UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No.)

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

Check the appropriate box:

o		Preliminary Proxy Statement
o		Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
þ		Definitive Proxy Statement
o		Definitive Additional Materials
o		Soliciting Material Pursuant to §240.14a-12

(Name of Registrant as Specified In Its Charter)

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

Payment of Filing Fee (Check the appropriate box):

þ		No fee required.
o		Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
		1)		Title of each class of securities to which transaction applies:
		2)		Aggregate number of securities to which transaction applies:
		3)		Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
		4)		Proposed maximum aggregate value of transaction:
		5)		Total fee paid:
		o		Fee paid previously with preliminary materials.
		o		Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
		1)		Amount Previously Paid:
		2)		Form, Schedule or Registration Statement No.:
		3)		Filing Party:
		4)		Date Filed:

 

One H&R Block Way

Kansas City, Missouri 64105

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD SEPTEMBER 4, 2008

 

 

 

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 Thursday, September 4, 2008, at 9:00 a.m., Kansas City time (CDT). 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 7, 2008 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

BRET G. WILSON

Secretary

 

Kansas City, Missouri

July 23, 2008

 

H&R BLOCK, INC.

PROXY STATEMENT

FOR THE 2008 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. (CDT), on Thursday, September 4, 2008, 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 the rules recently adopted by the Securities and Exchange Commission (“SEC”), the Company is making this Proxy Statement and its 2008 Annual Report available to shareholders electronically via the Internet. On or before July 25, 2008, 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 4, 2008” (the “Notice”). All shareholders will be able to access this Proxy Statement and our 2008 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 over the Internet or to request a printed copy may be found in the Notice. We believe that this new electronic process will expedite your receipt of the proxy materials and reduce the cost and environmental impact of our annual meeting.

 

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 eight items of business at the annual meeting:

 

 

 

 

 

 

 

 

1 n

WHO IS ENTITLED TO VOTE?

 

Shareholders of record as of the close of business on July 7, 2008 are entitled to vote at the annual meeting. Each share of H&R Block common stock is entitled to one vote.

 

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, “FOR” each of the amendments to the Company’s Restated Articles of Incorporation, “FOR” the advisory proposal on executive pay-for-performance compensation policies and procedures, “FOR” the approval of the 2008 Deferred Stock Unit Plan for Outside Directors to replace the 1989 Stock Option Plan for Outside Directors and “FOR” the ratification of Deloitte & Touche LLP as our independent accountants.

 

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, BNY Mellon Shareowner Services LLC (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. We will give you a ballot when you arrive.

 

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.

 

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 (David Baker Lewis, Richard C. Breeden and L. Edward Shaw, Jr.) will vote your shares FOR items 1 through 8. 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 1, 2008 at 11:59 pm 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

2 n

you owned shares of the Company on the record date of July 7, 2008, 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 at least ten days before the annual meeting date. If no instructions are given within that time frame, the nominees may vote those shares on matters deemed “routine” by the New York Stock Exchange. On non-routine matters, nominees cannot vote without instructions from the beneficial owner, resulting in so-called “broker non-votes.” Broker non-votes are not counted for the 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.

 

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.

 

For Items 1, 6, 7 and 8 on the form of proxy, 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. Shares represented by a proxy that directs that the shares abstain from voting or that a vote be withheld on a matter are deemed to be represented at the meeting as to that matter, and have the same effect as a vote against the proposal.

 

For Items 2, 3, 4 and 5 on the form of proxy, the affirmative vote of a majority of the outstanding shares entitled to vote at the annual meeting of shareholders is necessary for approval of the amendments to the Company’s Restated Articles of Incorporation. Shares represented by a proxy that directs that the shares abstain from voting or that a vote be withheld on a matter are deemed to be represented at the meeting as to that matter, and have the same effect as a vote against the proposal. Shares not voted are not deemed to be represented at the meeting as to that matter, and have the same effect as a vote against the 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, 329,180,751 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. Shares represented by a proxy that directs that the shares abstain from voting or that a vote be withheld on a matter will be included at the annual meeting for quorum purposes. Shares represented by proxy as to which no voting instructions are given as to matters to be voted upon will also be included at the annual meeting 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 4, 2008”?

 

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

3 n

 

HOW MUCH DID THIS PROXY SOLICITATION COST?

 

The Company has retained Mellon Investor Services LLC to assist in the solicitation of proxies on behalf of the Board of Directors for a fee of $8,500 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 Securities and Exchange Commission are available free of charge via a link from this address.

 

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.

 

 

ITEM 1 –

 

ELECTION OF DIRECTORS –

 

The Company’s Restated Articles of Incorporation (the “Articles”) and Amended and Restated Bylaws (the “Bylaws”) currently provide that the number of directors to constitute the Board of Directors shall not be fewer than nine nor more than 15, 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 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 4, 2008, 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. Alan M. Bennett, Thomas M. Bloch, Richard C. Breeden, Robert A. Gerard, Len J. Lauer, David Baker Lewis, Tom D. Seip, L. Edward Shaw, Jr., Russell P. Smyth (appointed Chief Executive Officer of the Company effective August 1, 2008) and Christianna Wood have been nominated by the Board for election as directors of the Company. Directors Henry F. Frigon and Roger W. Hale are not standing for reelection at the annual meeting. Information with respect to each nominee for election as a director of the Company is set forth below. 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 46 of this proxy statement.

 

 

NOMINEES FOR ELECTION AT THIS MEETING:

 

 

4 n

 

 

 

 

5 n

 

 

 

 

6 n

 

 

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.

 

THE BOARD OF DIRECTORS UNANIMOUSLY 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 2008 fiscal year, the Board of Directors held 31 meetings and the standing Board committees held 34 meetings. Each of the incumbent directors attended at least 75% of the aggregate total number of meetings of the Board of Directors and Board committees of which he 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, 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 tab “Company” and then under the heading “Block Investors” 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) and Messrs. Lauer, Seip and Shaw. The Board of Directors adopted a revised charter for the Audit Committee in February 2008, a copy of which is included as Appendix A to this proxy statement. 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” beginning on page 18. All of the members of the Audit Committee are independent under regulations adopted by the Securities and Exchange Commission, New York Stock Exchange listing standards and the Board’s Director Independence Standards. The Board has determined that Mr. Lewis and Mr. Lauer are audit committee financial experts, pursuant to the criteria prescribed by the Securities and Exchange Commission. The Audit Committee held 15 meetings during fiscal year 2008.

 

The members of the Compensation Committee are Mr. Seip (Chairman) and Messrs. Frigon, Hale and Shaw. The Board of Directors adopted a revised charter for the Compensation Committee in February 2008, a copy of which is included as Appendix B to this proxy statement. The functions of the 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 20. All of the members of the Compensation Committee are independent under the New York Stock Exchange listing standards and the Board’s Director Independence Standards. The Compensation Committee held 11 meetings during fiscal year 2008.

 

The members of the Finance Committee are Messrs. Breeden and Lauer (Co-Chairmen), and Messrs. Bloch and Gerard. The primary duties of the Finance Committee are to provide advice to management and the Board of Directors

7 n

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 four meetings during fiscal year 2008.

 

The members of the Governance and Nominating Committee are Mr. Gerard (Chairman), and Messrs. Breeden, Hale and Lewis. The Board of Directors adopted a revised charter for the Governance and Nominating Committee in February 2008, a copy of which is included as Appendix C to this proxy statement. 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 New York Stock Exchange listing standards and the Board’s Director Independence Standards. The Governance and Nominating Committee held four meetings during fiscal year 2008.

 

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. Also, in June 2008, the Governance and Nominating Committee retained Frederic W. Cook & Co., Inc. (“Frederic Cook”) as an external director compensation consultant to evaluate the design and competitiveness of the director compensation program. Frederic Cook provided the Committee with an overview of the current director compensation program, a competitive analysis of total director compensation, and an analysis of emerging trends in director compensation, and made recommendations concerning the structure of the Company’s director compensation program. Based on recommendations from the aforementioned parties and as more fully discussed below, the Board made certain modifications to the director compensation program that apply to fiscal year 2009.

 

Fiscal Year 2008 Compensation  – During fiscal year 2008, directors who were not employed by the Company or its subsidiaries received an annual director’s fee of $50,000. In addition, subject to the meeting fee moratorium discussed below, non-employee directors received meeting fees of $2,000 for each Board meeting attended, committee chairman fees of $2,000 for each committee meeting chaired, and meeting fees of $1,200 for each committee meeting attended in a capacity other than as chairman. The chairman of the audit committee received an annual committee chairman’s fee of $7,500, which the audit committee chairman could choose to receive in cash or shares of the Company’s common stock. On February 1, 2008, the Chairman of the Board, Richard C. Breeden, received a compensation award for serving as the non-executive chairman of the Board in the form of a grant of a stock option to purchase 37,595 shares of the Company’s Common Stock pursuant to the 2003 Long Term Executive Compensation Plan. In light of the high number of special Board and committee meetings held during fiscal year 2008, the Board agreed in February 2008 upon a moratorium on special Board and committee meeting fees (but not regularly scheduled meeting fees) until the Board re-evaluated director compensation.

 

Pursuant to the H&R Block Deferred Compensation Plan for Directors, eligible non-employee directors may defer receipt of their retainers and/or meeting fees. Deferrals are placed in an account maintained by the Company for each director and are fully vested at all times. Gains or losses are posted to each account in accordance with the participant’s selection among fixed rate, variable rate and Company Common Stock investment alternatives. Payment of benefits occurs in cash upon termination of the participant’s service as a director or upon his or her death. The account balance is generally paid out in approximately equal monthly installments over a 10-year period after the occurrence of the event which results in the benefit distribution.

 

Pursuant to the H&R Block Stock Plan for Non-Employee Directors, eligible non-employee directors have the opportunity to receive payment of their retainers and/or meeting fees on a deferred basis in shares of Common Stock of the Company. The retainers and/or fees are initially paid in the form of stock units. The stock units in the directors’ accounts are fully vested at all times. Payment of the stock units must be deferred at least one year after the date such units are credited and the director shall select the date of payment, which may be upon termination of service as a director. The maximum number of shares of Common Stock that may be issued under the Stock Plan is currently 600,000 shares.

 

The 1989 Stock Option Plan for Outside Directors (the “1989 Stock Option Plan”) was terminated by the Board of Directors on June 11, 2008 (except with respect to outstanding options thereunder). The 1989 Stock Option Plan provided for the grant of stock options on June 30 of each year in which the 1989 Stock Option Plan was in effect to

8 n

non-employee directors of the Company. The options granted under the 1989 Stock Option Plan were fully vested and immediately exercisable as of the date of grant. All outstanding options granted under the 1989 Stock Option Plan expire ten years after the date of grant.

 

The Company also offers to its non-employee directors free income tax return preparation services at an H&R Block office of their choice, a 50% discount on tax preparation services from RSM McGladrey, Inc. and 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 501(c)(3) organization 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 membership ownership guidelines provide for non-employee directors to own shares of Company stock with an aggregate value generally exceeding five times the annual retainer paid to non-employee directors.

 

Fiscal Year 2009 Compensation – For fiscal year 2009, directors who are not employed by the Company or its subsidiaries, each will receive an annual director’s fee of $40,000, meeting fees of $2,000 for each Board meeting attended (subject to a maximum of 10 Board meetings per fiscal year) and $1,200 for each committee meeting attended (subject to a maximum of 10 committee meetings per fiscal year for each committee). The chairman of each Board committee will receive an annual committee chairman’s fee as follows: audit committee – $15,000 (or $7,500 per co-chairman); compensation committee – $10,000 (or $5,000 per co-chairman); governance and nominating committee – $10,000 (or $5,000 per co-chairman); and finance committee – $10,000 (or $5,000 per co-chairman). The non-executive Chairman of the Board will receive an annual retainer in the form of $150,000 in value in stock options under the 2003 Long-Term Compensation Plan for Executives. Non-employee directors will also receive $100,000 in deferred stock units, subject to shareholder approval of the 2008 Deferred Stock Unit Plan for Outside Directors as discussed below.

 

Item 7 on the form of the proxy is the approval of the 2008 Deferred Stock Unit Plan for Outside Directors (the “2008 Stock Unit Plan”) to replace the 1989 Stock Option Plan. The material terms of the 2008 Stock Unit Plan are included beginning on page 15 of this proxy statement.

 

 

DIRECTOR COMPENSATION TABLE –

 

The following table sets forth director compensation for non-employee directors for fiscal year 2008.

 

 

NOTES:

 

 

9 n

 

 

 

 

 

 

 

 

 

 

 

CORPORATE GOVERNANCE – 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.

 

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 New York Stock Exchange listing standards. As described below, nine of the Board’s ten current directors are independent directors within the meaning of the Board’s Board of Directors Independence Standards (the “Independence Standards”) and the New York Stock Exchange listing standards.

 

The New York Stock Exchange 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 (amended in June 2008 and attached as Appendix D to this proxy statement) to assist the Board in determining whether a director has a material relationship with the Company.

 

In June 2008, the Board conducted an evaluation of director independence regarding the current directors and nominees for director, based on the Independence Standards and the New York Stock Exchange listing standards. In connection with this review, the Board evaluated commercial, charitable, consulting, familial and other

10 n

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. Breeden, Frigon, Gerard, Hale, Lauer, Lewis, Shaw and Seip and Ms. Wood are independent.

 

Finally, 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.

 

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. Ms. Wood, a non-executive nominee for director, has not previously stood for election by the shareholders and was recommended by the non-management directors.

 

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, at our offices at 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.

 

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.

 

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 preceding and following the annual meeting, with directors attending the annual meeting. All of the Company’s current directors (except for Ms. Wood, who was not a director at the time) attended last year’s annual meeting.

 

 

ITEM 2 –

 

ADOPTION OF AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION TO REQUIRE AN INDEPENDENT CHAIRMAN OF THE BOARD OF DIRECTORS –

 

Our shareholders approved a nonbinding shareholder proposal at the 2007 annual meeting of the shareholders requesting that the Board adopt a policy that the Chairman of the Board (“Chairman”) be an independent director

11 n

who has not previously served as an executive officer of the Company. The Board responded by amending its corporate governance policies and amending the Bylaws to prohibit the Chairman from holding the positions of vice-chairman, Chief Executive Officer (“CEO”) or president, to require that the Chairman be independent pursuant to standards promulgated by the Securities and Exchange Commission and the New York Stock Exchange, and to require that the Chairman shall not have served previously as an executive officer of the Company.

 

REASONS FOR AMENDMENT – The Articles do not require that the Chairman be independent and thus the Board has the ability to change the governance policies and Bylaw provisions requiring an independent Chairman at any time without shareholder approval. The Board has determined that a new Article Six (F) should be added to the Articles to require an independent Chairman (the “Independent Chairman Article Amendment”) so that the requirement of an independent Chairman cannot be changed without shareholder approval.

 

EFFECT OF AMENDMENT – If the shareholders approve the Independent Chairman Article Amendment, the Board believes that shareholder approval will be required for the Board to change its policy of selecting the Chairman from those independent directors who have never served as an executive officer of the Company. The Board believes that including a provision in the Articles requiring an independent Chairman will effectively require shareholder approval to eliminate the position of independent Chairman.

 

TEXT OF AMENDMENT – The text of the Independent Chairman Article Amendment is attached as Appendix E to this proxy statement.

 

APPROVAL REQUIREMENTS – The Board examined the arguments for and against prohibiting the Chairman from holding the positions of vice-chairman, CEO, or president, requiring that the Chairman be independent pursuant to standards promulgated by the Securities and Exchange Commission and the New York Stock Exchange, and requiring that the Chairman shall not have served previously as an executive officer of the Company and determined that requiring an independent Chairman is in the best interests of the Company’s shareholders. The Independent Chairman Article Amendment has unanimously been adopted by the members of the Board. Therefore, approval of the Independent Chairman Article Amendment requires the affirmative vote of at least a majority of the outstanding shares entitled to vote, or approximately 164,590,376 shares.

 

If the shareholders approve the Independent Chairman Article Amendment, it will become effective upon the filing of a certificate of amendment to the Articles with the Missouri Secretary of State. The Company plans to file a certificate of amendment to the Articles promptly after the requisite shareholder vote is obtained.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE ADOPTION OF AN AMENDMENT TO THE COMPANY’S RESTATED ARTICLES OF INCORPORATION TO REQUIRE AN INDEPENDENT CHAIRMAN OF THE BOARD OF DIRECTORS, AND PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE SO VOTED IN THE ABSENCE OF INSTRUCTIONS TO THE CONTRARY.

 

 

ITEM 3 –

 

ADOPTION OF AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION TO DECREASE THE PERMISSIBLE NUMBER OF DIRECTORS –

 

REASONS FOR AMENDMENT – Article Six (A) of the Articles and Section 14 of the Bylaws provide that the number of directors to constitute the Board shall be not less than nine nor more than fifteen. The Board has determined that the Articles should be amended to modify and restate Article Six (A) to decrease the permissible number of directors to not less than seven nor more than twelve (the “Director Number Article Amendment”), and has unanimously adopted a resolution approving the Director Number Article Amendment, declaring its advisability and recommending approval of the Director Number Article Amendment to our shareholders.

 

The Board has passed a resolution amending the Bylaws of the Company to decrease the permissible number of directors to not less than seven nor more than twelve (the “Director Number Bylaw Amendment”), to be effective at the time the Director Number Article Amendment becomes effective following approval by our shareholders and upon the filing of a certificate of amendment with the Missouri Secretary of State implementing the Director Number Article Amendment.

 

EFFECT OF AMENDMENT – If the shareholders approve the Director Number Article Amendment, the Board will continue to have the authority to set the exact number of directors, but the range will be decreased from the current range of nine to fifteen to a range from seven to twelve. Directors Henry F. Frigon (who has served on the

12 n

Board for seventeen years) and Roger W. Hale (who has served on the Board for eighteen years) are not standing for reelection at the Annual Meeting. The Board has set the number of directors to serve for the next year at ten. Thus, the Director Number Article Amendment will not decrease or affect the term of any other current director.

 

The Board believes that decreasing Board size will be both less costly and more effective due to the increased difficulties of operating effectively as a larger board.

 

TEXT OF AMENDMENT – The text of the Director Number Article Amendment is attached as Appendix F to this proxy statement. The text of the Director Number Bylaw Amendment is attached as Appendix G to this proxy statement.

 

APPROVAL REQUIREMENTS – The Board examined the arguments for and against a lower range of board sizes and determined that the range of Board sizes should be decreased. The Director Number Article Amendment has unanimously been adopted by the members of the Board. Therefore, approval of the Director Number Article Amendment requires the affirmative vote of at least a majority of the outstanding shares entitled to vote, or approximately 164,590,376 shares.

 

If the shareholders approve the Director Number Article Amendment, it will become effective upon the filing of a certificate of amendment to the Articles with the Missouri Secretary of State. The Company plans to file a certificate of amendment to the Articles promptly after the requisite shareholder vote is obtained.

 

If the shareholders approve the Director Number Article Amendment, Section 14 of the Bylaws will also be amended to be consistent with the Director Number Article Amendment. The Director Number Bylaw Amendment has been approved by the Board subject to the approval by the shareholders of the Director Number Article Amendment and does not require separate approval by the shareholders. The Director Number Bylaw Amendment will become effective concurrently with the effectiveness of the Director Number Article Amendment.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE ADOPTION OF AN AMENDMENT TO THE COMPANY’S RESTATED ARTICLES OF INCORPORATION TO DECREASE THE RANGE OF SIZES OF THE BOARD, AND PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE SO VOTED IN THE ABSENCE OF INSTRUCTIONS TO THE CONTRARY.

 

 

ITEM 4 –

 

ADOPTION OF AN AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION TO IMPOSE DIRECTOR TERM LIMITS –

 

REASONS FOR AMENDMENT – Neither the Articles nor the Bylaws restrict the number of terms that a director may serve on the Board. The Board has determined that the Articles should be amended to modify and restate Article Six (B) to provide that a director may not serve as a member of the Board beyond the twelfth annual shareholders meeting following the annual shareholders meeting at which such director was first elected to the Board (the “Term Limit Article Amendment”), and has unanimously adopted a resolution approving the Term Limit Article Amendment, declaring its advisability and recommending approval of the Term Limit Article Amendment to our shareholders.

 

The Board has passed a resolution amending the Bylaws of the Company to provide that a director may not serve as a member of the Board beyond the twelfth annual shareholders meeting following the annual shareholders meeting at which such director was first elected to the Board (the “Term Limit Bylaw Amendment”), to be effective at the time the Term Limit Article Amendment becomes effective following approval by our shareholders and upon the filing of a certificate of amendment with the Missouri Secretary of State implementing the Term Limit Article Amendment.

 

EFFECT OF AMENDMENT – If the shareholders approve the Term Limit Article Amendment, a director will not be permitted to seek election as a director if such director has served as a member of the Board beyond the twelfth annual shareholders meeting following the annual shareholders meeting at which such director was first elected to the Board. Directors Henry F. Frigon and Roger W. Hale, who have served on the Board for seventeen and eighteen years, respectively, are not standing for reelection at the Annual Meeting. The Term Limit Article Amendment will not decrease or affect the term of any other current director.

 

The Board believes that a twelve-term limit will require a periodic infusion of fresh thinking by adding new board members. Term limits will avoid any implication of performance issues when a director is not re-elected to the

13 n

Board due to the term limits, and will promote an adequate level of Board turnover to help keep the Board active and alert to marketplace concerns.

 

TEXT OF AMENDMENT – The text of the Term Limit Article Amendment is attached as Appendix H to this proxy statement. The text of the Term Limit Bylaw Amendment is attached as Appendix I to this proxy statement.

 

APPROVAL REQUIREMENTS – The Board examined the arguments for and against the imposition of term limits and determined that term limits should be imposed. The Term Limit Article Amendment has unanimously been adopted by the members of the Board. Therefore, approval of the Term Limit Article Amendment requires the affirmative vote of at least a majority of the outstanding shares entitled to vote, or approximately 164,590,376 shares.

 

If the shareholders approve the Term Limit Article Amendment, it will become effective upon the filing of a certificate of amendment to the Articles with the Missouri Secretary of State. The Company plans to file a certificate of amendment to the Articles promptly after the requisite shareholder vote is obtained.

 

If the shareholders approve the Term Limit Article Amendment, Section 15(a) of the Bylaws will also be amended to be consistent with the Term Limit Article Amendment. The Term Limit Bylaw Amendment has been approved by the Board subject to the approval by the shareholders of the Term Limit Article Amendment and does not require separate approval by the shareholders. The Term Limit Bylaw Amendment will become effective concurrently with the effectiveness of the Term Limit Article Amendment.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE ADOPTION OF AN AMENDMENT TO THE COMPANY’S RESTATED ARTICLES OF INCORPORATION TO IMPOSE DIRECTOR TERM LIMITS, AND PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE SO VOTED IN THE ABSENCE OF INSTRUCTIONS TO THE CONTRARY.

 

 

ITEM 5 –

 

ADOPTION OF AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION TO LIMIT VOTING RIGHTS OF PREFERRED STOCK –

 

On June 11, 2008, the Board approved, subject to the approval of the shareholders, an amendment to the Articles modifying the preferred stock the Board is authorized to issue (the “Preferred Stock Article Amendment”). The full text of proposed Article Three, Section (1) is attached as Appendix J to the proxy statement.

 

REASONS FOR AMENDMENT – The proposed amendment, if approved by shareholders, will allow the Company to retain the flexibility of an undesignated class of preferred stock that may be used to meet potential future capital requirements, while limiting the Board’s ability to use such preferred stock for any defensive or anti-takeover purpose. The Board of Directors represents that it will not without prior shareholder approval issue any series of preferred stock for any defensive or anti-takeover purpose, for the purpose of implementing any shareholder rights plan or with features specifically intended to make any attempted acquisition of the Company more difficult or costly. Although the Board has no immediate plans to issue preferred stock, the Board believes that the authority to issue preferred stock enhances the Company’s flexibility in structuring future public or private financings and possible acquisitions. Preferred stock also may be useful in connection with stock dividends, equity compensation plans or other proper corporate actions. Having the authority to issue preferred stock enables the Company to develop equity securities with terms tailored to specific purposes and to avoid the possible delay associated with, and significant expense of, calling and holding a special meeting of shareholders to authorize additional capital stock. The Board believes that such ability to respond to opportunities and to favorable capital market conditions before the opportunities or conditions pass is in the best interests of the Company and its shareholders.

 

EFFECT OF AMENDMENT – If the proposal is approved, the preferred stock would be so-called “de-clawed” blank check preferred stock in that (i) the voting rights of each share of preferred stock are limited to no more than one vote per share and (ii) the holders of shares of preferred stock will not be entitled to vote on any matter separately as a class (except with respect to an amendment to the Articles that would adversely affect the powers, preferences or special rights of the applicable series of preferred stock or as otherwise provided by law). The Board of Directors will continue to have the ability to issue preferred stock for financing, acquisition or other corporate purposes that have the effect of making an acquisition of the Company more difficult or costly, as could also be the case if the Board were to issue additional common stock for such purposes. Consequently, the Board believes that, as structured, the preferred stock is in the best interests of the Company and its shareholders

14 n

because it (i) is consistent with sound corporate governance principles and (ii) enhances the Company’s ability to take advantage of financing alternatives and acquisition opportunities.

 

TEXT OF AMENDMENT – The proposed amendment to the Articles to modify the Company’s preferred stock consists of a revision of Article Three, Section (1) of the Articles and is attached as Appendix J to this proxy statement.

 

APPROVAL REQUIREMENTS – The Preferred Stock Article Amendment to Article Three, Section (1) has unanimously been adopted by the members of the Board. Therefore, approval of this amendment requires the affirmative vote of at least a majority of the outstanding shares entitled to vote, or approximately 164,590,376 shares.

 

If the shareholders approve the Preferred Stock Article Amendment, it will become effective upon the filing of a certificate of amendment to the Articles with the Missouri Secretary of State. The Company plans to file a certificate of amendment to the Articles promptly after the requisite shareholder vote is obtained.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE ADOPTION OF AN AMENDMENT TO THE COMPANY’S RESTATED ARTICLES OF INCORPORATION TO SO MODIFY ITS PREFERRED STOCK, AND PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE SO VOTED IN THE ABSENCE OF INSTRUCTIONS TO THE CONTRARY.

 

 

ITEM 6 –

 

THE APPROVAL OF AN ADVISORY PROPOSAL ON THE COMPANY’S EXECUTIVE PAY-FOR-PERFORMANCE COMPENSATION POLICIES AND PROCEDURES –

 

We believe that our compensation policies and procedures are centered on a pay-for-performance culture and are strongly aligned with the long-term interests of our shareholders. We also believe that both the Company and shareholders benefit from responsive corporate governance policies and constructive and consistent dialogue. Thus, with Board approval, the Company announced on June 17, 2008 that the Company would voluntarily provide shareholders with the right to cast an advisory vote on our compensation program at the annual meeting of shareholders, beginning with the 2008 Annual Meeting.

 

This proposal, commonly known as a “Say on Pay” proposal, gives you as a shareholder the opportunity to endorse or not endorse our executive pay program through the following resolution:

 

“Resolved, that the shareholders approve the overall executive pay-for-performance compensation policies and procedures employed by the Company, as described in the Compensation Discussion and Analysis and the tabular disclosure regarding named executive officer compensation (together with the accompanying narrative disclosure) in this Proxy Statement.”

 

Because your vote is advisory, it will not be binding upon the Board. However, the Compensation Committee will take into account the outcome of the vote when considering future executive compensation arrangements.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” APPROVAL OF THE PAY-FOR-PERFORMANCE COMPENSATION POLICIES AND PROCEDURES EMPLOYED BY THE COMPENSATION COMMITTEE, AS DESCRIBED IN THE COMPENSATION DISCUSSION AND ANALYSIS, AND THE TABULAR DISCLOSURE REGARDING NAMED EXECUTIVE OFFICER COMPENSATION (TOGETHER WITH THE ACCOMPANYING NARRATIVE DISCLOSURE) IN THIS PROXY STATEMENT, AND PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE SO VOTED IN THE ABSENCE OF INSTRUCTIONS TO THE CONTRARY.

 

 

ITEM 7 –

 

THE APPROVAL OF THE 2008 DEFERRED STOCK UNIT PLAN FOR OUTSIDE DIRECTORS TO REPLACE THE 1989 STOCK OPTION FOR OUTSIDE DIRECTORS –

 

Shareholders are asked to vote to approve the H&R Block, Inc. 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, subject to shareholder approval.

 

The following summary of major features of the 2008 Stock Unit Plan is subject to the specific provisions in the full text of the 2008 Stock Unit Plan as set forth as Appendix K to this proxy statement.

15 n

 

PURPOSE OF THE 2008 STOCK UNIT PLAN – The 2008 Stock Unit Plan is designed to advance the interests of H&R Block and its shareholders by attracting, retaining and rewarding experienced and qualified Directors who are not employees of H&R Block, while creating further incentives for these Directors to maintain a long-term, strategic outlook for H&R Block. Because outside Directors will receive grants of deferred stock units under the 2008 Stock Unit Plan, but will not receive shares of Common Stock until their service terminates, the non-transferable units will contribute to the Directors’ long-term commitment to H&R Block’s financial performance, both in terms of revenue and earnings growth.

 

The 2008 Stock Unit Plan will replace the H&R Block, Inc. 1989 Stock Option Plan for Outside Directors which was terminated by the Board of Directors on June 11, 2008 (the “1989 Stock Option Plan”), except with respect to outstanding options thereunder. As of the termination date of the 1989 Stock Option Plan, outside Directors had the right to purchase 316,000 shares of Common Stock, in the aggregate, pursuant to options granted in connection with the 1989 Stock Option Plan.

 

SUMMARY OF THE 2008 STOCK UNIT PLAN

 

DURATION OF THE 2008 STOCK UNIT PLAN – No awards of deferred stock units may be granted under the 2008 Stock Unit Plan after ten years from the effective date of the 2008 Stock Unit Plan, or September 4, 2018.

 

ELIGIBILITY – Only members of the Board of Directors of H&R Block or any of its subsidiaries who are not employees of H&R Block or its subsidiaries are eligible to participate in the 2008 Stock Unit Plan. With respect only to grants of deferred stock units made within 30 days after initial approval of this 2008 Stock Unit Plan by shareholders, outside Directors whose terms expired at the 2008 annual meeting will be eligible to receive grants of deferred stock units under the 2008 Stock Unit Plan.

 

CREDITS – The number of deferred stock units 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 Common Stock for the ten consecutive trading dates ending on the date the deferred stock units are granted to the outside Director. The current market value generally is the closing sales price as reported on the NYSE or, in the absence of reported sales on the relevant date, the closing sales price on the immediately preceding date on which the sales were reported. Dividend equivalents will also be earned on all deferred stock units and will be recorded in the account of each outside Director.

 

SHARES AVAILABLE UNDER THE 2008 STOCK UNIT PLAN – Subject to adjustment as provided in the 2008 Stock Unit Plan, the maximum number of shares of Common Stock that may be paid out under the 2008 Stock Unit Plan shall not exceed, in the aggregate, 300,000 shares.

 

GRANT OF DEFERRED STOCK UNITS TO OUTSIDE DIRECTORS – Deferred stock units will be granted by the Board of Directors, in its sole and absolute discretion, from time to time during the continuance of the 2008 Stock Unit Plan. With respect only to grants of deferred stock units made within 30 days after initial approval of this 2008 Stock Unit Plan by shareholders, outside Directors whose terms expired at the 2008 annual meeting will be eligible to receive grants of deferred stock units under the 2008 Stock Unit Plan.

 

VESTING – Each deferred stock unit granted under the 2008 Stock Unit Plan is vested upon award.

 

TRANSFERABILITY – Deferred stock units granted under the 2008 Stock Unit Plan may not be transferred or assigned.

 

ADMINISTRATION – The 2008 Stock Unit Plan will be administered by the Board of Directors. The Board of Directors will have the full power and authority to interpret and administer the 2008 Stock Unit Plan in a manner consistent with the 2008 Stock Unit Plan’s provisions, including the power to determine which outside Directors will be granted deferred stock units under the 2008 Stock Unit Plan, and the timing and size of awards to be made under the 2008 Stock Unit Plan.

 

H&R Block will maintain individual deferred stock unit accounts for each outside Director. These accounts will be maintained solely for accounting purposes and shall not require segregation of any H&R Block assets.

 

The Board of Directors shall equitably adjust the number of deferred stock units in the account of each outside Director as the Board deems necessary and appropriate to prevent dilution or enlargement of the rights of the outside Directors resulting from any stock dividend, stock split, or combination or reclassification of shares. If H&R Block becomes a party to any merger, consolidation, major acquisition for stock, reorganization or liquidation, the Board Directors shall make arrangements it deems advisable with respect to outstanding deferred stock units, including but not limited to, the substitution of new deferred stock units for any

16 n

deferred stock unit then outstanding, the assumption of such deferred stock units and the termination of or payment for such deferred stock units.

 

The number of shares available under the 2008 Stock Unit Plan is also subject to adjustment upon the occurrence of any transaction or event described in the immediately preceding paragraph, as set forth in the 2008 Stock Unit Plan.

 

TIMING AND METHOD PAYOUT – If an outside Director terminates service with H&R Block and all related companies for reason other than death, deferred stock units 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 deferred stock unit account will be paid to the outside Director’s beneficiary, in shares of Common Stock, in a lump sum within 90 days following the outside Director’s death.

 

FUNDING OF DEFERRED STOCK UNITS – The 2008 Stock Unit Plan is payable solely from the general assets of H&R Block. Interests in the 2008 Stock Unit Plan will be subject to H&R Block creditors.

 

AMENDMENT, MODIFICATION AND TERMINATION – The Board of Directors may amend, modify, supplement, suspend or terminate the 2008 Stock Unit Plan, provided that no amendment, supplement, modification, suspension or termination of the 2008 Stock Unit Plan may materially adversely affect any award previously provided under the 2008 Stock Unit Plan without the consent of the affected outside Director. No amendment, modification or supplement to the 2008 Stock Unit Plan may increase the number of shares that may be issued under the 2008 Stock Unit Plan or change the termination date of the 2008 Stock Unit Plan without the approval of H&R Block’s shareholders.

 

APPROVAL REQUIREMENTS – The affirmative vote of a majority of shares present in person or represented by proxy, and entitled to vote on this proposal, is necessary for the approval of the 2008 Stock Unit Plan. Shares represented by a proxy which directs that the shares abstain from voting or that a vote be withheld on the proposal are deemed to be represented at the meeting as to that matter, and have the same effect as a vote against the proposal. Broker non-votes will have no effect on the outcome of the vote for this proposal.

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE ADOPTION OF THE H&R BLOCK, INC. 2008 DEFERRED STOCK UNIT PLAN FOR OUTSIDE DIRECTORS TO REPLACE THE 1989 STOCK OPTION PLAN FOR OUTSIDE DIRECTORS, AND PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE SO VOTED IN THE ABSENCE OF INSTRUCTIONS TO THE CONTRARY.

 

 

ITEM 8 –

 

RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS –

 

The Board of Directors has appointed Deloitte & Touche LLP (“Deloitte & Touche”) as independent accountants to audit the Company’s financial statements for the fiscal year ending April 30, 2009. KPMG LLP (“KPMG”) had previously served as the Company’s independent accountants from July 10, 2003 until September 20, 2007, at which time the Company dismissed KPMG as the Company’s independent accountants. The decision to dismiss KPMG was recommended and approved by the Audit Committee of the Company’s Board of Directors (the “Audit Committee”).

 

The audit reports of KPMG on the consolidated financial statements as of April 30, 2007 and 2006 and for the years then ended contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principle. The audit reports of KPMG on management’s assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting as of April 30, 2007 and 2006 did not contain any adverse opinion or disclaimer of opinion nor were they qualified or modified as to uncertainty, audit scope or accounting principle.

 

During the Company’s two most recent fiscal years and through September 20, 2007, (i) there was no “disagreement” (as defined in Item 304(a)(1)(iv) of Regulation S-K and related instructions) with KPMG on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement, if not resolved to the satisfaction of KPMG, would have caused KPMG to make reference to the subject matter of the disagreement in connection with its report and (ii) there were no “reportable events” (as defined in Item 304(a)(1)(v) of Regulation S-K), except for the material weakness in internal control in financial reporting related to the valuation of certain residual interests in securitizations, which KPMG advised the Company of and was reported by the Company in its quarterly report on Form 10-Q for the quarter ended

17 n

January 31, 2007. The material weakness was remediated as of April 30, 2007 and, as indicated above, KPMG issued an unqualified report on the Company’s internal control over financial reporting as of April 30, 2007. The Audit Committee discussed the material weakness with KPMG, and the Company has authorized KPMG to respond fully to inquiries from KPMG’s successor regarding the material weakness.

 

The Company requested that KPMG furnish to the Company a letter addressed to the Securities and Exchange Commission stating whether or not it agrees with the statements contained in the preceding two paragraphs. Such letter, dated September 24, 2007, was filed as an exhibit to the Current Report on Form 8-K filed by the Company on September 24, 2007.

 

On October 12, 2007, the Audit Committee engaged Deloitte as its independent accountants for the fiscal year ending April 30, 2008. During the Company’s two most recent fiscal years and the interim period prior to the engagement of Deloitte, neither the Company nor any one acting on its behalf consulted with Deloitte regarding (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s financial statements or (ii) any matter that was either the subject of a “disagreement” (as defined in Item 304(a)(1)(iv) and the related instructions of Regulations S-K) or a “reportable event” (as defined in Item 304(a)(1)(v) of Regulation S-K).

 

Representatives of Deloitte & Touche and KPMG are expected to attend the annual meeting to respond to appropriate questions and will have an opportunity to make a statement if they so desire. For additional information regarding the Company’s relationship with Deloitte, please refer to the “Audit Committee Report” on page 18.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE RATIFICATION OF THE APPOINTMENT OF DELOITTE & TOUCHE LLP, AND PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE SO VOTED IN THE ABSENCE OF INSTRUCTIONS TO THE CONTRARY.

 

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 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 independent 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 accountants, the Company’s audited financial statements for the fiscal year ended April 30, 2008. The Audit Committee has also discussed with Deloitte the matters required to be discussed by Statement on Auditing Standards No. 114 relating to communication with audit committees. In addition, the Audit Committee has received from Deloitte the written disclosures and the letter required by Independence Standards Board No. 1 relating to independence discussions with audit committees; 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.

 

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, 2008, for filing with the Securities and Exchange Commission.

 

AUDIT COMMITTEE

David Baker Lewis, Chairman

Len J. Lauer

Tom D. Seip

L. Edward Shaw, Jr.

18 n

 

AUDIT FEES –

 

The following table presents fees for professional services rendered by Deloitte & Touche LLP for the audit of the Company’s annual financial statements for the year ended April 30, 2008 and for professional services rendered by KPMG LLP for the audit of the Company’s annual financial statements for the year ended April 30, 2007 and fees billed for other services rendered by Deloitte & Touche LLP and KPMG LLP for such years, unless otherwise noted:

 

 

 

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.

 

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.

 

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 Securities and Exchange Commission’s rules on auditor independence. The Audit Committee will also consider whether the independent auditor is best positioned to provide the most effective and efficient service and whether the service might enhance the Company’s ability to manage or control risk or improve audit quality. All such factors will be considered as a whole and no one factor 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 2008 fiscal year was compatible with maintaining the independent accountant’s independence.

19 n

 

EXECUTIVE COMPENSATION –

 

COMPENSATION DISCUSSION AND ANALYSIS

 

INTRODUCTION – We are committed to increasing shareholder value through profitable growth and the execution of specific strategies for each of our businesses. 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, 2008, our named executive officers (“NEOs”) consisted of the following:

 

 

EXECUTIVE COMPENSATION PHILOSOPHY AND CORE PRINCIPLES – Our philosophy is to link executive compensation closely to shareholder value creation. This linkage may be direct to total shareholder return, or to financial, operational, and individual measures that we believe ultimately drive shareholder value. We establish performance objectives, consistent with our business planning process, that reflect meaningful progress toward strategy execution and shareholder value creation. Our executive compensation programs are designed to achieve pay for performance and alignment with long-term shareholder interests.

 

When determining the type and amount of executive compensation, we emphasize the direct elements of pay (current cash compensation and 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 appropriate awards for contributing to current business results, while at the same time motivating our executives to enhance future business results. We determine the mix between cash compensation and long-term, equity-based compensation based on market competitiveness and what we believe will motivate our executive team to achieve our business objectives.

 

The Compensation Committee works with 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, including the 25th, 50th and 75th percentile market pay data for each of the NEOs. For fiscal year 2008, these survey sources are the Hewitt TCM Executive Survey, the Mercer Benchmark Database Survey, the Towers Perrin CDB Executive Survey and the Wyatt Top Management Survey. The Compensation Committee reviews all data to confirm that the market references are appropriate for our business and the industries in which we compete for executive talent. For current and former NEOs, Peer Group data and survey data are considered to develop market references.

 

Generally, our philosophy is for targeted total compensation to approximate the market median with a significant portion of pay tied to performance, although individual executive officers may have targeted total pay above or below market median to reflect factors such as experience, tenure, role, performance, etc. The Compensation Committee generally sets performance objectives such that the targeted level of total compensation can be achieved only when targeted business performance objectives are met. Consequently, executives may receive total compensation substantially above or below targeted levels depending upon business performance.

20 n

PEER GROUP – The Compensation Committee reviews the Peer Group annually and revises the Peer Group as circumstances warrant. In light of our unique business portfolio in fiscal year 2008 (which consisted of tax services, mortgage services, investment services and business services), there was no true peer for compensation benchmarking purposes. Accordingly, we constructed a market reference of companies with (i) business lines similar to ours and (ii) of similar size, revenues, earnings and market capitalization. The Peer Group for fiscal year 2008 consisted of the following companies:

 

 

We changed the Peer Group for fiscal year 2009, to reflect our current business and, in particular, our exit from the mortgage business in fiscal year 2008. Generally, we established an objective process for identifying service-oriented (as opposed to manufacturing) companies 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”). We then narrowed this group to the 40 companies immediately adjacent to us in terms of annual revenue (20 larger and 20 smaller), subject to the following additional constraints: (i) market value approximately one half to twice our market value at the time; (ii) market-value-to-revenue ratio approximately one half to twice our ratio at the time of analysis; (iii) positive net income; and (iv) no more than 20% of the fiscal year 2009 Peer Group may fall within the financials sector as defined by GICS. The resulting Peer Group represents a broad spectrum of companies in service and service-related industries. Members of the 2009 Peer Group do not compete directly with us. We believe the 2009 Peer Group provides a reasonable guideline for the Committee’s use in determining compensation for our executives.

 

The fiscal year 2009 Peer Group is as follows:

 

 

USE OF EXTERNAL CONSULTANTS – The Compensation Committee retains Semler Brossy Consulting Group, LLC (“Semler Brossy”) as an external compensation consultant for objective advice and assistance on executive compensation matters. Among other things, Semler Brossy advises the Committee on the assessment of market compensation levels, our pay positioning relative to the market, the mix of pay, incentive plan design, and other executive employment terms. Semler Brossy provides its advice based in part on prevailing and emerging market practices, as well as our specific business context. In fiscal year 2008, Semler Brossy performed no other services for the Company. The Compensation Committee has the right to terminate Semler Brossy’s services at any time.

21 n

 

EXECUTIVE EVALUATION PROCESS – Our Compensation Committee normally 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, the Compensation Committee makes recommendations to the Board of Directors (none of whom are employees of the Company or its subsidiaries) regarding the CEO’s compensation. The Board then determines the CEO’s compensation, taking into account the Compensation Committee’s recommendation and its own review of the CEO’s performance. During fiscal year 2008, we hired Alan M. Bennett to serve as our CEO on an interim basis until we hired a permanent CEO. Mr. Bennett’s compensation for fiscal year 2008 was established during the course of negotiating his interim employment arrangement and thus was not subject to our normal CEO evaluation process.

 

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

 

ELEMENTS OF EXECUTIVE COMPENSATION PROGRAM – Our executive compensation program consists of four 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.

 

Base Salary – We establish and pay base salaries at levels designed to enable us to attract and retain superior executive talent and to reward executives for consistent high performance over a sustained time period. We determine executive base salaries based on the executive’s role, experience, and performance, as well as relative responsibilities within the Company and market data for similar positions.

 

For fiscal year 2008, base salaries for our NEOs were as follows:

 

 

Mr. Bennett was hired to serve as our Chief Executive Officer on an interim basis for the period beginning November 20, 2007 and ending on May 20, 2008 at a base salary of $450,000 for his employment term (annualized at $900,000 per year). The increase for Ms. Shulman reflects an increase in her responsibilities (and corresponding adjustment of $92,500 in base salary) associated with her election as our Chief Financial Officer in fiscal year 2008. The increases for Messrs. Tait and Gokey reflected a general increase to keep pace with market movement. The increase for Mr. Allanson reflects increased responsibilities and the increased strategic significance of the Company’s digital tax preparation business. The increase for Mr. Ernst reflected an adjustment to bring his salary closer to a market comparable level. The increase for Mr. Trubeck reflected both a general market increase and recognition of his performance in fiscal year 2007. Mr. Dubrish did not receive a salary increase due to the pending sale of Option One Mortgage Corporation (“OOMC”) and the retention award described on page 30. The increase for Mr. West reflected an increase in his responsibilities and the increased strategic significance of the Company’s commercial markets business.

22 n

At their June 2008 meetings, the Compensation Committee approved the following base salaries for our NEOs who currently are officers, effective July 1, 2008:

 

 

In May 2008, Mr. Bennett’s employment term was extended on an “at will” basis at the same annual rate of base salary until the Company’s hiring of a permanent chief executive officer. The increase for Ms. Shulman reflected both a general market increase and recognition of her performance in fiscal year 2008. The increases for Messrs. Tait, Gokey and Allanson reflect a general increase to keep pace with market movement.

 

Short-Term Incentive Compensation – Our short-term incentive (“STI”) compensation program is designed to reward executives for achieving pre-established annual financial and strategic objectives and, in some cases, individual performance objectives. The financial performance goals are based on our fiscal year business plan, which is developed by the CEO (with input from other senior executives) and approved by the Board. Performance targets in general are tied directly to the business plan. Threshold and maximum performance goals are set above and below the target goals to establish an appropriate relationship between changes in performance and changes in pay. Each year, the Compensation Committee reviews the financial performance goals and other strategic performance objectives for use under the STI compensation program for the following year.

 

We pay STI compensation following completion of our fiscal year, and generally pay STI compensation only to the extent the Company (or applicable business unit) has met the applicable financial and strategic performance objectives previously reviewed and approved by the Compensation Committee for business unit-level executives and by the Board for corporate-level executives. Prior to payment, the Compensation Committee reviews and approves the STI compensation payouts for business unit-level executives, and the Board (based on Compensation Committee recommendations) reviews and approves STI compensation payouts for corporate-level executives. STI compensation payouts can range from 0% to 200% of the target award based on actual performance against previously established objectives.

 

STI compensation payouts generally are paid in cash. Any payouts in excess of 150% of the targeted payouts (“Restricted Stock STI Payouts”) are paid 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. 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 award restricted stock each year). We pay Restricted Stock STI Payouts to provide an incentive for sustained high performance over an extended time period.

 

Actions Pertaining to Fiscal Year 2008 STI Compensation.  In June 2007, the Compensation Committee recommended and the non-employee members of the Board approved the fiscal year 2008 STI performance criteria and objectives for corporate-level executive officers:

 

 

These criteria were selected because they were believed to represent the key corporate and business unit drivers of shareholder value for fiscal year 2008. This performance framework recognizes the importance of consolidated revenues, pre-tax earnings and earnings per share (“EPS”) and also focuses our corporate-level executives on our key strategic business units. In approving these criteria, the Board retained the right to

23 n

re-examine the criteria if (i) OOMC was not sold by September 30, 2007 or (ii) discontinued operations’ performance for fiscal year 2008 differed significantly from that contemplated by our fiscal year 2008 plan.

 

For business unit-level NEOs, STI performance criteria were weighted more towards business unit performance, with 20% of targeted STI compensation tied to corporate EPS from continuing operations and 80% based on business unit performance criteria (such as pre-tax earnings and client growth) and strategic objectives. This framework reflects the greater and more direct impact of unit-level executives on their business units. These criteria were selected as the key corporate and business unit drivers of shareholder value.

 

Our agreement to sell OOMC was terminated in fiscal year 2008, and our discontinued operations performance for fiscal year 2008 was significantly worse than contemplated by our fiscal year 2008 plan. Accordingly, the Board (based on the Compensation Committee’s recommendation) re-examined and adjusted the fiscal year 2008 STI performance criteria and objectives to eliminate any payout pertaining to our corporate EPS from continuing operations and consolidated pretax earnings from continuing operations. This elimination (and corresponding reduction to our NEOs’ STI program payouts) was made in consideration of our substantial losses on a consolidated basis and the corresponding adverse impact on shareholder value generated by our discontinued operations in fiscal year 2008. The table below provides (i) the target-level payout under our 2008 STI program for our NEOs (the target-level payout for Ms. Shulman is prorated to reflect Ms. Shulman’s assumption of increased responsibilities in being appointed as our chief financial officer in fiscal year 2008), (ii) the payout that would have occurred under our original 2008 STI performance criteria and objectives and (iii) awards actually paid based on performance against previously established 2008 STI program performance objectives (as subsequently adjusted by the Board):

 

 

For fiscal year 2008, actual STI compensation payouts for Messrs. Tait and Gokey were greater than targeted payouts primarily because pre-tax earnings for their respective business units exceeded the corresponding pre-established performance targets. Actual fiscal year 2008 STI compensation payouts for Mr. Allanson and Ms. Shulman were less than targeted payouts because the corporate EPS from continuing operations and consolidated pretax earnings from continuing operations components of the STI performance criteria were eliminated. Mr. Bennett did not receive a payout under the 2008 STI program. Instead, Mr. Bennett received a guaranteed bonus pursuant to his employment contract, as described in “Other Awards” below. Mr. West’s STI compensation payout was contractually stipulated by his severance agreement.

 

In June 2008, the Compensation Committee approved a discretionary short-term incentive award to Ms. Shulman of $50,000. This award was paid in recognition of Ms. Shulman’s efforts regarding our improved capital structure, funding of our working capital requirements through our tax season and the sale of the OOMC servicing business during fiscal year 2008.

24 n

 

Actions Pertaining to Fiscal Year 2009 STI Compensation.  At their June 2008 meetings, the Compensation Committee recommended and the Board approved fiscal year 2009 target STI opportunities for our corporate-level NEOs, and our Compensation Committee approved target STI opportunities for our business unit-level NEOs as follows:

 

 

These target opportunities are intended to place a significant portion of our NEOs’ fiscal year 2009 total 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 earlier.

 

The Compensation Committee approved and recommended for Board approval consolidated net income and tax segment professional services client growth as fiscal year 2009 STI performance criteria for our corporate-level NEOs. The Compensation Committee also approved the 2009 STI performance criteria for business unit-level NEOs, which typically include consolidated net income and business-unit-specific criteria such as business-unit-level net income and client growth or revenue growth targets. These criteria were selected as the key corporate and business unit drivers of shareholder value. The performance targets were established at levels such that executives will receive a target-level payout if we meet our fiscal year 2009 business plan goals. The fiscal year 2009 business plan goals are broadly consistent with financial performance guidance announced publicly in June 2008.

 

Long-Term Incentive Compensation – We pay equity-based compensation to encourage stock ownership by our executive officers and to provide executives an economic interest in increasing shareholder value over the long term, thereby aligning executive and shareholder interests. We also use equity-based compensation to encourage retention by providing for equity-based compensation to vest over multi-year periods. We believe that our equity-based compensation is effective in attracting, retaining, and rewarding executives and key employees.

 

Equity-based compensation is awarded at the Board’s discretion, taking into account the Compensation Committee’s recommendations. We generally award 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. 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 responsibility, performance and long-term potential. The award amount is also guided by market data for positions of similar scope and responsibility.

 

Our NEOs receive equity-based compensation in the form of stock options and performance shares. In addition, our NEOs may occasionally receive grants of restricted stock. In fiscal years 2008 and 2009, our NEOs received a mix of equity-based compensation consisting of approximately 75% of value in stock options and 25% of value in performance shares, respectively. The Compensation Committee weighted the mix of these awards to be consistent with our objective of providing compensation that is appropriately balanced from an at-risk perspective. We weight the mix of equity-based compensation so that our NEOs receive a greater portion of long-term value in stock options and performance shares (rather than restricted shares) to more closely align their pay with company performance.

 

The forms of equity-based compensation, which are delivered pursuant to our 2003 Long-Term Executive Compensation Plan, are as follows:

 

Stock Options – We generally grant stock options 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. In cases of grants for new hires, promotions and special awards, options are awarded as of the first trading day of the month following the month during which the hiring, promotion or special award occurred. Option exercise prices are set at the closing price of the stock on the date of grant and the options expire after ten years. Options granted in fiscal year 2008

25 n

generally become exercisable (i) over a three-year period in one-third increments or (ii) if earlier, upon occurrence of a “change of control” of the Company as explained below. We do not re-price previously granted options.

 

Performance Shares – Beginning in fiscal year 2007, a targeted number of performance shares are 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. A participating executive has the opportunity to receive between 0.5 times and 1.5 times the target number of performance shares based on performance against a pre-established objective. The 1.5 times maximum opportunity provides an incentive for driving significant shareholder value over the long-term. We limited the range of payout to 0.5 to 1.5 times the target number of shares to recognize the complexities of setting and achieving performance objectives over the long term. In addition, the actual value of shares earned is affected directly by our share price at the end of the performance period.

 

Performance shares vest after three years (pursuant to performance against pre-established objectives) and are contingent upon the recipient remaining employed with the Company throughout the three-year performance period. Performance shares are settled upon vesting using shares of our common stock and do not pay dividends during the vesting period. Instead, dividend equivalents are carried as fractional performance shares until vesting, at which time they are settled as additional shares of common stock. Unvested performance shares do not carry voting rights. Shares earned through achievement of performance objectives carry voting rights once the shares are paid out.

 

Performance shares granted in fiscal year 2008 for corporate-level executives and unit-level executives in Tax Services will be earned based on our relative total shareholder return for the three-year period ending April 30, 2010. Relative total shareholder return will be measured against the S&P 500 at the following parameters:

 

 

Performance shares granted in fiscal year 2008 to Business Services executives will be earned based on the following cumulative earnings targets: (i) maximum shares earned (1.5 times target) for cumulative earnings from continuing operations before income taxes for fiscal years 2008 through 2010 of $300 million, (ii) target shares earned (1.0 times target) for cumulative earnings from continuing operations before income taxes for fiscal years 2008 through 2010 of $245 million, and (iii) minimum shares earned (0.5 times target) for cumulative earnings from continuing operations before income taxes for fiscal years 2008 through 2010 of $220 million. We believe that using business unit performance objectives, rather than relative total shareholder return, is more appropriate for our smaller business units because senior executives in these business units have a greater impact upon their business unit results.

 

Awards will be linearly interpolated for performance between minimum and target or between target and maximum as defined above.

 

Restricted Stock – Restricted stock is granted 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 and, in certain cases, upon hiring or promotion or as a special award. Restrictions on restricted stock granted in fiscal year 2008 lapse over a three-year period in one-third annual increments beginning on the first anniversary of the date of issuance. 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 receive cash dividends on unvested restricted stock on the same basis as if such stock were unrestricted. Restricted stock recipients may vote unvested restricted stock shares at shareholders meetings. In fiscal year 2008, Ms. Shulman was the only NEO to receive restricted stock. She received two restricted stock awards, the first award of 2,160 shares to provide a retention incentive and a second award of 10,275 shares upon her election as our Chief Financial Officer.

26 n

In June 2007, our NEOs were granted stock options and performance shares (for the fiscal year 2008 through the fiscal year 2010 performance period) in the following amounts:

 

 

The stock options are exercisable at a price of $23.37 per share (the date-of-grant closing price on June 30, 2007). The performance shares for Messrs. Gokey, Allanson, Ernst, Trubeck and West and Ms. Shulman vest after three years, with the actual number of performance shares to be received depending on our relative total shareholder return as compared to the S&P 500 as described above. The performance share terms for Mr. Tait provide for vesting after three years, with the actual number of performance shares Mr. Tait will ultimately receive depending on our Business Services segment cumulative net earnings (excluding discontinued operations for fiscal year 2008) for the three fiscal years ending on April 30, 2010.

 

In addition to the stock option grants to our NEOs described above, Mr. Bennett was granted a stock option to purchase 150,000 shares of common stock in connection with his employment with the Company as our interim chief executive officer. The stock option is exercisable at a price of $19.46 per share (the date-of-grant closing price on December 3, 2007), vests as of May 20, 2008 (the expiration of Mr. Bennett’s term of employment), and expires on December 3, 2012. The Board granted this stock option as part of an overall compensation package intended to recruit and attract Mr. Bennett to serve as our chief executive officer through May 20, 2008. The amount of the stock option grant, and its related terms, took into account Mr. Bennett’s level of responsibility as well as the challenges facing the Company at the time Mr. Bennett assumed the chief executive officer role.

 

In June 2008, our NEOs who are currently officers were granted stock options and performance shares in the following amounts:

 

 

The stock options are exercisable at a price of $21.81 per share (the date-of-grant closing price on July 3, 2008). The performance shares for Ms. Shulman and Messrs. Gokey and Allanson vest after three years, with the actual number of performance shares to be received depending on our relative total shareholder return as compared to the S&P 500 as described above. The performance share terms for Mr. Tait provide for vesting after three years, with the actual number of performance shares Mr. Tait will ultimately receive depending on our Business Services segment cumulative net earnings for the three fiscal years ending on April 30, 2011. The increase in the number of options and performance shares awarded to Ms. Shulman reflect her increased responsibilities in being appointed as our chief financial officer in fiscal year 2008. The increase in the number of options and decrease in performance shares for Messrs. Tait and Gokey is due primarily to shifting the mix of equity-based compensation for our NEOs so that stock options uniformly comprise 75% of the value of equity-based compensation. The decrease in the number of options and performance shares for Mr. Allanson in fiscal year 2008 is due to a special one-time

27 n

increased equity-based compensation award in fiscal year 2007 that reflected Mr. Allanson’s increased responsibilities and the increased strategic significance of the Company’s digital tax preparation business.

 

Compensation “Clawback” Policy – In the event of a restatement to 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.

 

Benefits – We provide certain benefits to all full-time employees such as: employer matching contributions to our qualified retirement plans; 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 survivor plan and deferred compensation plan. We believe our executive benefit program is generally conservative relative to market practice, which is consistent with our philosophy to emphasize the direct elements of our executive compensation program.

 

Our executive survivor plan is a 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. We contribute an annual match to the plan equal to 100% of the first 5% of aggregate salary and bonus deferred to the plan and our qualified retirement plans, less any employer matching contributions made previously to one of our qualified retirement plans for that year. Company contributions vest (i) over a ten-year period starting from the date an executive officer first participates in the plan and (ii) upon a change in control. 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, except in cases of disability or hardship.

 

Perquisites – We generally provide minimal perquisites to our senior executive officers. These perquisites consist primarily of reimbursements for tax preparation fees and reimbursements for physical examinations. We own a fractional interest in a private aircraft for executives and directors to use for business travel purposes. Personal use of this private aircraft is limited to our chief executive officer as approved by the Board in advance or pursuant to a contractual arrangement approved by the Board. Our chief executive officer reimburses us for this personal use at the same contractual rate we are charged, except to the extent provided otherwise pursuant to a contractual arrangement approved by the Board. We believe our overall executive perquisites are conservative relative to broader market practice.

 

In connection with hiring Mr. Bennett to serve as our interim chief executive officer, we agreed to provide Mr. Bennett the following perquisites: (i) reasonable and customary furnished housing when Mr. Bennett is in Kansas City for company business; (ii) use of our private aircraft for one round trip per week between Mr. Bennett’s personal residences and Kansas City; (iii) additional compensation necessary to gross up the foregoing housing and private aircraft benefits to cover anticipated income and employment tax liabilities; (iv) rental car usage while Mr. Bennett is at our headquarters; and (v) reimbursement for any out-of-network charges Mr. Bennett may incur while in Kansas City on company business under the terms of his current retiree medical program. We provided these perquisites in recognition that it would not be practical for Mr. Bennett to relocate to Kansas City during his likely short-term tenure as our interim chief executive officer. We also provided these perquisites with a view to recruit and attract Mr. Bennett to serve as our interim chief executive officer.

 

TERMINATION OF EMPLOYMENT AND SEVERANCE ARRANGEMENTS –

 

Severance – We provide severance compensation and health and welfare benefits under the H&R Block Severance Plan (the “Severance Plan”) to certain executives whose employment is involuntarily terminated in certain instances. We offer the Severance Plan as a tool for attracting and retaining talented executives and structure the Severance Plan to be generally consistent with competitive market practice. In addition, we may from time to time as circumstances warrant pay severance compensation and related benefits over and above benefits provided by the Severance Plan.

 

Under the Severance Plan, an employee who is involuntarily terminated will qualify for compensation and benefits under our severance plan unless (i) the employee was offered a comparable position, (ii) the termination resulted from a sale of assets or other corporate acquisition or disposition, (iii) the employee’s position was

28 n

redefined to a lower salary rate, (iv) the employee was terminated for “cause,” or (v) the employee’s employment contract was not renewed. Executive officers with employment agreements receive severance pay based upon the number of years of service as defined in their employment agreement. Otherwise, an executive receives one month’s salary as severance pay for each year of service, subject to a minimum of 6 months’ severance pay and a maximum of 18 months’ severance pay. In addition, executive officers receive a pro-rated payment of short-term incentive compensation at the target pay-out rate, based on the executive’s years of service. The Severance Plan also provides for (i) stock options that would have vested within 18 months after termination to vest as of the termination date and (ii) restrictions on restricted shares that would have lapsed within six months after termination to lapse as of the termination date. Pursuant to the Severance Plan, employees may exercise stock options vested as of the termination date for a period following termination generally not exceeding fifteen months.

 

We paid severance compensation to four of our NEOs during fiscal year 2008 – Mark A. Ernst (former Chairman of the Board, President and Chief Executive Officer), William L. Trubeck (former Executive Vice President and Chief Financial Officer), Robert E. Dubrish (former Chief Executive Officer of OOMC) and Marc West (former Group President – Commercial Markets of H&R Block Management LLC) . Mr. Ernst’s severance arrangement provided for a total lump sum payment of approximately $2,553,000, as well as COBRA continuation coverage at the Company’s expense through June 30, 2009 and $1,350 per month thereafter until December 2010. In addition, (i) 762,925 previously granted stock options vested and became exercisable as of December 31, 2007 until September 30, 2009 or their earlier expiration, (ii) restrictions on 10,000 shares of previously awarded H&R Block, Inc. common stock terminated as of December 31, 2007, resulting in such shares becoming fully vested, (iii) approximately 16,500 performance shares will be paid out to Mr. Ernst, depending on our ultimate performance for the three-year period ending June 30, 2009 and (iv) previously unvested Company contributions to Mr. Ernst’s deferred compensation plan account became fully vested.

 

Mr. Trubeck’s severance arrangement provided for (i) a lump-sum cash severance payment of $900,600, (ii) COBRA continuation coverage through December 31, 2008, (iii) full vesting for 200,000 previously unvested outstanding stock options, with such stock options remaining exercisable through March 31, 2009 or their earlier expiration, (iv) termination of restrictions on 4,667 shares of previously granted restricted stock, (v) a payout of approximately 7,500 performance shares depending on our performance for the three-year period ending June 30, 2009, and (vi) full vesting of previously unvested Company contributions under our deferred compensation plan.

 

Mr. Dubrish’s severance compensation is pursuant to the Severance Plan. Under the Severance Plan, Mr. Dubrish is to receive a $1,072,009 severance payment, paid in semi-weekly or bi-monthly installments over a twelve-month period and is to participate in various health and welfare benefits pursuant to the Severance Plan.

 

Mr. West’s severance arrangement provided for (i) a severance payment of $640,000 over a twelve-month period, (ii) participation in various health and welfare benefit plans pursuant to the Severance Plan, (iii) full vesting for 136,000 previously unvested outstanding stock options, with such stock options remaining exercisable through various selected dates, (iv) termination of restrictions on 1,334 shares of previously granted restricted stock, (v) a payout of approximately 6,000 performance shares depending on our performance for three-year performance period ending June 30, 2009, (vi) outplacement services for 12 months, and (vii) full vesting of previously unvested Company deferred compensation plan contributions.

 

The severance compensation to Messrs. Ernst, Trubeck, Dubrish and West was awarded in consideration of (i) transition assistance, (ii) agreements not to engage in certain competitive activities, (iii) agreements not to recruit, solicit or hire certain of our employees, and (iv) a mutual general release of claims. We believe these severance arrangements are conservative relative to the market, provided for a smooth management transition and minimized management distraction.

 

A table showing potential severance payments to our NEOs is located on page 42 in this proxy statement. We believe that the benefits our NEOs would receive under severance scenarios are conservative relative to the market.

 

Change-in-Control Provisions – Our NEOs generally are parties to employment agreements that provide for payment of compensation and benefits in certain instances upon a “change in control.” In addition, certain unvested benefits under our compensation programs accelerate upon a “change in control.” These change-in-control provisions (including the events that would trigger change-in-control compensation and benefits) are described on pages 38 through 44 in this proxy statement. We provide these change-in-control benefits as a means to attract and retain talented executives.

29 n

Once each year, our Compensation Committee reviews all components of compensation for our CEO and other highly compensated executive officers. This review encompasses all forms of compensation, including base salary, short-term incentives, long-term incentives, and other vested benefit payouts, 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 payments upon any “change in control.” Further information regarding payments upon a change in control and other termination scenarios is provided on pages 42 through 44 in this proxy statement.

 

OTHER AWARDS – In certain instances, we award compensation to executives in the form of retention awards and sign-on awards when we believe it is in our best interests and our shareholders’ best interests. We offer retention awards in limited instances where there is a strong likelihood that an executive may leave and retention of the executive is critical to achieving a particular business objective. The most common instance in which we offer retention awards is when we sell or dispose of a business. These awards are designed to retain critical employees through the sale and in some instances for a short transition period following the sale.

 

During fiscal year 2007, Mr. Dubrish was offered a retention award in connection with our announced plans to pursue strategic alternatives for OOMC. Under this award, Mr. Dubrish was to receive a retention payment of approximately $750,000 if he remained employed with OOMC through the date OOMC was sold. The payment was to be in the form of accelerated vesting of previously awarded unvested restricted shares held by Mr. Dubrish at the sale date with the remaining payment being paid in cash. We have determined that Mr. Dubrish did not meet the conditions to receiving this retention award and, accordingly, have not made the retention payment to Mr. Dubrish.

 

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 guaranteed bonuses in the initial year of employment or grants of equity-based compensation such as stock options or restricted stock. Pursuant to his employment agreement, Mr. Bennett was paid a guaranteed bonus of $562,500 for serving as our interim chief executive officer through the end of his employment term on May 20, 2008.

 

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 the following minimum levels:

 

 

Executive officers subject to the Company’s executive stock ownership guidelines generally are in compliance, or are progressing toward compliance, with the guidelines. Each of our current NEOs other than Mr. Bennett (who is serving on an interim basis and is thus not subject to the guidelines) are progressing toward compliance with the guidelines. In instances where an executive fails to comply with stock ownership guidelines levels within five years, our CEO may prohibit the executive from selling shares acquired through the vesting of restricted shares or performance shares and may require the executive to utilize net cash bonuses to purchase shares. The Compensation Committee and our CEO review annually 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 Statement of Financial Accounting Standards No. 123(R), “Stock-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 Internal Revenue Code limits to $1 million our federal income tax deduction for compensation paid to any of our NEOs, subject to certain transition rules and exceptions for certain 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

30 n

exceptions may occur. Nevertheless, the Compensation Committee may recommend for Board approval non-deductible compensation when it believes it is in our shareholders’ best interest, balancing tax efficiency with long-term strategic objectives.

 

Our benefit plans that provide for deferrals of compensation are subject to Section 409A of the Internal Revenue Code. We have reviewed such plans for compliance with Section 409A and believe that they comply with Section 409A.

 

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 2008 proxy statement.

 

COMPENSATION COMMITTEE

Tom D. Seip, Chairman

Henry F. Frigon

Roger W. Hale

L. Edward Shaw, Jr.

 

 

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION —

 

The following non-employee directors serve on the Compensation Committee of the Board of Directors: Tom D. Seip (Chairman), Henry F. Frigon, Roger W. Hale and L. Edward Shaw, Jr. No directors on the Compensation Committee (a) are or have been officers or employees of the Company or any of its subsidiaries, or (b) had any relationships requiring disclosure in the proxy statement.

31 n

 

SUMMARY COMPENSATION TABLE –

 

The following table sets forth for the fiscal year ended April 30, 2008 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, the Company’s former principal executive officer (Mr. Ernst) and former principal financial officer (Mr. Trubeck), and two additional executive officers (Mr. Dubrish and Mr. West) who each would have been included as one of the three other highest paid executive officers, but for the fact neither was serving as an executive officer as of April 30, 2008 (collectively, the “Named Executive Officers”).

 

 

NOTES:

 

32 n

 

 

33 n

 

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, 2008. The compensation plans under which the grants in the following table were made are described on pages 22 through 28 in this proxy statement.