consultation with the Compensation Committee’s independent compensation consultant, assists the Governance and Nominating Committee in its review by accumulating and summarizing market data pertaining to director compensation levels and practices at our peer group of companies, reviewing external survey sources, and conducting its own custom research.

In June 2017, based on a review of our Peer Group of companies and consultation with the Company’s independent compensation consultant, the Governance and Nominating Committee recommended and the Board approved (i) an increase in the Board’s annual retainer to $70,000 from $60,000 and (ii) an increase in the value of the annual grants of deferred stock units (“DSUs”) to $150,000 from $145,000, both to be effective in fiscal year 2018 following the Annual Meeting.

The following chart describes the compensation elements for our non-employee directors in effect at the end of fiscal year 2017 and to become effective in fiscal year 2018 following the Annual Meeting:

 

Compensation Element  

FY17 Amount

(annual except for meeting fees)

 

FY18 Amount

(annual except for meeting fees)

  Annual Cash Retainer(1)

 

$60,000

 

$70,000

  Annual Equity Retainer(2)

 

$145,000 in deferred stock units

 

$150,000 in deferred stock units

  Non-Executive Chairman of the Board Retainer(1)

 

$200,000 (payable in deferred stock units)

 

$200,000 (payable in deferred stock units)

  Chair Retainer – Audit Committee

 

$20,000

 

$20,000

  Chair Retainer – All Other Committees(3)

 

$15,000

 

$15,000

  Board Meeting Fee(4)

 

$2,000 per meeting

 

$2,000 per meeting

  Committee Meeting Fee(5)

 

$1,500 per meeting

 

$1,500 per meeting

 

(1) 

Paid in quarterly installments.

(2) 

Equity grants are generally made immediately following election of directors at the Annual Meeting.

(3) 

Due to his position as non-executive Chairman of the Board, Mr. Gerard has waived his eligibility for the Chair retainer related to his service as Chair of the Finance Committee.

(4) 

Subject to a maximum of ten Board meetings per year.

(5) 

Subject to a maximum of ten committee meetings per year per committee.

In addition, in consideration of emerging corporate governance best practices the Governance and Nominating Committee recommended, and in July 2017 our Board approved, a limit of $750,000 on the amount of equity and cash compensation that can be paid to a non-employee director of the company in a calendar year. The limit does not apply to incremental compensation paid to a director solely in his or her capacity as non-executive Chairman of the Board, provided that such non-executive Chairman does not participate in the decision to award such additional compensation. The non-employee director compensation limit is set forth in the 2018 Long Term Incentive Plan (the “2018 Plan”) and is therefore subject to approval by our shareholders at the Annual Meeting. In setting the non-employee director compensation limit, the Governance and Nominating Committee and the Board reviewed survey data provided by the Compensation Committee’s independent compensation consultant.

In fiscal year 2017, DSUs were granted to non-employee directors under the 2013 Long Term Incentive Plan (the “2013 Plan”). The number of DSUs credited to a non-employee director’s account pursuant to an award under the 2013 Plan is determined by dividing the dollar amount of the award by the average current market value per share of the Company’s

 

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common stock for the ten consecutive trading dates ending on the date the DSUs are granted. The current market value generally is the closing sales price of a share of our common stock as reported on the NYSE.

DSU awards are fully vested on the grant date and are not subject to forfeiture. Vested DSUs are held in a deferred compensation account and become payable to each non-employee director, in shares of common stock, on the six-month anniversary date of termination of service as a director. However, if a non-employee director dies prior to the payment in full of all amounts due such non-employee director, the balance of the non-employee director’s DSU account becomes payable to the non-employee director’s beneficiary, in shares of common stock, within ninety days following the non-employee director’s death. There are no dividends paid on outstanding DSUs prior to the DSUs becoming payable, but dividend equivalents on the number of outstanding DSUs accumulate. When the DSUs become payable, in addition to receiving the applicable number of shares of common stock, the director will receive additional shares of common stock equal in value to the total dividends that would have been paid on such shares.

On September 8, 2016, DSUs approximately equal in value to $145,000 were granted to each of the Company’s non-employee directors for the one-year period of service on the Board beginning September 8, 2016. In addition, DSUs approximately equal in value to $200,000 were granted to Mr. Gerard for serving as the non-executive Chairman of the Board for the one-year period beginning September 8, 2016. Additional DSUs approximately equal in value to $71,507 were also granted to Ms. Archon for her pro-rata service on the Board from her appointment on March 11, 2016 through September 7, 2016.

The Company provides to its non-employee directors free business travel insurance in connection with Company-related travel and, consistent with the benefit provided to our full-time employees, the opportunity to use our tax preparation services for no charge. In addition, the H&R Block Foundation will match gifts by non-employee directors to any qualified not-for-profit organization on a dollar-for-dollar basis up to an annual aggregate limit of $5,000 per director per calendar year.

The Board has adopted stock ownership guidelines regarding stock ownership by non-employee directors. The non-employee director ownership guidelines require non-employee directors to own a level of qualifying equity securities with an aggregate value of at least five times the annual cash retainer paid to them. Our stock ownership guidelines provide that, until a non-employee director satisfies the applicable holding requirement, he or she is required to retain any covered shares (which include shares owned directly or indirectly by such non-employee director, the after-tax value of vested stock option awards, if any, and share equivalents the non-employee director holds in the Company’s benefit plans) owned as of the date on which he or she becomes subject to the guidelines or acquired thereafter.

 

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DIRECTOR COMPENSATION TABLE

The following table sets forth total director compensation for non-employee directors for fiscal year 2017.

 

Current Directors   

Fees Earned or
Paid in Cash

($)(1)

    

Stock

Awards

($)(2)(3)

    

Option
Awards

($)(4)

  

All Other
Compensation

($)(5)

  

Total

($)

 

  Angela N. Archon(6)

     $81,500        $210,770      -    -      $292,270  

  Paul J. Brown

     $91,250        $141,156      -    $5,000      $237,406  

  Robert A. Gerard

     $84,500        $335,853      -    $5,000      $425,353  

  Richard A. Johnson

     $84,500        $141,156      -    $5,000      $230,656  

  David Baker Lewis

     $91,500        $141,156      -    $2,500      $235,156  

  Victoria J. Reich

     $106,000        $141,156      -    $6,035      $253,191  

  Bruce C. Rohde

     $107,000        $141,156      -    $5,000      $253,156  

  Tom D. Seip

     $95,250        $141,156      -    $5,000      $241,406  

  Christianna Wood

     $84,500        $141,156      -    $5,000      $230,656  

  James F. Wright

     $87,500        $141,156      -    $5,000      $233,656  

 

(1) 

This column includes, as applicable, the annual cash retainer, meeting fees for each Board and committee meeting attended, and committee retainers earned or paid for services as a director during fiscal year 2017.

(2) 

The dollar amounts represent the grant date fair value under FASB Accounting Standards Codification Topic 718 “Stock Compensation” (“ASC 718”) for DSUs awarded during fiscal year 2017 to the non-employee director. These DSU awards are fully vested in that they are not subject to forfeiture; however, no shares underlying a particular award will be issued until six months following the date the director ends his or her service on the Board (or within ninety days of death, if earlier). The grant date fair value of an award is computed in accordance with ASC 718 utilizing assumptions discussed in Note 9: “Stock-Based Compensation” to the Company’s consolidated financial statements in the Form 10-K for the year ended April 30, 2017, as filed with the SEC. As of April 30, 2017, the following DSUs were outstanding: Ms. Archon – 9,786; Mr. Brown – 40,677; Mr. Cobb – 12,856; Mr. Gerard – 125,523; Mr. Johnson – 10,924; Mr. Lewis – 70,083; Ms. Reich – 40,677; Mr. Rohde – 53,900; Mr. Seip – 70,083; Ms. Wood – 65,323; and Mr. Wright – 40,677. Mr. Cobb’s DSUs were awarded prior to fiscal year 2012, during the time that Mr. Cobb was a non-employee director of the Company.

(3)

The DSU award value approved by the Board of Directors for fiscal year 2017 is converted into the number of DSUs by dividing the dollar amount of the award by the average current market value per share of the Company’s common stock for the ten consecutive trading dates ending on the date the DSUs are granted to the non-employee director. The current market value generally is the closing sales price of a share of our common stock as reported on the NYSE. However, the grant date fair value of an award computed in accordance with ASC 718 does not utilize such an average. As such, the value approved by the Board of Directors for fiscal year 2017 differs from the value reported in this column.

(4)

No stock options to purchase the Company’s common stock were granted to individuals while serving as non-employee directors during fiscal year 2017. As of April 30, 2017, the following stock options were outstanding: Mr. Lewis – 8,000; and Mr. Seip – 8,000.

(5)

This column represents the H&R Block Foundation matching amount on contributions to 501(c)(3) organizations on a calendar year basis. The amount includes matching contributions that occurred in the 2016 calendar year and in the 2017 calendar year (all of which were paid within fiscal year 2017); therefore, the amount reported in this column may exceed $5,000.

(6)

As previously disclosed, Ms. Archon was appointed to the Board on March 11, 2016 and, on September 8, 2016, received a pro-rated DSU grant, representing her service on the Board from March 11, 2016 through September 7, 2016, in addition to her standard DSU grant for the one-year period of service on the Board beginning September 8, 2016.

 

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CORPORATE GOVERNANCE

Corporate Governance Guidelines

Our Board of Directors operates under Corporate Governance Guidelines (the “Governance Guidelines”) to assist the Board in exercising its responsibilities. The Governance Guidelines reflect the Board’s commitment to monitoring the effectiveness of policy and decision-making both at the Board level and the management level, with a view to enhancing shareholder value over the long term. The Governance Guidelines also ensure that the Board will have the necessary authority and practices in place to review and evaluate the Company’s business operations as needed and to make decisions that are independent of the Company’s management. The Governance Guidelines are not intended to be a static statement of the Company’s policies, principles, and guidelines, but are subject to regular assessment and refinement as the Board may determine advisable or necessary in line with the best interests of the Company and our shareholders.

Pursuant to the Governance Guidelines, the Board evaluates its performance on an annual basis through an evaluation process administered by the Governance and Nominating Committee. To protect the directors’ anonymity and the integrity of the process, the evaluations are conducted in separate interviews by an independent third party who compiles the responses into a report for the Governance and Nominating Committee. In addition to Board performance, the annual interview includes questions regarding the performance of the individual Board members and the committees of the Board. Results of all evaluations are discussed at appropriate Committee meetings and with the full Board.

Director Service on Other Boards

The Governance Guidelines provide that directors should not serve on more than three other boards of public companies in addition to the Company’s Board. Furthermore, before serving on the board of another public company, directors are required to give prior notice to the Board. A permanent Chief Executive Officer of the Company is not permitted to serve on more than one other board of a public company in addition to the Company’s Board and must obtain Board approval prior to serving on the board of any public company. Currently, all director nominees are in compliance with these guidelines.

Mandatory Director Resignation Policies

The Company’s Bylaws provide that any incumbent director who is not elected by a majority of shares entitled to vote on their election and represented in person or by proxy shall promptly tender his or her irrevocable resignation from the Board to the Company’s Board, subject only to the condition that it is accepted by the Board, for consideration by the Governance and Nominating Committee. The Governance and Nominating Committee will then make a recommendation to the Board as to whether to accept or reject the resignation. The Board will then act on the tendered resignation, taking into account the recommendation of the Governance and Nominating Committee, and publicly disclose its decision regarding the tendered resignation and the rationale behind the decision within ninety days from the date of the certification of the election results. The Governance and Nominating Committee in making its recommendation, and the Board in making its decision, may consider any factors or other information that it considers appropriate and relevant. The director who tenders his or her resignation is not permitted to participate in the proceedings of the Governance and Nominating Committee or the decision of the Board with respect to his or her resignation. If the Board accepts a director’s resignation, or if a non-incumbent nominee for director is not elected, then the Board may fill the vacant position or decrease the size of the Board in accordance with the Company’s Bylaws.

In addition, the Governance Guidelines require that any director whose principal employment or major responsibilities materially change shall tender his or her resignation from the Board for consideration by the Governance and Nominating Committee. The Governance and Nominating Committee will then make a recommendation to the Board as to whether to accept or reject the resignation. The Board will then act on the tendered resignation, taking into account the recommendation of the Governance and Nominating Committee.

To be eligible to be a nominee for election as a director, whether nominated by the Board or a shareholder, a person must deliver to the Company a written agreement that such person will abide by these director resignation requirements.

 

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Independent Chairman

The Company’s Articles and the Governance Guidelines require that the Chairman of the Board be an independent director who has not previously served as an executive officer of the Company. As Chairman, Mr. Gerard leads all meetings of the Board, including executive sessions of the non-employee directors held at each regular meeting of the Board.

All Current Members of the Board are Independent

As further described in the Governance Guidelines, the Board believes that a substantial majority of the Board should consist of directors who are independent under NYSE listing standards. As described below, all ten of the Board’s current directors are independent directors within the meaning of the Independence Standards and NYSE listing standards. Mr. Cobb, who served on the Board until his retirement on July 31, 2017, was not an independent director under the Independence Standards or NYSE listing standards due to his position as our President and Chief Executive Officer. Assuming all nine director nominees are elected at the Annual Meeting, all will be independent directors within the meaning of the Independence Standards and NYSE listing standards.

NYSE listing standards provide that a director does not qualify as independent unless the Board affirmatively determines that the director has no material relationship with the Company. The listing standards permit the Board to adopt and disclose standards to assist the Board in making determinations of independence. Accordingly, the Board has adopted the Independence Standards to assist the Board in determining whether a director has a material relationship with the Company.

Evaluation of Director Independence

In July 2017, the Board conducted an evaluation of director independence regarding the current directors and nominees for director based on the Independence Standards and NYSE listing standards. In addition, the Board also conducted an evaluation of the independence of each of the members of the Audit, Compensation, and Governance and Nominating Committees in accordance with the requirements of the NYSE listing standards. In connection with this evaluation, the Board considered the responses provided by the directors in their annual director questionnaires and reviewed commercial, charitable, consulting, familial, and other relationships between each director or immediate family member and the Company, its subsidiaries, and their employees. As a result of its evaluation, the Board affirmatively determined that Messrs. Brown, Gerard, Johnson, Lewis, Rohde, Seip, and Wright and Mses. Archon, Reich, and Wood are independent. In addition, the Board affirmatively determined that each member of the Audit, Compensation, and Governance and Nominating Committees is independent.

Code of Ethics

All directors, officers, and employees of the Company must act ethically and in accordance with the policies set forth in the H&R Block Code of Business Ethics and Conduct (the “Code”). The Code includes guidelines relating to the ethical handling of actual or potential conflicts of interest, compliance with domestic and foreign laws, accurate financial reporting, and procedures for promoting compliance with, and reporting violations of, the Code. In support of the Code, we have established a number of channels for reporting potential ethics violations or similar concerns or for guidance on ethics matters, such as via email, telephone, or in-person communications. All individuals have the ability to report concerns or discuss ethics-related matters anonymously. The Audit Committee has also established procedures for the receipt, retention and treatment of reports received by us regarding accounting, internal accounting controls or audit matters, including reports made to the Corporate Secretary by phone at (816) 854-4288 or by email to corporatesecretary@hrblock.com. The Code is overseen by the Company’s Chief Ethics Officer, who is appointed by the Audit Committee. To help ensure the Audit Committee’s effective oversight of our ethics and compliance program, the Audit Committee regularly receives reports from the Chief Ethics Officer and reviews matters related to the Company’s ethics and compliance program. The Company will post any amendments to or waivers of the Code, to the extent applicable to any of the Company’s executive officers or directors as required under applicable rules, on our website.

The Code can be accessed on the Company’s website at www.hrblock.com by clicking the “Investor Relations” link and then clicking the “Corporate Governance” link under the “Company” tab. The Code is also available in print to shareholders upon written request to the Corporate Secretary, H&R Block, Inc., One H&R Block Way, Kansas City, Missouri 64105.

 

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Succession Planning

The Board recognizes the importance of effective executive leadership to the Company’s success. The Company’s Board is actively engaged and involved in succession planning. As discussed above, the Board has formed a CEO Search Committee to oversee the search for a permanent President and Chief Executive Officer. In addition, the Board discusses the talent pipeline for specific critical roles, and high-potential leaders are given exposure and visibility to Board members through formal presentations and informal events. More broadly, the Board is regularly updated on key talent indicators for the overall workforce, including economic environment, diversity, recruiting, and development programs.

BOARD LEADERSHIP STRUCTURE AND ACCOUNTABILITY

The Company’s Articles, Bylaws, and the Governance Guidelines require that the Chairman of the Board (i) be an independent director pursuant to NYSE listing standards, (ii) not simultaneously be Chief Executive Officer or President of the Company, and (iii) not have previously served as an executive officer of the Company. As such, the Board is led by an independent Chairman, currently Mr. Gerard, who has also been designated as the Board’s Senior Independent Director.

We believe that our current Board structure creates a positive balance in leadership and accountability, as the functions of Chief Executive Officer and Board Chairman are significantly different. In addition to balancing responsibilities, we believe that our current structure enhances the accountability of the Chief Executive Officer to the Board and strengthens the Board’s independence from management. Separating the roles of Board Chairman and Chief Executive Officer also allows the Chief Executive Officer to focus his or her efforts on running our business and managing the Company in the best interests of our shareholders. At the same time, our non-executive Chairman handles the separate responsibilities of Board and committee scheduling, Board agendas, and other Board organizational tasks, as well as leading the Board in discussions concerning CEO employment and performance evaluation and speaking on behalf of the Board and the Company regarding corporate governance- and investor relations-related issues.

COMMUNICATIONS WITH THE BOARD

Shareholders and other interested parties wishing to communicate with the Board of Directors, the non-employee directors, or an individual Board member concerning the Company may do so by writing to the Board, to the non-employee directors, or to the particular Board member, and mailing the correspondence to the Corporate Secretary, H&R Block, Inc., One H&R Block Way, Kansas City, Missouri 64105 or by emailing the correspondence to corporatesecretary@hrblock.com. Please indicate on the envelope whether the communication is from a shareholder or other interested party. The Board has instructed the Corporate Secretary and other relevant members of management to examine incoming communications and forward to the Board or individual directors as appropriate, communication he or she deems relevant to the Board’s roles and responsibilities. The Board has requested that certain types of communications not be forwarded, and redirected if appropriate, such as: spam, business solicitations or advertisements, resumes or employment inquiries, service complaints or inquiries, surveys, or any threatening or hostile materials. In addition, our non-executive Chairman and other Board members have made and may in the future make themselves available for consultation and direct communication with significant shareholders.

DIRECTOR ATTENDANCE AT ANNUAL MEETINGS OF SHAREHOLDERS

Although the Company has no specific policy regarding director attendance at the Company’s annual meeting of shareholders, all directors are encouraged to attend. All of the Company’s current directors attended last year’s annual meeting.

BOARD’S ROLE IN RISK OVERSIGHT

Our Board has oversight responsibility for managing risk, directly and through its various Committees, and management is responsible for the Company’s day-to-day enterprise risk management activities. The Company has established a management Risk Committee to support senior management in fulfilling its day-to-day enterprise risk management responsibilities and to support the Board in fulfilling its oversight responsibility for risk management. The Company’s Vice President and Treasurer oversees the activities of the Risk Committee, which is made up of key members of the Company’s management. The

 

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Company’s management Risk Committee assists the Board in its oversight of enterprise risk management by creating and facilitating a process to identify, prioritize, monitor, and report on risks and mitigation strategies, overseeing regular reporting of risks to the Board and its committees, identifying additional risk mitigation strategies as appropriate, and monitoring emerging risks.

In fulfilling its oversight role, the Board generally focuses on the adequacy of the Company’s risk management and mitigation processes. The Board works with the Company’s Chief Executive Officer, Chief Financial Officer, General Counsel, and Vice President and Treasurer to determine the Company’s risk tolerance, and works to ensure that management identifies, evaluates, and properly manages the overall risk profile of the Company.

In addition to the discussion of risk at the Board of Directors level, the Board’s standing committees also focus on risk exposure as part of their ongoing responsibilities:

 

Committee of the Board    Areas of Risk Oversight    Additional Information

Audit Committee

   Responsible for the oversight of policies and processes pertaining to the Company’s enterprise risk management program and specifically considers risks and controls relating to, among other things, data security and the Company’s financial statements and financial reporting processes.   

The Company’s Audit Services department assists the Audit Committee and the Board in their oversight of enterprise risk management by ensuring that key risks are included in the audit plan, providing objective assurance to the Board on the effectiveness of risk management processes, and reviewing the management of key risks.

 

Compensation Committee

   Responsible for reviewing the Company’s compensation policies and practices (including enterprise risks and compensation design risks) and the relationship among the Company’s risk management policies and practices, corporate strategy, and compensation policies and practices.   

The Compensation Committee conducts an annual risk assessment related to the Company’s compensation programs. For more information, see the discussion beginning on page 48 regarding the Company’s compensation policies and practices.

 

Governance and Nominating Committee

   Responsible for reviewing the Company’s corporate governance policies and practices and making recommendations to the Board that take into account the management of governance-related risk.   

In addition, the Governance and Nominating Committee’s primary involvement in the director nomination and Board self-evaluation processes assists the Board in reviewing and mitigating risks related to the governance of our Board.

 

Finance Committee

   Responsible for reviewing and approving plans and strategies with respect to financing transactions, acquisitions and dispositions, and other transactions involving financial risks.   

The Finance Committee reviews the Company’s earnings and free cash flow, its sources and uses of liquidity, compliance with financial covenants, and uses of the Company’s cash.

 

Each of the committee chairs regularly reports to the full Board concerning the activities of the applicable committee, the significant issues it has discussed, and the actions taken by that committee.

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

In this section, we describe the material components of our executive compensation program for our named executive officers (“named executive officers” or “NEOs”), whose compensation is set forth in the Summary Compensation Table and other compensation tables contained in this proxy statement. For our 2017 fiscal year, which ended April 30, 2017, our NEOs included the following individuals:

 

  Officers    Title as of April 30, 2017

  William C. Cobb

  

President and Chief Executive Officer(1)

  Tony G. Bowen

  

Chief Financial Officer(2)

  Kathryn M. Collins

  

Chief Marketing and Strategy Officer

  Thomas A. Gerke

  

General Counsel and Chief Administrative Officer(3)

  Jason L. Houseworth

  

Chief Innovation Officer(4)

  Former Officer     

  Gregory J. Macfarlane

  

Former Senior Vice President, U.S. Retail Products and Operations(5)

 

  (1)

Mr. Cobb retired from his positions as President, Chief Executive Officer, and director of the Company effective July 31, 2017. Additional information can be found in our Form 8-K filed on May 16, 2017.

 
  (2)

Mr. Bowen was appointed as Chief Financial Officer effective May 1, 2016. Additional information can be found in our Form 8-K filed on April 26, 2016.

 
  (3)

Mr. Gerke was appointed as President and Chief Executive Officer (in an interim capacity) (“Interim CEO”) effective August 1, 2017. Additional information can be found in our Form 8-K filed on May 16, 2017.

 
  (4)

Mr. Houseworth departed the Company after serving as Chief Innovation Officer until April 30, 2017. Additional information can be found in our Form 8-K filed on April 27, 2017.

 
  (5)

Mr. Macfarlane departed the Company after serving as Senior Vice President, U.S. Retail Products and Operations until December 30, 2016. Additional information can be found in our Form 8-K filed on December 7, 2016. Mr. Macfarlane is included as an NEO in accordance with SEC rules as he would have been one of our three most highly compensated executive officers other than our chief executive officer and chief financial officer had he been serving as an executive officer on April 30, 2017.

 

In addition, we provide an overview of our executive compensation philosophy and the elements of our executive compensation program. We also explain how and why the Compensation Committee arrives at specific compensation policies and practices involving our NEOs.

EXECUTIVE SUMMARY

CEO Transition

On May 15, 2017, Mr. Cobb notified the Company of his decision to retire from his positions as President and Chief Executive Officer and as a member of the Board effective as of July 31, 2017. In connection with his retirement, Mr. Cobb will receive the benefits to which he is entitled upon a retirement under the terms and conditions of his applicable plans and agreements, as described in more detail beginning on page 53. As contemplated under the terms of the H&R Block, Inc. Executive Performance Plan, the Compensation Committee determined that Mr. Cobb will be entitled to receive pro-rated annual short term incentive (“STI”) compensation for fiscal year 2018 that will be payable only if and to the extent that annual STI compensation is payable to other Company senior executive officers, as determined by the Compensation Committee. In light of the timing of his retirement, Mr. Cobb did not receive a fiscal year 2018 long term incentive (“LTI”) award.

Following Mr. Cobb’s notice of retirement, the Board appointed Mr. Gerke as Interim CEO, effective August 1, 2017, to serve until a permanent President and Chief Executive Officer is appointed. To reflect his enhanced duties while serving as Interim CEO, the Compensation Committee approved increases in Mr. Gerke’s compensation, which remain heavily weighted

 

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to long term and performance-based compensation. Additional detail regarding fiscal year 2018 compensation for Mr. Gerke, as well as our other NEOs, can be found beginning on page 26.

Overall Executive Compensation Philosophy

Our executive compensation decisions are influenced by a variety of factors, with the primary goals being to align management’s and shareholders’ interests and to link pay with performance. We evaluate performance over both short term and multi-year periods based on (i) the Company’s financial, operational, and strategic performance, including results for certain key performance metrics and (ii) the Company’s total return to shareholders over time, both on an absolute basis and relative to other companies in the S&P 500 index.

We view compensation practices as an avenue to communicate our goals and standards of conduct and a means to reward executives for their achievements. We believe our executive compensation program is reasonable, competitive, and appropriately balances the objectives of attracting, motivating, rewarding, and retaining our executives. To ensure management’s interests are aligned with those of our shareholders and to motivate and reward individual initiative and effort, a substantial portion of our NEOs’ compensation is at-risk and will vary above or below target levels commensurate with Company performance. We emphasize performance-based compensation that appropriately rewards executives for delivering financial, operational, and strategic results that meet or exceed pre-established goals through our STI and LTI programs. Additionally, we further align the interests of our executives with those of shareholders and the long term interests of the Company through stock ownership requirements and grants of equity-based awards consisting of restricted share units, performance share units, and market stock units under our LTI program.

Our Pay for Performance Philosophy

To align the interests of our executives with those of our shareholders, we have designed our executive compensation program with a substantial emphasis on variable compensation, which ties the earned compensation of our executives to the annual and long term performance of the Company as measured by financial and strategic accomplishments as well as changes in shareholder value.

Fiscal Year 2017 Compensation Decisions

As discussed in the Compensation Discussion and Analysis in our 2016 proxy statement filed on July 26, 2016, fiscal year 2016 was challenging for the Company, as we reported a decrease in revenue and earnings from continuing operations before interest, taxes, depreciation and amortization (EBITDA), primarily due to lower worldwide client volumes, as compared to the prior year. As a result, our NEOs did not receive any fiscal year 2016 STI compensation as detailed in our 2016 proxy statement. In response to fiscal year 2016 results, the Compensation Committee took several significant actions related to fiscal year 2017 executive compensation to ensure that executive pay would continue to be aligned with Company performance and to enhance the focus on addressing market share declines that had occurred over a multi-year period:

 

   

There were no increases in target total direct compensation for our NEOs for fiscal year 2017, and fiscal year 2017 target compensation remained at the levels set for fiscal year 2016;

 

   

A market share element was added to our STI program; and

 

   

Performance share unit vesting was tied directly to year-over-year EBITDA growth.

Additional discussion of fiscal year 2017 compensation decisions can be found beginning on page 30.

Fiscal Year 2017 Results and Impact on Fiscal Year 2018 Compensation Decisions

Fiscal Year 2017 Results

For fiscal year 2017, we achieved our goal of improving the client trajectory through competitive promotions, impactful marketing, and an improved client experience, while also producing strong financial results. We served our customers well,

 

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invested with an eye toward the future, and continued to deliver value to you, our shareholders. The results of these efforts included:

 

   

Serving approximately 23 million clients worldwide, outperforming the overall U.S. market and achieving share gains in the do-it-yourself category, all during a year in which the industry experienced a general decline in returns;

 

   

Maintaining revenues at just over $3.0 billion;

 

   

Decreasing operating expenses by approximately $85 million from the prior year;

 

   

Increasing net income from continuing operations 10% from the prior year to $421 million and increasing EBITDA from continuing operations 11% from the prior year to $904 million. EBITDA from continuing operations is a non-GAAP financial measure. For more information regarding financial measures not prepared in accordance with generally accepted accounting principles (“GAAP”) that are disclosed in this section and for a reconciliation of these non-GAAP measures to the most directly comparable financial measures prepared in accordance with GAAP, see “Non-GAAP Financial Information” on pages 30 through 32 in Part II, Item 7 to the Company’s annual report on Form 10-K for the fiscal year ended April 30, 2017 filed with the SEC on June 16, 2017;

 

   

Increasing our EBITDA margin from continuing operations to 29.8% while still investing in the business, representing an improvement of over 300 basis points from the prior fiscal year. EBITDA margin from continuing operations is computed as EBITDA from continuing operations divided by revenues from continuing operations;

 

   

Continuing our record of making quarterly dividend payments, which, along with the Board’s approval in the first quarter of fiscal year 2018 of a 9% increase in the quarterly dividend to $0.24 per share, is consistent with our strong history of allocating capital to our shareholders; and

 

   

Continuing to “Do the Right Thing,” taking care of our clients, and delivering for you, our shareholders.

Fiscal Year 2017 Performance-Based Compensation

The Compensation Committee established our NEOs’ compensation for fiscal year 2017, including performance-based STI and LTI awards, in July 2016. Consistent with the prior year, the Compensation Committee selected Revenue from Continuing Operations and Pre-Tax Earnings as Step Two STI metrics in order to balance a top- and bottom-line focus, and added a new market share element to focus on improving the client trajectory.

The Company’s results for fiscal year 2017 were above target performance goals related to Pre-Tax Earnings from Continuing Operations and Revenues from Continuing Operations, but fell slightly short of the target performance goals related to market share growth. In June 2017, the Compensation Committee reviewed the Company’s performance as compared to the pre-determined performance objectives and approved an overall payout for our NEOs of 121.8% of their targets. Additional discussion of fiscal year 2017 STI compensation decisions can be found beginning on page 32.

The charts below illustrate the mix of fiscal year 2017 total direct compensation types, using target LTI amounts and actual base salaries and STI amounts, for our CEO and, on average, for our other NEOs (except for Mr. Macfarlane, who departed the Company on December 30, 2016).

 

LOGO

 

 

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For our CEO, the specific components of total direct compensation for fiscal year 2017 are illustrated by the chart on the left below. The chart shows that 74% of his fiscal year 2017 total direct compensation was at-risk, with target performance-based equity comprising 80% of his LTI compensation and actual performance-based STI compensation comprising 60% of his total cash compensation. The chart on the right below illustrates the specific components of our other NEOs’ average total direct compensation for fiscal year 2017 (except for Mr. Macfarlane who departed the Company on December 30, 2016). The chart shows that an average of 64% of our other NEOs’ fiscal year 2017 compensation was at-risk, with target performance-based equity comprising 80% of their LTI compensation and actual performance-based STI compensation comprising 48% of their total cash compensation. The components depicted below are more fully described beginning on page 28.

 

 

LOGO

The variance between our CEO’s compensation and our other NEOs’ compensation reflects the difference in responsibilities and overall accountability to shareholders. Our CEO’s at-risk compensation is higher than the other NEOs because the CEO bears a greater level of responsibility for the Company’s performance, as he is directly responsible for leading the development and execution of the Company’s strategy and for selecting, retaining, and managing the executive team.

We have included charts and tables in this Compensation Discussion and Analysis to enhance our shareholders’ understanding of the compensation of our NEOs. These tables and charts are meant to be in addition to, and not an alternative to, the charts and tables provided under the heading “Executive Compensation” beginning on page 49.

Fiscal Year 2018 Compensation

In light of the Company’s generally strong performance in fiscal year 2017 as well as the leadership transition occurring in connection with Mr. Cobb’s retirement and Mr. Gerke’s appointment as Interim CEO, the Compensation Committee took actions designed to appropriately reward, retain, and motivate returning executives. The Compensation Committee’s determinations regarding our NEOs’ base salaries and STI and LTI opportunities for fiscal year 2018 are summarized in the chart on the following page, and additional discussion of these compensation decisions can be found beginning on page 30.

 

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    Compensation Element         Compensation Committee Action for Fiscal Year 2018    
 

CEO Compensation

  

Mr. Cobb’s base salary and STI target levels for fiscal year 2018 through his retirement on July 31, 2017 remained unchanged on an annualized basis from fiscal year 2017, and he did not receive a fiscal year LTI award in light of the timing of his retirement. As additional compensation to reflect Mr. Gerke’s enhanced duties while serving as Interim CEO, the Compensation Committee approved an increase to his total direct compensation for fiscal year 2018.

 

 
  Other Returning NEO Compensation   

For fiscal year 2018, in recognition of individual performance, contributions to the Company’s financial and operational performance, and, in Mr. Bowen’s case, to bring individual compensation closer to the applicable market median, the Committee:

 

 
       

Approved increases to base salaries as described more fully on page 30;

 

 
       

Approved increases in fiscal year 2018 target STI opportunities, as described more fully on page 34; and

 

 
       

Approved increases in fiscal year 2018 LTI compensation as described more fully on page 39.

 

 
 

Incentive Plan Metrics

  

The Committee selected incentive plan metrics for fiscal year 2018 STI and LTI compensation that continue to focus on propelling growth and overall Company performance through utilization of revenue, pre-tax earnings, market share, EBITDA from continuing operations, year-over-year EBITDA growth, and return on invested capital, as well as total shareholder return on an absolute basis and relative to other companies.

 

 

The Company and the Board regularly evaluate our compensation policies and practices to ensure they are meeting our objectives and take into account executive compensation best practices. As part of that process, the Compensation Committee and the Board consider the results of our shareholder advisory vote on executive compensation (commonly known as a “say-on-pay” vote). At our 2016 annual meeting of shareholders held on September 8, 2016, our shareholders approved the compensation awarded to our NEOs, as disclosed in our 2016 proxy statement, with approximately 97% of the votes cast in favor of the proposal. We view this overwhelming level of support as a clear message from our shareholders that they believe our compensation levels are appropriately aligned with our performance and that they approve of our executive compensation practices generally. We value the opinions of our shareholders and consider the outcome of say-on-pay votes when making compensation decisions for our NEOs. As discussed in Proposal 4, we are seeking advisory shareholder approval to continue conducting a say-on-pay vote on an annual basis.

As described above, a primary goal of our executive compensation program is to directly link a significant portion of executive pay to Company performance. Consistent with our shareholders’ support, the Compensation Committee decided to retain the core design features of our executive compensation program in fiscal year 2018, with certain enhancements to STI and LTI compensation elements to further align our compensation program with our current strategic focus, as further described below. In structuring fiscal year 2018 compensation, the Compensation Committee aimed to continue to closely align executive pay with Company performance by:

 

   

Maintaining a balanced focus on Company performance through at-risk incentive compensation: tying STI and LTI payouts to a balance of growth in revenue, profitability, market share, and absolute and relative stock price performance; and

 

   

Retaining an equity mix for executive LTI compensation that increases the focus on performance-based awards and total shareholder return on an absolute basis and relative to other companies by weighting LTI heavily in performance share units and market stock units, for each of which the number of shares earned upon vesting, if any, depends on performance against specified goals over a full three-year period.

Additional discussion of fiscal year 2018 compensation decisions can be found beginning on page 30.

 

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EXECUTIVE COMPENSATION PRACTICES

The table below highlights our current compensation practices, including the practices we have implemented because we believe they drive performance and the practices we have not implemented because we do not believe they would serve our shareholders’ long term interests.

 

       

Executive Compensation Practices

We Have Implemented

(What We Do)

     

Executive Compensation Practices

We Have Not Implemented

(What We Don’t Do)

   
 

  We tie pay to performance by ensuring that a significant portion of target compensation is performance-based and at-risk. For fiscal year 2017, 74% of CEO total direct compensation was performance-based and at-risk.   û   We do not have employment contracts with executives except for the employment agreement with Mr. Cobb, our CEO, whose retirement was effective July 31, 2017.  
 

  We engage in a rigorous target-setting process to establish total direct compensation and its components, including reviewing market and survey data sourced from our peer group of companies and general industry, and utilizing tally sheets when making executive compensation decisions.   û   We do not provide excise tax gross-ups, and we do not have a supplemental executive retirement plan that provides benefits to the NEOs that are not available to all employees.  
 

  We mitigate undue risk through substantial emphasis on long term equity incentives and utilizing caps on potential payments, clawback provisions, reasonable retention strategies, and performance targets.   û   We do not maintain compensation programs that we believe create risks reasonably likely to have a material adverse effect on the Company.  
 

  We have modest post-employment provisions and double-trigger change in control provisions that generally apply to all executive officers.   û   We do not have individual change in control agreements, except for certain provisions in Mr. Cobb’s employment agreement.  
 

  We generally prohibit accelerated vesting of equity awards after a change in control for executives who voluntarily separate from the Company (i.e., we require a “double-trigger”).   û   We do not pay dividends on any unvested long term equity awards or unearned performance-based equity awards. Dividend equivalents are only payable on such awards to the extent the awards ultimately vest and are earned.  
 

  We provide only minimal perquisites that we believe have a sound benefit to the Company’s business.   û   We do not provide significant additional benefits to executive officers that differ from those provided to all other employees.  
 

  We have stock ownership and retention guidelines that we believe align management and shareholder interests.   û   We expressly prohibit hedging, pledging and the use of margin accounts related to our stock.  
 

  We impose minimum vesting periods for all executives’ equity awards.   û   We expressly prohibit the repricing of stock options and stock appreciation rights.  
 

  Beginning with fiscal year 2018 awards, we require recipients of performance share units to hold one-half of earned shares for one year following vesting.   û   We do not allow cash buyouts for underwater stock options or stock appreciation rights.  
 

  The Compensation Committee benefits from the use of an external, independent compensation consulting firm that it retains.   û   The Compensation Committee does not allow its compensation consulting firm to provide any other services to the Company.  

 

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EXECUTIVE COMPENSATION PROGRAM SUMMARY

The pay packages for our executive officers, including our NEOs, contain a mix of elements based on an individual’s responsibilities and performance, as well as (i) the Company’s performance against specific pre-established annual and multi-year financial, operational, and strategic performance goals, and (ii) the Company’s total return to shareholders over time, both on an absolute basis and relative to other companies in the S&P 500 index.

For awards that are based on the Company’s performance, our specific decisions regarding the setting of performance goals focus on certain metrics that relate to our business plan and strategic priorities and that we believe are the most critical value drivers of the business, such as revenue from continuing operations, pre-tax earnings from continuing operations, earnings from continuing operations before interest, taxes, depreciation, and amortization, or EBITDA, earnings from continuing operations before interest and taxes, or EBIT, market share, and average return on invested capital. Actual performance goals, as well as strategic priorities, vary from year to year based on the business environment and the Compensation Committee’s determination of goals that it believes are important for a particular year.

Unlike target incentive compensation levels, which are set by the Compensation Committee near the beginning of each fiscal year, actual incentive compensation is a function of the Company’s financial, operational, strategic, and absolute and relative stock performance, as reflected through STI payouts, payouts of LTI performance share units and market stock units, and the value of all LTI awards. A substantial portion of our executives’ actual compensation is intended to be at-risk and to vary above or below target levels commensurate with Company performance.

 

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The chart below summarizes the elements and objectives of our fiscal year 2017 compensation program for our executive officers, including our NEOs. Each of the following compensation components fulfills one or more of our objectives of attracting, motivating, rewarding, and retaining a high-performing executive team.

 

    Component    Purpose    Characteristics    Discussion    
  Base Salary    Compensates for scope and level of responsibility, experience, and sustained individual performance.   

Fixed cash component based on experience, role and responsibilities, individual performance, and market data. To promote a performance culture, increases are not automatic or guaranteed, but only made when merit-based on annual evaluation. No NEO received an annual merit increase in fiscal year 2017.

 

   page 30  
  Short Term Incentive   

Motivates and rewards achievement of pre-established annual financial, operational, and strategic performance objectives.

 

   A variable cash component designed to tie directly to our business plan and provide competitive total cash opportunities that are subject to achievement of specific performance objectives.    page 31  
  Long Term Incentive    Motivates and rewards achievement of multi-year performance objectives that enhance shareholder value.   

Equity-based compensation designed to support multiple objectives. For fiscal year 2017, the incentive was delivered through a mix of performance share units, market stock units, and restricted share units.

 

   page 35  
  Retirement, Health and Welfare Benefits   

Offers market-competitive health insurance options and income replacement upon retirement, death, or disability, thus supporting our attraction and retention objectives.

 

   Benefits for executives are generally the same as those available to all employees, including a group health plan, a group life insurance program, and a 401(k) plan with matching Company contributions capped based on applicable Internal Revenue Code limits.    page 41  
  Perquisites   

Provides modest benefits that promote health and work-life balance, thereby supporting our attraction and retention objectives.

 

   Perquisites are an immaterial component of our executive compensation program and are below the market median for our Peer Group.    page 41  
  Deferred Compensation Plan   

Allows executives to defer compensation in a tax-efficient manner, thereby supporting our attraction and retention objectives.

 

   Executives can elect to defer base salary and STI compensation.    page 52  
 

Executive Severance Plan

   Encourages executives to act in the best interests of our shareholders, while supporting attraction and retention objectives and ensuring the orderly succession of talent.    Benefits are contingent in nature, payable only if a participant’s employment is terminated without cause or termination occurs after a change in control (known as a “double-trigger”). Double-trigger applies to both cash severance and equity vesting.    page 54  

EXECUTIVE COMPENSATION PROGRAM COMPONENTS

Our executive compensation program consists of the following components: base salary, STI, LTI, retirement, health and welfare benefits, a minimal amount of perquisites, and benefits under our executive severance plan, group life insurance program, qualified retirement plan, and nonqualified deferred compensation plan. Each of these compensation components fulfills one or more of our objectives of attracting, motivating, rewarding, and retaining a high-performing executive team, and the Compensation Committee annually reviews tally sheets of all such components for each of our executive officers. As a part

 

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of this process, the Compensation Committee also reviews the total value of all stock-denominated compensation held by each executive and the potential executive termination costs for each of our executive officers, including potential payments upon termination in connection with a “change in control.” The Compensation Committee evaluates these elements and, under its charter, has authority to approve certain matters and make recommendations to the Board regarding matters requiring Board approval (such as certain actions related to severance or change in control provisions).

Except as otherwise noted under “Executive Evaluation Process,” the Compensation Committee’s executive compensation determinations are the result of the Committee’s business judgment, which is informed by the experiences of the Committee members, input from the Committee’s independent compensation consultant, and the CEO’s evaluation of performance.

Base Salary

We establish base salaries at levels designed to enable us to attract and retain talented executives and to reward and motivate consistent high performance over a sustained time period. We determine executive base salaries based on the executive’s experience, role and responsibilities, individual performance, and market data for similar positions among comparable companies within our industry and among our Peer Group. Annual merit increases for NEOs, other than the CEO, are based on evaluation of their performance by the CEO and the Compensation Committee, as well as the Company’s performance and outlook for the upcoming fiscal year. Annual merit increases are not automatic or guaranteed from year to year; adjustments, if any, take into account the executive’s experience, role and responsibilities, individual performance, and market data for similar positions among comparable companies within our industry and among our Peer Group.

For fiscal year 2017, base salaries for our NEOs were as follows:

 

Officers    Annual Base Salary as
of April 30, 2017 ($)
  

% Increase from  

Fiscal Year 2016  

  William C. Cobb

   $995,000    0.0%

  Thomas A. Gerke

   $550,000    0.0%

  Jason L. Houseworth

   $420,000    0.0%

  Tony G. Bowen

   $400,000    n/a

  Kathryn M. Collins

   $350,000    0.0%
Former Officer   

Annual Base Salary

Prior to Departure ($)

    

  Gregory J. Macfarlane

   $612,000    0.0%

Based on the Company’s financial performance in fiscal year 2016, the Compensation Committee determined that the fiscal year 2017 base salaries for all NEOs, other than Mr. Bowen, who was appointed as Chief Financial Officer of the Company effective May 1, 2016, would remain unchanged from fiscal year 2016 base salaries. In setting Mr. Bowen’s base salary as Chief Financial Officer, the Committee considered Mr. Bowen’s experience and new role and responsibilities, the compensation levels for other Company executives, and market data for Chief Financial Officer positions within our Peer Group.

In May and June 2017, the Compensation Committee approved the fiscal year 2018 base salaries shown in the table below for our NEOs who served as executive officers at that time.

 

Officers    Fiscal Year 2018
Salary ($)
  

% Increase from  

Fiscal Year 2017  

  William C. Cobb

   $995,000    0.0%

  Thomas A. Gerke

   $950,000    72.7%

  Tony G. Bowen

   $480,000    20.0%

  Kathryn M. Collins

   $375,000    7.1%

 

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Mr. Cobb continued to receive a base salary in an amount that would equal $995,000 annually in fiscal year 2018 through his retirement on July 31, 2017. Additional information regarding Mr. Cobb’s retirement and fiscal year 2018 compensation can be found on page 54.

As described above, Mr. Gerke was appointed as Interim CEO effective August 1, 2017. As additional compensation to reflect his enhanced duties while serving as Interim CEO, the Compensation Committee approved an increase to Mr. Gerke’s base salary to an amount that would equal $950,000 annually, with such increase effective beginning June 1, 2017 and continuing through the later of (i) the end of the duration of his appointment as Interim CEO and (ii) December 1, 2017. Additional information regarding Mr. Gerke’s fiscal year 2018 compensation can be found on page 54.

The fiscal year 2018 salary increases for Mr. Bowen and Ms. Collins were intended to recognize their contributions to the Company’s financial and operational performance, their specific roles and responsibilities at the Company, and their individual performance in fiscal year 2017. The salary increase for Mr. Bowen was also intended to bring his base salary closer to market median for Chief Financial Officer positions within our Peer Group and the general market environment.

Short Term Incentive Compensation

STI compensation is performance-based and at-risk compensation intended to motivate and reward executives for the attainment of goals that are measured over annual time horizons. Our executive STI compensation program under the H&R Block Executive Performance Plan (“Executive Performance Plan”) approved by our shareholders is designed to compensate executives primarily for achieving pre-established annual financial, operational, or strategic performance objectives that relate to our fiscal year business plan. STI compensation for our executive officers is determined under a two-step approach. The two-step approach is designed with the intent to qualify the STI awards under the Executive Performance Plan as “performance-based compensation” under Internal Revenue Code (“IRC”) Section 162(m) and to enable the Company to deduct the amount of the STI awards to the greatest extent permitted under IRC Section 162(m).

Under Step One of the methodology, the Compensation Committee approves a specific STI “initial funding performance target,” or threshold level of performance, within ninety days after the beginning of the fiscal year. In setting the initial funding performance target, the Compensation Committee uses one or more of the specific performance criteria identified in the Executive Performance Plan. Under Step Two of the methodology, the CEO, in consultation with other senior executives, proposes separate performance objectives that are then reviewed by the Compensation Committee in consultation with its independent compensation consultant. These separate performance objectives are generally based on our fiscal year business plan. After the Compensation Committee makes any changes to these performance objectives that it considers appropriate, the Compensation Committee approves the objectives for use with respect to our executive officers.

Following the end of the fiscal year, the Compensation Committee reviews the Company’s performance measured against the initial funding performance target set in Step One and the separate performance objectives set in Step Two. Failure to achieve the initial funding performance target for the applicable objective set in Step One would result in no payouts being made under the Executive Performance Plan. Achievement of the initial funding performance target set in Step One results in potential funding of the STI payments for the applicable executive officers at the maximum payout level. In such event, the Compensation Committee is permitted under IRC Section 162(m) to exercise its discretion to reduce, but not increase, the potential funding amount to the actual amounts to be paid to each executive, if any, based primarily on performance against the separate performance objectives applicable to each executive officer set in Step Two. The Compensation Committee uses this negative discretion to reduce the actual payout, as it deems appropriate, based on the Company’s performance relative to these pre-determined performance objectives and on the Compensation Committee’s evaluation of financial, operational, strategic, and individual performance.

Our planning cycle occurs in the summer, which allows us to set Step Two performance objectives during, or shortly after, the planning cycle but before the start of the subsequent tax season. We believe this timing is appropriate due to the seasonal nature of our tax business, which delivers the majority of the Company’s revenues in the last four months of our fiscal year, which is the period from January through April of each year.

Maximum and threshold performance objectives are set above and below the target objectives to establish an appropriate relationship between actual Company performance and the executives’ STI compensation. Because they are subject to the

 

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Company’s attainment of performance objectives, STI target opportunities for our NEOs are intended to place a significant portion of our NEOs’ annual cash compensation at risk, thereby aligning their compensation with shareholders’ interests. These target opportunities are also intended to provide competitive total cash compensation opportunities within our pay positioning context discussed above. Performance criteria and objectives are subject to adjustment as is necessary to prevent reduction or enlargement of an award based on various events occurring during the course of the applicable performance period that distort the criteria applicable to any performance objective. Such events generally include the following:

 

   

Any recapitalization, reorganization, merger, acquisition, divestiture, consolidation, spin-off, split-off, combination, liquidation, dissolution, discontinuation, sale of assets, or other similar corporate transaction or event;

 

   

Any changes in applicable tax laws or accounting principles; or

 

   

Any unusual, extraordinary or nonrecurring events (as described in Financial Accounting Standards Board Accounting Standard 225-20 “Extraordinary and Unusual Items” (or any successor provision) or in management’s discussion and analysis of financial condition and results of operations appearing in the Company’s Annual Report on Form 10-K for the applicable fiscal year).

Ultimate STI payouts can range from 0% to 200% of each current NEO’s target STI opportunity, subject to certain limitations contained in the Executive Performance Plan and, for Mr. Cobb, limitations contained in his employment agreement. The terms of Mr. Cobb’s employment agreement, including amendments thereto, are set forth below under the heading “William C. Cobb Employment Agreement” beginning on page 53.

Each year, the Compensation Committee approves a target opportunity for STI compensation for each of our executive officers that is a percentage of such executive officer’s base salary. The target opportunities applicable to our NEOs for fiscal years 2017 and 2018 are set forth below under “Targeted vs. Actual STI Awards” and “Actions Pertaining to Fiscal Year 2018 STI Compensation,” respectively. The variance between our CEO’s STI target opportunity and other NEOs’ opportunities reflects the difference in responsibilities and overall accountability to shareholders. Also, to ensure alignment with shareholders’ interests, a larger portion of our CEO’s annual cash opportunity is at risk.

Actions Pertaining to Fiscal Year 2017 STI Compensation

In July 2016, the Compensation Committee approved the use of earnings before interest and taxes, or EBIT, from continuing operations in the amount of $540.0 million as the initial funding performance target for fiscal year 2017 STI compensation for our executive officers. In July 2016, the Compensation Committee also approved the separate fiscal year 2017 STI performance Step Two criteria and objectives applicable to our executive officers. These separate fiscal year 2017 STI performance criteria and objectives, shown below, focus on driving revenue and earnings growth to enhance the ultimate performance of the Company as a whole. These criteria and objectives are disclosed in the limited context of our executive compensation program, and should not be deemed to apply in other contexts.

 

Goal    Criteria    Threshold    Target    Maximum    Weight

Propel Growth

   Revenue from Continuing Operations(1)    $2,902.4    $3,023.3    $3,114.0       50%
Focus on ultimate performance of the Company as a whole    Pre-Tax Earnings from Continuing Operations(2)       $520.5       $572.0       $623.4       50%

 

(1) 

Revenue from Continuing Operations includes consolidated revenue for fiscal year 2017 attributable to continuing operations (in millions).

(2) 

Pre-Tax Earnings from Continuing Operations includes consolidated net earnings for fiscal year 2017 attributable to continuing operations before the deduction of income taxes (in millions).

In addition, the Compensation Committee added a new market share element in fiscal year 2017, in order to balance top- and bottom-line metrics, while adding a focus on improving the client trajectory. The market share element acts as a multiplicative modifier to the initial payout level, if any, as determined under the Revenue from Continuing Operations and Pre-Tax Earnings from Continuing Operations metrics. The market share modifier increases or decreases the initial payout,

 

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based on year-over- year change in market share, such that the final payout amount ranges from 50% to 120% of the payout amount calculated after applying the two performance metrics described above, as follows:

 

     Minimum     Target     Maximum  

H&R Block Market Share(1)

     -30       +50       +150  

Market Share Modifier(2)

     50     100     120

 

(1) 

Represents change in the Company’s market share as determined by the Compensation Committee (reflected as +/- basis points) in fiscal year 2017 as compared to fiscal year 2016. Market share for each fiscal year is calculated as H&R Block U.S. assisted and U.S. digital returns for the respective fiscal year, divided by the number of total returns reported by the Internal Revenue Service for that fiscal year.

(2) 

Linear interpolation is used for market share values between the individual points noted above.

The Compensation Committee selected these criteria because it determined that they represented key business drivers of shareholder value over the shorter term. The Compensation Committee set the targets following the Board’s review and approval of our fiscal year 2017 operating plan. The performance targets were set to reward strong management performance, and, as indicated above, balance top-line metrics (Revenue from Continuing Operations), bottom-line metrics (Pre-Tax Earnings from Continuing Operations), and a focus on improving the client trajectory. The Compensation Committee believes such a balance drives the appropriate amount of focus on propelling growth through revenue and clients, without detracting from the ultimate performance of the Company as a whole. Each fiscal year the Compensation Committee examines the target levels for each performance metric, with the goal of establishing target levels with an appropriate level of difficulty considering the industry and competitive environment and the Company’s strategic priorities and operating plan for the fiscal year. Though the target levels for the performance metrics may vary from year-to-year and from the prior year’s actual performance, the Committee believes that the performance metrics for fiscal year 2017, including the target level for Revenue from Continuing Operations, were set at appropriate levels of difficulty to motivate the executives and reward strong management performance, and further reflect the Company’s strategic focus on market share and improving the client trajectory.

Based on the Company’s financial performance in fiscal year 2016, target STI opportunities for fiscal year 2017, as a percentage of base salary, for our NEOs (other than Mr. Bowen, who was appointed as Chief Financial Officer of the Company effective May 1, 2016) did not increase from fiscal year 2016. Mr. Cobb’s fiscal year 2017 target opportunity of 125% of his base salary was set under the terms of his employment agreement. In connection with his appointment as Chief Financial Officer effective May 1, 2016, the Compensation Committee set Mr. Bowen’s target STI opportunity for fiscal year 2017 as 75% of his base salary. In determining Mr. Bowen’s STI opportunity as Chief Financial Officer, the Committee considered Mr. Bowen’s experience and new role and responsibilities, the STI levels for other Company executives, and market data for Chief Financial Officer positions within our Peer Group.

Targeted vs. Actual STI Awards

The following formula was used to calculate the payout awarded for fiscal year 2017 STI compensation for our executive officers:

 

LOGO

Our NEOs received fiscal year 2017 STI compensation of 121.8% of their target opportunities. In determining the level of achievement of the performance goals, the calculations of the results for the performance criteria were adjusted pursuant to the types of adjustments that the Compensation Committee approved at the time it set the 2017 STI performance goals and objectives. As discussed above, management delivered generally strong performance in fiscal year 2017 despite industry-wide volume declines. The Company’s results for fiscal year 2017 were above target performance goals related to Pre-Tax Earnings from Continuing Operations and Revenues from Continuing Operations, but fell slightly short of the target performance goals related to market share growth. Pre-tax Earnings from Continuing Operations increased from $569 million in fiscal year 2016 to $629 million in fiscal year 2017, primarily due to cost reduction efforts taken by the Company resulting in a decrease in

 

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operating expenses by approximately $85 million from the prior year. Revenues from Continuing Operations for fiscal year 2017 were essentially flat compared to the prior year at $3.036 billion, as improvement in the Company’s net average charge was partially offset by a decline in return volume. The Company’s market share increased one basis point as compared to market share in fiscal year 2016, which resulted in an 80.4% outcome for the Market Share Modifier element described above.

The table below shows the target opportunities and actual awards under our fiscal year 2017 STI program for each of our NEOs:

 

Officers   

Target Opportunity
(as a % of

Base Salary)

  

Target Opportunity

($)

  

Actual

Award ($)

    William C. Cobb

   125%    $1,243,750    $1,514,888

    Thomas A. Gerke

     80%       $440,000       $535,920

    Jason L. Houseworth

     75%       $315,000       $383,670

    Tony G. Bowen

     75%       $300,000       $365,400

    Kathryn M. Collins

     65%       $227,500       $277,095
Former Officer               

    Gregory J. Macfarlane(1)

     85%       $520,000                  $0

 

(1) 

Mr. Macfarlane forfeited his fiscal year 2017 STI award as a result of his voluntary departure on December 30, 2016.

Actions Pertaining to Fiscal Year 2018 STI Compensation

In May and June 2017, the Compensation Committee approved fiscal year 2018 target STI opportunities for our NEOs who served as executive officers at that time as follows:

 

Officers   

Target Opportunity

(as a % of Base Salary)

  

Target Opportunity

($)

    William C. Cobb

   125%       $313,493(1)

    Thomas A. Gerke

     95%    $900,000

    Tony G. Bowen

     80%    $384,000

    Kathryn M. Collins

     75%    $281,250

 

(1) 

Reflects a pro-rated annual target STI opportunity for Mr. Cobb’s service through July 31, 2017.

Mr. Cobb’s fiscal year 2018 target opportunity of 125% of his base salary was set under the terms of his employment agreement. Mr. Cobb retired as of July 31, 2017 and will be entitled to receive a pro-rated fiscal year 2018 STI payment that is payable only if and to the extent that fiscal year 2018 annual STI payments are made to other Company senior executives under the STI plan. Additional information regarding Mr. Cobb’s retirement and fiscal year 2018 compensation can be found on page 54.

As incentive to perform his enhanced duties while serving as Interim CEO, in May 2017 the Compensation Committee approved Mr. Gerke’s target fiscal year 2018 STI opportunity of $900,000. Additional information regarding Mr. Gerke’s fiscal year 2018 compensation can be found on page 54. The increases in target opportunities for Mr. Bowen and Ms. Collins are in recognition of their individual performance in fiscal year 2017, their specific roles and responsibilities, and their overall contributions to the strategic direction of the Company. Mr. Bowen’s increase in target opportunity was also made to bring his total targeted cash compensation closer to market median for Chief Financial Officer positions within our Peer Group and the general market environment. Consistent with its approach in prior years, the Compensation Committee maintained complete discretion to pay less than the target amounts described above.

 

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For fiscal year 2018, the Board again utilized the two-step approach described above for determining the design of STI compensation applicable to our executive officers. In June 2017, the Compensation Committee approved a specified level of the Company’s earnings before interest and taxes, or EBIT, from continuing operations as the specific STI “initial funding performance target,” or threshold level of performance. The two-step approach is designed with the intent to qualify payments under the STI plan as “performance-based compensation” under IRC Section 162(m) and to enable the Company to deduct the amount of the payments to the greatest extent permitted under IRC Section 162(m). In June 2017, the Compensation Committee set the separate performance objectives applicable to our executive officers for fiscal year 2018, as well as the permitted types of adjustments. The Compensation Committee again selected Revenue from Continuing Operations and Pre-Tax Earnings from Continuing Operations as Step Two objectives, and also added market share as a weighted Step Two objective for fiscal year 2018 rather than a multiplicative modifier as in fiscal year 2017. This approach refined the balance among the top- and bottom-line metrics, as well as the Company’s desired focus on continuing to improve the client trajectory. In addition, to ensure a balanced focus on all metrics, the payout for each of the Step Two metrics is limited to 125% of target opportunity, unless the Company achieves at least a 75% payout for each of the other two metrics.

Long Term Incentive Compensation

We believe that a significant portion of each NEO’s compensation should depend on the amount of long term value we create for our shareholders. Our LTI compensation is equity-based and is designed to support multiple objectives, including (i) aligning management’s interests with those of our shareholders, (ii) tying compensation to the attainment of long term financial and operating goals and strategic objectives, thereby mitigating incentives for management to pursue short term objectives at the expense of long term value creation, (iii) ensuring that realized compensation reflects changes in shareholder value over the long term, and (iv) attracting, motivating, rewarding, and retaining highly skilled executives.

Historically, we have awarded equity-based compensation on an annual basis, within ninety days of the beginning of each fiscal year, in order to align awards with our performance and achievement of business goals. From time to time, we also award equity-based compensation as part of an employment offer or promotion or, in certain limited instances, as a special award. The amount of equity-based compensation awarded in these circumstances is based on the executive’s role and responsibilities, long term potential, or individual or Company performance. The award amount is also guided by market data for positions of similar scope and responsibility.

Actions Pertaining to Fiscal Year 2017 LTI Compensation

For fiscal year 2017, our NEOs received a mix of equity-based incentive awards consisting of approximately 50% of value in performance share units, 30% of value in market stock units, and 20% of value in time-based restricted share units, each of which are explained below. We weighted the mix of equity-based compensation so that our NEOs received a greater portion of LTI compensation in performance-based equity vehicles, such as performance share units and market stock units, as compared to time-based equity vehicles, such as restricted share units. As a result, a substantial portion of our NEOs’ equity-based compensation is at-risk and aligned with shareholders’ interests. The portion delivered in time-based restricted share units is intended to serve as an ongoing retention tool and a continuing link to shareholder value, given that the value of the restricted share units increases only to the extent that the Company’s stock price increases. Additional detail regarding the forms of LTI compensation awarded as part of the fiscal year 2017 annual LTI compensation grant is provided below.

 

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Performance Share Units

For fiscal year 2017, our executive officers, including our NEOs, received 50% of their annual LTI compensation in the form of performance share units. We believe the performance share units appropriately reflect our compensation philosophy by establishing a clear connection between the compensation of our NEOs and the achievement of performance goals that are important for long term value creation.

 

A participating executive has the opportunity to earn an initial performance share unit payout, ranging from 0% to 200% of his or her target award, based upon the Company’s performance against a pre-established performance metric. This initial payout is then modified based on the Company’s total shareholder return (“TSR”) over the performance period relative to the S&P 500. Beginning with fiscal year 2017 performance share unit awards, the S&P 500 companies used

   

H&R Block Percentile Rank Among S&P 500

 

  TSR Modifier*

 

  
   

  Upper Quintile (80th percentile and above)

  125.0%   
   

  4th Quintile (60th to 80th percentile)

  108.3% - 125.0%   
   

  3rd Quintile (40th to 60th percentile)

  91.7% - 108.3%   
   

  2nd Quintile (20th to 40th percentile)

  75.0% - 91.7%   
   

  Lower Quintile (below 20th percentile)

  75.0%   
   

  *  Linear interpolation will be used to determine the exact TSR modifier percentage.

  

in the relative TSR calculation are initially set as the component companies of the S&P 500 at the outset of the three-year performance period, and (i) companies that fall out of the index during the performance period due to market capitalization changes remain in the calculation, (ii) companies that become bankrupt or insolvent during the performance period remain in the calculation, but a $0 ending stock price is used in the calculation, and (iii) companies that fall out of the index during the performance period for any other reason are removed from the calculation. This is a change from the calculation of relative TSR in prior years, which removed all companies that ceased to be index members during the performance period, regardless of reason.

 

The TSR modifier increases or decreases the initial payout by up to 25% of the initial payout amount (for a modifier ranging from 75% to 125% of the initial payout amount, as shown in the chart above). However, notwithstanding the result of that calculation, the maximum earned amount is capped at 200%. The Compensation Committee determined to reduce the cap beginning in fiscal year 2017 from 250% to 200% to bring the maximum potential payout more in line with broader market practices. The following formula is used to calculate the final number of earned performance share units, subject to the overall 200% cap:

 

LOGO

For performance share units granted in fiscal year 2017, performance is measured over a three-year period beginning on May 1, 2016 and ending on April 30, 2019 and the applicable performance metric is the Company’s year-over-year growth in EBITDA from continuing operations (“Annual EBITDA Growth”), which is averaged over the three year period to determine the number of performance share units that ultimately vest. The Compensation Committee selected Annual EBITDA Growth as the fiscal year 2017 performance metric, rather than the cumulative three-year EBITDA metric used for the fiscal year 2016 performance share units, because it believes EBITDA from continuing operations is a critical driver of sustained value creation over the longer term, and the Compensation Committee desired to add a focus on year-over-year improvement. At the end of the performance period, the Compensation Committee will certify the performance results and percentage payout, as well as the resulting final number of performance share units earned by each executive officer. There are no dividends paid on outstanding performance share units during the vesting period, but dividend equivalents accumulate during the vesting period. Upon vesting of the performance share units, in addition to receiving the number of shares of common stock determined according to the payout calculation, the executive will receive additional shares of common stock equal in value to the total dividends that would have been paid on the number of shares of common stock that ultimately vest. Performance share units do not carry voting rights.

 

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Market Stock Units

For fiscal year 2017, our executive officers, including our NEOs, received 30% of their annual LTI compensation in the form of market stock units. If certain performance thresholds are met, a participating executive has the opportunity to earn a payout between 50% and 200% of his or her target number of market stock units based on the ratio of the average of the Company’s stock price for the fifteen consecutive trading days prior to the grant date (“Grant Date Price”) and the average of the Company’s stock price for the fifteen consecutive trading days beginning on the date the Company’s Annual Report on Form 10-K is filed with the SEC for the last fiscal year within the performance period, which is fiscal year 2019 (“Ending Date Price”). In July 2016, the Compensation Committee selected this measurement period for stock price performance to ensure that results relating to years prior to the performance period do not unduly influence the performance measurement and results relating to years within the performance period do appropriately influence the performance measurement.

Performance is measured over a three-year performance period beginning on May 1, 2016 and ending on April 30, 2019, with the applicable performance metrics established within ninety days of the beginning of the performance period and the cumulative results for the three-year period determining whether any shares of common stock are payable upon vesting of the market stock units following the end of the three-year period.

The vesting of market stock units is subject to two thresholds, both of which must be satisfied for any payout to occur. First, the Ending Date Price must be greater than or equal to 50% of the Grant Date Price. Second, the Company’s average return on invested capital based on after-tax net operating profit from continuing operations and average invested capital during the three-year performance period, each as defined in the award agreement, must be greater than or equal to 14%. The Compensation Committee determined to utilize average return on invested capital as the second of these thresholds for market stock units, as it believes the investment community considers this metric to be an effective measure of capital efficiency.

Failure to attain either of these thresholds would result in forfeiture of the entire market stock unit award. The total number of market stock units earned by participating executives, if any, is equal to the number of market stock units granted on the grant date multiplied by the ratio of the Ending Date Price to the Grant Date Price. The following formula is used to calculate the final number of earned market stock units:

 

LOGO

At the end of the performance period, the Compensation Committee will certify the performance results and percentage payout, as well as the resulting number of market stock units earned by each executive officer. There are no dividends paid on outstanding market stock units during the vesting period, but dividend equivalents accumulate during the vesting period. Upon vesting of the market stock units, in addition to receiving the number of shares of common stock determined according to the payout calculation, the executive will receive additional shares of common stock equal in value to the total dividends that would have been paid on the number of shares of common stock that ultimately vest. Market stock units do not carry voting rights.

Restricted Share Units

For fiscal year 2017, our executive officers, including our NEOs, received 20% of their annual LTI compensation in the form of restricted share units. There are no dividends paid on outstanding restricted share units during the vesting period, but dividend equivalents accumulate during the vesting period. Upon vesting of the restricted share units, in addition to receiving the applicable number of shares of common stock, the executive will receive additional shares of common stock equal in value to the total dividends that would have been paid on such shares. Restricted share units do not carry voting rights.

Fiscal Year 2017 LTI Vesting Provisions

Performance share units and market stock units generally vest, if at all, on the third anniversary of the grant date. Restricted share units generally vest in one-third annual increments beginning on the first anniversary of the grant date. However, certain

 

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special grants may have a different vesting schedule. For fiscal year 2017 performance share units, market stock units, and restricted share units, the grant date of the awards was July 18, 2016, but the awards retained the standard June 30 vesting schedule, to align vesting of fiscal year 2017 awards with historical annual grants.

An executive generally will forfeit his or her equity award upon voluntary termination of employment or termination for cause prior to the vesting date, but will be entitled to pro-rata vesting of his or her awards (as determined based upon the attainment of performance goals, when applicable) in the event of the executive’s retirement more than one year following the grant date, and will be entitled to a full vesting of his or her awards (as determined based upon the attainment of performance goals, when applicable) in the event of the executive’s death or disability more than one year following the grant date. For performance share units and market stock units, an executive will be entitled to receive pro-rata vesting of the awards, as determined based upon the attainment of applicable performance goals, in the event of the executive’s involuntary termination without cause more than one year following the grant date. Unvested restricted share units are forfeited upon an executive’s involuntary termination without cause.

In the event of a change in control, the Compensation Committee may in its discretion waive the performance goals that apply to performance-based awards. If it does, the units generally will vest as a result of the executive’s continued employment through the third anniversary of the grant date and the executive will be entitled to receive all or a pro-rata portion of the award in the event of certain forms of termination that occur in connection with or following the change in control. For restricted share units, the executive will be entitled to receive full vesting in the event of certain forms of termination (as set forth in the award agreement governing the grant) in connection with a change in control.

Messrs. Cobb and Gerke’s fiscal year 2017 equity-based compensation awards contain modified vesting provisions providing that voluntary retirement after reaching age 60 will not result in the forfeiture of any equity awards outstanding for more than one year prior to such retirement; rather, the entire equity awards will continue to vest on the stated vesting dates set forth in the applicable award agreement and with performance adjustments (if any) made under such agreement as if he remained employed through such stated vesting dates.

Fiscal Year 2017 LTI Compensation Awards

For fiscal year 2017, we awarded our NEOs performance share units, market stock units, and restricted share units in the following amounts:

 

Officers   

Award

Value ($)(1)

   Performance Share
Units (#)
(1)
   Market Stock
Units (#)
(1)
   Restricted Share
Units (#)
(1)

    William C. Cobb(2)

   $5,500,000    108,098    65,192    46,006

    Thomas A. Gerke

   $1,100,000      21,620    13,039      9,202

    Jason L. Houseworth(3)

      $900,000      17,689    10,668      7,529

    Tony G. Bowen

      $900,000      17,689    10,668      7,529

    Kathryn M. Collins

      $600,000      11,793      7,112      5,019
Former Officer                    

    Gregory J. Macfarlane(4)

   $1,200,000      23,585    14,224    10,038

 

(1) 

Represents the value of our LTI compensation awards, which are subject to rounding. These award values are converted into: (i) the number of performance share units and market stock units based on the Monte Carlo valuation model as of the grant date; and (ii) the number of restricted share units based on the closing price of one share of common stock on the grant date. The number of performance share units, market stock units, or restricted share units resulting from the conversion of the award value to the number of units awarded is rounded up to the nearest whole unit, such rounded numbers are reflected in the chart above. As such, the award value reported in this column may differ from the accounting grant date fair value under ASC 718 presented in the Summary Compensation Table and the Grants of Plan-Based Awards Table on pages 49 and 50, respectively. For assumptions used in the valuation models, refer to Note 9 of the Company’s financial statements in the Company’s Annual Report on Form 10-K for the year ended April 30, 2017, as filed with the SEC. In such Annual Report on Form 10-K, Note 9 references “performance-based share units,” which include performance share units and market stock units.

(2) 

Pursuant to the terms of his award agreements, as a result of his retirement effective more than one year after the grant date, Mr. Cobb’s fiscal year 2017 LTI awards will continue to vest on the stated vesting dates set forth in the applicable award agreement and with

 

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performance adjustments (if any) made under such agreement as if he remained employed through such stated vesting dates. Additional information regarding Mr. Cobb’s retirement and fiscal year 2018 compensation can be found on page 54.

(3) 

Pursuant to the terms of his award agreements and Severance and Release Agreement, Mr. Houseworth forfeited all of his fiscal year 2017 performance share units, market stock units, and restricted share units upon his termination of employment as of April 30, 2017. Additional information regarding Mr. Houseworth’s Severance and Release Agreement can be found beginning on page 57.

(4) 

Mr. Macfarlane forfeited all of his fiscal year 2017 performance share units, market stock units, and restricted share units due to his voluntary termination of employment as of December 30, 2016.

The fiscal year 2017 performance share units and market stock units will vest, if at all, on June 30, 2019 and the fiscal year 2017 restricted share units will vest, if at all, in one-third annual increments beginning on June 30, 2017.

Actions Pertaining to Fiscal Year 2018 LTI Compensation

At the beginning of fiscal year 2017, the Compensation Committee considered the mix of equity-based compensation for executive officers and determined that the current equity mix continues to strike the appropriate balance among rewarding, motivating and retaining our executives. The Committee determined that this equity mix properly motivates our executives to work towards achieving our long term objectives and further aligns their interests with the interests of our shareholders. As a result, our executive officers, including our NEOs, received 50% of their annual LTI compensation for fiscal year 2018 in performance share units, 30% in market stock units and 20% in time-based restricted share units. The payment structures, vesting schedules, terms and conditions of the fiscal year 2018 equity-based compensation are substantially similar to those of the fiscal year 2017 equity-based compensation described above under the heading “Actions Pertaining to Fiscal Year 2017 LTI Compensation” beginning on page 35. Among other changes, a mandatory post-vesting holding requirement was added for performance share units granted in fiscal year 2018, as set forth in the revised award agreements filed with the Company’s Current Report on Form 8-K filed on June 23, 2017, which requires that the executive hold at least 50% of the shares earned upon vesting of the performance share units for a period of one year after the vesting date.

Mr. Gerke’s fiscal year 2018 equity-based compensation awards contain the same modified vesting provisions as his fiscal year 2017 equity-based awards, as described above under “Fiscal Year 2017 LTI Vesting Provisions.”

Fiscal Year 2018 LTI Compensation Awards

In June 2017, we awarded annual LTI compensation grants for fiscal year 2018 to NEOs who served as executive officers at that time (other than Mr. Cobb) as set forth in the chart below. In connection with his retirement effective July 31, 2017, the Company and Mr. Cobb agreed that he would not receive a fiscal year 2018 LTI award. Additional information regarding Mr. Cobb’s retirement and fiscal year 2018 compensation can be found on page 54.

 

Officers   

Award

Value ($)(1)

   Performance Share
Units (#)
(1)
   Market Stock
Units (#)
(1)
   Restricted Share
Units (#)
(1)

    Thomas A. Gerke

   $2,500,000      39,733    21,313    16,176

    Tony G. Bowen

   $1,000,000      15,894      8,526      6,471

    Kathryn M. Collins

      $700,000      11,126      5,968      4,530

 

(1) 

Represents the value of our annual LTI compensation program awards, which are subject to rounding. These award values are converted into: (i) the number of performance share units and market stock units based on the Monte Carlo valuation model as of the grant date and (ii) the number of restricted share units based on the closing price of one share of common stock on the grant date. The number of performance share units, market stock units, or restricted share units resulting from the conversion of the award value to the number of units awarded is rounded up to the nearest whole unit, such rounded numbers are reflected in the chart above. As such, the award value reported in this column may differ from the accounting grant date fair value under ASC 718.

As incentive to perform his enhanced duties while serving as Interim CEO, in May 2017 the Compensation Committee approved Mr. Gerke’s fiscal year 2018 LTI target opportunity of $2.5 million. Additional information regarding Mr. Gerke’s fiscal year 2018 compensation can be found on page 54.

The increases in fiscal year 2018 LTI awards for Mr. Bowen and Ms. Collins are intended to recognize their contributions to the Company’s financial and operational performance, their specific roles and responsibilities, and their individual performance

 

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in fiscal year 2017. The increase for Mr. Bowen also aims to bring his total target direct compensation closer to market median for Chief Financial Officer positions within our Peer Group and the general market environment.

Vesting and Performance-based Payouts of Fiscal Year 2015 Performance Share Units and Market Stock Units

As previously disclosed, our executive officers, including certain of our NEOs, received performance share units and market stock units in fiscal year 2015. Performance for these performance share units and market stock units was based on a three-year period beginning on May 1, 2014 and ending on April 30, 2017. This performance was certified, and the overall payout was approved, by the Compensation Committee in June 2017. The performance share units and market stock units vested on June 30, 2017.

Under the terms of the award agreements for fiscal year 2015 performance share units, a participating executive had the opportunity to earn an initial performance share unit payout, ranging from 0% to 200% of his or her target award, based upon the Company’s performance against pre-established performance metrics. The Committee selected cumulative EBITDA from continuing operations as the performance metric for the three-year performance period beginning in fiscal year 2015. This initial payout was then modified based on the Company’s TSR over the three-year period relative to the S&P 500. The TSR modifier could increase or decrease the payout by up to 25% of the initial payout amount. As a result of the TSR modifier, a participating executive could receive a maximum final payout of up to 250% of the performance share units initially granted to such executive. The performance metric and objective (in millions) for the performance period was as follows:

 

Performance Period    Metric    Threshold      Target      Maximum  

    May 1, 2014 – April 30, 2017

   Cumulative 3 Year EBITDA from Continuing Operations(1)      $2,543.0        $2,825.0        $3,108.0  

 

(1) 

Cumulative 3 Year EBITDA includes the cumulative earnings of the Company from continuing operations before interest, taxes, depreciation, and amortization for the three fiscal years ended in 2015, 2016 and 2017.

Based on the Company’s results relative to the above thresholds, targets, and maximums, and subject to adjustment pursuant to the terms of the 2013 Plan and the applicable award agreement, the Compensation Committee approved a performance percentage of 57.5%. The Compensation Committee then applied a TSR modifier of 75% based on the Company’s TSR over the three-year performance period. Based on the performance percentage and the TSR modifier, our NEOs received 43.1% of the performance share units they were initially granted, as well as additional shares of common stock equal in value to the total dividends that would have been paid on the number of shares of common stock that vested pursuant to the payout calculation. The table below shows the target-level opportunities and actual awards under our fiscal year 2015 performance share unit program for our NEOs:

 

Officers    PSUs Granted (#)     

Actual Shares

Received (#)(1)

 

  William C. Cobb

     74,184        34,949  

  Thomas A. Gerke

     14,163        6,673  

  Jason L. Houseworth(2)

     10,116        4,502  

  Tony G. Bowen(3)

     n/a        n/a  

  Kathryn M. Collins

     6,744        3,178  
Former Officer              

  Gregory J. Macfarlane(4)

     15,174        0  

 

(1) 

The amount of shares actually received by the NEOs includes additional shares of common stock equal in value to the total dividends that would have been paid on the number of shares of common stock that vested pursuant to the payout calculation.

(2) 

Pursuant to the terms of his award agreements and Severance and Release Agreement, Mr. Houseworth was entitled to receive pro-rata vesting of outstanding performance share units granted during his service with the Company. Mr. Houseworth forfeited 609 of his 10,116 target fiscal year 2015 performance share units (10,969, including accumulated dividend equivalents) resulting in a target opportunity of 10,360 shares. Additional information regarding Mr. Houseworth’s Severance and Release Agreement can be found beginning on page 57.

 

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(3) 

Mr. Bowen was not eligible for grants of fiscal year 2015 performance share units as he was not yet an executive officer of the Company.

(4) 

Mr. Macfarlane forfeited all of the fiscal year 2015 performance share units shown in the table above due to his voluntary termination of employment as of December 30, 2016.

Under the terms of the award agreements for fiscal year 2015 market stock units, if certain performance thresholds were met, a participating executive had the opportunity to earn a payout between 50% and 200% of his or her target number of market stock units based on the difference between the average of the Company’s stock price for the thirty days prior to the grant date (“2015 MSU Grant Date Price”) and the average of the Company’s stock price for the thirty days prior to the vesting date for the awards, which is the end of the three-year performance period applicable to the awards, or April 30, 2017 (“2015 MSU Ending Date Price”). The vesting of market stock units was subject to two thresholds, both of which must be satisfied for any payout to occur. First, the 2015 MSU Ending Date Price must have been greater than or equal to 50% of the 2015 MSU Grant Date Price. Second, the Company’s average return on equity (as defined in the award agreement) during the three-year performance period must have been greater than or equal to 20%. Based on the Company’s results, and subject to adjustment pursuant to the terms of the 2013 Plan and the applicable award agreement, the Compensation Committee certified that both thresholds were achieved and approved a performance percentage of 75.3%. Our NEOs therefore received 75.3% of the market stock units they were initially granted, as well as additional shares of common stock equal in value to the total dividends that would have been paid on the number of shares of common stock that vested pursuant to the payout calculation.

The table below shows the target-level opportunities and actual awards under our fiscal year 2015 market stock unit program for our NEOs:

 

Officers    MSUs Granted (#)     

Actual Shares

Received (#)(1)

 

  William C. Cobb

     44,296        36,459  

  Thomas A. Gerke

     8,457        6,962  

  Jason L. Houseworth(2)

     6,041        4,697  

  Tony G. Bowen

     2,819        2,321  

  Kathryn M. Collins

     4,027        3,316  
Former Officer              

Gregory J. Macfarlane(3)

     9,061        0  

 

(1) 

The amount of shares actually received by the NEOs includes additional shares of common stock equal in value to the total dividends that would have been paid on the number of shares of common stock that vested pursuant to the payout calculation.

(2) 

Pursuant to the terms of his award agreements and Severance and Release Agreement, Mr. Houseworth was entitled to receive pro-rata vesting of outstanding market stock units granted during his service with the Company. Mr. Houseworth forfeited 364 of his 6,041 target fiscal year 2015 market stock units (6,551, including accumulated dividend equivalents) resulting in a target opportunity of 6,187 shares. Additional information regarding Mr. Houseworth’s Severance and Release Agreement can be found beginning on page 57.

(3) 

Mr. Macfarlane forfeited all of the fiscal year 2015 market stock units shown in the table above due to his voluntary termination of employment as of December 30, 2016.

Retirement, Health and Welfare Benefits, and Perquisites

We provide certain benefits to all full-time employees, including employer matching contributions to our qualified retirement plan, an employee stock purchase plan that permits purchases of our common stock at a discount, life insurance, health and welfare benefit programs, and the opportunity to use our tax preparation services for no charge. Benefits for executives generally are the same as benefits for all other full-time employees, except that executive officers and certain key employees may participate in our group life insurance program and our deferred compensation plan and are entitled to certain relocation benefits as described below. We have structured our executive benefit program to be consistent with our philosophy of emphasizing performance-based elements in our executive compensation program. We believe the benefits our executives receive are modest relative to market practices.

 

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In order to attract and retain executives, we offer a group life insurance program that provides death benefits up to three times the participating executive’s annual base salary. The death benefits are payable to beneficiaries designated by the participating executive.

Our deferred compensation plan, which is discussed in detail beginning on page 52, is designed to assist our executives in building retirement savings by offering participants the opportunity to defer their receipt of base salary and STI compensation.

We also provide relocation benefits to eligible employees. These relocation benefits generally cover certain common relocation expenses and are subject to a clawback requirement, which requires recipients to repay all or a portion of the benefits to the Company in the event of their voluntary termination or termination for cause within 12 months following the relocation date.

We purchase tickets to various cultural, charitable, civic, entertainment, and sporting events for business development and relationship-building purposes, as well as to maintain our involvement in communities in which the Company operates and our employees live. Occasionally, our employees, including our executives, use such tickets for personal purposes when they are not otherwise used for business purposes.

Perquisites represent an immaterial element of our executive compensation program. We believe our overall executive perquisites are well below the market median relative to our Peer Group.

COMPENSATION “CLAWBACK” POLICY AND RESTRICTIVE COVENANTS

Our Board has adopted a “clawback” policy which provides that, in the event of a restatement of our financial results, the Board has the authority to seek reimbursement of any portion of performance-based or incentive compensation paid, vested, or awarded in any previous year that is greater than the amount that would have been paid or awarded if calculated based on the restated financial results. Mr. Cobb’s employment agreement, the Executive Performance Plan, and the award agreements applicable to our executive officers under the H&R Block, Inc. 2003 Long Term Executive Compensation Plan (the “2003 Plan”) and the 2013 Plan each include a clawback provision consistent with the terms of the Board’s clawback policy. As discussed in Proposal 5, we are seeking shareholder approval of the 2018 Plan, and the award agreements under the 2018 Plan will also include a clawback provision consistent with the terms of the Board’s clawback policy.

Our award agreements contain restrictive covenants, including non-competition and non-solicitation provisions, which, if violated, authorize the Company to cancel or rescind the award or seek reimbursement of value received by the individual, consistent with applicable law.

COMPENSATION PHILOSOPHY AND BENCHMARKING

We benchmark our executive compensation practices relative to publicly-disclosed information for a defined group of peer companies, which for fiscal year 2017 is set forth below (the “Peer Group”). We also review compensation data from multiple survey sources, reflective of general industry pay levels for companies of relevant size based on total revenue, as compared to each of the NEOs. For fiscal year 2017, these survey sources were the Aon Hewitt Total Compensation Measurement Executive Survey and the Towers Watson CDB General Industry Executive Compensation Survey. The Compensation Committee reviews summary survey and Peer Group data to confirm that the market references we use are appropriate for our business and the industries in which we compete for executive talent.

Our philosophy is to set total direct compensation (which consists of base salary plus targeted annual STI compensation plus targeted LTI grant values) for our NEOs near the median market rate, on average, taking into account the Company’s size relative to our Peer Group. Under this approach, target total direct compensation for specific executives may be above or below market median due to multiple factors, including experience, role and responsibilities, individual performance, and readiness for promotion or growth potential. The Compensation Committee generally sets performance objectives under the STI and LTI plans so that targeted total direct compensation levels can be achieved only when targeted financial, operational, and strategic goals are met. Consequently, actual pay realized by executives will vary above or below the targeted level based on the degree to which specific performance objectives are attained.

With the input of its independent compensation consultant, the Compensation Committee reviews the Peer Group annually and revises it as circumstances warrant. We endeavor to identify companies that are comparable to our core

 

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businesses, including tax and professional products and services, as well as comparable from a size perspective. As a result of the Compensation Committee’s annual review in May of 2016, the Compensation Committee determined to remove Apollo Education Group, Inc., Cognizant Technology Solutions Corporation, Garmin Ltd., and Yahoo! Inc. from the then-current Peer Group, because the companies were outside of the Company’s competitive size range or less appropriate from a business fit perspective. Three new companies—Broadridge Financial Solutions, Inc., Paychex, Inc., and The Western Union Company—were deemed more appropriate from both a business fit and a size perspective. The Peer Group considered by the Compensation Committee in benchmarking fiscal year 2017 compensation consists of the 17 companies listed in the following chart, which sets forth the relative size measures considered by the Compensation Committee:

 

Fiscal Year 2017 Peer Group  

Company

    Revenue(1)           Total Assets(2)           Market Cap(3)           Enterprise Value(3)      

  Arthur J. Gallagher & Co.

    $5,489       $11,200       $9,255       $11,563  

  Broadridge Financial Solutions, Inc.

    $3,198       $2,942       $7,895       $8,793  

  CA, Inc.

    $4,033       $11,022       $13,275       $12,779  

  Convergys Corporation

    $2,907       $2,392       $2,342       $2,501  

  DST Systems, Inc.

    $2,892       $2,565       $3,428       $3,697  

  Equifax Inc.

    $3,010       $6,807       $14,159       $16,932  

  Fidelity National Information Services, Inc.

    $8,669       $26,134       $24,827       $35,010  

  First American Financial Corporation

    $5,428       $9,246       $4,023       $3,324  

  Fiserv, Inc.

    $5,442       $9,637       $23,069       $27,396  

  Genpact Limited

    $2,536       $2,893       $4,886       $5,333  

  Global Payments Inc.

    $3,308       $10,113       $10,668       $14,665  

  Intuit Inc.

    $4,759       $3,933       $29,417       $29,912  

  Paychex, Inc.

    $3,063       $5,776       $21,846       $21,656  

  Robert Half International Inc.

    $5,290       $1,872       $6,188       $5,896  

  Unisys Corporation

    $2,889       $2,176       $749       $745  

  The Western Union Company

    $5,431       $9,519       $10,531       $12,457  

  Willis Towers Watson PLC

    $6,844       $31,801       $16,721       $19,927  

  Median

    $4,033       $6,807       $10,531       $12,457  

  H&R Block, Inc. (1)

    $3,029       $2,082       $4,762       $6,497  

  — H&R Block, Inc. Percentile Rank

    27%       4%       24%       33%  

Data Source: Standard & Poor’s Capital IQ

 

(1) 

Most recently reported four quarters as of March 2017 (in millions)

 

(2) 

Most recently reported quarter as of March 2017 (in millions)

 

(3) 

As of December 31, 2016

Relative to our Peer Group, the fiscal year 2017 target total direct compensation for our NEOs, including our CEO, is between the 25th percentile and median of the Peer Group.

As a result of the Compensation Committee’s annual review in March of 2017, the Peer Group of companies used by the Compensation Committee in benchmarking fiscal year 2018 pay determinations remained unchanged from the 17 companies used in fiscal year 2017.

Use of External Consultant

The Compensation Committee retains Frederic W. Cook & Co. (“FW Cook”) as its external, independent compensation consultant for objective advice and assistance on executive compensation matters. FW Cook reports directly to the Committee and the Committee may replace FW Cook or hire additional consultants at any time. FW Cook advises the Compensation

 

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Committee on issues pertaining to executive compensation, including the assessment of market-based compensation levels, the selection of our Peer Group, our pay positioning relative to the market, the mix of pay, incentive plan design, and other executive employment matters. FW Cook provides its advice based in part on prevailing and emerging market practices, as well as our specific business context. The Committee retains sole authority to hire FW Cook, approve its compensation and the appropriate funding by the Company for such compensation, determine the nature and scope of its services, evaluate its performance, and terminate its engagement. The Compensation Committee believes that external compensation consultants for the Compensation Committee should be independent and serve the Compensation Committee exclusively, and should not perform any other services for the Company at any time. FW Cook performs no other services for the Company.

For fiscal year 2017, the Compensation Committee assessed FW Cook’s independence, taking into account the following factors:

 

   

FW Cook provides no other services to the Company;

 

   

The amount of fees received from the Company by FW Cook as a percentage of FW Cook’s total revenue;

 

   

FW Cook’s policies and procedures that are designed to prevent conflicts of interest;

 

   

Any business or personal relationship between the individuals at FW Cook performing consulting services and the members of the Compensation Committee;

 

   

Any ownership of Company stock by the individuals at FW Cook performing consulting services for the Compensation Committee; and

 

   

Any business or personal relationship between the consultant or any other employee at FW Cook and an executive officer of the Company.

In connection with the Compensation Committee’s review, FW Cook provided the Compensation Committee with appropriate assurances and confirmation of its independent status. The Compensation Committee believes FW Cook has been independent throughout its service for the Committee and that there is no conflict of interest between FW Cook and the Compensation Committee.

Executive Evaluation Process

The Compensation Committee reviews our CEO’s performance each year against pre-established financial, operational, strategic, and individual objectives. Our CEO is responsible for sharing with the Compensation Committee his current year accomplishments in light of current year objectives, as well as proposed objectives for the following year. The Compensation Committee reviews the CEO’s accomplishments, objectives, and overall performance with assistance from the Compensation Committee’s independent compensation consultant. The Committee keeps the independent members of the Board apprised of its activities related to the review and approval of CEO performance and compensation matters and, from time to time, consults with such independent members on matters concerning CEO compensation. Based on its evaluation, the Compensation Committee determines the CEO’s compensation. Following such determination, the Chairman of the Board discusses the Compensation Committee’s evaluation and determinations with the CEO. Our CEO does not play a role in determining his own compensation, other than discussing his annual performance review with the Chairman of the Board and sharing his accomplishments and proposed objectives with the Compensation Committee.

The Compensation Committee consults with the CEO concerning the performance of other executive officers and approves the compensation of such officers, taking into account recommendations of the CEO and input from the Board and the Committee’s independent compensation consultant. Our CEO and General Counsel and Chief Administrative Officer assist the Compensation Committee in reaching compensation decisions regarding executives other than themselves. In addition, the CEO (with input from other senior executives) develops recommendations for the Committee’s approval regarding performance goals under our STI and LTI compensation programs. Executive officers do not play a role in determining their own compensation, other than discussing their annual performance reviews with their supervisors and, in the case of the CEO, making recommendations for the Committee’s approval regarding performance goals under our STI and LTI programs. The Committee reviews the recommendations and approves any changes as it determines in its sole discretion to be in the best interests of the Company and our shareholders.

 

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Except as otherwise noted, the Compensation Committee’s executive compensation determinations are the result of the Committee’s business judgment, which is informed by the experiences of the Committee members as well as input from the Committee’s independent compensation consultant.

Other Awards

We occasionally offer sign-on awards as a means to attract talented executives. These awards are typically offered in negotiating employment terms and generally are in the form of cash, guaranteed STI bonuses in the initial year of employment, or grants of LTI compensation. We may also grant awards from time-to-time in special recognition for certain accomplishments, which may be paid in the form of equity awards, cash bonuses, or a combination of equity awards and cash bonuses.

Under authority delegated by the Compensation Committee, our CEO may approve the grant of equity awards to employees other than executive officers. Such equity awards are subject to the terms and conditions approved by the Compensation Committee, including a limitation on the total number of equity awards that our CEO is authorized to grant, and our CEO exercises this authority to approve grants to certain employees other than executive officers as part of their annual LTI compensation, to newly hired and promoted individuals, or in recognition of outstanding achievements.

Stock Ownership Guidelines

We believe that our executive officers should have a significant financial stake in the Company to ensure that their interests are aligned with those of our shareholders. To that end, we have adopted stock ownership guidelines that define ownership expectations for certain executive officers covered under the guidelines. Under the guidelines adopted by the Committee, covered executives are expected to attain and retain a level of qualifying equity securities equal to a multiple of their annual base salaries. In determining whether a covered executive has met the applicable ownership requirement, we include shares owned by such executive directly or indirectly, the after-tax value of vested stock option awards, and share equivalents the executive holds in the Company’s benefit plans (any of such shares, awards or share equivalents, “Covered Shares”). Unvested equity awards, regardless of the type of award, are not included for purposes of determining compliance with the executive’s ownership requirement.

Our stock ownership guidelines provide that, until a covered executive satisfies the applicable holding requirement, he or she is required to retain a specified percentage of any Covered Shares owned as of the date on which he or she becomes subject to the guidelines or acquired thereafter. The covered executives, required ownership levels, and retention percentages under our stock ownership guidelines are as follows:

 

Covered Executives (reflects titles as of April 30, 2017)   Ownership Requirement     Retention Percentage  

  Chief Executive Officer

    6x Base Salary       100

  Senior Executive Team, as designated by the CEO(1)

    3x Base Salary       50

 

(1) 

Includes all other NEOs.

The stock ownership guidelines were modified in fiscal year 2017 to more closely align with our leadership structure, and to provide for a 3x base salary holding requirement for all executive officers (other than the Chief Executive Officer), with a 50% retention percentage.

Before the covered executive satisfies the applicable ownership requirement, he or she will be subject to the retention requirements described above and may only sell or transfer Covered Shares in a manner that does not violate the applicable retention percentage requirement. After the covered executive satisfies the applicable ownership requirement, he or she will no longer be subject to the retention requirements and the stock ownership guidelines will no longer preclude a sale or transfer of any Covered Shares, so long as such executive’s ownership of Covered Shares continues to exceed the applicable ownership requirement. Mr. Cobb has met his ownership requirement. Mr. Gerke has met the 3x Base Salary ownership requirement applicable to him in his role as General Counsel and Chief Administrative Officer, and is progressing toward attaining the ownership requirements as Interim CEO. All of our other NEOs have either met or are progressing toward attaining their applicable ownership requirements. The Compensation Committee annually reviews each covered executive’s progress toward meeting the stock ownership guidelines.

 

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Accounting for Stock-Based Compensation

We recognize stock-based compensation expense for the issuance of performance share units, market stock units, and restricted share units, as well as stock purchased under our employee stock purchase plan, pursuant to FASB Accounting Standards Codification Topic 718, “Stock Compensation.” Under this accounting methodology, we generally recognize stock-based compensation expense on a straight-line basis over applicable vesting periods. For assumptions used in determining these expenses, refer to Note 9 of the Company’s financial statements in the Company’s Annual Report on Form 10-K for the year ended April 30, 2017, as filed with the SEC.

Prohibition on Derivatives Trading and Hedging and Pledging of Our Securities

Our Insider Trading Policy prohibits all directors and employees, including the NEOs, from trading in any puts, calls, covered calls or other derivative products involving any Company securities. Additionally, our policy prohibits these individuals from engaging in any hedging transactions with respect to any Company securities, which includes the purchase of certain instruments (including “cashless collars,” forward sales contracts, equity swaps or any other similar instruments) designed to hedge, monetize, or offset any decrease in the market value of such securities. The policy also prohibits our employees and directors from pledging, or using as collateral, Company securities in order to secure personal loans or obligations, which includes a prohibition against holding shares of Company stock in a margin account.

Tax Considerations

We believe it is in the best interests of our shareholders for us to maximize tax deductibility when appropriate. Section 162(m) of the IRC limits to $1,000,000 our federal income tax deduction for compensation paid to any of our NEOs (other than our Chief Financial Officer), subject to certain exceptions, including an exception for performance-based compensation. We designed the Executive Performance Plan and portions of our equity-based compensation with an intent to enable the Company to deduct such compensation under IRC Section 162(m) to the greatest extent permitted.

Although deductibility of compensation is preferred, tax deductibility is not a primary objective of our compensation programs. We believe it is important to retain the flexibility to compensate executives competitively even if such compensation is potentially not deductible for tax purposes. The Compensation Committee and the Board consider the impacts of IRC Section 162(m) in developing, implementing, and administering our compensation programs. However, the Committee and the Board balance this consideration with our primary goal of structuring compensation programs to attract, motivate, reward, and retain highly talented executives. As such, exceptions may occur when the Compensation Committee or the Board, after balancing tax efficiency with long term strategic objectives, believe it is in the best interests of our shareholders. In addition, because of the uncertainties associated with the application and interpretation of IRC Section 162(m) and the regulations issued thereunder, there can be no assurance that compensation intended to satisfy the requirements for deductibility under IRC Section 162(m) will in fact be deductible.

 

 

TERMINATION OF EMPLOYMENT, SEVERANCE AND TRANSITION ARRANGEMENTS

Executive Severance Plan

In connection with the Company’s movement from executive employment agreements to standardized employment terms and arrangements, the Company adopted the H&R Block Executive Severance Plan (“Executive Severance Plan”). Messrs. Gerke and Bowen and Ms. Collins are participants in the Executive Severance Plan. Messrs. Macfarlane and Houseworth participated in the Executive Severance Plan prior to their respective departures from the Company, and Mr. Houseworth received payments under the Executive Severance Plan pursuant to his Severance and Release Agreement described in more detail beginning on page 57. Information regarding the Executive Severance Plan is included beginning on page 54.

Under the terms of Mr. Cobb’s employment agreement, which is described in more detail on page 53, Mr. Cobb would only participate in the Executive Severance Plan if and to the extent that the benefits related to equity awards thereunder exceeded those contained in his employment agreement.

 

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The Executive Severance Plan is intended to support a variety of objectives, including (i) standardization of severance policy among the senior officers, which ensures internal parity, simplifies internal administration, and mitigates negotiation at hire and termination, and (ii) the attraction and retention of highly skilled executives by protecting them from the short term economic consequences associated with unexpected termination of employment in the absence of cause. Based on advice from the Compensation Committee’s independent compensation consultant, we believe the benefits our NEOs would receive under various severance scenarios are modest relative to the market but sufficient to support the above objectives.

Change in Control Provisions

Change in control provisions for our NEOs are set forth in the Executive Severance Plan, discussed above and on page 54, and the LTI awards, discussed beginning on page 56. We provide these “change in control” benefits as a means to attract and retain talented executives, who could have other job alternatives that may appear more attractive absent these benefits. In addition, by providing financial protection in the event that a transaction results in the loss of employment, the change in control program helps to ensure the independence and objectivity of our executives when reviewing potential transactions and that executives will remain focused during periods of uncertainty. All change in control payments under the Executive Severance Plan require both a change in control and the subsequent loss of employment by the NEO (a “double-trigger”).

Change in control provisions for Mr. Cobb are set forth in his employment agreement. Consistent with the Executive Severance Plan, Mr. Cobb’s employment agreement does not provide for any gross-up payments to offset excise tax liabilities that result from change in control payments. All change in control payments under his employment agreement include a double-trigger, as described above.

In addition, in connection with equity awards granted pursuant to the 2013 Plan, our current NEOs have entered into award agreements with the Company that contain provisions accelerating the vesting of equity awards upon certain changes in control and include a double-trigger, as described above. We use this “double-trigger” equity acceleration policy to protect against the loss of retention power following a change in control and to avoid windfalls, both of which could occur if vesting accelerated automatically as a result of a transaction. Equity acceleration following a change in control under the award agreements is discussed beginning on page 56. As discussed in Proposal 5, we are seeking shareholder approval of the 2018 Plan, and the award agreements under the 2018 Plan will also contain “double-trigger” acceleration provisions.

The Company has historically avoided the use of excise tax gross-up provisions relating to a change in control and has no such gross-up obligations in place with respect to any executive officers, including Mr. Cobb. Consistent with the Company’s historical practice, in the future we intend to refrain from providing excise tax gross-up provisions relating to a change in control.

These change in control arrangements are not provided exclusively to the NEOs. A larger group of management employees is eligible to receive many of the change in control benefits described in this section.

 

 

COMPENSATION COMMITTEE REPORT

The Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis. Based on its review and discussion with management, the Committee approved the Compensation Discussion and Analysis and recommended to the Board of Directors that it be included in the Company’s 2017 Proxy Statement and the Company’s Annual Report on Form 10-K.

COMPENSATION COMMITTEE

Bruce C. Rohde, Chair

Richard A. Johnson

David Baker Lewis

Tom D. Seip

James F. Wright

 

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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The following non-employee directors, each of whom is independent, served on the Compensation Committee of the Board of Directors during the fiscal year ended April 30, 2017: Bruce C. Rohde (Chair), Richard A. Johnson (effective September 8, 2016), David Baker Lewis, Tom D. Seip, and James F. Wright. No director serving on the Compensation Committee during fiscal year 2017 (i) was or was formerly an officer or employee of the Company or any of its subsidiaries or (ii) had any relationships requiring disclosure in this proxy statement. None of our executive officers has served as a director or member of the Compensation Committee (or other committee serving an equivalent function) of any other entity whose executive officers served as a director or member of the Compensation Committee.

 

 

RISK ASSESSMENT IN COMPENSATION PROGRAMS

With the assistance of FW Cook, the Compensation Committee has assessed its broad-based and executive compensation programs to determine if the programs’ provisions and operations create undesired or unintentional risk of a material nature. The risk assessment included two work streams – one focused on reviewing areas of enterprise risk and the other focused on identifying compensation design risk. The enterprise risk analysis examined the types and magnitudes of risks our business activities present to the Company. The compensation design risk analysis examined the potential risks in the design of our performance-based compensation arrangements. The Committee identified and assessed the risk profile of each performance-based compensation plan. In this assessment, the Committee considered several features we have adopted to mitigate potential risks related to our compensation practices, including:

 

   

Placing greater emphasis on long term equity incentives over short term cash incentives;

 

   

Utilizing caps on potential payments of cash and equity compensation;

 

   

Our clawback policy, which is discussed beginning on page 42;

 

   

Our Insider Trading Policy, which prohibits executives from hedging in the Company’s stock, pledging the Company’s stock, and engaging in transactions involving derivative products related to the Company’s stock;

 

   

Our executive stock ownership guidelines, which, among other things, require our CEO to own shares or share equivalents held in the Company’s benefit plans equal to six times his or her base salary, which is discussed further on page 45; and

 

   

The overall design of our compensation programs, including our focus on at-risk compensation that is directly tied to the Company’s performance and utilization of a balanced mix of performance measures which avoid placing excessive weight on a single performance measure.

As a result of our analysis, the Compensation Committee believes, and FW Cook concurs, that our compensation policies and practices do not create inappropriate or unintended material risks to the Company as a whole, and that, consequently, our compensation policies and practices do not create risks that are reasonably likely to have a material adverse effect on the Company.

 

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EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth for the fiscal year ended April 30, 2017 the compensation paid to or earned by the Company’s named executive officers.

 

    Name and Principal Position  

Fiscal 

Year(1)

 

Salary

($)(2)

  Bonus
($)
  Stock
Awards
($)
(3)
  Option
Awards
($)
  Non-Equity
Incentive Plan
Compensation
($)
(4)
  All Other
Compensation
($)(5)
  Total($)    
 

  William C. Cobb,

  2017   1,003,201   -   5,500,026   -   1,514,888   19,562   8,037,677  
 

  President and Chief Executive Officer(6)

  2016   1,038,736   -   5,500,042   -   -   18,906   6,557,684  
    2015   984,948   -   5,500,053   -   1,171,613   26,378   7,682,992  
 

  Tony G. Bowen,

  2017   399,437   -   900,034   -   365,400   14,384   1,679,255  
 

  Chief Financial Officer(7)

                 
 

  Thomas A. Gerke

  2017   554,533   -   1,100,050   -   535,920   12,659   2,203,162  
 

  General Counsel and Chief

  2016   568,901   175,000   1,425,066   -   -   16,243   2,185,210  
 

  Administrative Officer(8)

  2015   515,333   -   1,050,048   -   367,380   16,678   1,949,439  
 

  Jason L. Houseworth,

  2017   413,077   -   900,034   -   383,670   780,280   2,477,061  
 

  Chief Innovation Officer(9)

  2016   434,945   -   900,041   -   -   15,291   1,350,277  
    2015   392,307   -   750,029   -   263,760   11,283   1,417,379  
 

  Kathryn M. Collins,

  2017   352,885   -   600,023   -   277,095   11,986   1,241,989  
 

  Chief Marketing and Strategy Officer(10)

                 
 

  Gregory J. Macfarlane,

                 
 

  Former Senior Vice President,

  2017   413,604   -   1,200,020   -   -   4,751   1,618,375  
 

  U.S. Retail Products and

  2016   636,791   175,000   1,525,076   -   -   14,866   2,351,733  
 

  Operations(11)

  2015   595,129   -   1,125,042   -   452,160   11,431   2,183,762  

 

(1) 

Compensation for fiscal year 2015 and 2016 is included for only those NEOs who were also NEOs of the Company for such fiscal years.

(2) 

The amounts shown represent base salary amounts accrued by the Company related to the applicable fiscal year, rather than amounts actually paid to the executives. Therefore, these numbers vary somewhat from the annual base salaries disclosed on page 30. Each of the NEOs contributed a portion of his or her fiscal year 2017 salary to the Company’s 401(k) savings plan, the H&R Block Retirement Savings Plan (“RSP”).

(3) 

This column represents the grant date fair value under ASC 718 for performance share units, market stock units, and restricted share units granted during fiscal year 2017, as well as prior fiscal years (as applicable). Grants were made pursuant to the 2013 Plan. The grant date fair value of these awards is computed in accordance with ASC 718 utilizing assumptions discussed in Note 9 “Stock-Based Compensation” to the Company’s consolidated financial statements in the Form 10-K for the year ended April 30, 2017, as filed with the SEC. These amounts reflect an accounting expense and do not correspond to the actual value that may be realized by the NEOs.

(4) 

This column represents amounts awarded and earned under the Company’s STI compensation program, as discussed beginning on page 31.

(5) 

In valuing personal benefits, we use the incremental cost to the Company of the benefit. For fiscal year 2017, these figures include the following: (i) the Company’s matching contributions under the RSP of $10,800 (Mr. Cobb), $13,031 (Mr. Bowen), $10,600 (Mr. Gerke), $10,500 (Mr. Houseworth), $10,600 (Ms. Collins), and $3,068 (Mr. Macfarlane); (ii) the economic value of the death benefit provided by the Company’s group life insurance program of $3,762 (Mr. Cobb), $1,353 (Mr. Bowen), $2,059 (Mr. Gerke), $1,584 (Mr. Houseworth), $1,386 (Ms. Collins), and $1,683 (Mr. Macfarlane) (the imputed income reported represents the portion of the premium paid by the Company that is attributable to term life insurance coverage for the executive officer; the program provides only an insurance benefit with no cash compensation element to the executive officer); (iii) the Company did not make any payments on behalf of any of our NEOs for the incremental cost of personal use of the Company’s fractional share of a private aircraft; Mr. Cobb’s family members or guests accompanied him on certain business flights at no incremental cost to the Company (incremental cost includes variable costs incurred as a result of personal flight activity, such as hourly charges for each flight, fuel charges and miscellaneous fees; it excludes non-variable costs, such as the Company’s monthly management fee and insurance fees); (iv) H&R Block Foundation matching amount on behalf of Mr. Cobb ($5,000) with respect to his individual contributions to 501(c)(3) organizations on a calendar year basis relating to his position as a director of the Company; and (v) for Mr. Houseworth, a severance payment in the amount of $735,000, a COBRA subsidy in the amount of $13,196, and amounts accrued for outplacement services in the amount of $20,000, in each case, that were accrued in fiscal year 2017. Additional information regarding Mr. Houseworth’s Severance and Release Agreement can be found beginning on page 57.

(6) 

Mr. Cobb retired from his positions as President, Chief Executive Officer, and director of the Company effective July 31, 2017.

(7) 

Mr. Bowen was appointed Chief Financial Officer effective May 1, 2016.

(8) 

Mr. Gerke was appointed as Interim CEO effective August 1, 2017.

(9) 

Mr. Houseworth departed the Company after serving as Chief Innovation Officer until April 30, 2017. Pursuant to the terms of his award agreements and Severance and Release Agreement, Mr. Houseworth forfeited all of his fiscal year 2017 equity awards upon his termination of employment as of April 30, 2017. Additional information regarding Mr. Houseworth’s Severance and Release Agreement can be found beginning on page 57.

(10) 

Ms. Collins was appointed as an executive officer of the Company effective May 1, 2016.

(11) 

Mr. Macfarlane departed the Company after serving as Senior Vice President, U.S. Retail Products and Operations until December 30, 2016. Mr. Macfarlane forfeited his fiscal year 2017 STI, and all of his fiscal year 2017 performance share units, market stock units, and restricted share units included in this table due to his voluntary termination of employment as of December 30, 2016.

 

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GRANTS OF PLAN-BASED AWARDS TABLE

The following table provides information about non-equity incentive plan awards, equity incentive plan awards, and stock awards granted to our NEOs during the fiscal year ended April 30, 2017. The compensation plans under which the grants in the following table were made are described on pages 28 through 41 of this proxy statement.

 

               

Estimated Future Payouts

Under Non-Equity Incentive

Plan Awards

    Estimated Future Payouts
Under Equity Incentive Plan
Awards
       
  Name of Executive   Grant
Date
    Approval
Date
    Threshold
($)
   

Target

($)

    Maximum
($)
    Threshold
(#)
    Target
(#)
   

Maximum

(#)

    All Other
Stock
Awards:
Number of
Shares of
Stock or
Units (#)
    All Other
Option
Awards:
Number of
Securities
Underlying
Options
(#)
    Exercise
or Base
Price of
Option
Awards
($/Sh)
    Grant Date
Fair Value of
Stock and
Option
Awards($)
 

  Cobb

                             

  - STI Award(2)

    -       -       310,938       1,243,750       2,000,000       -       -       -       -       -       -       -  

  - LTI Award(1)

    7/18/16       7/18/16       -       -       -       -       65,192       130,384       46,006       -       -       2,750,013  

  - LTI Award(1)

    7/18/16       7/18/16       -       -       -       -       108,098       216,196       -       -       -       2,750,013  

  Bowen

                             

  - STI Award(2)

    -       -       75,000       300,000       600,000       -       -       -       -       -       -       -  

  - LTI Award(1)

    7/18/16       7/18/16       -       -       -       -       10,668       21,336       7,529       -       -       450,025  

  - LTI Award(1)

    7/18/16       7/18/16       -       -       -       -       17,689       35,378       -       -       -       450,008  

  Gerke

                             

  - STI Award(2)

    -       -       110,000       440,000       880,000       -       -       -       -       -       -       -  

  - LTI Award(1)

    7/18/16       7/18/16       -       -       -       -       13,039       26,078       9,202       -       -       550,037  

  - LTI Award(1)

    7/18/16       7/18/16       -       -       -       -       21,620       43,240       -       -       -       550,013  

  Houseworth

                             

  - STI Award(2)

    -       -       78,750       315,000       630,000       -       -       -       -       -       -       -  

  - LTI Award(1)

    7/18/16       7/18/16       -       -       -       -       10,668       21,336       7,529       -       -       450,025  

  - LTI Award(1)

    7/18/16       7/18/16       -       -       -       -       17,689       35,378       -       -       -       450,008  

  Collins

                             

  - STI Award(2)

    -       -       56,875       227,500       455,000       -       -       -       -       -       -       -  

  - LTI Award(1)

    7/18/16       7/18/16       -       -       -       -       7,112       14,224       5,019       -       -       300,009  

  - LTI Award(1)

    7/18/16       7/18/16       -       -       -       -       11,793       23,586       -       -       -       300,014  

  Macfarlane

                             

  - STI Award(2)

    -       -       130,050       520,200       1,040,400       -       -       -       -       -       -       -  

  - LTI Award(1)

    7/18/16       7/18/16       -       -       -       -       14,224       28,448       10,038       -       -       600,018  

  - LTI Award(1)

    7/18/16       7/18/16       -       -       -       -       23,585       47,170       -       -       -       600,002  

 

  (1) 

Amounts represent awards made under the Company’s LTI compensation program and granted pursuant to the 2013 Plan. Dollar values represent the accounting grant date fair value of performance share units, market stock units, and restricted share units under ASC 718. The grant date fair value of these awards is computed in accordance with ASC 718 utilizing assumptions discussed in Note 9 “Stock-Based Compensation” to the Company’s consolidated financial statements in the Form 10-K for the year ended April 30, 2017, as filed with the SEC. The dollar values reflect an accounting expense and do not correspond to the actual value that may be realized by the NEOs. Messrs. Houseworth and Macfarlane forfeited all of their respective fiscal year 2017 LTI awards included in this table in connection with their departures from the Company. See beginning on page 36 for a discussion of the terms of the fiscal year 2017 LTI awards.

 
  (2) 

Amounts represent the potential value of the payouts under the Company’s STI compensation program. Actual fiscal year 2017 STI payout amounts are included in the Summary Compensation Table on page 49. Mr. Macfarlane forfeited his fiscal year 2017 STI award in connection with his departure from the Company. See beginning on page 32 for a discussion of the terms of the fiscal year 2017 STI awards.

 

 

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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE

The following table summarizes the equity awards made to our NEOs outstanding as of April 30, 2017.

 

    Option Awards   Stock Awards
Name of Executive   Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
  Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
  Equity Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
  Option
Exercise
Price ($)
  Option
Expiration
Date
  Number of
Shares or
Units of
Stock That
Have Not
Vested (#)(1)
 

Market Value

of Shares or

Units of Stock

That Have Not
Vested ($)(2)

  Equity Incentive
Plan Awards:
Number of
Unearned Shares,
Units or Other
Rights That
Have Not
Vested (#)(3)
  Equity Incentive
Plan Awards:
Market
or Payout
Value of
Unearned
Shares, Units
or Other
Rights That
Have
Not Vested ($)(2)

Cobb

  -   -   -   -   -   -   -   178,367   4,421,728
    -   -   -   -   -   47,354   1,173,905   -   -
    -   -   -   -   -   -   -   153,327   3,800,972
    -   -   -   -   -   26,288   651,686   -   -
    581,970   -   -   $19.14   6/30/21   70,842   1,756,173   -   -
    606,470

 

  -

 

  -

 

  $17.48

 

  5/2/21

 

  12,050

 

  298,725

 

  -

 

  -

 

Bowen

  -   -   -   -   -   -   -   29,188   723,567
    -   -   -   -   -   7,750   192,113   -   -
    -   -   -   -   -   -   -   2,523   62,549
    -   -   -   -   -   1,651   40,922   -   -
    -   -   -   -   -   2,302   57,067   -   -
    -

 

  -

 

  -

 

  -

 

  -

 

  1,152

 

  28,555

 

  -

 

  -

 

Gerke

  -   -   -   -   -   -   -   35,675   884,371
    -   -   -   -   -   9,472   234,801   -   -
    -   -   -   -   -   5,126   127,083   -   -
    -   -   -   -   -   -   -   30,666   760,215
    -   -   -   -   -   5,258   130,347   -   -
    -   -   -   -   -   13,526   335,310   -   -
    122,380

 

  -

 

  -

 

  $17.00

 

  2/1/22

 

  2,302

 

  57,057

 

  -

 

  -

 

Houseworth(4)

  -   -   -   -   -   -   -   15,333   380,113
    6,522   -   -   $16.04   4/30/18   9,125   226,209   -   -
    8,489

 

  -

 

  -

 

  $12.59

 

  4/30/18

 

  -

 

  -

 

  -

 

  -

 

Collins

  -   -   -   -   -   -   -   19,459   482,386
    -   -   -   -   -   5,166   128,067   -   -
    -   -   -   -   -   -   -   16,727   414,660
    -   -   -   -   -   2,869   71,129   -   -
    4,116   -   -   $16.04   6/30/21   6,441   159,672   -   -
    5,855

 

  -

 

  -

 

  $12.59

 

  10/1/20

 

  1,097

 

  27,188

 

  -

 

  -

 

Macfarlane(5)

 

  -

 

  -

 

  -

 

  -

 

  -

 

  -

 

  -

 

  -

 

  -

 

 

  (1)

Unvested restricted share units of the Company’s common stock vest as follows: Mr. Cobb – 47,354 restricted share units vest in one-third increments on June 30, 2017, June 30, 2018, and June 30, 2019; 26,288 restricted share units vest in two equal increments on June 30, 2017 and June 30, 2018; 12,050 restricted share units vest on June 30, 2017; Mr. Bowen – 7,750 restricted share units vest in one-third increments on June 30, 2017, June 30, 2018, and June 30, 2019; 1,651 restricted share units vest in two equal increments on June 30, 2017 and June 30, 2018; 1,152 restricted share units vest on June 30, 2017; Mr. Gerke – 5,126 restricted share units vest on December 10, 2017; 9,472 restricted share units vest in one-third increments on June 30, 2017, June 30, 2018, and June 30, 2019; 5,258 restricted share units vest in two equal increments on June 30, 2017 and June 30, 2018; 2,302 restricted share units vest on June 30, 2017; Ms. Collins – 5,166 restricted share units vest in one-third increments on June 30, 2017, June 30, 2018, and June 30, 2019; 2,869 restricted share units vest in two equal increments on June 30, 2017 and June 30, 2018; 1,097 restricted share units vest on June 30, 2017. Also included are the following performance share units and market stock units (adjusted for actual performance, including accumulated dividend equivalents) granted in June 2014: Mr. Cobb – 34,672 performance share units and 36,170 market stock units; Mr. Bowen – 2,302 market stock units; Mr. Gerke – 6,620 performance share units and 6,906 market stock units; Mr. Houseworth – 4,466 performance share units and 4,659 market stock units; and Ms. Collins – 3,152 performance share units and 3,289 market stock units. Performance for these performance share units and market stock units was based on a three-year period beginning on May 1, 2014 and ending on April 30, 2017. Performance was certified, and the overall payout was approved, by the Compensation Committee in June 2017, and the performance share units and market stock units vested on June 30, 2017.

 
  (2)

Market value was determined using the closing price of the Company’s common stock of $24.79, which was the closing price as reported on the NYSE on April 28, 2017 (the last trading day of fiscal year 2017).

 
  (3)

Unvested target performance share units and market stock units (including dividend equivalents accumulated as of April 30, 2017) vest as follows: Mr. Cobb – 111,265 performance share units and 67,102 market stock units cliff vest on June 30, 2019; 93,009 performance share units and 60,318 market stock units cliff vest on June 30, 2018; Mr. Bowen – 18,207 performance share units and 10,981 market stock units cliff vest on June 30, 2019; 2,523 market stock units cliff vest on June 30, 2018; Mr. Gerke – 22,253 performance share units and 13,421 market stock units cliff vest on June 30, 2019; 18,603 performance share units and 12,064 market stock units cliff vest on June 30, 2018; Mr. Houseworth – 9,301 performance share units and 6,032 market stock units cliff vest on June 30, 2018; Ms. Collins – 10,147 performance share units and 7,320 market stock units cliff vest on June 30, 2019; 10,147 performance share units and 6,580 market stock units cliff vest on June 30, 2018. Actual shares delivered are subject to performance conditions and therefore may vary from the target units reported here.

 

 

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  (4)

Pursuant to the terms of his award agreements and Severance and Release Agreement, Mr. Houseworth forfeited all of his fiscal year 2017 equity awards, and all of his outstanding unvested restricted share units upon his termination of employment on April 30, 2017, and those awards are not included in the table. The fiscal year 2015 and 2016 performance share units and market stock units included above reflect pro-ration for Mr. Houseworth’s termination calculated as the number of whole months of service divided by 36, as provided by the terms of the applicable award agreements. Additional information regarding Mr. Houseworth’s Severance and Release Agreement can be found beginning on page 57.

 
  (5)

Pursuant to the terms of his award agreements, Mr. Macfarlane forfeited all of his outstanding unvested performance share units, market stock units, and restricted share units due to his voluntary termination of employment as of December 30, 2016

 

 

 

OPTION EXERCISES AND STOCK VESTED TABLE

The following table summarizes the value realized by the NEOs upon option award exercises and stock award vesting during the fiscal year ended April 30, 2017.

 

     Option Awards    Stock Awards
    Name of Executive    Number of Shares
Acquired on Exercise (#)
   Value Realized on
Exercise ($)
   Number of Shares
Acquired on Vesting (#)
(1)
   Value Realized on Vesting ($)  

    Cobb

   -    -    138,231    3,179,713

    Bowen

   -    -    5,352    123,109

    Gerke

   -    -    35,161    808,536

    Houseworth

   -    -    16,312    375,221

    Collins

   -    -    5,885    135,368

    Macfarlane

   -    -    35,499    816,315

 

(1) 

Amounts in this column reflect restricted share units that vested during the fiscal year ended April 30, 2017 (including dividend equivalents accumulated as the date of vesting) and fiscal year 2014 performance share units and market stock units that vested as of June 30, 2016 and were distributed in July 2016 (including dividend equivalents accumulated as of the date of vesting). These amounts do not include shares acquired pursuant to the vesting of the fiscal year 2015 performance share units and market stock units on June 30, 2017, which were distributed in July 2017 following Compensation Committee certification of the performance and approval of the payouts (as described above under “Vesting and Performance-based Payouts of Fiscal Year 2015 Performance Share Units and Market Stock Units” beginning on page 40).

 

 

NONQUALIFIED DEFERRED COMPENSATION TABLE

The following table summarizes our NEOs’ compensation under the H&R Block, Inc. Deferred Compensation Plan for Executives during fiscal year 2017.

 

         Name of Executive   Executive
Contributions in Last
FY ($)
  Registrant
Contributions in Last
FY ($)
  Aggregate Earnings
(Loss) in Last FY ($)
(1)
  Aggregate
Withdrawals/
Distributions ($)
  Aggregate Balance at    
Last FYE ($)
(2)

    Cobb

  -   -   -   -   -

    Bowen

  -   -   -   -   -

    Gerke

  -   -   -   -   -

    Houseworth

  -   -   15,249   -   72,745

    Collins

  -   -   18,872   -   129,966

    Macfarlane

  -   -   68,111   (345,305)   294,978

 

(1) 

The amounts in this column are not included in the Summary Compensation Table because they are not above-market or preferential earnings on deferred compensation.

 

(2)

Amounts in this column include, among other things, NEO contributions and Company contributions previously reflected in Summary Compensation Tables included in the Company’s proxy statements commencing with the proxy statement for the fiscal year ended April 30, 2012 to the extent any such NEO was included in the Company’s Summary Compensation Tables for such fiscal years.

 

 

H&R BLOCK DEFERRED COMPENSATION PLAN FOR EXECUTIVES

The Company provides the H&R Block, Inc. Deferred Compensation Plan for Executives, a nonqualified plan (the “DC Plan”), to employees who meet certain eligibility requirements. The DC Plan is intended to pay, out of the general assets of the Company, an amount substantially equal to the deferrals and Company contributions, adjusted for any earnings or losses. The Company does not provide any matching contributions for this plan.

 

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Participants can elect to defer from 0% to 100% of eligible base salary and eligible commissions and up to 100% of annual bonus on a pre-tax basis. The DC Plan offers various investment options (which mirror the options available under the Company’s 401(k) plan) to participants, including a fixed rate option and Company stock. Participant deferrals are credited to a bookkeeping account that is administered by Fidelity Investments. Earnings are credited to each participant’s account based on the investment options selected by such participant. Participants may change or reallocate their investments at any time.

Participants can elect to receive in-service payments or lump-sum or monthly payments over one to 15 years following termination from service or disability. To ensure compliance with IRC Section 409A, the DC Plan provides that the payments following termination shall not be made before a date that is six months after the termination date. Amounts deferred under the DC Plan by NEOs, if any, are included in the “Salary” column of the Summary Compensation Table.

 

 

EMPLOYMENT AGREEMENTS, CHANGE IN CONTROL AND OTHER ARRANGEMENTS

William C. Cobb Employment Agreement

William C. Cobb entered into an Employment Agreement effective May 16, 2011 (the “Cobb Agreement”) to serve as the Company’s President and Chief Executive Officer which was subsequently amended as described below. The Cobb Agreement included the following: an initial base salary of $950,000; participation in the Company’s STI compensation plan with a target incentive award equal to 125% of base salary; sign-on awards of cash and equity; and reimbursement of expenses in relation to the relocation of his family to the greater Kansas City area as provided under the Company’s standard executive relocation policy. The Company also provided Mr. Cobb with other customary health and employment benefits. A copy of the Cobb Agreement was filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on April 29, 2011.

The Cobb Agreement was originally set to expire on May 16, 2017 and provided that it may be terminated (i) by the Company with or without “Cause” (as defined in the footnotes to the Potential Payments Upon Termination or Change in Control Table beginning on page 58 of this proxy statement), (ii) by Mr. Cobb with or without “Good Reason” (as defined in the footnotes to the Potential Payments Upon Termination or Change in Control Table beginning on page 58 of this proxy statement) upon thirty days’ prior written notice, and (iii) by the Company for “Disability” (defined as Mr. Cobb’s incapacitation due to mental or physical illness or injury for 130 business days in any consecutive twelve months) upon thirty days’ prior written notice. If Mr. Cobb was terminated for Good Reason or involuntarily terminated without Cause, the Company was obligated to provide to Mr. Cobb the compensation and benefits set forth in the Potential Payments Upon Termination or Change in Control Table beginning on page 58. The Cobb Agreement contained the following post-termination restrictions on Mr. Cobb: non-hire, non-solicitation, and non-compete for one year following his last day of employment; non-disparagement of the Company for two years following his last day of employment; and non-disclosure of proprietary information in perpetuity.

The Cobb Agreement was amended on January 4, 2013 via a letter agreement (the “2013 Letter Agreement”). The 2013 Letter Agreement modified Mr. Cobb’s participation in the Company’s STI compensation plan by removing the reference to “such higher amount as permitted by the annual STI Plan” and instituting a set maximum of 175% of Mr. Cobb’s target STI compensation, subject to any limitations contained in the applicable STI plan. Additionally, the 2013 Letter Agreement modified the change in control definition set forth in the Cobb Agreement to match the change in control definition set forth in the equity award agreements entered into pursuant to the 2013 Plan.

The Cobb Agreement was further amended on July 15, 2014 via a letter agreement (the “2014 Letter Agreement”). The 2014 Letter Agreement extended the term of agreement to September 1, 2016. It also modified Mr. Cobb’s participation in the Company’s STI compensation plan by increasing the set maximum of 175% of Mr. Cobb’s target STI compensation to 200% of his target STI compensation, subject to any limitations contained in the applicable STI plan. Additionally, the 2014 Letter Agreement extended the terms of Mr. Cobb’s post-employment non-hiring, non-solicitation, and non-competition restrictive covenants from one year following his last date of employment to two years following his last date of employment. The 2014 Letter Agreement also modified the clawback provisions providing that, to the extent future laws or applicable stock exchange listing standards require more expansive clawback provisions, the more expansive provisions will be deemed incorporated into the Cobb Agreement and, to the extent more onerous, the more expansive provisions will be deemed to supersede the existing clawback provisions.

 

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On June 18, 2015, the Cobb Agreement was further amended via a letter agreement to extend the term of the agreement to September 1, 2018. Except for the amendments described above, the terms of the Cobb Agreement remained unchanged.

On May 15, 2017, Mr. Cobb, notified the Company of his decision to retire from his positions as President and Chief Executive Officer and as a member of the Board effective as of July 31, 2017. In connection with his retirement, the Company, H&R Block Management, LLC, and Mr. Cobb entered into a Letter Agreement Regarding Retirement and Transition, dated May 15, 2017 (the “Letter Agreement”). The Letter Agreement provided that Mr. Cobb would continue full-time employment with the Company through July 31, 2017, and that he would assist in the transition of his responsibilities during that time. In addition, the Letter Agreement confirmed that Mr. Cobb would receive the benefits to which he was entitled upon retirement under the terms and conditions of his applicable plans and agreements. Those benefits are described below, under Equity Award Agreements beginning on page 56, and Potential Payments Upon Termination or Change in Control, beginning on page 58. In addition, the Letter Agreement provides that Mr. Cobb will be entitled to receive pro-rated annual STI compensation for fiscal year 2018 that will be payable only if and to the extent that annual STI compensation is payable to other Company senior executive officers under the Executive Performance Plan, based on Company performance in fiscal year 2018 as determined by the Compensation Committee.

Interim CEO Letter

On May 15, 2017, the Compensation Committee approved changes to Mr. Gerke’s compensation in connection with his appointment as Interim CEO. Pursuant to a letter dated May 15, 2017, Mr. Gerke receives a base salary amount that would equal $950,000 annually, effective June 1, 2017 and continuing through the later of (i) the end of the duration of his appointment as President and Chief Executive Officer (in an interim capacity) and (ii) December 1, 2017. The letter also provides that Mr. Gerke will (i) participate in the Company’s fiscal year 2018 STI plan, with a target award value of $900,000, (ii) receive equity grants as a participant in the Company’s LTI program for fiscal year 2018, with a target award value of $2.5 million, and (iii) remain employed with the Company until July 31, 2018, except in the event of a termination for Cause as such term is defined in the Executive Severance Plan.

H&R Block Executive Severance Plan

Other than Mr. Cobb, as noted below, all of our executive officers, including Messrs. Gerke and Bowen and Ms. Collins, participate in the Executive Severance Plan. Messrs. Macfarlane and Houseworth participated in the Executive Severance Plan prior to their departure from the Company. Pursuant to the Cobb Agreement, Mr. Cobb participates in the Executive Severance Plan only if and to the extent that the benefits related to equity awards thereunder exceed those contained in his employment agreement.

The Executive Severance Plan is intended to support a variety of objectives, including (i) standardization of severance policy among the senior officers, which ensures internal parity, simplifies internal administration, and mitigates negotiation at hire and termination, and (ii) the attraction and retention of highly skilled executives by protecting them from the short term economic consequences associated with unexpected termination of employment in the absence of cause. Based on advice from the Compensation Committee’s independent compensation consultant, we believe the benefits our NEOs would receive under various severance scenarios are modest relative to the market.

Eligibility. An associate of the Company whose participation in the Executive Severance Plan is approved by the Compensation Committee is eligible.

Severance Benefits. Under the terms of the Executive Severance Plan, if a Participant incurs a Qualifying Termination or a Change in Control Termination (each as defined below), he or she is entitled to receive a lump sum severance amount equal to: (i) the Participant’s monthly compensation multiplied by the Participant’s years of service, subject to a minimum payout equal to 12 months of service and a maximum payout equal to 18 months of service; (ii) a specified percentage of the Participant’s monthly compensation, as determined by the Compensation Committee, multiplied by the Participant’s years of service, subject to a minimum payout equal to 12 months of service and a maximum payout equal to 18 months of service; and (iii) an amount equal to the Participant’s COBRA subsidy multiplied by 12, if the Participant was enrolled in the Company’s applicable health, dental, and vision benefits on the termination date. The Company will also provide reasonable outplacement assistance

 

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for a period not to exceed 15 months. The Participant is entitled to a pro-rata award of any amounts payable under the Company’s STI compensation plan, based upon the Participant’s actual performance and the attainment of goals established as determined by the Board in its sole discretion.

Equity Awards. Effective November 8, 2013 and with respect to equity awards granted on or after March 5, 2013, the terms of the applicable equity award agreements govern the treatment of equity.

If a Participant incurs a Qualifying Termination, then: (i) a Participant shall forfeit any stock options, restricted shares, and restricted share unit awards granted after July 11, 2010 that are not vested as of the separation date; and (ii) a Participant shall be entitled to a pro-rata award of any outstanding performance shares (including performance share units and market stock units) as of his or her separation date based on the achievement of the performance goals at the end of the applicable performance period.

If a Participant incurs a Change in Control Termination, then: (i) the Participant becomes vested in all outstanding stock options, restricted shares, and restricted share unit awards; and (ii) a Participant shall be entitled to a pro-rata award of any outstanding performance shares (including performance share units and market stock units) as of his or her separation date based on the achievement of the performance goals at the end of the applicable performance period

Release. The Participant is required to sign a release agreement in order to receive severance benefits.

Repayment and Clawback. If the Company is required to restate financial statements or the Participant violates the provisions of any confidentiality, non-competition, or similar agreements with the Company, the Board may recover or require reimbursement of benefits under the Executive Severance Plan.

Definitions. “Qualifying Termination” means the involuntary separation from service by the Company under circumstances not constituting Cause (as defined below), but does not include the elimination of the Participant’s position where the Participant was offered a comparable position with the Company or with a party that acquires any assets from the Company, the redefinition of Participant’s position to a lower compensation rate or grade, or the Participant’s death or disability.

“Change in Control Termination” means a Participant’s Qualifying Termination or Good Reason Termination (as defined below), in either event within 75 days immediately preceding or within 18 months immediately following a Change in Control. Change in Control under the Executive Severance Plan is defined below in footnote 4 to the Potential Payments Upon Termination or Change in Control Table beginning on page 58.

“Cause” is defined as any of the following unless, if capable of cure, such events are fully corrected in all material respects by the Participant within 10 days after the Company provides notice of the occurrence of such event:

 

  (i)

A Participant’s misconduct that materially interferes with or materially prejudices the proper conduct of the business of the Company;

 

  (ii)

A Participant’s commission of an act materially and demonstrably detrimental to the good will of the Company;

 

  (iii)

A Participant’s commission of any act of dishonesty or breach of trust resulting or intending to result in material personal gain or enrichment of the Participant at the expense of the Company;

 

  (iv)

A Participant’s violation of any non-competition, non-solicitation, confidentiality or similar restrictive covenant under any employment-related agreement, plan, or policy with respect to which the Participant is a party or is bound; or

 

  (v)

A Participant’s conviction of, or plea of guilty or nolo contendere to, a misdemeanor involving an act of moral turpitude or a felony.

“Good Reason Termination” is defined as a separation from service

 

  (i)

within 75 days immediately preceding or 18 months immediately following a Change in Control which is initiated by the Participant, subject to certain notice requirements, on account of one or more of the following conditions occurring within that same time frame:

 

  (A)

A material diminution in the Participant’s Base Compensation;

 

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  (B)

A material diminution in the Participant’s authority, duties, or responsibilities;

 

  (C)

A material change in the geographic location at which the Participant must perform the services; or

 

  (D)

Any other action or interaction that constitutes a material breach by the Company of any written employment-related agreement between the Participant and the Company;

 

  (ii)

for which the Participant does not consent to the condition referenced in (i) above; and

 

  (iii)

for which the Company does not substantially remedy the condition.

“Participant” means an associate of the Company whose participation in the plan is approved by the Compensation Committee.

Equity Award Agreements

In connection with equity awards our executives enter into equity award agreements that provide for acceleration of vesting or acceleration of forfeiture of the awards upon certain events. Equity awards provide for vesting or forfeiture, as applicable, upon certain qualifying terminations or qualifying terminations following a change in control. A “qualifying termination” can include a “Qualifying Involuntary Separation” or a “Good Reason Termination,” as these terms are defined under the applicable award agreement for equity awards granted on or after June 30, 2013, or a “Qualifying Termination” or a “Change in Control Termination” as such terms are defined under the Executive Severance Plan for equity awards granted prior to March 5, 2013. Any outstanding equity awards that we granted to our NEOs pursuant to the 2013 Plan, the 2003 Plan, or any predecessor plan, prior to March 5, 2013 will be treated in accordance with the Executive Severance Plan. No grants were made to our NEOs between March 5, 2013 and the fiscal year 2014 grants made on June 30, 2013.

Our standard equity award agreements for restricted stock units applicable to grants during the time period covered by this proxy statement that were made to executives through fiscal year 2017 contain a retirement provision that accelerates the vesting of a pro-rata portion of all outstanding restricted stock units that have been outstanding for at least one year. The pro-rata portion is equal to a percentage based upon the number of whole months of service completed divided by 36, minus the number of restricted share units previously vested. Our standard equity award agreements for performance share units and market stock units applicable to grants made during the time period covered by this proxy statement contain a retirement provision that provides for the pro-ration of awards that have been outstanding for at least one year based on the number of whole months of service completed divided by 36, with the ultimate vesting of the awards subject to attaining the performance goals set forth in the applicable award agreement. Under award agreements made in fiscal year 2013, retirement is defined as a participant’s voluntary termination of employment at or after reaching age 60 and “Early Retirement” is defined as voluntary termination of employment at or after reaching age 55 with at least five years of service with the Company. Under award agreements made in fiscal years 2014 through 2017, retirement is defined as voluntary termination at or after (i) reaching age 55 with at least five years of service with the Company or (ii) reaching age 60. The Compensation Committee utilized alternate forms of award agreements for Mr. Cobb beginning in fiscal year 2015 and Mr. Gerke beginning in fiscal year 2017, which are described in the Company’s Current Report on Form 8-K filed on July 1, 2014, that define retirement as voluntary termination at or after reaching age 60. In addition, such alternate forms of award agreements contain modified vesting provisions providing that voluntary retirement after reaching age 60 will not result in the forfeiture of any equity awards outstanding for more than one year prior to such retirement; rather, the entire equity awards will continue to vest on the stated vesting dates set forth in the applicable award agreement and with performance adjustments (if any) made under such agreement as if he remained employed through such stated vesting dates.

Our performance-based equity award agreements applicable to grants made to executives through fiscal year 2017 also provide for vesting of a pro-rated portion of the awards that are earned as a result of attaining the award’s performance goals in the event of the executive’s qualifying termination (which, except in certain situations where such qualifying termination occurs after a change in control, does not include a “good reason termination”), death or disability, that occurs more than one year after the grant date. For award agreements made in fiscal years 2014 through 2017 after a change in control, the Compensation Committee may, in its discretion, equitably adjust the performance goals or payment formula that apply to the performance share units or the market stock units, as determined necessary due to the change in control. Following a change in control, performance share units or market stock units generally will vest as a result of the executive’s continued

 

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employment through the third anniversary of the grant date and the Company’s level of performance during the performance period. However, if an executive’s employment terminates before such third anniversary due to certain qualifying terminations that occur in connection with the change in control, or disability, death or retirement, the executive may be entitled to receive all or a pro-rata portion of the award.

The terms of the fiscal year 2017 LTI awards are described in more detail above under the headings “Actions Pertaining to Fiscal Year 2017 LTI Compensation,” beginning on page 35.

Severance and Release Agreement

In connection with Mr. Houseworth’s departure, the Company and Mr. Houseworth entered into a Severance and Release Agreement (the “Severance Agreement”) under the Executive Severance Plan. Under the terms of the Severance Agreement and the Executive Severance Plan, in consideration for the imposition on Mr. Houseworth of two-year non-competition and non-solicitation covenants and his agreeing to provide a general release of claims, Mr. Houseworth received a lump sum cash severance payment in the amount of $735,000, plus a COBRA subsidy in the amount of $13,196. Additionally, pursuant to the terms of the Executive Severance Plan, Mr. Houseworth was entitled to receive payment of his STI plan award for the Company’s 2017 fiscal year based upon his actual performance and the Company’s attainment of goals established under the STI plan as determined by the Compensation Committee. See page 34 for additional information regarding Mr. Houseworth’s 2017 STI award. Under the terms of his equity award agreements, Mr. Houseworth was also entitled to vesting of a pro-rata portion of awards of his performance share units and market stock units granted under the 2013 Plan that had been outstanding for at least one year, in each case based upon the achievement of performance goals during the applicable performance period. Mr. Houseworth is also entitled to receive reasonable outplacement assistance for up to 15 months.

Indemnification Agreements

We have entered into indemnification agreements with each of our directors and certain of our officers, including each of our named executive officers, on a form previously approved by our Board and filed as Exhibit 10.2 to the quarterly report on Form 10-Q for the quarter ended January 31, 2012. These agreements are intended to supplement our officer and director liability insurance and to provide the officers and directors with specific contractual assurance that the protection provided by our Bylaws will continue to be available regardless of, among other things, an amendment to the Bylaws or a change in management or control of the Company.

In general, the indemnification agreement provides that, subject to the provisions set forth therein, the Company will indemnify and hold harmless the director or officer (each, an “Indemnitee”) against all direct and indirect costs and liabilities incurred by an Indemnitee, to the fullest extent permitted by applicable law, in connection with any actions, claims, suits or other proceedings brought against such Indemnitee by reason of (i) the fact that the Indemnitee is or was a director, officer or other fiduciary of the Company or, at the request of the Company, a director, officer or other fiduciary of a subsidiary of the Company, or (ii) any action taken, or failure to act, by such Indemnitee in such capacity. The indemnification agreement provides contractual assurances regarding the scope of the indemnification as permitted by the Missouri General and Business Corporation Law and the Bylaws.

Under the Indemnification Agreement, an Indemnitee will have the right to advancement by the Company of expenses as they are actually and reasonably paid or incurred in connection with defending a claim covered by the Indemnification Agreement prior to the final disposition of such claim. The Indemnitee is required to repay any expenses advanced to the Indemnitee if such Indemnitee is determined not to be entitled to indemnification by the Company.

The above description of the terms of the Indemnification Agreement does not purport to be complete and is qualified in its entirety by reference to the form of Indemnification Agreement, a copy of which is filed as Exhibit 10.2 to the quarterly report on Form 10-Q for the quarter ended January 31, 2012.

 

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POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL

The following table summarizes the potential payments our NEOs (other than Messrs. Houseworth and Macfarlane) would receive in the event of termination or a change in control of the Company. For Messrs. Houseworth and Macfarlane, who departed the Company during the fiscal year, the table includes amounts received under the circumstances of their respective actual departures. The agreements and arrangements that govern the payments included in the table are described in more detail above under Employment Agreements, Change in Control and Other Arrangements. For Messrs. Cobb, Bowen, and Gerke and Ms. Collins, this table assumes the relevant triggering event occurred on April 30, 2017, and the value of the equity-based awards included below was therefore determined using the closing price of the Company’s common stock of $24.79, which was the closing price as reported on the NYSE on April 28, 2017 (the last trading day of fiscal year 2017). Accordingly, the amounts provided in this table for Messrs. Cobb, Bowen, and Gerke and Ms. Collins are based on hypothetical circumstances, may materially differ from actual amounts payable upon the triggering event, and the actual amounts to be paid out can only be determined at the time of such triggering event.

POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL TABLE

 

Name of Executive    Termination Other than
for Cause
(1) (2)or Good
Reason
(3) ($)
     Termination After
Change in Control
($)
(2) (4)
     Retirement
($)
(5)
     Death or Disability(6)  

  Cobb(7)

           

  Cash(8)

     $2,238,750        $3,233,750        -        -  

  Restricted Share Units

     -        $2,124,316        $950,411        $950,411  

  Stock Options (vesting accelerated)

     -        -        -        -  

  Market Stock Units

     $2,038,381        $4,349,493        $2,686,032        $2,686,032  

  Performance Share Units

     $3,292,437        $7,058,150        $4,299,884        $4,299,884  

  Health and Welfare Plan Benefits

     $26,347        $8,782        -        -  

  Outplacement Services

     -        -        -        -  

  Total

     $7,595,915        $16,774,491        $7,936,326        $7,936,326  

 

  Bowen(2)

           

  Cash(8)

     $763,927        $763,927        -        -  

  Restricted Share Units

     -        $261,589        -        $69,477  

  Stock Options (vesting accelerated)

     -        -        -        -  

  Market Stock Units

     $109,794        $410,537        -        $138,329  

  Performance Share Units

     -        $451,359        -        -  

  Health and Welfare Plan Benefits

     $13,196        $13,196        -        -  

  Outplacement Services

     $20,000        $20,000        -        -  

  Total

     $906,917        $1,920,608        -        $207,805  

 

  Gerke(2)

     

  Cash(8)

     $990,000        $990,000        -        -  

  Restricted Share Units

     -        $549,288        $103,870        $314,487  

  Stock Options (vesting accelerated)

     -        -        -        -  

  Market Stock Units

     $397,465        $859,102        $397,465        $526,394  

  Performance Share Units

     $641,394        $1,393,548        $641,394        $841,885  

  Health and Welfare Plan Benefits

     $12,161        $12,161        -        -  

  Outplacement Services

     $20,000        $20,000        -        -  
  Total      $2,061,019        $3,824,100        $1,142,729        $1,682,766  

 

  Houseworth(9)

           

  Cash(8)

     $735,000        -        -        -  

  Restricted Share Units

     -        -        -        -  

  Stock Options (vesting accelerated)

     -        -        -        -  

  Market Stock Units

     $302,903        -        -        -  

  Performance Share Units

     $487,409        -        -        -  

  Health and Welfare Plan Benefits

     $13,196        -        -        -  

  Outplacement Services

     $20,000        -        -        -  
  Total      $1,558,508        -        -        -  

 

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Name of Executive    Termination Other than
for Cause
(1) (2)or Good
Reason
(3) ($)
   Termination After
Change in Control
($)
(2) (4)
   Retirement
($)
(5)
   Death or Disability(6)

 

  Collins(2)

           

  Cash(8)

   $577,500    $577,500    -    -

  Restricted Share Units

   -    $226,384    -    $98,317

  Stock Options (vesting accelerated)

   -    -    -    -

  Market Stock Units

   $201,927    $452,851    -    $271,379

  Performance Share Units

   $324,934    $733,739    -    $432,824

  Health and Welfare Plan Benefits

   $12,161    $12,161    -    -

  Outplacement Services

   $20,000    $20,000    -    -
  Total    $1,136,521    $2,022,635    -    $802,521
  Macfarlane(10)    -    -    -    -

 

(1)

Applies to Mr. Cobb under the Cobb Agreement. Applies to Messrs. Bowen and Gerke and Ms. Collins, and, in the case of Mr. Houseworth did apply, under the Executive Severance Plan. “Cause” under the Cobb Agreement referred to any one or more of the following grounds: (i) Mr. Cobb’s commission of an act materially and demonstrably detrimental to the Company or any affiliate, which act constitutes gross negligence or willful misconduct by Mr. Cobb in the performance of his material duties to the Company or any affiliate; (ii) Mr. Cobb’s commission of any material act of dishonesty or breach of trust resulting or intending to result in material personal gain or material enrichment of Mr. Cobb at the expense of the Company or any affiliate; (iii) Mr. Cobb’s violation of certain covenants related to confidentiality, non-hiring of employees, and non-solicitation of customers; or (iv) the inability of the Company or any affiliate to participate in any activity subject to government regulation and material to the Company’s or any affiliate’s business solely as a result of any willful action or inaction by Mr. Cobb. The definition of “Cause” under the Executive Severance Plan is described above under “Employment Agreements, Change in Control and Other Arrangements.”

 

(2)

Payments to Messrs. Bowen and Gerke and Ms. Collins would be made, and, in the case of Mr. Houseworth were made, pursuant to the terms of the Executive Severance Plan and various equity award agreements described above under “Employment Agreements, Change in Control and Other Arrangements” and “Long Term Incentive Compensation.” Payments to Mr. Cobb would be made pursuant to the terms of the Cobb Agreement and various equity award agreements described above under “Employment Agreements, Change in Control and Other Arrangements.” Pursuant to the Cobb Agreement, Mr. Cobb participated in the Executive Severance Plan only if and to the extent that the benefits related to equity awards thereunder exceed those contained in his employment agreement.

 

(3)

Payments to Messrs. Bowen and Gerke and Ms. Collins would be made pursuant to the terms of the Executive Severance Plan and various equity award agreements described under “Employment Agreements, Change in Control and Other Arrangements” and “Long Term Incentive Compensation.” Termination for “Good Reason” under the Cobb Agreement refers to any one or more of the following grounds unless cured within thirty days of receipt of notice thereof: (i) a material diminution in Mr. Cobb’s base compensation; (ii) relocation of Mr. Cobb’s location of employment outside of the Kansas City, Missouri metropolitan area; (iii) a material diminution in Mr. Cobb’s status, duties or authority, authority as President and Chief Executive Officer of the Company, or a requirement to report to anyone other than the Company’s Board of Directors; or (iv) any other action or inaction that constitutes a material breach by the Company of the Cobb Agreement.

 

(4)

(a) Under the Cobb Agreement, if Mr. Cobb terminated for Good Reason following a Change in Control (as defined below), including a 409A Change in Control (as defined below) of the Company, Mr. Cobb would have been entitled to those payments set forth in the table.

 

  

Under the Cobb Agreement, the definition of “Change in Control” was substantially the same as that under the Executive Severance Plan, as set forth in Note 4(b) below.

 

  

Under the Cobb Agreement, a “409A Change in Control” means a Change in Control that constitutes a “change in control” under IRC Section 409A (regarding change in the ownership or effective control of a corporation or a change in the ownership of a substantial portion of the assets of a corporation).

 

  

(b) Under the Executive Severance Plan, a “Change in Control” means the occurrence of one or more of the following events:

(i) Any one person, or more than one person acting as a group, acquires ownership of stock of H&R Block, Inc. (“HRB”) that, together with stock held by such person or group, constitutes more than 50 percent of the total fair market value or total voting power of the stock of HRB. If any one person, or more than one person acting as a group, is considered to own more than 50 percent of the total fair market value or total voting power of the stock of HRB, the acquisition of additional stock by the same person or persons shall not be considered to cause a Change in Control. An increase in the percentage of stock owned by any one person, or persons acting as a group, as a result of a transaction in which HRB acquires its stock in exchange for property will be treated as an acquisition of stock for purposes of this Section 2(e)(i).

(ii) Any one person, or more than one person acting as a group, acquires (when combined with all other acquisitions of HRB stock acquired during the twelve (12) month period ending on the date of the most recent acquisition by such person or persons) ownership of stock of HRB possessing 35 percent or more of the total voting power of the stock of HRB. If any one person, or more than one person acting as a group, is considered to effectively control a corporation within the meaning of Treasury Regulation §1.409A-3(i)(5)(vi), the acquisition of additional

 

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control of the corporation by the same person or persons is not considered to cause a change in the effective control of the corporation. An increase in the percentage of stock owned by any one person, or persons acting as a group, as a result of a transaction in which HRB acquires its stock in exchange for property will not be treated as an acquisition of stock for purposes of this Section 2(e)(ii), but will be treated as an acquisition of stock for purposes of Section 2(e)(i).

(iii) A majority of members of the Board is replaced during any 12-month period by directors whose appointment or election is not endorsed by two-thirds (2/3) of the members of the Board before the date of such appointment or election.

(iv) Any one person, or more than one person acting as a group, acquires (when combined with all other acquisitions of HRB assets acquired during the twelve (12) month period ending on the date of the most recent acquisition by such person or persons) assets from HRB that have a total gross fair market value equal to or more than 50 percent of the total gross fair market value of all of the assets of HRB immediately before such acquisition or acquisitions. For this purpose, gross fair market value means the value of the assets of HRB, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets. Notwithstanding the foregoing, there is no Change in Control event under this Section 2(e)(iv) when there is a transfer to an entity that is controlled by the shareholders of HRB immediately after the transfer. A transfer of assets by HRB is not treated as a change in the ownership of such assets if the assets are transferred to: (a) a shareholder of HRB (immediately before the asset transfer) in exchange for or with respect to its stock; (b) an entity, 50 percent or more of the total value or voting power of which is owned, directly or indirectly, by HRB; (c) a person, or more than one person acting as a group, that owns, directly or indirectly, 50 percent or more of the total value or voting power of all the outstanding stock of HRB; or (d) an entity, at least 50 percent of the total value or voting power of which is owned, directly or indirectly, by a person described in (c) above.

 

  

(c) Equity acceleration under our equity award agreements is described above under “Employment Agreements, Change in Control and Other Arrangements.”

 

(5)

Equity acceleration for performance share units, market stock units, restricted share units, and stock options under the terms of our equity award agreements upon the Retirement of an NEO is described above under “Employment Agreements, Change in Control and Other Arrangements.”

 

  

Under award agreements for fiscal years 2015, 2016, and 2017, “Retirement” means voluntary termination at or after (i) reaching age 55 with at least five years of service with the Company or (ii) reaching age 60. The Compensation Committee utilized alternate forms of award agreements for Mr. Cobb beginning in fiscal year 2015 and for Mr. Gerke beginning in fiscal year 2017, which are described in the Company’s Current Report on Form 8-K filed on July 1, 2014, that define retirement as voluntary termination at or after reaching age 60.

 

  

The equity award agreements for fiscal year 2017 are described in more detail under the heading “Actions Pertaining to Fiscal Year 2017 LTI Compensation,” beginning on page 35.

 

  

As of April 30, 2017, Messrs. Cobb and Gerke were the only named executive officers who had satisfied the requirements to be eligible for payments upon retirement.

 

(6)

Equity acceleration for performance share units, market stock units, restricted share units, and stock options under the terms of our equity award agreements upon the death or Disability is described above under “Employment Agreements, Change in Control and Other Arrangements.”

 

  

Under award agreements for fiscal years 2015, 2016, and 2017, “Disability” means (i) for participants covered by a group long term disability program, the participant is receiving income replacement benefits for at least three months under the program because of any physical or mental impairment expected to result in death or last for a continuous period of at least twelve months (a “qualifying impairment”); or (ii) in all other cases, the participant is unable to engage in any substantial gainful activity for a period of at least nine months because of a qualifying impairment.

 

  

The equity award agreements for fiscal year 2017 are described in more detail under the heading “Actions Pertaining to Fiscal Year 2017 LTI Compensation,” beginning on page 35.

 

(7)

As discussed above, Mr. Cobb retired from the Company effective July 31, 2017. See page 54 for a discussion of the amounts paid to Mr. Cobb in connection with his retirement.

 

(8)

Under the Cobb Agreement, in the event of a termination by the Company other than for Cause or by Mr. Cobb for Good Reason, Mr. Cobb was entitled to a lump-sum payment equal to his base salary and his target bonus. The payment to Messrs. Bowen and Gerke and Ms. Collins would be made pursuant to the terms of the Executive Severance Plan, which provides for a lump sum cash payment if a Participant incurs a Qualifying Termination or a Change in Control Termination (each as defined under “H&R Block Executive Severance Plan” above), in an amount equal to: (i) the Participant’s monthly compensation multiplied by the Participant’s years of service, subject to a minimum payout equal to 12 months of service and a maximum payout equal to 18 months of service; and (ii) a specified percentage of the Participant’s monthly compensation, as determined by the Compensation Committee, multiplied by the Participant’s years of service, subject to a minimum payout equal to 12 months of service and a maximum payout equal to 18 months of service.

 

(9)

As discussed above, Mr. Houseworth departed the Company after serving as Chief Innovation Officer until April 30, 2017. In connection with his departure, Mr. Houseworth received the payments and other benefits disclosed under the “Termination Other than for Cause or Good Reason” column and was no longer eligible to receive payments in the event of termination after a change in control or death, disability, or retirement.

 

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(10)

As discussed above, Mr. Macfarlane voluntarily departed the Company after serving as Senior Vice President, U.S. Retail Products and Operations until December 30, 2016. Mr. Macfarlane received no additional compensation in connection with his voluntary departure, and forfeited his fiscal year 2017 STI award and all outstanding unvested performance share units, market stock units, and restricted share units as a result of his voluntary departure, and was no longer eligible to receive payments in the event of a termination other than for cause or good reason, termination after a change in control, or death, disability, or retirement.

 

 

EQUITY COMPENSATION PLANS

The following table provides information about the Company’s common stock that may be issued upon the exercise of options, warrants and rights under all of the Company’s existing equity compensation plans as of April 30, 2017. As of April 30, 2017, the Company had two stock-based compensation plans: the 2013 Plan and the H&R Block, Inc. 2000 Employee Stock Purchase Plan (as amended and restated effective November 7, 2013). Our shareholders have approved all of the Company’s current stock-based compensation plans. Our shareholders approved the 2013 Plan in September 2012 to replace the 2003 Plan and the H&R Block, Inc. 2008 Deferred Stock Unit Plan for Outside Directors (the “DSU Plan”), effective January 1, 2013, at which time the 2003 Plan and the DSU Plan terminated except with respect to outstanding awards thereunder. The 2003 Plan was approved by our shareholders in September 2002 to replace the 1993 Long-Term Executive Compensation Plan, effective July 1, 2003. Our shareholders approved the DSU Plan in September 2008 to replace the 1989 Stock Option Plan for Outside Directors, which terminated upon the DSU Plan’s effectiveness, except with respect to outstanding awards thereunder.

As discussed in Proposal 5, we are asking our shareholders to approve the adoption of the 2018 Plan at the Annual Meeting. If the 2018 Plan is approved by shareholders, beginning one business day after the Annual Meeting we will make grants of equity-based compensation to employees, non-employee directors, and consultants under the 2018 Plan, and the 2013 Plan will terminate at that time except with respect to outstanding awards thereunder.

 

  Plan Category   

Number of securities to be

issued upon exercise of
outstanding options,

warrants, and rights

(A) (# 000)

    

Weighted-average

exercise price of

outstanding options,

warrants, and rights

(B) ($)

    

Number of securities remaining

available for future issuance under
equity compensation plans  excluding
securities reflected in column (A)

(C) (# 000)

 

  Equity compensation plans approved by security holders

     1,702        17.99        8,222  

  Equity compensation plans not approved by security holders

     -        -        -  

  Total

     1,702        17.99        8,222  

 

 

AUDIT COMMITTEE REPORT

The Company’s management is responsible for preparing financial statements in accordance with accounting principles generally accepted in the United States (GAAP) and the financial reporting process, including the Company’s disclosure controls and procedures and internal control over financial reporting. The Company’s independent registered public accounting firm is responsible for (i) auditing the Company’s financial statements and expressing an opinion as to their conformity to GAAP and (ii) auditing the effectiveness of the Company’s internal control over financial reporting and expressing an opinion as to its effectiveness. The Audit Committee of the Board of Directors, composed solely of independent directors, meets periodically with management, including the Vice President, Audit Services (the employee with primary responsibility for the Company’s internal audit functions) and others in the Company, and the Company’s independent registered public accounting firm to review and oversee matters relating to the Company’s financial statements, audit services (internal audit) activities, disclosure controls and procedures, and internal control over financial reporting and non-audit services provided by the independent accountants. In addition, the Audit Committee pre-approved all audit and non-audit fees paid to such firm.

The Audit Committee has reviewed and discussed with management and Deloitte & Touche LLP (“Deloitte”), the Company’s independent registered public accounting firm, the Company’s audited financial statements for the fiscal year ended April 30, 2017. The Audit Committee has also discussed with Deloitte the matters required to be discussed by Auditing Standard No. 16 (codified as Auditing Standard No. 1301), “Communications with Audit Committees” issued by the Public

 

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Company Accounting Oversight Board (“PCAOB”). In addition, the Audit Committee received from Deloitte the written disclosures and the letter required by applicable requirements of the PCAOB regarding Deloitte’s communications with the Audit Committee concerning independence, discussed with Deloitte its independence from the Company and the Company’s management, and considered whether Deloitte’s provision of non-audit services to the Company is compatible with maintaining the auditor’s independence.

The Audit Committee conducted its own self-evaluation and evaluation of the services provided by Deloitte during the fiscal year ended April 30, 2017. Based on its evaluation of Deloitte, the Audit Committee reappointed Deloitte as the Company’s independent registered public accounting firm for the fiscal year ended April 30, 2018.

Based on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors of the Company that the Company’s audited financial statements be included in the Annual Report on Form 10-K for the fiscal year ended April 30, 2017, for filing with the SEC.

AUDIT COMMITTEE

Victoria J. Reich, Chair

Angela N. Archon

Richard A. Johnson

Christianna Wood

 

 

AUDIT FEES

The following table presents fees for professional services rendered by Deloitte for the audit of the Company’s annual financial statements for the years ended April 30, 2017 and 2016, and fees billed for other services rendered by Deloitte for such years. Fees disclosed below include fees actually billed and expected to be billed for services relating to the applicable fiscal year. Amounts previously disclosed for fiscal year 2016 have been adjusted to reflect actual billings.

 

  Fiscal Year      2017        2016  

  Audit Fees

     $ 2,977,886        $ 3,043,953      

  Audit-Related Fees

     $ 107,000        $ 102,000      

  Tax Fees

     $ 255,964        $ 265,661      

  All Other Fees

       -          -      
    

 

 

 

  Total Fees

     $ 3,340,850        $ 3,411,614      

Audit Fees consist of fees for professional services rendered for the audit of the Company’s financial statements and review of financial statements included in the Company’s quarterly reports and services normally provided by the independent auditor in connection with statutory and regulatory filings or engagements.

Audit-Related Fees are fees for assurance and related services that are reasonably related to the performance of the audit or review of the Company’s financial statements or that are traditionally performed by the independent auditor. Amounts included consist of fees incurred relating to support of business acquisition and divestiture activities, independent assessments of internal controls, audits of employee benefits plan financial statements, and other audit-related services.

Tax Fees consist of fees for the preparation or review of original and amended tax returns, claims for refunds and tax payment-planning services for tax compliance, tax planning, tax consultation, and tax advice. Amounts included above consist of fees incurred relating to transfer pricing studies, technical consultation related to international tax matters, and other tax advisory services.

All Other Fees are fees billed for professional services that were not the result of an audit, review, or tax-related services, and consist primarily of subscriptions to human resources publications and related items.

 

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The Audit Committee has adopted policies and procedures for pre-approving audit and non-audit services performed by the independent auditor so that the provision of such services does not impair the auditor’s independence. All fees reported above were approved pursuant to the policy. Under the Audit Committee’s pre-approval policy, the terms and fees of the annual audit engagement require specific Audit Committee approval. Other types of services are eligible for general pre-approval. Unless a type of service to be provided by the independent auditor has received general pre-approval, it will require specific Audit Committee pre-approval. In addition, any proposed services exceeding pre-approved cost levels will require specific pre-approval by the Audit Committee.

General pre-approval granted under the Audit Committee’s pre-approval policy extends to the next fiscal year following the date of pre-approval. The Audit Committee reviews and pre-approves services that the independent auditor may provide without obtaining specific Audit Committee pre-approval on an annual basis and revises the list of general pre-approved services from time to time. In determining whether to pre-approve audit or non-audit services (regardless of whether such approval is general or specific pre-approval), the Audit Committee will consider whether such services are consistent with the SEC’s rules on auditor independence. The Audit Committee will also consider whether the independent auditor is best positioned to provide the most effective and efficient service and whether the service might enhance the Company’s ability to manage or control risk or improve audit quality. All such factors will be considered as a whole and no one factor is necessarily determinative. The Audit Committee will also consider the relationship between fees for audit and non-audit services in deciding whether to pre-approve any such services. The Audit Committee may determine for each fiscal year the appropriate ratio between fees for Audit Services and fees for Audit-Related Services, Tax Services, and All Other Services.

The Audit Committee may delegate pre-approval authority to one or more of its members. The member or members to whom such authority is delegated shall report any pre-approval decisions to the Audit Committee at its next scheduled meeting.

The Audit Committee has concluded that the provision of non-audit services provided to the Company by Deloitte during the 2017 fiscal year was compatible with maintaining its independence.

 

 

 

LOGO

PROPOSAL 2 – RATIFICATION OF APPOINTMENT OF THE

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board’s Audit Committee has appointed Deloitte & Touche LLP (“Deloitte”) as the Company’s independent registered public accounting firm to audit the Company’s financial statements for the fiscal year ending April 30, 2018. As a matter of good corporate governance, the Audit Committee submits its selection of Deloitte to our shareholders for ratification, and will consider the vote of our shareholders when appointing our independent registered public accounting firm in the future. A representative of Deloitte is expected to attend the Annual Meeting to respond to appropriate questions and will have an opportunity to make a statement, if desired. For additional information regarding the Company’s relationship with Deloitte, please refer to the “Audit Committee Report” and “Audit Fees” sections above.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” PROPOSAL 2.

 

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LOGO

PROPOSAL 3 – ADVISORY APPROVAL OF THE COMPANY’S

NAMED EXECUTIVE OFFICER COMPENSATION

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and Section 14A of the Securities Exchange Act of 1934 (the “Exchange Act”) require that we permit our shareholders to vote to approve, on an advisory (non-binding) basis, the compensation of our named executive officers as disclosed in the “Compensation Discussion and Analysis” section, the Summary Compensation Table and accompanying executive compensation tables, and the related narrative disclosure beginning on page 22. At our 2011 annual meeting, our shareholders approved, on an advisory basis, that an advisory vote on executive compensation should be held annually. Based on such result, our Board determined that the advisory vote on executive compensation will be held every year until the next advisory vote on the frequency of future advisory votes on executive compensation. As discussed in Proposal 4, we are seeking advisory shareholder approval to continue conducting a say-on-pay vote on an annual basis.

     We believe that our compensation programs and policies reflect an overall pay-for-performance culture that is strongly aligned with the interests of our shareholders. We are committed to utilizing a mix of incentive compensation programs that will reward success in achieving the Company’s financial objectives and growing value for shareholders, and continuing to refine these incentives to maximize Company performance. The Compensation Committee of the Board has overseen the development of a compensation program designed to achieve pay-for-performance and alignment with shareholder interests, as described more fully in the “Compensation Discussion and Analysis” section beginning on page 22. The compensation program was designed in a manner that we believe is reasonable, competitive, and appropriately balances the goals of attracting, motivating, rewarding, and retaining our executives.

The Company and the Board regularly evaluate our compensation policies and practices to ensure they are meeting our objectives and are consistent with corporate governance best practices. As part of that process, the Compensation Committee and the Board consider the results of our shareholder advisory vote on executive compensation. At our 2016 annual meeting of shareholders held on September 8, 2016, our shareholders approved our fiscal year 2016 compensation awarded to our NEOs with approximately 97% of the votes cast in favor of the proposal. We believe this overwhelming level of support represents a clear message from our shareholders that they approve of our NEOs’ compensation arrangements, as well as our executive compensation practices generally. We value the opinions of our shareholders and consider the outcome of say-on-pay votes, as well as feedback received throughout the year, when making compensation decisions for our NEOs. Consistent with our shareholders’ support, the Compensation Committee decided to retain the core design features of our executive compensation program in fiscal year 2017, with certain changes to short term and long term incentive compensation elements to further align our compensation program with our current strategic focus. The Compensation Committee believes the compensation program design features continue to properly reward our executives for their performance, motivate them to work towards achieving our long term objectives, and, with 80% of our executives’ long term incentive awards being performance-based, strengthen the alignment of their interests with the interests of our shareholders. The Compensation Committee will continue to routinely evaluate and enhance or modify our compensation program, as appropriate, after considering the views of our shareholders.

For the reasons discussed in the “Compensation Discussion and Analysis” section beginning on page 22, the Board recommends that shareholders vote in favor of the following “say-on-pay” resolution:

“Resolved, that the compensation paid to the Company’s named executive officers, as disclosed pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the Compensation Discussion and Analysis, compensation tables, narrative discussion and any related material disclosed in this proxy statement, is hereby approved.”

Because your vote is advisory, it will not be binding upon the Company, the Board, or the Compensation Committee. However, we value the views of our shareholders and the Compensation Committee will continue to consider the outcome of the vote when considering future executive compensation arrangements.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” PROPOSAL 3.

 

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LOGO

PROPOSAL 4 – ADVISORY APPROVAL OF THE FREQUENCY OF HOLDING FUTURE ADVISORY VOTES ON THE COMPANY’S EXECUTIVE COMPENSATION

Pursuant to the Dodd-Frank Act and Section 14A of the Exchange Act, we are asking our shareholders to vote to approve, on an advisory (non-binding) basis, the frequency of future shareholder advisory votes on the compensation of our named executive officers. This proposal gives you the opportunity to advise the Board on whether such advisory votes should occur every one year, every two years, or every three years. Our say-on-pay votes currently take place on an annual basis.

    The Board believes that submitting the advisory vote on the compensation of our named executive officers on an annual basis is appropriate for the Company and our shareholders. We view the advisory vote on the compensation of our named executive officers as an additional opportunity for our shareholders to communicate with us regarding their views. Additionally, an annual advisory vote is consistent with our objective of engaging in regular dialogue with our shareholders on corporate governance and executive compensation matters. Further, the Company’s current Amended and Restated Bylaws state that it is the Company’s practice to provide the shareholders with this opportunity on an annual basis. Accordingly, the Board recommends that shareholders approve holding the advisory vote to approve the compensation of our named executive officers every “ONE YEAR.”

The enclosed proxy card gives you four choices for voting on this item. You can choose whether the say-on-pay vote should be conducted every ONE YEAR, TWO YEARS or THREE YEARS. You may also abstain from voting on this item, which will not be counted as a vote for any option. You are not voting to approve or disapprove the Board’s recommendation on this item.

Although the advisory vote is non-binding, the Board of Directors will consider the outcome of the vote when making future decisions about the frequency of holding an advisory vote on executive compensation.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR CONDUCTING FUTURE ADVISORY VOTES ON THE COMPANY’S EXECUTIVE COMPENSATION EVERY “ONE YEAR.”

 

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LOGO

PROPOSAL 5 – APPROVAL OF THE 2018 LONG TERM INCENTIVE PLAN

SUMMARY

Shareholders are being asked to approve the adoption of the 2018 Plan at the Annual Meeting. The 2018 Plan will replace and supersede our existing 2013 Plan. The 2018 Plan was approved by the Board, based on the recommendation of the Compensation Committee, on July 19, 2017, and will become effective, subject to approval by the shareholders at the Annual Meeting, one business day following that approval. Shareholder approval of the 2018 Plan will also constitute approval of the material terms of the performance goals under the 2018 Plan for purposes of IRC Section 162(m).

     The Compensation Committee of the Board has established long-term, equity-based compensation as a significant component of overall compensation. The Compensation Committee emphasizes long-term compensation to support multiple objectives, including: (i) aligning management’s interests with those of shareholders, (ii) tying compensation to the attainment of long-term goals and strategic objectives, thereby mitigating incentive for management to pursue short-term objectives at the expense of long-term priorities, (iii) ensuring that realized compensation reflects changes in shareholder value over the long-term, and (iv) attracting and retaining highly skilled executives. Consistent with our compensation philosophy, we believe that equity-based compensation fosters and strengthens a sense of proprietorship and personal involvement in the Company’s success and contributes to continuity and stability within the Company’s executive leadership.

As of June 30, 2017, there were 8,044,716 remaining shares available for issuance under the 2013 Plan, after taking into account equity awards granted that day. Although the 2013 Plan and 2018 Plan are very similar, as described herein a number of features have been added or modified in the 2018 Plan from the 2013 Plan which reflect the Company’s goal of promoting good compensation practices. Awards are currently outstanding under the 2013 Plan, as well as under the 2003 Plan and the DSU Plan (the 2003 Plan, DSU Plan, and 2013 Plan are collectively referred to in this Proposal 5 as the “Prior Plans”). The 2013 Plan replaced and superseded the 2003 Plan and the DSU Plan. If the 2018 Plan is approved by shareholders, it will replace and supersede the 2013 Plan, effective one business day after the Annual Meeting, and no new awards will be made under the 2013 Plan after such effective date. Any awards previously granted under the Prior Plans will remain outstanding under the applicable plan and will, among other things, continue to vest and/or become exercisable in accordance with their original terms and conditions. No additional awards have been granted under the 2003 Plan or the 2008 Plan since our shareholders approved the 2013 Plan on September 13, 2012. In the event the 2018 Plan is not approved by shareholders, the 2018 Plan will not become effective, the 2013 Plan will remain in effect, and we may continue to grant awards under the 2013 Plan, subject to its terms and conditions, using the shares available for issuance thereunder.

If the 2018 Plan is approved by our shareholders, the maximum number of shares of common stock reserved for issuance under the 2018 Plan will be 15,000,000 shares, less one share for every one share subject to an award granted under the 2013 Plan after June 30, 2017. In addition, the 2018 Plan will reserve shares for future awards with respect to any shares of our common stock that: (i) are subject to any award under the 2018 Plan that are forfeited, expire or otherwise terminate without issuance of the underlying shares, settle for cash or otherwise does not result in the issuance of the underlying shares or used to satisfy tax withholding obligations for “full-value” awards (i.e., an award other than a stock option, stock appreciation right or similar appreciation award); and (ii) are subject to any award under the Prior Plans that, after June 30, 2017, are forfeited, expire or otherwise terminate without issuance of the underlying shares, settle for cash or otherwise does not result in the issuance of the underlying shares or used to satisfy tax withholding obligations for full-value awards. As of July 24, 2017, no awards have been granted under the 2013 Plan since June 30, 2017.

In addition to requesting shareholder approval of the 2018 Plan and the new shares being reserved for issuance thereunder, we are also requesting that our shareholders approve the material terms of the performance goals contained in the 2018 Plan in order to allow certain awards to be potentially eligible for exemption from the $1.0 million deduction limit imposed by IRC Section 162(m), as discussed under “Description of the 2018 Plan – Performance Criteria” below. For purposes of IRC Section 162(m), the material terms of the performance goals for awards granted under the 2018 Plan include: (i) the employees eligible to receive compensation; (ii) the description of the business criteria on which the performance goals may be based; and (iii) the maximum amount, or the formula used to calculate the maximum amount, of compensation that can be

 

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paid to an employee under the arrangement. Each of these aspects is discussed in this Proposal 5, and shareholder approval of this Proposal 5 constitutes approval of each of these aspects for purposes of the IRC Section 162(m) shareholder approval requirements.

FEATURES OF THE 2018 PLAN PROMOTING GOOD COMPENSATION GOVERNANCE PRACTICES

We believe that the 2018 Plan contains a number of features that reflect compensation and governance best practices, with some of the key features as follows:

 

   

Limitations on Individual Grants. Subject to certain adjustments discussed below, the maximum number of shares with respect to which options or stock appreciation rights may be granted to any participant in any calendar year of the Company may not exceed 5,000,000 shares, and the maximum number of shares that are subject to all other types of equity awards granted under the 2018 Plan that may be granted to any participant in any calendar year of the Company and that are intended to be performance-based may not exceed 1,000,000 shares.

 

   

No Repricings or Replacement of Share Options or Stock Appreciation Rights. Without shareholder approval or except in corporate transactions involving the adjustment of awards, we may not amend any option or stock appreciation right to reduce the exercise price or replace any option or stock appreciation right with cash or any other award when the price per share of the option or stock appreciation rights exceeds the fair market value of the underlying shares.

 

   

No In-the-Money Option or Stock Appreciation Right Grants. Options and stock appreciation rights may not be granted with an exercise or base price less than the fair market value of our common shares on the date of grant.

 

   

Limitation on Share Counting. Shares previously subject to awards under the 2018 Plan that are used to satisfy the exercise price or tax withholding obligations with respect to an option or stock appreciation right, or any shares tendered by a participant or withheld by the Company in payment of an option exercise price may not be reissued pursuant to future awards under the 2018 Plan. Shares that are used to satisfy any withholding tax liabilities in connection with the vesting or issuance of any full-value award granted under the 2018 Plan (or a full-value award under a Prior Plan) may be reissued and are added back to the allowable share reserve under the 2018 Plan.

 

   

Independent Administration. The Compensation Committee, which consists of non-employee directors, generally administers the 2018 Plan.

 

   

No Dividend or Dividend Equivalents on Unearned Awards. Dividend or dividend equivalents on all awards are subject to the same vesting restrictions and risk of forfeiture as the underlying awards.

 

   

Non-Employee Director Compensation Limit. The 2018 Plan includes a limit under which the maximum amount of compensation that may be paid to any non-employee director during any single fiscal year is capped at $750,000 in total value, subject to the limitation and calculation principles discussed herein and in the 2018 Plan.

BACKGROUND AND DETERMINATION OF SHARE AMOUNTS

The following factors, among others, were taken into account by our Board in approving the proposed 2018 Plan and the number of shares available for issuance thereunder:

 

   

Our award grant history under our equity incentive plans;

 

   

Our historical burn rate under our equity plans;

 

   

The number of shares remaining available under the 2013 Plan for future awards;

 

   

The number of outstanding unvested and unexercised equity awards; and

 

   

Potential dilution resulting from the proposed increase in shares available under the proposed 2018 Plan.

 

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In setting the number of proposed shares issuable under the 2018 Plan, our Board also considered the following annual share usage under our equity compensation program for fiscal years 2015 to 2017 as follows (rounded to the nearest thousand):

 

     Fiscal 2017      Fiscal 2016      Fiscal 2015         

  Options Granted

     23,000        112,000        14,000     

  Restricted Shares, Performance-Based Share Units, Restricted Share Units, and Deferred Stock Units – Full Value Awards Granted

     1,178,000        1,505,000        1,046,000     

  Restricted Shares, Performance-Based Share Units, Restricted Share Units and Deferred Stock Units – Full Value Awards on an Option Equivalent Basis (2.5:1)(1)

     2,945,000        3,762,500        2,615,000     

  Total Shares Granted (option equivalent basis)

     2,968,000        3,874,500        2,629,000     

  Basic Weighted Average Common Shares Outstanding

     212,809,000        249,009,000        275,033,000     

  Burn Rate – Annual Share Usage (option equivalent basis)(2)

     1.39%        1.56%        0.96%       

Average  

1.30%

 

 

 

(1)

The number of shares subject to full value awards in the table equals the actual number of shares subject to such awards multiplied by 2.5.

(2)

Represents Total Shares Granted divided by Basic Weighted Average Common Shares Outstanding.

The historical amounts shown above are not necessarily indicative of the shares that might be awarded in 2018 and beyond, including under the proposed 2018 Plan.

If we continue making equity awards consistent with our practices over the past three years as set forth above, we estimate that the shares available for future awards, consisting solely of the 15,000,000 shares reserved for issuance under the 2018 Plan if the 2018 Plan is approved, will be sufficient for awards for at least five years. While we believe this estimate is reasonable, there are a number of factors that could impact our future equity share usage. Among the factors that will impact our actual share usage are changes in market grant values, changes in the number of recipients, changes in our common stock price, payout levels of performance-based awards, changes in the structure of our long-term incentive plan and forfeitures of outstanding awards.

As of June 30, 2017, we had approximately 2,303,921 shares of common stock subject to outstanding equity awards, which takes into account the equity awards granted that day. The 2,303,921 shares are comprised of 2,073,541 shares subject to full value awards (1,034,120 unvested restricted share units, plus 489,278 unvested performance share units, plus 550,143 unvested market stock units) plus 230,380 shares subject to outstanding stock options. The 2,303,921 shares comprised 1.1% of the Company’s common shares outstanding at June 30, 2017. The 15,000,000 shares proposed to be included in the 2018 Plan share reserve would increase the Company’s fully diluted overhang percentage by an additional 2.9% to approximately 7.7% at June 30, 2017 (excluding the 8,044,716 remaining shares authorized for issuance under the 2013 Plan at June 30, 2017, which would no longer be available for issuance if the 2018 Plan is approved).

Additional information in respect of equity awards currently outstanding, as of June 30, 2017, is included in the following table:

 

     As of June 30, 2017  

  Stock Options Outstanding

   230,380

  Weighted Average Exercise Price of Outstanding Stock Options

   $17.91

  Weighted Average Remaining Term of Outstanding Stock Options

   4.6 years

  Full Value Awards Outstanding

   2,073,541

  Common Shares Outstanding

   208,348,834

In its determination to recommend that the Board approve the 2018 Plan, the Compensation Committee considered the information above, as well as the opinion of FW Cook, its independent compensation consultant, which concluded that the number of shares under the 2018 Plan is reasonable.

In light of the factors described above, and the ability to continue to grant equity compensation is vital to our ability to continue to attract, motivate, and retain highly qualified executives, consultants, and non-employee directors of the Company, the Board has determined that the size of the share reserve under the 2018 Plan is reasonable and appropriate at this time.

 

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DESCRIPTION OF THE 2018 PLAN

The following is a summary of the principal features of the 2018 Plan. This summary is qualified in its entirety by reference to the full text of the 2018 Plan, a copy of which is attached as Appendix A to this proxy statement.

Administration. Subject to the terms of the 2018 Plan, the Compensation Committee has the authority to interpret and administer the Plan. The Committee has authority to determine, within the limits of the express provisions of the 2018 Plan, the individuals to whom awards will be granted, the nature, amount and terms of such awards, and the objectives and conditions for earning such awards. Additionally, the Committee has the ability to delegate this authority subject to certain restrictions set forth in the 2018 Plan.

Eligibility. Employees and consultants of the Company, its direct and indirect subsidiary corporations and their respective divisions, departments, and subsidiary corporations, and the non-employee directors of the Board are eligible to receive awards under the 2018 Plan. An eligible individual who is selected to receive an award under the 2018 Plan is referred to herein as a participant.

Shares Subject to the Plan. Subject to adjustment as described below, if the 2018 Plan is approved by our shareholders, the maximum number of shares of common stock reserved for issuance under the 2018 Plan will be 15,000,000 shares, less one share for every one share subject to an award granted under the 2013 Plan after June 30, 2017. In addition, the 2018 Plan will reserve shares for future awards with respect to any shares of our common stock that: (i) are subject to any award under the 2018 Plan that are forfeited, expire or otherwise terminate without issuance of the underlying shares, settle for cash or otherwise does not result in the issuance of the underlying shares or used to satisfy tax withholding obligations for “full-value” awards (i.e., an award other than a stock option, stock appreciation right or similar appreciation award); and (ii) are subject to any award under the Prior Plans that, after June 30, 2017, are forfeited, expire or otherwise terminate without issuance of the underlying shares, settle for cash or otherwise does not result in the issuance of the underlying shares or used to satisfy tax withholding obligations for full-value awards. Shares that are used to satisfy the exercise price or tax withholding obligations with respect to an option or stock appreciation right, or any shares tendered by a participant or withheld by the Company in payment of an option exercise price or tax withholding obligation will not be reissued pursuant to future awards under the 2018 Plan. As of June 30, 2017, there were 2,303,921 shares subject to outstanding awards under the Prior Plans, after taking into account equity awards granted that day. In addition, shares issued under awards granted by another company and assumed or substituted-for by the Company will be in addition to and will not reduce the number of shares available for awards under the 2018 Plan.

In the event of any change in the number or kind of outstanding shares due to a merger, reorganization, consolidation, recapitalization, dividend or distribution, stock split, reverse stock split, spin-off or similar transaction or other change in corporate structure, an appropriate adjustment will be made, after taking into account the accounting and tax consequences, in the number and kind of shares for which any award may thereafter be granted, both in the aggregate and as to each eligible recipient, in the number and kind of shares or other property, including cash, subject to outstanding awards, in the option or stock appreciation rights exercise prices, and any other adjustments as the Compensation Committee deems appropriate.

Award Types. The 2018 Plan permits grants of options, incentive stock options, stock appreciation rights, restricted share awards, restricted share unit awards, other share-based awards, and performance awards.

 

   

Options, Incentive Stock Options and Stock Appreciation Rights. The 2018 Plan provides for the grant of (i) options, which include any right granted to a participant allowing such participant to purchase shares of common stock at such price or prices as the Compensation Committee shall determine, (ii) incentive stock options, which are stock options that are designated by the Compensation Committee as incentive stock options and which meet the applicable requirements for incentive stock options pursuant to IRC Section 422, and (iii) stock appreciation rights (“SARs”), which are rights to receive an amount of cash, shares, or other property with a fair market value equal to the increase in the fair market value of a specified number of shares between the date on which the SAR is granted and the date on which it is exercised. References in this summary to “stock options” shall mean both incentive stock options and options, unless otherwise specified. Subject to adjustment for certain corporate events, a maximum of 15,000,000 shares may be issued in the form of incentive stock options under the 2018 Plan.

 

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Pursuant to the terms of the 2018 Plan, the Compensation Committee determines the terms and conditions, not inconsistent with the Plan, of any award of stock options or SARs. The 2018 Plan provides that awards of stock options and SARs are subject to the following restrictions: (i) the exercise price per share for stock options may not be less than 100% of the fair market value of one share of common stock on the grant date and the exercise price for certain incentive stock options may not be less than 110% of the fair market value of one share of common stock on the grant date; (ii) stock options and SARs may not have a term of more than 10 years, except in the event of death or disability and the term of certain incentive stock options may not be more than 5 years; (iii) except in connection with certain corporate transactions affecting the shares of common stock, shareholder approval is required to reprice any stock options or SARs after their grant date; and (iv) stock options and SARs shall have a vesting period of not less than twenty-four months if subject only to continued service with the Company or a subsidiary or one year if subject to the achievement of performance objectives, except with respect to grants to directors or consultants and in certain circumstances following a change in control or other special circumstances. In addition, the exercise price of shares purchased upon the exercise of any stock option may be paid in cash, common stock, by cashless exercise, by delivery of other consideration having a fair market value on the exercise date equal to the total purchase price, or in any other manner as may be permitted by the applicable award agreement.

 

   

Restricted Share Awards and Restricted Share Units Awards. The 2018 Plan provides for the grant of (i) restricted shares, which is common stock that may not be sold, transferred, pledged or assigned until the satisfaction of vesting restrictions and (ii) restricted share units, which are an award valued by reference to a share and such value may be paid to the participant in shares or cash as determined by the Compensation Committee upon the satisfaction of vesting restrictions. Pursuant to the terms of the 2018 Plan, the Compensation Committee determines the terms and conditions, not inconsistent with the 2018 Plan, of any award of restricted shares or restricted share units. The 2018 Plan provides that awards of restricted shares and restricted share units are subject to the following restrictions: (A) a participant holding restricted shares may vote the shares awarded and will be entitled to the payment of dividends and other distributions on the shares from the date the award is made, subject to such restrictions or conditions as the Compensation Committee may determine, except that no dividend shall be paid in respect of awards prior to the vesting of such awards; (B) a participant holding restricted share units shall in no event have voting rights with respect to such award; and (C) restricted shares and restricted share units shall have a vesting period of not less than twenty-four months if subject only to continued service with the Company or a subsidiary or one year if subject to the achievement of performance objectives, except with respect to grants to directors or consultants and in certain circumstances following a change in control or other special circumstances.

 

   

Other Share-Based Awards. The 2018 Plan provides for other awards of shares or non-share compensation which are valued in whole or in part by reference to, or are otherwise based on, shares or other property, including deferred stock units. Pursuant to the terms of the 2018 Plan, the Compensation Committee determines the terms and conditions, not inconsistent with the 2018 Plan, of any award of other share-based awards. The 2018 Plan provides that grants of other share-based awards shall have a vesting period of not less than twenty-four months if subject only to continued service with the Company or a subsidiary or one year if subject to the achievement of performance objectives, except with respect to grants to directors or consultants and in certain circumstances following a change in control or other special circumstances. Additionally, other share-based awards may be paid in a lump sum or in installments or, in accordance with procedures established by the Compensation Committee, on a deferred basis subject to the requirements of IRC Section 409A.

 

   

Performance Awards. Performance awards in the form of performance cash, performance share units, and performance units may be granted under the 2018 Plan. Pursuant to the terms of the 2018 Plan, the Compensation Committee determines the terms and conditions, not inconsistent with the 2018 Plan, of any performance award. The 2018 Plan provides that performance awards shall not have a performance period of less than one year unless the performance award is not payable in shares. Additionally, performance awards may be paid in cash, shares, other property, or any combination thereof and may be paid in a lump sum or in installments or, in accordance with procedures established by the Compensation Committee, on a deferred basis subject to the requirements of IRC Section 409A.

 

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Performance Criteria. If the Compensation Committee determines that a restricted share award, a restricted share unit, any other share-based award, a performance award, or any other award is intended to be a performance-based award, the lapsing of restrictions thereon and the distribution of property pursuant thereto, as applicable, shall be subject to the achievement of one or more objective performance goals established by the Compensation Committee. Such performance goals shall be based on the attainment of specified levels of one or more of the following business or performance criteria which shall be based on the attainment of specified levels of one or any combination of the following:

 

   

sales (including comparable sales), net sales or return on sales;

 

   

revenue, net revenue, product revenue or system-wide revenue (including growth of such revenue measures);

 

   

operating income (before or after taxes) or pre- or after-tax income or loss (before or after allocation of corporate overhead and bonus);

 

   

earnings or loss per share or net income or loss (before or after taxes);

 

   

return on equity (including average return on equity), total shareholder return (or any element of shareholder return), or return on assets or net assets;

 

   

the price of the shares of the Company’s common stock or any other publicly-traded securities of the Company;

 

   

total number of clients, number of new clients, client retention, total tax returns prepared, or market share;

 

   

gross profits, gross or net profit margin, gross profit growth, or net operating profit (before or after taxes);

 

   

operating earnings, earnings or losses or net earnings or losses (including earnings or losses before taxes, before interest and taxes, or before interest, taxes, depreciation and amortization), or earnings or losses margin percentage or net earnings or losses margin percentage; economic value-added models or equivalent metrics;

 

   

comparisons with various stock market indices;

 

   

reductions in costs;

 

   

cash flow (including operating cash flow and free cash flow) or cash flow per share (before or after dividends); return on capital (including return on total capital or return on invested capital), cash flow return on investment, or cash flow return on capital;

 

   

improvement in or attainment of expense levels or working capital levels, including cash, inventory and accounts receivable, or general and administrative expense savings;

 

   

inventory control;

 

   

operating margin or gross margin;

 

   

year-end cash;

 

   

cash margin;

 

   

debt reduction;

 

   

shareholders equity;

 

   

operating efficiencies;

 

   

cost reductions or savings;

 

   

market share;

 

   

customer related goals, including customer satisfaction, customer growth and customer retention;

 

   

employee satisfaction;

 

   

productivity or productivity ratios;

 

   

regulatory achievements (including submitting or filing applications or other documents with regulatory authorities or receiving approval of any such applications or other documents);

 

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strategic partnerships or transactions (including in-licensing and out-licensing of intellectual property;

 

   

establishing relationships with commercial entities with respect to the marketing, distribution and sale of the Company’s products (including with group purchasing organizations, distributors and other vendors);

 

   

co-development, co-marketing, profit sharing, joint venture or other similar arrangements); financial ratios, including those measuring liquidity, activity, profitability or leverage;

 

   

cost of capital or assets under management;

 

   

financing and other capital raising transactions (including sales of the Company’s equity or debt securities; debt level;

 

   

year-end cash position;

 

   

book value;

 

   

factoring transactions;

 

   

competitive market metrics;

 

   

timely completion of new product roll-outs;

 

   

timely launch of new facilities (such as new store openings, gross or net);

 

   

sales or licenses of the Company’s assets, including its intellectual property, whether in a particular jurisdiction or territory or globally; or through partnering transactions);

 

   

royalty income;

 

   

implementation, completion or attainment of measurable objectives with respect to research, development, manufacturing, commercialization, products or projects, production volume levels, acquisitions and divestitures, succession and hiring projects, reorganization and other corporate transactions, expansions of specific business operations and meeting divisional or project budgets;

 

   

factoring transactions; and

 

   

recruiting and maintaining personnel.

Any performance goals that are financial metrics may be determined in accordance with United States Generally Accepted Accounting Principles (“GAAP”) or may be adjusted when established (or to the extent permitted under IRC Section 162(m), at any time thereafter) to include or exclude any items otherwise includable or excludable under GAAP. The above business criteria also may be based solely by reference to the Company’s consolidated performance, performance of the Company’s continuing operations, or the performance of a Subsidiary, division, business segment or business unit of the Company, or based upon the performance of the Company relative to performance of other companies or upon comparisons of any of the indicators of Company performance relative to performance of other companies. Finally, when determining the specific metrics applicable to any established performance goal and calculating the actual results related thereto, the Compensation Committee may include or exclude the impact of an event or occurrence which the Compensation Committee determines should appropriately be included or excluded, including without limitation (i) restructurings, performance attributable to discontinued operations, extraordinary items, and other unusual, infrequently occurring, or non-recurring charges, (ii) any event either not directly related to the operations of the Company, Subsidiary, division, business segment or business unit or not within the reasonable control of management, (iii) acquisitions and divestitures, (iv) any reorganization or change in the corporate structure or capital structure of the Company, (v) foreign exchange gains or losses or (vi) the cumulative effects of tax or accounting changes in accordance with GAAP.

The performance goals shall be set by the Compensation Committee within the time period prescribed by, and shall otherwise comply with the requirements of, IRC Section 162(m), and the regulations thereunder.

Under the 2018 Plan, no participant may be granted (i) options or stock appreciation rights during any calendar year with respect to more than 5,000,000 shares and (ii) restricted share awards, restricted share unit awards, performance awards and/or other share-based awards during any calendar year with respect to more than 1,000,000 shares, ignoring for purposes of the

 

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limitation described in this clause (ii), any restricted share awards, restricted share units awards, performance awards, and/or any other share-based awards that are (A) not intended to comply with the performance-based exception under IRC Section 162(m) or (B) denominated in cash. During any calendar year, no participant may be granted performance awards that are intended to comply with the performance-based exception under IRC Section 162(m) and are denominated in cash under which more than $3,000,000 may be earned for each twelve months in the Performance Period. These limitations may be multiplied by two with respect to awards to a participant during the first calendar year in which the participant commences employment with the Company or its subsidiaries. If an award is cancelled, the cancelled award shall continue to be counted toward the applicable limitation in this section.

Because of the uncertainties associated with the application and interpretation of IRC Section 162(m) and the regulations issued thereunder, there can be no assurance that compensation intended to satisfy the requirements for deductibility under IRC Section 162(m) will in fact be deductible. Moreover, the Board or Committee may elect to grant performance-based awards that are not intended to satisfy all of the conditions necessary for awards granted under the 2018 Plan to qualify as “performance-based compensation” under IRC Section 162(m), even if all or less than all of the compensation resulting from the exercise, vesting or settlement of such awards is non-deductible. For instance, the Company has in the past granted a number of service-based awards that are not eligible for deductibility under IRC Section 162(m).

Dividend Equivalents. The recipient of an award, other than an option, SAR, or restricted share award, may, if determined by the Compensation Committee, be entitled to receive currently or on a deferred basis, amounts equivalent to cash, stock, or other property paid as dividends on shares (“Dividend Equivalents”). However, the 2018 Plan provides that (i) in no event shall Dividend Equivalents be paid before the underlying shares covered by the award vest, and (ii) any such Dividend Equivalents are subject to the same restrictions and risk of forfeiture as underlying shares subject to the award and will be paid, if at all, at the time such restrictions and risk of forfeiture lapse.

Director Compensation Limit. The 2018 Plan imposes a limit of $750,000 on the amount of equity and cash compensation that can be paid to a non-employee director of the company in a calendar year. The value of equity compensation for this purpose is determined using the grant date fair value of such equity compensation for financial reporting purposes. The limit does not apply to incremental compensation paid to a director solely in his or her capacity as non-executive chairman of the Board, provided that such non-executive chairman does not participate in the decision to award such additional compensation. In setting the non-employee director compensation limit, the Board reviewed survey data provided by the Compensation Committee’s independent compensation consultant.

Amendment, Adjustments, and Termination. The Board may, from time to time, alter, amend, suspend, or terminate the 2018 Plan as it shall deem advisable, subject to any requirement for shareholder approval imposed by applicable law. In addition, the Board may not, without shareholder approval, amend the 2018 Plan to: (i) increase the number of shares that may be awarded under the 2018 Plan; (ii) expand the types of awards available under the 2018 Plan; (iii) materially expand the class of persons eligible to participate in the 2018 Plan; (iv) eliminate the requirements relating to minimum exercise price, minimum grant price and stockholder approval related to options and stock appreciation rights; (v) increase the maximum permissible term of any option or stock appreciation right; or (vi) increase any of the limitations on grants to individual participants. No amendment or termination of the 2018 Plan may impair the rights of a participant in any material respect under any award previously granted without such participant’s consent. However, the maximum number of shares of common stock available for issuance under the 2018 Plan and the individual limits described above shall be equitably adjusted upon certain events affecting the capitalization of the Company such as a recapitalization, stock split, merger, reorganization, or consolidation.

Transferability. Except as provided by the Compensation Committee, an award under the 2018 Plan is not transferable other than by a participant’s will or the laws of descent and distribution. Any permitted transfer shall be without consideration.

Change in Control. In the event of a “change of control,” as defined in the 2018 Plan, outstanding awards may be assumed or substituted or may become fully vested and exercisable, restrictions applicable to awards may terminate or lapse, and performance goals applicable to any award may be deemed fully achieved, in each case as set forth in the applicable award agreement or as determined by the Compensation Committee.

 

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NEW PLAN BENEFITS

If approved by the shareholders, participants in the 2018 Plan will be eligible for awards of shares as determined by the Board or the Compensation Committee. All employees and consultants of the Company and its subsidiaries and non-employee directors of the Company are eligible to receive awards under the Plan. As of July 24, 2017, there were approximately 2,300 regular, full-time employees of the Company and its subsidiaries and 10 non-employee directors of the Company, though, as discussed in this proxy statement, Mr. Wright is not standing for re-election at the Annual Meeting and will therefore not be eligible for awards under the 2018 Plan.

Awards under the 2018 Plan following its adoption will generally be made in the discretion of the Board or the Compensation Committee and are therefore not determinable at this time. However, current benefits granted to employees and consultants of the Company and its subsidiaries and non-employee directors of the Company would not have increased if they had been made under the proposed 2018 Plan. Please refer to the “Grants of Plan-Based Awards Table” on page 50 of this proxy statement to review equity awards made to our named executive officers for fiscal year 2017. The closing price of a share of the Company’s common stock as reported by the NYSE on July 24, 2017 was $29.78.

FEDERAL INCOME TAX CONSEQUENCES

The following is a brief summary of the U.S. federal income tax consequences of awards made under the 2018 Plan. It is based on the U.S. federal tax laws and regulations currently in effect and existing administrative rules of the Internal Revenue Service. Participants may also be subject to state and local and foreign taxes in connection with the grant of awards under the 2018 Plan. Participants should consult with their individual tax advisers to determine the tax consequences associated with awards granted to them under the 2018 Plan.

Incentive Stock Options. A recipient who is granted an incentive stock option will not have any taxable income either on the grant or exercise of the incentive stock option. However, upon exercise, the excess of the fair market value of the shares acquired over the option price is an item of adjustment in computing the alternative minimum taxable income of the recipient. If the recipient disposes of the shares purchased pursuant to the incentive stock option more than two years after the date of grant and more than one year after the transfer of the shares (the required statutory “holding period”), and if the recipient has been an employee of the Company or an affiliate throughout the period beginning with the date of grant and ending three months prior to the date of exercise, (i) the recipient will recognize long-term capital gain or loss, as the case may be, in an amount equal to the difference between the selling price and the exercise price; and (ii) the Company will not be entitled to a deduction with respect to the shares of stock so issued.

If the holding period requirements are not met, a “disqualifying disposition” is deemed to have taken place and any gain realized upon disposition will be taxed as ordinary income equal to the lesser of (i) the excess of the fair market value of the shares at the time of exercise over the exercise price, or (ii) the gain on the sale. Subject to IRC Section 162(m), the Company will be entitled to a deduction in the year of disposition in an amount equal to the ordinary income recognized by the recipient. Any additional gain will be taxed as short-term or long-term capital gain, depending upon the length of the period the recipient has held the shares.

Except as described in the next paragraph below, a recipient has no income, gain or loss on the exercise of an incentive stock option through the exchange of previously acquired shares of the Company. The recipient’s basis in the number of newly acquired shares that equals the number of shares exchanged will be equal to such recipient’s basis in the shares exchanged, and the recipient’s holding period with respect to that number of newly acquired shares will include the holding period for the shares exchanged. The number of newly acquired shares in excess of the number of old shares exchanged will have zero basis and their holding period will begin on the date of exercise.

If the previously acquired shares are incentive stock option shares that were not held for the required statutory holding period, the exchange constitutes a disqualifying disposition of such previously acquired shares. In such case, the recipient’s basis in the number of newly acquired shares that equals the number of shares exchanged will be equal to such recipient’s basis in the shares exchanged, increased by the amount included as ordinary income as a result of the disqualifying disposition. The disqualifying disposition is treated as a sale of the shares with the lowest basis first.

 

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Nonqualified Stock Options. Stock options granted under the 2018 Plan that are not incentive stock options are treated as nonqualified stock options and the recipient of a nonqualified stock option under the 2018 Plan will not have any income on the grant of the option. Generally, on the exercise of a nonqualified stock option, the recipient will have ordinary income equal to the difference between the fair market value of the shares on the exercise date and the exercise price for the shares. Subject to IRC Section 162(m), the Company generally will be entitled to a deduction on the date of exercise in an amount equal to the recipient’s ordinary income. Upon disposition of the shares purchased pursuant to a nonqualified stock option, the recipient will recognize long-term or short-term capital gain or loss, depending upon the length of the period such recipient has held the shares, in an amount equal to the difference between the amount realized on such disposition and the basis for such shares, which basis will include the amount previously recognized by the recipient as ordinary income.

Where a nonqualified stock option is exercised with previously acquired shares of the Company, the recipient’s basis in the number of newly acquired shares that equals the number of shares exchanged will be equal to such recipient’s basis in the shares exchanged, and the recipient’s holding period with respect to that number of newly acquired shares will include the holding period for the shares exchanged. The number of newly acquired shares in excess of the number of old shares exchanged will have zero basis and their holding period will begin on the date of exercise.

Stock Appreciation Rights. A recipient who is granted stock appreciation rights will not have any taxable income on the receipt of the stock appreciation rights. Upon the exercise of a stock appreciation right, (i) the recipient will have ordinary income equal to the amount received (the increase in the fair market value of one share of the Company’s common stock from the date of grant of the stock appreciation right to the date of exercise); and (ii) subject to IRC Section 162(m), the Company will be entitled to a deduction on the date of exercise in an amount equal to the recipient’s ordinary income.

Restricted Shares. A recipient will not be taxed at the date of an award of restricted shares, but will have ordinary income in an amount equal to the fair market value of any restricted shares as of the date that the restrictions lapse, unless the recipient, within 30 days after transfer of such restricted shares to the recipient, elects under IRC Section 83(b) to include in ordinary income the fair market value of the restricted shares as of the date of such transfer (“83(b) Election”). Subject to IRC Section 162(m), the Company will be entitled to a corresponding deduction. Any disposition of shares after restrictions lapse will be subject to the regular rules governing long-term and short-term capital gains and losses, with the basis for this purpose equal to the fair market value of the shares at the end of the restricted period (or the date of the award of the restricted shares, if the employee elects to be taxed on the fair market value upon the date of such award). However, if the restricted shares were forfeited under the terms of the Plan, no loss would be allowed. Further, the employee would not be entitled to any refund of tax previously paid as a result of the Section 83(b) Election.

Restricted Share Units. A recipient will not have taxable income under the IRC at the time a restricted share unit award is granted. When the restricted share unit award vests and the recipient is paid the stock (plus any cash dividends or dividend equivalents), the recipient will recognize ordinary compensation income in an amount equal to the cash received plus the fair market value of any shares received. Slightly different rules may apply if the recipient is subject to Section 16 of the Exchange Act. A recipient’s compensation income will be subject to normal income and employment tax withholdings.

When a recipient sells shares acquired as part of a restricted share unit award, the difference between the price of the shares on the date of the award and the fair market value of those shares at the date the recipient recognizes ordinary income will be treated as long-term or short-term capital gain or loss, depending on whether the stock was held for more than one year. The holding period for the shares will begin on the day the recipient recognizes ordinary income.

The Company is not entitled to a deduction upon granting a recipient a restricted share unit award. To the extent that the recipient recognizes ordinary income at the time of delivery of shares or cash upon vesting of the award, the Company will generally be allowed (subject to the requirement of reasonableness, the provisions of IRC Section 162(m) and the satisfaction of tax reporting obligations) to a corresponding business expense deduction.

Performance Awards. A recipient of performance awards will not have any income resulting from the grant of the right to receive such an award. The recipient will have ordinary income at the time of receipt of cash and/or common stock with respect to the award in an amount equal to the excess, if any, of the fair market value of the award on the date received over any amount paid by the recipient for the award. Subject to IRC Section 162(m), the Company will be entitled to a deduction on

 

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the date of receipt of the performance share units by the recipient in an amount equal to the recipient’s ordinary income. Upon disposition of any stock received, the recipient will recognize long-term or short-term gain or loss, depending upon the length of the period such recipient has held the shares, in an amount equal to the difference between the amount realized and the fair market value of the stock on the date of receipt.

Deductibility of Awards under IRC Section 162(m). Awards granted under the 2018 Plan may qualify as “performance-based compensation” under IRC Section 162(m) in order to preserve federal income tax deductions by the Company with respect to annual compensation required to be taken into account under IRC Section 162(m) that is paid to the Company’s covered employees. While the Company considers the deductibility of awards as one factor in determining executive compensation, the Company also considers other factors in approving compensation and retains the flexibility to grant awards, such as service-based awards, that it determines to be consistent with the Company’s goals for its executive compensation program even if the award is potentially not deductible by the Company for tax purposes. In addition, because of the uncertainties associated with the application and interpretation of IRC Section 162(m) and the regulations issued thereunder, there can be no assurance that compensation intended to satisfy the requirements for deductibility under IRC Section 162(m) will in fact be deductible.

INFORMATION ABOUT OTHER EQUITY COMPENSATION PLANS

A summary of our securities authorized for issuance under equity compensation plans as of April 30, 2017 is set forth on page 61 of this proxy statement and additional information is included in the Company’s Annual Report on Form 10-K filed with the SEC on June 16, 2017.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” PROPOSAL 5.

 

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LOGO

PROPOSAL 6 – SHAREHOLDER PROPOSAL REGARDING REVISIONS TO THE

COMPANY’S PROXY ACCESS BYLAW

In accordance with SEC rules, we have set forth below a shareholder proposal, along with the supporting statement of the shareholder proponent. The shareholder proposal and the supporting statement are included exactly as submitted to us by the shareholder proponent. The Company is not responsible for any inaccuracies they may contain. The shareholder proposal is required to be voted on at our annual meeting only if properly presented. The name and address of the shareholder proponent is set forth below. We will promptly provide you with, to our knowledge, the number of voting securities held by the shareholder proponent, upon receiving a written or oral request. As explained below, the Board of Directors unanimously recommends a vote “AGAINST” the shareholder proposal.

Shareholder Proposal and Shareholder’s Supporting Statement

Mr. John Chevedden, on behalf of Mr. Kenneth Steiner, 14 Stoner Ave., 2M, Great Neck, NY 11021, has informed H&R Block, Inc. of his intention to offer the following shareholder proposal for consideration at the 2017 annual meeting of shareholders.

The proposal and supporting statement, as submitted, read as follows:

Proposal 6 — Shareholder Proxy Access Amendment

RESOLVED: Shareholders ask our board of directors to amend its proxy access bylaws (primarily found in section 21: “Shareholder Nominations Included in the Corporation’s Proxy Materials”) and any other associated bylaw sections and other documents, to include the following change for the purpose of decreasing the average amount of Company common stock each member of a nominating group would have to hold for 3-years to satisfy the aggregate ownership requirements to form a nominating group:

No limitation shall be placed on the number of shareholders that can aggregate their common shares to achieve the 3% “Required Shares” for an “Eligible Shareholder.”

Under current provisions, even if the 20 largest public pension funds were able to aggregate their shares, they would not meet the 3% criteria at most of companies examined by the Council of Institutional Investors. Allowing a greater number of shareholders to aggregate their shares would facilitate greater participation by individuals and institutional investors in meeting the “Required Shares,” which are 3% of the outstanding common shares entitled to vote.

The SEC’s universal proxy access Rule 14a-11 (https://www.sec.gov/rules/final/2010/33-9136.pdf) set no aggregation limit on shareholders forming nominating groups. However, the SEC vacated the rule after a court decision. Therefore, proxy access rights must be established and amended on a company-by-company basis.

Subsequently, Proxy Access in the United States: Revisiting the Proposed SEC Rule

<http://www.cfainstitute.org/learning/products/publications/ccb/Pages/ccb.v2014.n9.1.aspx?WPID=BrowseProducts> (http://www.cfapubs.org/doi/abs/10.2469/ccb.v2014.n9.1) a cost-benefit analysis by CFA Institute, found proxy access would “benefit both the markets and corporate boardrooms, with little cost or disruption,” raising US market capitalization by up to $140 billion.

Governance Changes through Shareholder Initiatives: The Case of Proxy Access (http://ssrn.com/abstract=2635695) found a 0.5 percent average increase in shareholder value for proxy access targeted firms.

Proxy Access: Best Practices

(http://www.cii.org/files/publications/misc/08_05_15_Best%20Practices%20-%20Proxy%20Access.pdf) by the Council of Institutional Investors, “highlights the most troublesome provisions” in recently implemented proxy access bylaws.

Although our Board adopted a proxy access bylaw, it contains a troublesome provision – participants limited to 20 shareholders – that significantly impairs the ability of shareholders to join as Eligible Shareholders because of the large average

 

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amount of common shares each is required to hold for 3-years given the current aggregation limit of 20. Adoption of the requested amendment would lower the average required common shares allowed to be aggregated, thus allowing more shareholders to form an “Eligible Shareholder.”

Please vote to enhance shareholder value:

Shareholder Proxy Access Amendment – Proposal 6

Our Response to the Shareholder Proposal

Our Board of Directors has carefully considered the shareholder proposal and recommends a vote against it. Last year, a proponent submitted a proxy access proposal which included the same change being proposed again here. Approximately 70% of the votes cast on the proposal at the 2016 annual meeting voted against the proposal. As discussed below, we have already implemented a proxy access bylaw provision for our shareholders that we believe is aligned with best practices followed by most other public companies. Our existing proxy access bylaw provision provides shareholders with meaningful and appropriate proxy access rights while properly balancing the need to protect all shareholders’ interests. Our Board of Directors believes that the change to the Company’s existing proxy access bylaw provision that is sought by the proponent is not in the best interests of the Company or our shareholders due to the excessive expense and administrative burden it would create. Our Board of Directors therefore recommends that shareholders vote “AGAINST” the proposal for the following reasons:

 

   

Our shareholders just last year considered whether to implement the change the proponent seeks in the shareholder proposal and voted against it by a substantial margin, with approximately 70% of the votes cast against the proposal. In submitting its proposal the proponent ignores the actions taken by the Board and the shareholders of the Company last year in resoundingly rejecting a proposal that included the same change.

 

   

The shareholder proposal is unnecessary because we have already adopted a bylaw providing meaningful and appropriate proxy access rights that we believe are aligned with current best practices and properly balances the need to protect all shareholders’ interests. As described in our Current Report on Form