UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

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Exchange Act of 1934 (Amendment No.)

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One H&R Block Way

Kansas City, Missouri 64105

 

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

TO BE HELD SEPTEMBER 14, 2011

 

 

The annual meeting of shareholders of H&R Block, Inc., a Missouri corporation (the “Company”), will be held at the Copaken Stage of the Kansas City Repertory Theatre in the H&R Block Center located at One H&R Block Way (corner of 13th Street and Walnut), Kansas City, Missouri, on Wednesday, September 14, 2011, 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 Walnut or Main Street). The meeting will be held for the following purposes:

 

 

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 12, 2011 as the record date for determining shareholders of the Company entitled to notice of and to vote at the meeting.

 

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
ANDREW J. SOMORA
Secretary

 

Kansas City, Missouri

August 2, 2011

 

 

Dear Fellow Shareholder,

 

Please join me at our 2011 Annual Meeting of Shareholders on Wednesday, September 14, in Kansas City, Missouri, where we will be asking you to vote on and to support some important issues for our Company.

 

We are pleased to have our new senior leadership team in attendance at this Annual Meeting, as well as four exceptional new director nominees up for election along with the rest of the members of our Board.

 

Bill Cobb became our new CEO in mid-May and enabled a smooth management transition because of the in-depth familiarity that he was able to bring to the position from having served on your Board over the past year. Your Board believes that Bill’s extensive background in marketing and the Internet and financial industries, as well as his significant experience as a senior executive at other public companies, will provide stable and strong leadership for your Company to move forward successfully after a challenging period. We recognize that the past few years have been marked by several executive changes. Therefore, your Board is especially pleased that Bill has committed to lead H&R Block for at least the next five years, and we have accordingly designed his compensation incentives to retain him for an extended period of time.

 

We thank Alan Bennett, who decided to step down as CEO earlier this year after having led the Company through a very successful 2011 tax season. Alan made considerable contributions to the Company, acting as our CEO on two different occasions over the last four years.

 

We are delighted to have identified and to be adding four exceptional new Board nominees for election by our shareholders this year – Paul Brown, Marvin Ellison, Vicky Reich and Jim Wright. As you will see in the discussion at pages 6-11 in the proxy statement, each of these individuals brings experience and skills which complement the resources provided by the continuing members of the Board. I hope that you will join me in voting for each of these highly regarded individuals.

 

Our new directors will fill vacancies occasioned by the departure of four directors. Richard Breeden, our former Chairman, resigned from our Board this past April. Alan Bennett, Len Lauer and Ed Shaw have decided not to stand for re-election at this year’s Annual Meeting. These individuals have provided invaluable counsel while serving on your Board and the Board’s Committees. We are grateful for their many contributions and wish them all well.

 

As your new Chairman, I’m excited to work with Bill Cobb and our senior leadership team, and to lead the Board of a company that has such a strong and vibrant brand.

 

As you review these materials, please note the emphasis that your Board is placing on a pay-for-performance culture at H&R Block. Starting at the top, Bill Cobb’s compensation arrangements are heavily weighted to stock versus cash, thus aligning his interests directly with those of all shareholders. More broadly, the stock compensation of our entire senior management team will now include a substantial long-term performance-based component. Beginning with the stock grants made this June, 30% of the grant will be determined by a formula based both on meeting annual performance targets for the next three years and by total shareholder return over the entire three-year period. Going forward, our compensation programs will be driven increasingly by long-term value considerations.

 

For those attending the Annual Meeting, we look forward to reviewing with you our major Company developments over the past year and sharing with you our plans for the future. If you plan to attend, please see the section entitled “May I Attend The Meeting?” on page 3 of the proxy statement for instructions.

 

Whether or not you expect to attend the Annual Meeting, it is important that your shares be represented. We urge you to vote your shares via the toll-free telephone number, over the Internet, or by mail, as provided in the enclosed materials.

 

Thank you again for your support. We are very optimistic about the prospects for our Company and are confident that we have the leadership in place to capture the opportunities that lie ahead.

 

Robert A. Gerard

Chairman of the Board

 

H&R BLOCK, INC.

PROXY STATEMENT

FOR THE 2011 ANNUAL MEETING OF SHAREHOLDERS

 

 

 

QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING AND VOTING

 

The Board of Directors (the “Board of Directors” or “Board”) of H&R Block, Inc., a Missouri corporation (“H&R Block” or the “Company”) solicits the enclosed proxy for use at the annual meeting of shareholders of the Company to be held at 9:00 a.m. central time, on Wednesday, September 14, 2011, at the Copaken Stage of the Kansas City Repertory Theatre in the H&R Block Center located at One H&R Block Way (corner of 13th Street and Walnut), Kansas City, Missouri. 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”) in 2007, the Company is making this Proxy Statement and its 2011 Annual Report available to shareholders electronically via the Internet. On or before August 5, 2011, we mailed to our shareholders of record the “Important Notice Regarding the Availability of Proxy Materials for the Shareholder Meeting to be held on September 14, 2011” (the “Notice”). All shareholders will be able to access this Proxy Statement and our 2011 Annual Report on the website referred to in the Notice or request to receive printed copies of the proxy materials. Instructions on how to access the proxy materials on the Internet or request a printed copy may be found in the Notice.

 

HOW CAN I ELECTRONICALLY ACCESS THE PROXY MATERIALS?

 

The Notice will provide 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 by email, which will save us the cost of printing and mailing documents to you. If you choose to receive future proxy statements by email, you will receive an email next year with instructions containing a link to the proxy voting site. Your election to receive proxy materials by email 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:

 

 

WHO IS ENTITLED TO VOTE?

 

Shareholders of record as of the close of business on July 12, 2011 are entitled to vote at the annual meeting. Each share of H&R Block Common Stock is entitled to one vote.

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WHAT ARE THE VOTING RECOMMENDATIONS OF THE BOARD OF DIRECTORS?

 

Our Board of Directors recommends that you vote your shares “FOR” the proposed slate of directors named in this proxy standing for election to the Board, “1 YEAR” for the frequency of future advisory votes on the Company’s executive compensation, and “FOR” the other listed proposals, as seen in the following example:

 

1. Election of Directors:
Nominees				For		Against		Abstain
1a. Paul J. Brown				þ		o		o
1b. William C. Cobb				þ		o		o
1c. Marvin R. Ellison				þ		o		o
1d. Robert A. Gerard				þ		o		o
1e. David B. Lewis				þ		o		o
1f. Victoria J. Reich				þ		o		o
1g. Bruce C. Rohde				þ		o		o
1h. Tom D. Seip				þ		o		o
1i. Christianna Wood				þ		o		o
1j. James F. Wright				þ		o		o
				For		Against		Abstain
2. The approval of an advisory proposal on the Company’s executive compensation.				þ		o		o
		1 Year		2 Years		3 Years		Abstain
3. The approval of an advisory vote on the frequency of future advisory votes on the Company’s executive compensation.		þ		o		o		o
				For		Against		Abstain
4. The approval of an amendment to the 2008 Deferred Stock Unit Plan for Outside Directors to increase the aggregate number of shares of Common Stock issuable under the Plan by 600,000 shares, from 300,000 shares to 900,000 shares.				þ		o		o
				For		Against		Abstain
5. The approval of the material terms of performance goals for performance shares issued pursuant to the 2003 Long-Term Executive Compensation Plan.				þ		o		o
				For		Against		Abstain
6. The ratification of the appointment of Deloitte & Touche LLP as the Company’s independent accountants for the fiscal year ending April 30, 2012.				þ		o		o

 

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 (known as a “registered shareholder”), you are considered, with respect to those shares, the “shareholder of record”, and the Notice was sent to you directly by the Company. If you are a shareholder of record, you may vote in person at the annual meeting.

 

If your shares are held in a stock brokerage account or by a bank or other nominee, you are considered the “beneficial owner” of shares held in street name, and that organization forwarded the Notice to you. As the beneficial owner, you have the right to direct your broker, bank or nominee holding your shares how to vote and 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.

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HOW DO I VOTE?

 

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

 

 

Your shares will be voted as you indicate. If you do not indicate your voting preferences, the appointed proxies (Robert A. Gerard, Bruce C. Rohde, and David Baker Lewis) will vote your shares FOR Items 1, 2, 4, 5, and 6, and for ONE YEAR with respect to Item 3. 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.

 

If your shares are held in a brokerage account in your broker’s name (this is called street name), you may also vote as set forth above, and your broker or nominee should vote your shares as you have directed. Again, you must have a legal proxy from the shareholder of record in order to vote the shares in person at the annual meeting.

 

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 by Internet, telephone or written proxy card, Fidelity Management Trust Company, the Plan’s Trustee, should 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 by no later than September 9, 2011 at 11:59 p.m. eastern time in order for your shares to be voted by the Trustee at the Annual Meeting.

 

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 must present a 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 owned shares of the Company on the record date of July 12, 2011, or a legal proxy from your broker or 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.

 

WHAT ARE BROKER NON-VOTES AND HOW ARE THEY COUNTED?

 

Broker non-votes occur when nominees, such as brokers and banks holding shares on behalf of the beneficial owners, are prohibited from exercising discretionary voting authority for beneficial owners who have not provided voting instructions. Brokers and other nominees may vote without instruction only on “routine” proposals. On “non-routine” proposals, nominees cannot vote without instructions from the beneficial owner, resulting in so-called “broker non-votes.” The proposal to ratify Deloitte & Touche LLP as the Company’s independent accountants is the only routine proposal. All other proposals are non-routine. If you hold your shares with a broker or other nominee, they will not be voted on these proposals unless you give voting instructions. Broker non-votes are counted in determining a quorum but are not counted for purposes of determining the number of shares present in person or represented by proxy on a voting matter.

 

MAY I CHANGE MY VOTE?

 

You may revoke your proxy and change your vote at any time before the final vote at the annual meeting. You may vote again on a later date on the Internet or by telephone (only your latest Internet or telephone proxy submitted prior to the annual meeting will be counted), or by signing and returning a new proxy card or voting instruction form with a later date, or 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.

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WHAT VOTE IS REQUIRED TO APPROVE EACH PROPOSAL?

 

For all matters to be voted upon at the annual meeting, shareholders may vote “for,” “against,” or “abstain” on such matters, except for Item 3 for which shareholders may vote “1 year,” “2 years,” “3 years,” or “abstain.”

 

For all matters to be voted upon at the annual meeting, 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. The votes on Item 2 and 3 are non-binding advisory votes only.

 

Shares represented by a proxy that directs that the shares abstain from voting are deemed to be represented at the meeting as to that matter, and have the same effect as a vote against the proposals. Proxies marked abstain on Item 3 (the frequency proposal) will not be counted as a vote for any option. Broker non-votes have no impact on any proposal.

 

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, 305,642,373 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 included for quorum purposes.

 

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, 2011”?

 

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

 

HOW MUCH DID THIS PROXY SOLICITATION COST?

 

The costs of this proxy will include 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, fax or other personal contact; such individuals will not receive compensation or reimbursement for such actions. Additionally, the Company has retained Georgeson Inc. to assist in the solicitation of proxies on behalf of the Board of Directors 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 WEB ADDRESS?

 

The Company’s home page is www.hrblock.com. The Company’s filings with the SEC are available free of charge via a link from this website.

 

WILL ANY OTHER MATTERS BE VOTED ON?

 

As of the date of this proxy statement, our management knows of no other matter that will be presented for consideration at the 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, validly executed proxies in the enclosed form will be voted in accordance with the recommendation of the Board 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 Articles and Bylaws also provide that all of the directors shall be elected at each annual meeting of shareholders to hold office until the next succeeding annual meeting of shareholders or until such director’s successor has been elected and qualified, and subject to prior death, resignation, retirement or

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removal from office of a director. Any vacancy on the Board may be filled by a majority of the surviving or remaining directors then in office.

 

At the annual meeting of shareholders to be held on September 14, 2011, ten directors will be elected to hold office until the next annual meeting of shareholders or until their successors are elected and shall have qualified. The Board has nominated Paul J. Brown, William C. Cobb, Marvin R. Ellison, Robert A. Gerard, David Baker Lewis, Victoria J. Reich, Bruce C. Rohde, Tom D. Seip, Christianna Wood and James F. Wright for election as directors of the Company.

 

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 the shareholders. The Governance and Nominating Committee is responsible for identifying, screening and recommending candidates to the entire Board for Board membership. 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 such as general understanding of various business disciplines (e.g., marketing, finance, information technology), the Company’s business environment, educational and professional background, ability to work well with other Board members, analytical ability and willingness to devote adequate time to Board duties. The Board evaluates each individual in the context of the Board as a whole with the objective of retaining a group 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 the other members of the Board and 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 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, 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 and request additional information from the candidate. The Committee uses the same process for evaluating all candidates for nomination by the Board, including those recommended by shareholders. The Company’s 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 outlined in the “Shareholder Proposals and Nominations” section of this proxy statement.

 

Diversity

 

Although there is no formal policy on diversity of director nominees, both the Board of Directors and the Governance and Nominating Committee believe that diversity of skills, perspectives and experiences among Board members, in addition to the factors discussed above, promotes improved monitoring and evaluation of management on behalf of the shareholders and produces more creative thinking and solutions by the Board. 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.

 

New Directors

 

The Board nominated our new director candidates based on a determination that they would make significant contributions to the overall strength of the Board and its diverse set of abilities, following an evaluation of each of their particular skill sets, knowledge base and experience. These directors were identified by search firm Spencer Stuart, drawing upon a variety of sources including shareholders, Board members and employees, and were recommended to our Governance and Nominating Committee.

 

SELECTING AND EVALUATING OUR NOMINEES

 

When evaluating potential director nominees, the Governance and Nominating Committee considers each individual’s professional expertise and educational background in addition to their general qualifications. The Governance and Nominating Committee works with the Board to determine the appropriate mix of backgrounds and experiences that would establish and maintain a Board that is strong in its collective knowledge, allowing the

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Board to fulfill its responsibilities and best perpetuate our long-term success and represent our shareholders’ interests.

 

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

 

 

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

 

 

The Board believes that all the director nominees are highly qualified. As the table shows, the director nominees have significant leadership experience, knowledge and skill 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 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 beneficially owned by each nominee for director is listed under the heading “Security Ownership of Directors and Management” on page 58.

 

DIRECTOR NOMINEES

 

Our Board currently has nine directors, and is nominating ten directors for election to the Board. All Board members are subject to annual election. Shareholders elected six of the current directors at the 2010 Annual Meeting. Alan M. Bennett has decided not to stand for re-election as he is no longer an independent director under New York Stock Exchange (“NYSE) listing standards due to his service as President and Chief Executive Officer of

6

the Company. Len J. Lauer and L. Edward Shaw, Jr. have decided not to stand for re-election due to the demands of other business and professional obligations. The following pages present information regarding each director nominee, including information about each nominee’s professional experience, 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.

 

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8

9

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Unless otherwise instructed, the proxy holders will vote 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 such contingency should arise, it is the intention of the proxies to vote for such person or persons as the Board of Directors may recommend.

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THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE NOMINEES NAMED ABOVE, AND PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE SO VOTED IN THE ABSENCE OF INSTRUCTIONS TO THE CONTRARY.

 

 

ADDITIONAL INFORMATION CONCERNING THE BOARD OF DIRECTORS

 

BOARD OF DIRECTORS’ MEETINGS AND COMMITTEES

 

The Board of Directors is responsible for managing the property and business affairs of the Company. The Board of Directors reviews significant developments affecting the Company and acts on matters requiring Board approval. During the 2011 fiscal year, the Board of Directors held 11 meetings and the standing Board committees held 22 meetings. Each of the incumbent directors attended at least 90% of the aggregate total number of meetings of the Board of Directors and Board committees of which he or she was a member.

 

The standing committees of the Board are the Audit Committee, the Compensation Committee, the Finance Committee, and the Governance and Nominating Committee. The Company’s Corporate Governance Guidelines, Code of Business Ethics and Conduct, the Board of Directors Independence Standards and charters for the Audit, Compensation, and Governance and Nominating Committees are available on the Company’s website at www.hrblock.com under the “Company” link and then under the heading “Investor Relations” and then under “Corporate Governance.” These documents are also available in print to shareholders upon written request to: Corporate Secretary, H&R Block, Inc., One H&R Block Way, Kansas City, Missouri 64105. Set forth below is a description of the duties of each committee and its members.

 

The members of the Audit Committee are Mr. Lewis (Chairman), Mr. Shaw and Ms. Wood. Mr. Cobb was a member of the Audit Committee during fiscal year 2011 and until he became an employee of H&R Block Management, LLC, a subsidiary of the Company, on May 2, 2011. On that date Mr. Cobb ceased to be independent, and hence was no longer eligible to serve as a member of the Audit Committee. The functions of the Committee are described in the Audit Committee Charter and include making recommendations to the Board of Directors with respect to the appointment of the Company’s independent accountants, evaluating the independence and performance of such accountants, reviewing the scope of the annual audit, and reviewing and discussing with management and the independent accountants the audited financial statements and accounting principles. See the “Audit Committee Report” on page 17. All of the members of the Audit Committee are independent under regulations adopted by the SEC, NYSE listing standards and the Board of Directors Independence Standards. The Board has determined that Mr. Lewis and Ms. Wood are audit committee financial experts, pursuant to the criteria prescribed by the SEC. The Audit Committee held 8 meetings during fiscal year 2011.

 

The members of the Compensation Committee are Mr. Shaw (Chairman), Ms. Wood and Messrs. Lauer, Rohde and Seip. The functions of the Compensation Committee primarily include reviewing and approving the compensation of the executive officers of the Company and its subsidiaries, recommending to the Board of Directors the compensation of the Company’s Chief Executive Officer, and administering the Company’s long-term incentive compensation plans. See the “Compensation Discussion and Analysis” beginning on page 19. All of the members of the Compensation Committee are independent under the NYSE listing standards and the Board of Directors Independence Standards. The Compensation Committee held 7 meetings during fiscal year 2011.

 

The members of the Finance Committee are Mr. Gerard (acting Chairman) and Messrs. Bennett, Cobb and Rohde. The primary duties of the Finance Committee are to provide advice to management and the Board of Directors concerning the financial structure of the Company, the funding of the operations of the Company and its subsidiaries, and the investment of Company funds. The Finance Committee held 4 meetings during fiscal year 2011.

 

The members of the Governance and Nominating Committee are Mr. Gerard (Chairman) and Messrs. Lewis and Seip. The Governance and Nominating Committee is responsible for corporate governance matters, the initiation of nominations for election as a director of the Company, the evaluation of the performance of the Board of Directors, and the determination of compensation of outside directors of the Company. All of the members of the Governance and Nominating Committee are independent under the NYSE listing standards and the Board of Directors Independence Standards. The Governance and Nominating Committee held 3 meetings during fiscal year 2011.

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DIRECTOR COMPENSATION

 

The Board considers and determines outside 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 other companies. The Governance and Nominating Committee may delegate its authority to such subcommittees as it deems appropriate in the best interest of the Company and its shareholders. Management assists the Governance and Nominating Committee in its review by accumulating and summarizing market data pertaining to director compensation levels and practices. The following table describes the compensation paid to our outside directors in fiscal year 2011:

 

 

⁽¹⁾  Paid in four quarterly installments.

⁽²⁾  Subject to a maximum of ten Board meetings per year.

⁽³⁾  Subject to a maximum of ten Committee meetings per year per Committee.

 

Deferred Stock Unit Plan

 

Deferred stock units (“DSUs”) are granted to outside Directors pursuant to the 2008 Deferred Stock Unit Plan for Outside Directors (the “2008 Stock Unit Plan”). The 2008 Stock Unit Plan was approved by the Governance and Nominating Committee and the Board of Directors on June 11, 2008, and was approved by the Company’s shareholders on September 4, 2008. The 2008 Stock Unit Plan provides for the grant of DSUs to directors of the Company or its subsidiaries who are not employees of the Company or any of its subsidiaries. The Plan specifies that the Board of Directors may make grants of DSUs to outside directors in its sole discretion. The number of DSUs credited to an outside director’s account pursuant to an award is determined 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 outside director. The current market value generally is the closing sales price as reported on the NYSE. If an outside director terminates service with the Company for reason other than death, DSUs will be paid to such outside director, in shares of Common Stock, in one lump sum on the six month anniversary date of the termination of service. If an outside director dies prior to the payment in full of all amounts due such outside director under the 2008 Stock Unit Plan, the balance of the outside director’s DSU account will be paid to the outside director’s beneficiary, in shares of Common Stock, within 90 days following the outside director’s death. Currently, the maximum number of shares of Common Stock that may be paid out under the 2008 Stock Unit Plan is 300,000.

 

On September 30, 2010, $100,000 in value of DSUs for the one-year period beginning September 30, 2010 were approved for Ms. Wood and Messrs. Breeden, Cobb, Gerard, Lauer, Lewis, Rohde, Seip and Shaw. The grant date of these awards was November 1, 2010. In addition, on September 30, 2010, Mr. Rohde was awarded DSUs with an aggregate value of $18,056, and Mr. Cobb was awarded DSUs with an aggregate value of $14,772, for the period beginning on the date of each of their respective appointments to the Board of Directors and ending on September 29, 2010. The grant date of these awards was also November 1, 2010. On September 30, 2010, $150,000 in value of DSUs was approved for Mr. Breeden for serving as the non-executive Chairman of the Board for the one year period ending September 29, 2010, and $150,000 in value of DSUs was approved for Mr. Breeden for serving as the non-executive Chairman of the Board for the period beginning September 30, 2010. The grant date of these awards was also November 1, 2010.

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The Company also provides to its non-employee directors free business travel insurance in connection with Company-related travel. 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 Board members. The Board member ownership guidelines provide for non-employee directors to own shares of the Company’s Common Stock with an aggregate value generally exceeding five times the annual cash retainer paid to them.

 

 

DIRECTOR COMPENSATION TABLE

 

The following table sets forth total director compensation for non-employee directors for fiscal year 2011.

 

 

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CORPORATE GOVERNANCE

 

 

Corporate Governance Guidelines

 

Our Board of Directors operates under Corporate Governance Guidelines (the “Guidelines”) to assist the Board in exercising its responsibilities. The Guidelines reflect the Board’s commitment to monitor the effectiveness of policy and decision-making both at the Board level and management level, with a view to enhancing shareholder value over the long term. The Guidelines also assure 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 Guidelines are not intended to be a static statement of the Company’s policies, principles and guidelines, but are subject to continual assessment and refinement as the Board may determine advisable or necessary in the view of the best interests of the Company and its shareholders.

 

Retirement and Tenure Policy

 

The Company’s Articles and Bylaws provide that no director may serve as a member of the Board for a period that extends beyond the twelfth annual shareholders meeting following the annual meeting at which such director was first elected to the Board. Additionally, the Guidelines provide that a director must retire from the Board at the next annual meeting following such director’s 75th birthday.

 

Independent Chairman

 

It is the Board’s policy, and the Company’s Articles 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.

 

Substantial Majority of Board is Independent

 

As further described in the Guidelines, the Board believes that a substantial majority of the Board should consist of directors who are independent under the NYSE listing standards. As described below, seven of the Board’s nine current directors are independent directors within the meaning of the Company’s Board of Directors Independence Standards (the “Independence Standards”) and the NYSE listing standards.

 

The 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.

 

Independent Board Standards

 

In June 2011, the Board conducted an evaluation of director independence regarding the current directors and nominees for director, based on the Independence Standards and the NYSE listing standards. In connection with this review, the Board evaluated commercial, charitable, consulting, familial and other relationships between each director or immediate family member and the Company and its subsidiaries. As a result of this evaluation, the Board affirmatively determined that Messrs. Gerard, Lauer, Lewis, Rohde, Seip and Shaw and Ms. Wood were independent, and that Messrs. Bennett and Cobb were not independent. Upon their respective nominations to the Board in July 2011, the Board affirmatively determined that Messrs. Brown, Ellison and Wright and Ms. Reich were independent.

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Code of Ethics

 

All directors, officers and employees of the Company must act ethically and in accordance with the policies comprising 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 laws, accurate financial reporting, and procedures for promoting compliance with, and reporting violations of, the Code. The Company intends to post any amendments to or waivers of the Code (to the extent applicable to the Company’s Chief Executive Officer, Chief Financial Officer or Principal Accounting Officer) on our website.

 

Succession Planning

 

The Board recognizes the importance of effective executive leadership to H&R Block’s success. The Company’s Board is actively engaged and involved in talent management. The Board discusses the talent pipeline for specific critical roles. 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 climate, diversity, recruiting and development programs.

 

BOARD LEADERSHIP STRUCTURE

 

The Company’s Articles require that the Chairman of the Board not simultaneously be Chief Executive Officer or President of the Company, not have previously served as an executive officer of the Company, and be an independent director pursuant to the NYSE listing standards. As such, the Board is led by an independent Chairman, currently Mr. Gerard. In addition, the Company’s Guidelines require that independent directors constitute a substantial majority of the Board. Messrs. Bennett and Cobb are the only two members of the Board who are not independent.

 

BOARD ACCOUNTABILITY

 

We strongly believe that our current Board structure creates a better balance in leadership and accountability, as the functions of Chief Executive Officer and Board Chairman are significantly different. In addition to balancing responsibilities, this structure enhances the accountability of the Chief Executive Officer to the Board and strengthens the Board’s independence from management. In addition, separating the roles of Board Chairman and Chief Executive Officer allows the Chief Executive Officer to focus his efforts on running our business and managing the Company in the best interests of our shareholders. At the same time, Mr. Gerard as Chairman handles the separate responsibilities of Board and Committee scheduling, Board agendas and other Board organizational tasks, as well as serving on occasion as spokesman for the Board.

 

COMMUNICATIONS WITH THE BOARD

 

Shareholders and other interested parties wishing to communicate with the Board of Directors, the non-management directors, or with an individual Board member concerning the Company may do so by writing to the Board, to the non-management directors, or to the particular Board member, and mailing the correspondence to: Corporate Secretary, H&R Block, Inc., One H&R Block Way, Kansas City, Missouri 64105. Please indicate on the envelope whether the communication is from a shareholder or other interested party. All such communications will be forwarded to the director or directors to whom the communication is addressed. In addition, Mr. Gerard and other Board members have made and make themselves available for consultation and direct communication with significant shareholders.

 

DIRECTOR ATTENDANCE AT ANNUAL MEETINGS

 

Although the Company has no specific policy regarding director attendance at its annual meeting, all directors are encouraged to attend. Board and Committee meetings are held immediately following the annual meeting. All of the Company’s then current directors attended last year’s annual meeting.

 

BOARD’S ROLE IN RISK OVERSIGHT

 

Management is responsible for the Company’s day to day risk management activities, and the Board has oversight responsibility for managing risk, focusing on the adequacy of the Company’s risk management and mitigation processes. In fulfilling this oversight role, the Board works with the Company’s Chief Executive Officer

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and Chief Financial Officer to determine the Company’s risk tolerance and works to ensure that management is identifying, evaluating, and managing the overall risk profile of the Company.

 

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

 

 

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

 

The Company has also established a Risk Management Committee to support the Board and senior management in fulfilling their oversight responsibilities. The Risk Management Committee reports to the Chief Financial Officer and is made up of key management-level employees. The Company’s risk management team and Risk Management Committee assists the Board in its oversight of 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, identifying additional risk mitigation strategies as appropriate, and monitoring emerging risks.

 

 

AUDIT COMMITTEE REPORT

 

The Company’s management is responsible for preparing financial statements in accordance with generally accepted accounting principles 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 accountants are responsible for (i) auditing the Company’s financial statements and expressing an opinion as to their conformity to accounting principles generally accepted in the United States and (ii) auditing management’s assessment of the Company’s internal control over financial reporting and expressing an opinion on such assessment. The Audit Committee of the Board of Directors, composed solely of independent directors, meets periodically with management, the Company’s independent registered public accountants and the internal auditor to review and oversee matters relating to the Company’s financial statements, internal audit activities, disclosure controls and procedures and internal control over financial reporting and non-audit services provided by the independent accountants.

 

The Audit Committee has reviewed and discussed with management and Deloitte & Touche LLP (“Deloitte”), the Company’s independent registered public accountants, the Company’s audited financial statements for the fiscal year ended April 30, 2011. The Audit Committee has also discussed with Deloitte the matters required to be discussed by the Statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1, AU section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T, relating to communication with audit committees. In addition, the Audit Committee has received from Deloitte the written disclosures and the letter required by applicable requirements of the Public Company Accounting Oversight Board regarding Deloitte’s communications with the Audit Committee concerning independence; has discussed with Deloitte their independence from the Company and its management; and has considered whether Deloitte’s provision of non-audit services to the Company is compatible with maintaining the auditor’s independence.

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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, 2011, for filing with the SEC.

 

AUDIT COMMITTEE

David Baker Lewis, Chairman

L. Edward Shaw, Jr.

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, 2011 and 2010, 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.

 

 

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 above consist of fees incurred relating to comfort letter procedures for registration statement filings and other audit-related services.

 

Tax Fees consist of fees for the preparation 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 and other tax advisory services.

 

All other fees are fees billed for professional services that were not the result of an audit or review.

 

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. 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 service 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 fiscal year next 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

18

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 should necessarily be 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 its independent accountant during the 2011 fiscal year was compatible with maintaining the independent accountant’s independence.

 

 

EXECUTIVE COMPENSATION

COMPENSATION DISCUSSION AND ANALYSIS

 

INTRODUCTION

 

We are committed to increasing shareholder value through the execution of specific strategies for our businesses that will provide profitable growth. Superior performance by our executive officers and management team is essential to achieving that goal. To that end, we have designed our executive compensation program to attract, retain, motivate and reward a high-performing executive team.

 

For the fiscal year ended April 30, 2011, our named executive officers (“NEOs”) consisted of the following:

 

 

 

 

EXECUTIVE SUMMARY

 

Our executive compensation decisions are influenced by a variety of factors with the overarching goals of linking pay with performance and creating alignment between management and shareholders’ interests. To that end, we strive to link executive compensation closely to changes in shareholder value as well as the attainment of financial, operational and strategic goals that we believe are critical drivers of sustained value creation over the longer term.

 

When determining the type and amount of executive compensation, we emphasize the direct elements of pay (cash compensation – base salary and annual incentives – as well as long-term, equity-based compensation) as opposed to other, more indirect pay programs (i.e., executive benefits and perquisites). We combine these components in a manner we believe delivers the appropriate reward for contributing to current business results, while at the same time motivating our executives to enhance future business results. We determine the mix

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between cash compensation and long-term, equity-based compensation based on what we believe will motivate our executive team to achieve both our short-term and long-term business objectives while factoring in market competitiveness relative to our peer group.

 

It is the intent of the management and the Board of Directors to continue to increase the percentage of executive compensation that is based on long-term Company performance, and as the Company’s business plan evolves we anticipate increasing our focus on longer-term, multi-year measurement of performance in the overall compensation program.

 

FISCAL YEAR 2011 RESULTS

 

For fiscal year 2011, the Company reported net income from continuing operations of $419.4 million, or $1.35 per share; in fiscal year 2010 these figures were $488.9 million and $1.46 per share respectively. Total revenues for fiscal year 2011 were $3.8 billion, down 2.6% compared to the prior year. Adjusted (non-GAAP) income from continuing operations for fiscal 2011 was $470.6 million, essentially flat to adjusted net income in the prior year. Adjusted earnings per share increased 7% to $1.52, due to a decline in weighted shares outstanding as a result of our fiscal year 2011 share repurchases.

 

Tax Services

 

The Tax Services segment reported fiscal year 2011 pretax income of $767.5 million compared to $867.4 million reported in fiscal year 2010. Adjusting for special items, the segment’s pretax income was $829.9 million, essentially flat to the prior year. Adjusted pretax margin for the segment improved to 28.5%, compared with a pretax margin of 27.9% in the prior year, as a result of cost savings achieved through reductions in force and the office network.

 

Fiscal year 2011 segment revenues declined 2.1% to $2.9 billion. This decline was primarily attributable to the strategic sale of 280 company owned locations to franchisees, as well as lower revenues stemming from our inability to offer refund anticipation loans this tax season.

 

Total U.S. tax returns prepared by H&R Block in fiscal year 2011 grew 6.5 percent, or 1.3 million returns. Total retail returns prepared grew 3.6 percent, while the net average retail fee per tax return prepared declined 3.3 percent. Total digital tax returns prepared increased 13.5 percent, led by growth of 28.7 percent in online filings.

 

Overall, we achieved our highest level of U.S. tax client growth since 2001. Additionally, we also reversed years of market share declines and have built a solid pipeline of new and younger clients.

 

RSM McGladrey

 

In fiscal year 2011, this segment pretax income of $49.0 million was down 16.5% compared to fiscal year 2010. Adjusting for legal charges related to settlement of certain litigation, fiscal year 2011 pretax income was $77.3 million and the pretax margin was 9.3%. This compares to adjusted pretax income of $88.2 million and pretax margin of 10.3% in the prior year. Fiscal year 2011 segment revenues fell 3.6% to $829.8 million.

 

Corporate

 

Corporate operations include corporate support department costs, as well as net interest margin and other gains/losses associated with H&R Block Bank’s mortgage portfolio. Corporate operations reported a pretax loss of $139.5 million in fiscal year 2011 compared to a loss of $141.9 million in the prior year.

 

While operational results in fiscal year 2011 slipped relative to the prior fiscal year as a result of the broad economic recession and the settlement of certain legal issues, the Compensation Committee believes that overall performance was strong in light of the challenging environment the Company faced in fiscal year 2011.

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EXECUTIVE COMPENSATION PRACTICE

 

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

 

 

ELEMENTS OF COMPENSATION SUMMARY

 

The table below summarizes the elements and objectives of our fiscal year 2011 compensation program for executive officers, including NEOs. In general, our pay package contains a mix of elements based on the executive’s individual performance and the Company’s performance against specific pre-established annual financial and operational performance goals.

 

For those awards based on the Company’s performance, our specific decisions around setting performance goals and other actions impacting executive compensation focus on certain areas that we believe are critical value drivers of the business, including: revenue, earnings or EBITDA (earnings before interest, taxes, depreciation and amortization), client growth and retention, and number of tax returns prepared. The actual performance goals vary

21

from year to year based upon the business environment and those goals that are identified as being more important for a particular year.

 

 

In the past several years, the Company has gone through a challenging period in which it has had relatively high turnover in the CEO position. In fiscal year 2011, the Company relied more heavily than usual on stock options as a component of executive compensation, based in part on these transitions, and in part on the difficulty in establishing long-term performance metrics for our evolving business portfolio. As described below, we have hired a new CEO that we believe will provide stable and strong leadership, nominated new Directors who will contribute to our executive oversight and business development, and continued to revise our compensation practices to ensure strong alignment between pay and performance.

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RELATIONSHIP BETWEEN COMPANY PERFORMANCE AND EXECUTIVE COMPENSATION

 

It is our goal to link executive pay to Company performance, and in recent years we have increasingly taken significant steps towards achieving that goal. The chart below provides a summary of the recent revisions we have made to our compensation practices in an effort to move towards alignment of pay with performance:

 

 

As discussed below, we have recently gone through a CEO transition, hiring William C. Cobb to serve as our President and Chief Executive Officer. In an effort to revise our executive compensation program to help maintain stability in the leadership of our Company, we have designed a program with substantial emphasis placed on long-term compensation, which ties the compensation of our executives to the long-term growth of the Company and creates the necessary incentives to attract and maintain top quality executive talent going forward. The following is a more detailed discussion of the process by which the Company hired Mr. Cobb and created his compensation package.

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RESIGNATION OF ALAN M. BENNETT AS PRESIDENT AND CHIEF EXECUTIVE OFFICER AND EMPLOYMENT OF WILLIAM C. COBB AS PRESIDENT AND CHIEF EXECUTIVE OFFICER

 

After the Board became aware in the spring of 2011 that Mr. Bennett was considering retiring as President and Chief Executive Officer of the Company following the 2011 tax season, the Board identified Mr. Cobb as a potential successor to Mr. Bennett. The Board then began discussions with Mr. Cobb, a member of the Board of Directors and an experienced senior executive with the desired background to lead the Company, regarding potential terms of an employment agreement in the event Mr. Bennett retired. Ultimately, Mr. Bennett informed the Company that he was going to retire as President and Chief Executive Officer of the Company effective May 16, 2011. As a result, the Board asked Mr. Cobb to become President and Chief Executive Officer of the Company. Following further discussions and negotiation with Mr. Cobb regarding terms of employment, Mr. Cobb’s Employment Agreement to serve as the Company’s President and Chief Executive Officer following Mr. Bennett’s retirement was recommended by the Compensation Committee and approved by the Board of Directors on April 25, 2011.

 

Mr. Cobb’s Agreement was designed to induce Mr. Cobb to become President and Chief Executive Officer and to provide stability to the Company by providing Mr. Cobb with long-term incentives to remain as President and Chief Executive Officer for an extended period of time. In light of the Company’s recent history with relatively high turnover at the CEO position, the Board considered it important to the future of the Company to design a compensation package that included these long-term incentives.

 

In order to effect a smooth transition from Mr. Bennett to Mr. Cobb, the Directors approved a Transition Agreement with Mr. Bennett regarding the provision of Mr. Bennett’s transition and consulting services. The Transition Agreement does not amend or otherwise modify the terms of Mr. Bennett’s Employment Agreement. For more information on this Transition Agreement, please see page 60.

 

WILLIAM C. COBB EMPLOYMENT AGREEMENT

 

Mr. Cobb’s Employment Agreement, dated April 27, 2011, provides for the following:

 

 

 

 

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EXECUTIVE COMPENSATION BENCHMARKS AND TARGETS

 

The Compensation Committee works with external compensation consultants to define the appropriate market for executive compensation and benchmark our executive compensation program against that market each year. We benchmark pay relative to a specific group of peer companies (the “Peer Group”) based on publicly disclosed information. We also review pay data from multiple survey sources, reflective of general industry pay levels for companies of relevant size based on market capitalization and total revenue for each of the NEOs. For fiscal year 2011, these survey sources were the Hewitt TCM Executive Survey and the Towers Perrin CDB Executive Survey. The Compensation Committee reviews summary survey/peer group data to confirm that the market references are appropriate for our business and the industries in which we compete for executive talent.

 

Our philosophy is for targeted total compensation (base pay plus targeted annual incentive plus long-term incentive grant values) to approximate over time the size-adjusted market median rate with a significant portion of pay tied to performance. On an individual basis, specific officers may have targeted total pay above or below

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market median to reflect factors such as experience, role, performance, etc. The Compensation Committee generally sets performance objectives so that targeted total compensation levels can be achieved only when targeted business performance objectives 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.

 

For a more detailed explanation of our methodology in calculating our compensation packages, please see the Compensation Methodology and Calculation section on page 34.

 

ELEMENTS OF EXECUTIVE COMPENSATION PROGRAM

 

Our executive compensation program consists of the following elements: base salary, short-term incentives, long-term incentives and benefits and perquisites. Each of our compensation elements fulfills one or more of our objectives of attracting, retaining, motivating and rewarding a high-performing executive team. These elements are evaluated by our Compensation Committee, which has authority to approve certain matters and makes recommendations to the Board regarding matters requiring Board approval (such as the compensation of our CEO and certain actions under plans in which the CEO participates). The Board takes these recommendations into account in making determinations.

 

It is the intent of the management and the Board of Directors to continue to increase the percentage of executive compensation that is based on long-term Company performance, and as the Company’s business plan evolves we anticipate increasing our focus on longer-term, multi-year measurement of performance in the overall compensation program.

 

The chart below shows the fiscal year 2011 mix of base salary, short-term and long-term incentive (based on amounts shown in the Summary Compensation Table on page 40) for our CEO and the average for our other NEOs (excluding Mr. Smyth). Mr. Bennett’s short-term incentive includes his sign-on bonus of $900,000.

 

 

BASE SALARY

 

We establish base salaries at levels designed to enable us to attract and retain talented executives and to reward these executives for consistent high performance over a sustained time period. We determine executive base salaries based on the executive’s role, experience and individual performance, as well as market data for similar positions among comparable companies within our industry.

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For fiscal year 2011, base salaries for our NEOs were as follows:

 

 

Mr. Bennett’s base salary for fiscal year 2011 was determined during the negotiation of his employment agreement.

 

On May 1, 2010, while Mr. Brown was still serving as the Company’s Controller, he became the Company’s interim Chief Financial Officer, but did not receive an increase in his base salary at that time. Mr. Brown was ultimately appointed the Chief Financial Officer on September 20, 2010, at which time his base salary was increased to reflect his promotion from Controller and interim Chief Financial Officer to Chief Financial Officer. Mr. Mazzini was appointed President, Retail Tax Services of HRB Tax Group, Inc., on August 31, 2010, at which time his base salary was increased to reflect his promotion from one of three Area Presidents of Retail Tax Services to the President of Retail Tax Services.

 

At their May 2011 meeting, the Compensation Committee approved the following fiscal year 2012 base salaries for our NEOs who are currently executive officers, effective July 1, 2011:

 

 

The salary increases for Messrs. Brown, Mazzini and Turtledove reflect both a general market increase and recognition for their performances in fiscal year 2011. The resulting salaries for Messrs. Brown and Mazzini are positioned well below the market median for similar roles, reflecting the fact that they were recently appointed to their new positions. Mr. Andrews did not receive a salary increase for fiscal year 2012 in light of RSM McGladrey’s fiscal year 2011 performance and because his salary is well-positioned relative to the market.

 

SHORT-TERM INCENTIVE COMPENSATION

 

Our short-term incentive (“STI”) compensation program is designed to reward executives for achieving pre-established annual financial and operational goals. The financial performance goals are based on our fiscal year business plan. They are proposed by the CEO in consultation with other senior executives, and then reviewed by the Compensation Committee and, after any changes that are considered appropriate, are recommended to the Board for approval. These financial performance goals in general are tied directly to the business plan. Threshold and maximum performance goals are set below and above the target goals to establish an appropriate relationship between actual performance and changes in pay. STI target opportunities for our NEOs (as specified below) are intended to place a significant portion of our NEOs’ annual cash compensation at risk with Company performance, thereby aligning our NEOs’ compensation with shareholder interests. These target opportunities are also intended to provide competitive total compensation opportunities within our pay positioning context discussed above.

 

The CEO’s STI target opportunity is significantly higher than the other NEOs because the CEO’s duties and responsibilities are substantially more extensive than the other NEOs. Also, to ensure alignment with

27

shareholders, a larger portion of the CEO’s annual cash opportunity is variable. Mr. Bennett’s target opportunity was set under the terms of his employment agreement, which included a minimum STI payment for fiscal year 2011 of $700,000. The minimum guarantee was deemed necessary by the Board as part of an overall compensation package intended to recruit and attract Mr. Bennett to serve as our President and Chief Executive Officer. To ensure that the guarantee did not diminish Mr. Bennett’s incentive to meet or exceed the Company’s performance goals, the guaranteed amount was set at slightly less than 60% of his target opportunity.

 

We pay STI compensation following completion of our fiscal year, and generally pay STI compensation only to the extent the Company (or the applicable business unit) has met the applicable threshold financial and strategic performance objectives. Prior to payment, the Compensation Committee reviews and approves the STI compensation payouts for senior executives, and recommends the CEO’s STI compensation payout to the Board for approval. STI compensation payouts for fiscal year 2011 would (i) be zero if the previously established threshold performance objectives were not met or (ii) range from 25% to 175% of the targeted award based on actual performance against the objectives (or zero to 200% for Mr. Andrews).

 

STI compensation payouts are paid in cash up to 150% of the targeted award opportunity. Payouts in excess of this level, if any, are delivered in restricted shares of our Common Stock under terms and restrictions identical to those of restricted stock awarded as long-term incentive compensation as described below. This approach is intended to support our retention objectives and enhance the alignment between management and shareholders by retaining a portion of the earned compensation at risk in the form of Company stock. The amount of restricted stock awarded is calculated by dividing the cash value of the applicable incentive compensation by the last reported closing price for our Common Stock as of the later of June 30 or the third trading day following our announcement of earnings for the most recently completed fiscal year (the date on which we historically have awarded restricted stock each year).

 

Actions Pertaining to Fiscal Year 2011 STI Compensation

 

In July 2010, the Compensation Committee recommended and the Board approved the fiscal year 2011 STI performance criteria and objectives for our corporate-level NEOs (Mr. Bennett and Mr. Brown):

 

 

These criteria were selected for Mr. Bennett and Mr. Brown because they represented the key business drivers of shareholder value for fiscal year 2011. The balance was weighted slightly more towards net earnings from continuing operations because this metric best reflects the performance of the Company as a whole and therefore is the key driver of sustainable shareholder value creation.

 

The performance criteria for Mr. Mazzini and Mr. Turtledove for fiscal year 2011 were set as follows:

 

 

These criteria were selected for Mr. Mazzini and Mr. Turtledove because the Compensation Committee determined that based on their positions, their performance criteria and objectives should be more closely

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aligned with U.S. tax client results and related pretax earnings. The balance was weighted slightly more to pretax earnings because this metric is a key driver of long term growth for the tax business.

 

As President of RSM McGladrey, the Committee determined that Mr. Andrews’ STI performance criteria should be linked to both Company and RSM results. Accordingly, his 2011 criteria were set as follows:

 

 

The table below shows the target-level payouts and actual awards under our fiscal year 2011 STI program for our NEOs:

 

 

For fiscal year 2011, Mr. Bennett and Mr. Brown received STI compensation of 97% of their targeted payout amounts primarily because one of their performance criteria, H&R Block net earnings from continuing operations, was only slightly above the threshold performance goal while the number of retail, digital and international clients served in the Tax Segment was at the maximum performance goal. Mr. Mazzini and Mr. Turtledove received fiscal year 2011 STI compensation payouts of 127% of their targeted amounts because not only were pretax earnings close to the target performance goal but also because the number of U.S. retail and digital tax clients served during fiscal year 2011 was at the maximum performance goal. Mr. Andrews’ fiscal year 2011 STI payout was 10% of his targeted amount because only one of his three performance criteria, H&R Block net earnings from continuing operations, slightly exceeded the threshold performance goal for payment.

 

Actions Pertaining to Fiscal Year 2012 STI Compensation

 

At their June 2011 meetings, the Compensation Committee recommended and the Board approved fiscal year 2012 target STI opportunities for our senior executives including the following current NEOs as follows:

 

 

Mr. Cobb’s fiscal year 2012 target opportunity of 125% of his base salary was set under the terms of his employment agreement. Mr. Mazzini’s target opportunity for fiscal year 2012 was increased from 60% to 70% of base salary to make his target opportunity closer to the market median and to reflect his strong performance in his first year as the President of Retail Tax Services.

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The methodology utilized by the Board to determine payouts for fiscal year 2012 STI is commonly referred to as a “plan within a plan” approach. Under this methodology, a specific STI “funding trigger,” or threshold level of performance, was approved by the Board at its June 2011 meeting. Achievement of this threshold, which was set at a specified level of H&R Block net earnings from continuing operations, results in potential funding of the bonuses for the current NEOs at the maximum payout level. Failure to achieve the threshold level of H&R Block net earnings from continuing operations will result in no payouts under the STI plan for fiscal year 2012. Assuming the threshold is attained, the actual payouts will depend on performance against a separate set of performance goals and payouts will range from 0% to 200% of each current NEO’s target STI opportunity. The H&R Block net earnings from continuing operations funding trigger was set in June to ensure that the payouts under the STI plan will be fully deductible by the Company as “performance-based compensation” under Internal Revenue Code Section 162(m). The setting of the detailed performance metrics will be completed prior to the start of tax season. This timing is especially appropriate due to the seasonal nature of the tax business, which delivers the majority of the Company’s revenues in the last four months of the Company’s fiscal year. Given this seasonality, the optimal planning cycle for the Company is generally in the summer and early fall. This methodology allows STI performance metrics to be set after the planning cycle but before the start of the next tax season.

 

LONG-TERM INCENTIVE COMPENSATION

 

Our long-term incentive compensation is designed to support multiple objectives, including (a) aligning management’s interests with those of shareholders, (b) tying compensation to the attainment of long-term operating goals and strategic initiatives, thereby mitigating incentive for management to pursue short-term objectives at the expense of long-term priorities, (c) ensuring that realized compensation reflects changes in shareholder value over the long-term, and (d) attracting and retaining highly skilled executives.

 

Our long-term incentive compensation is largely equity based and is awarded at the Board’s discretion, taking into account the Compensation Committee’s recommendations. We historically have awarded equity-based compensation on an annual basis as of the later of June 30 or the third trading day following our announcement of earnings for the most recently completed fiscal year; however, for fiscal year 2011, those equity-based compensation awards were made on October 1, 2010, after shareholder approval of an amendment to the 2003 Long-Term Executive Compensation Plan to increase the aggregate number of shares issuable under the Plan. From time to time we 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 is based on the executive’s level of job responsibility, long-term potential and individual and Company performance. The award amount is also guided by market data for positions of similar scope and responsibility.

 

In fiscal year 2011, our NEOs (except for Messrs. Bennett and Andrews, as discussed below) received a mix of equity-based compensation consisting of approximately 80% of value in stock options and 20% of value in time-based restricted stock. We weighted the mix of equity-based compensation so that our NEOs received a greater portion of long-term incentive compensation in stock options to ensure that payouts from our equity programs strongly reflect changes in shareholder value. The portion delivered in time-based restricted shares was primarily intended to serve as a retention tool, which the Committee viewed as especially important during fiscal year 2011 as a result of our CEO transition.

 

The forms of long-term compensation awarded in fiscal year 2011 pursuant to our 2003 Long-Term Executive Compensation Plan were as follows:

 

Stock Options

 

Option exercise prices are set at the closing price of the stock on the date of grant and the options generally expire after ten years. Stock options awarded in fiscal year 2011 generally vest in one-fourth annual increments beginning on the one year anniversary of the grant date. Awards granted in prior years generally vest in one-third annual increments beginning on the one year anniversary of the grant date. Prior to vesting, stock options may not be transferred and are in most cases forfeited upon cessation of employment. We have not re-priced previously granted options.

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Restricted Stock

 

Prior to the lapse of restrictions, restricted stock may not be transferred and is in most cases forfeited upon cessation of employment. Restricted stock recipients do not receive cash dividends on any unvested restricted stock grants, except for those grants made prior to fiscal year 2011. Restricted stock recipients may vote unvested restricted stock shares at shareholder meetings. Restricted stock grants awarded in fiscal year 2011 vest in one-fourth annual increments beginning on the one year anniversary of the grant date. Grants made prior to fiscal year 2011 (and those made in fiscal year 2012), generally vest in one-third annual increments on the one year anniversary of the grant date.

 

Performance Cash

 

Pursuant to Mr. Andrews’ offer letter dated June 5, 2009, he was provided with (i) an initial target long-term performance cash award in fiscal year 2010 and (ii) the right to receive annual long-term performance cash award opportunities each subsequent fiscal year. The initial performance cash award and the right to receive subsequent annual performance cash award opportunities were granted on Mr. Andrews’ date of hire and were deemed instrumental in attracting him to the Company.

 

Mr. Andrews’ fiscal year 2011 long-term performance cash award opportunity of $640,000 provided him with the opportunity to earn a payout in the range of 0%-300% of the target award based on RSM McGladrey’s cumulative earnings over a three-year performance period, as follows: (i) maximum long-term performance cash payout (300% of target) for cumulative earnings for fiscal years 2011-2013 of at least $396.8 million, (ii) target long-term performance cash payout (100% of target) for cumulative earnings for fiscal years 2011-2013 of at least $351.7 million, and (iii) no long-term performance cash payout for cumulative earnings for fiscal years 2011-2013 of less than $316.5 million. We believe that using a performance metric specific to RSM McGladrey for this purpose is more appropriate than using a corporate level performance metric because Mr. Andrews’ responsibilities, as President of RSM McGladrey, relate exclusively to RSM McGladrey and not to the Company’s other businesses.

 

Mr. Andrews’ long-term performance cash award opportunity vests after three years (pursuant to performance against the RSM McGladrey cumulative earnings objective) and will be pro-rated if Mr. Andrews’ employment is terminated before the end of the three-year performance period. The award opportunity will be linearly interpolated for performance between the minimum and maximum payouts described above.

 

For fiscal 2011, our NEOs (except for Mr. Smyth) were granted stock options and restricted stock in the following amounts (see above for details regarding Mr. Andrews’ long-term performance cash award):

 

 

 

Mr. Bennett’s stock options were negotiated in connection with his hiring on July 7, 2010, and had a grant date of July 12, 2010. Pursuant to Mr. Bennett’s notice of termination of his employment agreement based upon his retirement, Mr. Bennett’s stock options will expire five years following his termination date of July 31, 2011, and became fully vested on July 11, 2011. Mr. Bennett’s stock options are exercisable as to one-fourth of the shares on each anniversary of the grant date.

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The stock options and restricted stock awarded to Messrs. Brown, Andrews, Mazzini and Turtledove had a grant date of October 1, 2010, and will vest in one-fourth annual increments beginning on the first anniversary of the grant date.

 

ADJUSTMENTS TO LONG-TERM COMPENSATION PROGRAM

 

In June 2012, the Compensation Committee adjusted the long-term compensation program for fiscal year 2012 awards, as follows:

 

 

The charts below highlight the changes in the long-term incentive mix from 2011 to 2012.

 

 

 

Under the new performance share plan, a targeted number of performance shares will be awarded annually as of the later of June 30 or the third trading day following our announcement of earnings for the most recently completed fiscal year. Under the plan:

 

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The Compensation Committee adopted the performance share plan to increase the focus on specific operational metrics and relative TSR. The Committee believes this is an important directional shift. The Company is adopting a three-year business planning cycle and it is expected that future performance share awards will have three-year performance metrics based on this cycle.

 

In conjunction with the adoption of the performance share plan, the Committee substituted performance shares for stock options, reducing stock options from 80% to 50% of the long-term incentive compensation awards for fiscal year 2012.

 

In June 2012, our current NEOs were awarded long-term incentive compensation grants as follows:

 

 

 

Under the terms of Mr. Cobb’s Employment Agreement, Mr. Cobb was to receive a long-term incentive compensation grant for fiscal year 2012 valued at not less than $4,500,000. This grant value was determined during the negotiation of Mr. Cobb’s Employment Agreement and future awards will be determined by the Board based on the recommendation of the Committee that reflect his performance and other appropriate factors. Mr. Bennett was not awarded a long-term compensation grant for fiscal year 2012 because of his retirement as President and Chief Executive Officer of the Company effective May 16, 2011. The values of the fiscal year 2012 long-term incentive compensation grants have increased from fiscal year 2011 for the NEOs (except for Mr. Andrews) to better position them relative to the market and to reflect the strong fiscal year 2011 performance.

 

The fiscal year 2012 performance metrics specified above were selected because we believe they are critical drivers of sustained value creation over the longer term.

 

COMPENSATION “CLAW-BACK” POLICY

 

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 would have been paid or awarded if calculated based on the restated financial results. It is the policy of the Board that it will seek such reimbursement in the event any such situation should arise.

 

BENEFITS

 

We provide certain benefits to all full-time employees such as: 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; and health and welfare benefit programs. 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 executive life insurance plan and our deferred compensation plan. We believe our executive benefit program is conservative relative to market practice, which is consistent with our philosophy to emphasize the direct elements of our executive compensation program.

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

 

Our deferred compensation plan is designed to build retirement savings by offering participants the opportunity to defer salary and short-term incentive compensation. Gains or losses are posted to a participant’s account pursuant to his or her selection of various investment alternatives. The plan benefits are paid following termination of employment, with a six month delay to fully comply with Internal Revenue Code (“IRC”) Section 409A, except in cases of disability or hardship. This plan does not provide for any Company match into the deferred compensation plan but does provide for restoration benefits of our qualified 401(k) plan should executives be limited under IRC Section 401(a)(17) limits on compensation taken into account under the 401(k) plan.

 

PERQUISITES

 

We generally provide minimal perquisites to our executive officers and therefore believe our overall executive perquisites are well below the market median relative to our Peer Group. These perquisites consist primarily of free tax preparation services at local H&R Block offices.

 

In connection with hiring Mr. Bennett, we agreed to provide him with the following perquisites on a tax “grossed up” basis for the six month period beginning July 7, 2010 (the effective date of his election as President and Chief Executive Officer): (i) reasonable and customary furnished housing and rental car expense while in Kansas City in connection with the Company’s business and (ii) use of the Company’s Net Jet share for one round trip per week between Mr. Bennett’s Connecticut or Florida residences and Kansas City. These provisions were implemented in order to encourage Mr. Bennett to immediately assume the role of President and Chief Executive Officer following the unexpected resignation of Mr. Smyth. The provisions were deemed appropriate to ensure that Mr. Bennett would not incur economic costs attributable to commuting to and from our corporate headquarters, thereby assuring that he was available continuously and able to immediately engage in leading the Company upon his hire.

 

COMPENSATION METHODOLOGY AND CALCULATION

 

PEER GROUP

 

The Compensation Committee reviews the Peer Group annually and revises it as circumstances warrant. The Peer Group of companies used in fiscal year 2011 remained unchanged from the 30 companies used in fiscal year 2010. The Compensation Committee originally identified this Peer Group utilizing an objective process to identify service-oriented companies (as opposed to companies in manufacturing, energy, financial services, health care, materials, utilities, media and gaming categories) of relevant size. More specifically, we identified members of the S&P 1500 that fall within service-oriented categories under the Global Industry Classification Standards (“GICS”) and then narrowed this group to the 30 companies immediately adjacent to us in terms of annual revenue and/or market capitalization (15 larger and 15 smaller), subject to certain additional constraints. The resulting Peer Group represented a broad spectrum of companies in service and service-related industries. The Peer Group for fiscal year 2011 consisted of the following companies:

 

 

For fiscal year 2012, the Compensation Committee revised the Peer Group using a screening process that focused more on the nature of the Company’s business. This approach was intended to eliminate companies that

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might be in service or service-related industries but which have clearly different operating models — such as lodging, restaurant and specialty retail — that may employ different compensation philosophies and attract different types of talent. We endeavor to identify companies with greater comparability to our core businesses, including tax and professional services, retail banking and consulting services and products. The revised approach resulted in a peer group of 18 companies with median revenue of approximately $4 billion. It consists of the following companies:

 

 

Relative to this revised peer group, the fiscal year 2012 targeted total compensation for our executive officers was between the 25th percentile and market median.

 

USE OF EXTERNAL CONSULTANTS

 

The Compensation Committee retains Frederic W. Cook & Co., Inc. (“Frederic Cook”) as its external compensation consultant for objective advice and assistance on executive compensation matters. Frederic Cook advised the 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. Frederic Cook provided its advice based in part on prevailing and emerging market practices, as well as our specific business context. In fiscal year 2011, Frederic Cook performed no other services for the Company. It is the general policy of the Board that external compensation consultants for the Compensation Committee must be independent and serve the Compensation Committee exclusively, and may not perform any other services for the Company at any time. Frederic Cook performs no other services for the Company.

 

EXECUTIVE EVALUATION PROCESS

 

Our Compensation Committee reviews our CEO’s performance each year against the financial, strategic and individual objectives established previously by the Board of Directors. Based upon its review and with assistance from its external compensation consultant, the Compensation Committee makes recommendations to the Board of Directors regarding the CEO’s compensation. The Board then determines the CEO’s compensation, taking into account the Compensation Committee’s recommendation and their own review of the CEO’s performance. The CEO does not play a role in determining his own compensation, other than discussing his annual performance review with the Chairman of the Board.

 

For more detailed information on our CEO transition, please see the summary on page 24.

 

Mr. Bennett was hired in fiscal year 2011 following his previously successful tenure as interim President and Chief Executive Officer from December 2007 to August 2008. His compensation for fiscal year 2011 was established during the course of negotiating his employment agreement, and thus was not subject to our normal CEO evaluation process. Mr. Bennett’s fiscal year 2011 short-term incentive compensation bonus was subject to Company performance (as discussed below), but as a result of his appointment as CEO after the fiscal year had commenced, was guaranteed at a minimum level.

 

Mr. Smyth resigned prior to the Compensation Committee and the Board conducting the evaluation process for his fiscal year 2011 compensation.

 

William C. Cobb was elected as the Company’s CEO effective May 16, 2011 and his target compensation for fiscal year 2012 was established during the course of negotiating his employment agreement. Under the terms of Mr. Cobb’s employment agreement, Mr. Cobb was provided with a fiscal year 2012 minimum $4,500,000 long-term compensation grant; however his short-term incentive compensation bonus for fiscal year 2012 is not guaranteed and will depend on the Company’s performance against specific goals established by the Compensation Committee.

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Our Compensation Committee assesses the performance of other executive officers and approves the compensation of such officers, taking into account recommendations of the CEO and input from its external compensation consultant. Our CEO and senior vice president of human resources assist the Compensation Committee in reaching compensation decisions regarding executives other than the CEO and the senior vice president of human resources. In addition, the CEO (with input from other senior executives) develops recommendations for the Board’s approval regarding performance goals under our short-term incentive compensation program. Executive officers do not play a role in determining their own compensation, other than discussing their annual performance reviews with their supervisor and, in the case of the CEO, making recommendations for the Board’s approval regarding performance goals under our variable compensation program.

 

ANNUAL COMPENSATION PROGRAM REVIEW

 

Our Compensation Committee annually reviews all components of compensation for our CEO and other executive officers. This review encompasses all forms of compensation, including base salary, short-term incentives, long-term incentives, and other benefits, as well as amounts pursuant to retirement and non-qualified deferred compensation plans. As a part of this process, the Compensation Committee also reviews tally sheets of executive termination costs for each of these executive officers, including potential payments upon any “change of control.” Based on the fiscal year 2011 review, we believe our executive termination costs are reasonable and below the median relative to our Peer Group. Further information regarding payments upon a change of control and other termination scenarios is provided on page 49.

 

Although non-binding, the Compensation Committee and the Board consider the results of the most recent shareholder advisory vote on executive compensation or “say-on-pay” vote in determining compensation policies and decisions concerning our executives.

 

OTHER AWARDS

 

We occasionally offer sign-on awards as a means to attract executives. These awards are typically offered in negotiating employment terms and generally are in the form of cash, guaranteed short-term incentive bonuses in the initial year of employment, or grants of long-term equity-based compensation, including stock options or restricted stock. In connection with recruiting and attracting Mr. Bennett to serve as the Company’s President and Chief Executive Officer in July 2010, Mr. Bennett was provided with a stock option grant (as discussed above) and a cash sign-on bonus of $900,000 on July 18, 2010. Additionally, in connection with recruiting and attracting Mr. Cobb to serve as the Company’s President and Chief Executive Officer upon Mr. Bennett’s retirement, Mr. Cobb was provided with the following (as discussed above): (i) a stock option to purchase 606,470 shares of the Company’s Common Stock; (ii) 128,720 restricted shares of the Company’s Common Stock; (iii) a cash sign-on bonus of $900,000; and (iv) the right to receive a long-term equity compensation award valued at no less than $4,500,000 for fiscal year 2012.

 

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. Under these guidelines, executive officers are expected to own shares at certain minimum levels within five years of employment taking into account direct and indirect ownership of shares and share equivalents, vested stock options and restricted stock held in Company plans.

 

During fiscal year 2011, we modified our stock ownership guidelines to move away from a fixed number of share ownership requirement to the more common practice of determining ownership levels as a multiple of base

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pay. In addition, beginning in fiscal year 2011, executives are now required to hold any equity that vests or is exercised (net of taxes) until ownership requirements are met. The required levels are as follows:

 

 

Of our current NEOs, Mr. Andrews has attained the ownership target and Messrs. Brown, Mazzini and Turtledove are progressing toward attaining the targets. In instances where an executive fails to attain the target ownership level within five years, our CEO may require the executive to utilize net cash bonuses to purchase shares or shift the mix of equity awards until the guidelines are satisfied. The Compensation Committee and our CEO annually review each executive’s progress toward meeting the stock ownership guidelines.

 

ACCOUNTING FOR STOCK-BASED COMPENSATION

 

We recognize stock-based compensation expense for the issuance of stock options, restricted stock, and performance shares, as well as stock purchased under our employee stock purchase plan pursuant to FASB Accounting Standards Codification Topic 718 (formerly referred to as FAS 123(R)), “Share-Based Payment.” Under this accounting methodology, we recognize stock-based compensation expense for the issuance of stock options, restricted stock, performance shares and shares under our employee stock purchase plan on a straight-line basis over applicable vesting periods.

 

TAX CONSIDERATIONS

 

We believe it is in our shareholders’ best interest to maximize tax deductibility when appropriate. Section 162(m) of the IRC limits to $1 million our federal income tax deduction for compensation paid to any of our NEOs (other than our Chief Financial Officer), subject to certain exceptions, including for performance-based compensation. We have designed the H&R Block Executive Performance Plan and portions of our equity-based compensation so that such compensation would be deductible under Section 162(m), although individual exceptions may occur when the Compensation Committee and Board believe it is in our shareholders’ best interest, balancing tax efficiency with long-term strategic objectives. If necessary to comply with Section 162(m), certain compensation matters will be approved by the Company’s “outside” directors, as such term is defined under Section 162(m).

 

EMPLOYMENT, TERMINATION OF EMPLOYMENT AND SEVERANCE ARRANGEMENTS

 

EMPLOYMENT AGREEMENTS

 

Beginning in fiscal year 2010, the Company made the decision to eliminate employment agreements for executives, except for the President and Chief Executive Officer position, and to standardize employment terms under other comprehensive agreements. Consistent with this decision, during fiscal year 2011, only Mr. Bennett and Mr. Smyth were parties to employment agreements with a subsidiary of the Company. These employment agreements are described beginning on page 45.

 

EMPLOYMENT ARRANGEMENTS

 

Mr. Andrews and Mr. Turtledove have employment arrangement with subsidiaries of the Company, the terms of which are contained within their respective offer letters. Additional information about these offer letters is set forth on page 46.

 

EXECUTIVE SEVERANCE PLAN

 

In connection with the Company’s movement from executive employment agreements to standardized employment terms and agreements, in May 2009, the Company adopted the H&R Block Executive Severance Plan (“Executive Severance Plan”). Information regarding the Executive Severance Plan is included on page 46.

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Messrs. Brown, Andrews, Mazzini and Turtledove are participants in the Executive Severance Plan. Messrs. Bennett and Smyth did not participate in the Executive Severance Plan as the terms of their severance arrangements were included in their respective employment agreements.

 

The Executive Severance Plan is intended to support a variety of objectives, including (a) standardization of severance policy among the senior officers, which ensures internal parity, simplifies internal administration, and mitigates negotiation at hire and termination, and (b) attracting and retaining 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 a review of competitive data and advice from the Compensation Committee’s independent consultant, we believe the benefits our NEOs would receive under various severance scenarios are very conservative relative to the market but sufficient to support the above objectives.

 

CHANGE OF CONTROL PROVISIONS

 

Change of control provisions for our NEOs, except for Mr. Bennett (as discussed below), are set forth in the Executive Severance Plan, discussed on page 47. We provide these “change of 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 of control program helps to ensure the independence and objectivity of our executives when reviewing potential transactions. The Executive Severance Plan does not provide for any gross-up payments to offset tax liabilities that result from change of control payments. All payments under the Executive Severance Plan require both a change of control and the subsequent loss of employment by the NEO (considered a “double trigger”).

 

In addition, in connection with equity awards granted pursuant to our 2003 Long-Term Executive Compensation Plan, our current NEOs have entered into award agreements with the Company that contain provisions accelerating the vesting of equity awards upon certain changes of control and the subsequent loss of employment following the business transaction (considered a “double trigger”). 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 would occur if vesting accelerated automatically as a result of a transaction. Equity acceleration following a change of control under the award agreements is discussed on page 47.

 

Mr. Bennett’s employment agreement provided that in the event of a change in control of the Company prior to July 7, 2011, Mr. Bennett was eligible to receive a tax gross-up payment in the event that it was determined that he received an excess parachute payment under applicable IRS rules. This payment was intended only to restore excise taxes and would not provide additional compensation to restore ordinary income taxes. In addition, it was applicable only if the total parachute payment exceeds the amount under which no excise tax would apply by at least $100,000. If the total parachute payment exceeded this level by less than $100,000, Mr. Bennett’s benefits would have been reduced to avoid the excise tax. Following Mr. Smyth’s resignation as President and Chief Executive Officer of the Company, the Board determined that it was desirable to appoint a new Chief Executive Officer promptly so that planning for the 2011 tax season could be continued without interruption. The Board also concluded that Mr. Bennett’s extensive knowledge of the Company’s business derived from his prior experience as interim Chief Executive Officer in 2007-2008 and his continuing service on the Company’s Board of Directors made him well suited for the position. Because of the manner in which excise taxes are determined under IRS rules, the Board recognized that Mr. Bennett would have been more likely to face potential excise taxes if a change in control occurred shortly after his hire, and that such a consequence could create an economic disincentive to assume the role of President and Chief Executive Officer or to support potential transactions that may be in shareholders’ best interests. Consequently, the Board believed that the provision of a limited tax gross-up was appropriate in light of these circumstances and for several other reasons, including (i) the fact that the gross-up would only have applied if the total value of change in control payments exceeded by at least $100,000 the IRS “safe harbor” (i.e., the amount of parachute payment below which no excise tax would apply), and (ii) the limited time and scope of Mr. Bennett’s gross-up relative to typical gross-up provisions.

 

The Company has historically avoided the use of excise tax gross-up provisions relating to a change in control and has no gross-up obligations in place with respect to any other executive officers, including Mr. Cobb, who assumed the role of President and Chief Executive Officer as of May 16, 2011. Mr. Bennett’s gross-up provision provided potential benefits substantially reduced from gross-up provisions used by many other companies. Most importantly, Mr. Bennett’s gross-up provisions were scheduled to expire approximately one year from the date of Mr. Bennett’s hire (July 7, 2011), compared to the multi-year terms or indefinite expiration dates used by many

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other companies. As a result of Mr. Bennett’s retirement on May 16, 2011, the gross-up provision is no longer applicable and there are no other executives who have a similar benefit. 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.

 

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 recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s 2011 proxy statement.

 

COMPENSATION COMMITTEE

L. Edward Shaw, Jr., Chairman

Len J. Lauer

Bruce C. Rohde

Tom D. Seip

Christianna Wood

 

 

RISK ASSESSMENT IN COMPENSATION PROGRAMS

 

With the assistance of Frederic Cook, the Company 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. Our risk assessment included two work streams — one focused on reviewing areas of enterprise risk and the other focused on identifying compensation design risk. Our enterprise risk analysis examined the types and magnitudes of risks the business areas present to the Company. Our compensation design risk analysis examined the potential risks in the design of our performance-based compensation arrangements. With respect to each performance-based compensation plan, we identified and assessed the risk profile of the plan. Finally, we evaluated on a combined basis the results of the enterprise and compensation risk assessments, on a business-by-business basis. As a result of our analysis, we believe that our compensation policies and practices do not create inappropriate or unintended material risk 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.

 

 

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

 

The following non-employee directors serve on the Compensation Committee of the Board of Directors: L. Edward Shaw, Jr. (Chairman), Len J. Lauer, Bruce C. Rohde, Jr. Tom D. Seip, and Christianna Wood. No director serving on the Compensation Committee during fiscal year 2011 (a) was or was formerly an officer or employee of the Company or any of its subsidiaries, or (b) had any relationships requiring disclosure in the proxy statement.

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SUMMARY COMPENSATION TABLE

 

The following table sets forth for the fiscal year ended April 30, 2011 the compensation paid to or earned by the Company’s principal executive officer and principal financial officer, each of the Company’s three highest paid executive officers (other than the principal executive officer and principal financial officer) who were serving as an executive officer of the Company at the end of such fiscal year, and one additional executive officer (Russell P. Smyth) who served as the Company’s principal executive officer during a portion of the fiscal year ended April 30, 2011 (collectively, the “Named Executive Officers” or “NEOs”).

 

 

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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 Named Executive Officers during the fiscal year ended April 30, 2011. The compensation plans under which the grants in the following table were made are described on pages 30 through 33 in this proxy statement.