DEF 14A 1 a2016proxy.htm DEF 14A DEF 14A

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. __ )
 
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Soliciting Material Pursuant to §240.14a-12
 
CarMax, Inc.
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Dear Fellow CarMax Shareholders:
 
I am pleased to invite you to attend the 2016 annual meeting of CarMax, Inc. shareholders, which will be held on Tuesday, June 28, 2016, in Richmond, Virginia. The attached notice of annual meeting and proxy statement are your guides to the meeting.
 
We have taken key actions this year to highlight our ongoing commitment to strong governance standards. In December 2015, our board adopted proxy access, which provides eligible CarMax shareholders a process for nominating director candidates to be included in CarMax’s proxy materials. We believe this action, which was carefully structured to serve the best interests of all shareholders, is responsive to shareholder concerns and supports shareholder value.
Another important step we’ve taken is to add independent director Alan B. Colberg to our board of directors. His experience will bring valuable insights to our business and support our strong commitments to growth and customer service. Our proxy statement includes more information about Mr. Colberg and our continuing directors, each of whom is nominated for election at the 2016 annual meeting.
We are once again providing live audio coverage of the annual meeting from the CarMax investor relations website at investors.carmax.com. A replay of the annual meeting will be available on this website after the meeting. We hope that this will allow those of you who are unable to attend the meeting in person to hear management discuss this year’s results.
 
We also are pleased to furnish proxy materials to shareholders primarily over the internet. On or about May 6, 2016, we mailed our shareholders a Notice of Internet Availability containing instructions on how to access our proxy statement and annual report and to vote online. Internet distribution of our proxy materials expedites receipt by shareholders, lowers the cost of the annual meeting, and conserves natural resources. However, if you would prefer to receive paper copies of our proxy materials, please follow the instructions included in the Notice of Internet Availability.
 
Whether or not you will be attending the annual meeting, your vote is very important to us. I encourage you to cast your ballot by internet, by telephone, by mail (if you request a paper copy) or in person at the annual meeting.
 
On behalf of the Board of Directors, I would like to thank you for your continued trust in CarMax. I look forward to seeing you at the annual meeting.
 
Sincerely,

 
 
William R. Tiefel
Chairman of the Board of Directors
May 6, 2016



NOTICE OF 2016 ANNUAL MEETING OF SHAREHOLDERS
 
 
 
 
 
 
When:
 
Tuesday, June 28, 2016, at 1:00 p.m. Eastern Time
Where:
 
Hilton Richmond Hotel, Short Pump
12042 West Broad Street
Richmond, VA 23233
Items of Business:
 
(1)
 
To elect the eleven directors named in the proxy statement to our Board of Directors.
 
 
(2)
 
To ratify the appointment of KPMG LLP as our independent registered public accounting firm.
 
 
(3)
 
To vote on an advisory resolution to approve the compensation of our named executive officers.
 
 
(4)
 
To approve the CarMax, Inc. 2002 Stock Incentive Plan, as amended and restated.
 
 
(5)
 
To vote on the shareholder proposal for a report on political contributions, if properly presented at the meeting.
 
 
(6)
 
To transact any other business that may properly come before the annual meeting or any postponements or adjournments thereof.
Who May Vote:
 
You may vote if you owned CarMax common stock at the close of business on April 22, 2016.
 
 
 
By order of the Board of Directors,

 
 
Eric M. Margolin
Executive Vice President,
General Counsel and Corporate Secretary
May 6, 2016
 



TABLE OF CONTENTS






PROXY SUMMARY
 
This summary highlights information contained elsewhere in this proxy statement. For more complete information, please review this entire proxy statement and CarMax’s Annual Report on Form 10-K for the year ended February 29, 2016.

Fiscal 2016 Results
 
We achieved solid revenue and net earnings growth for fiscal 2016. Annual highlights included the following:
Store Growth
We opened 14 stores in fiscal 2016. In fiscal 2017, we plan to open 15 stores. In fiscal 2018, we plan to open between 13 and 16 stores.
Revenues/Earnings
We achieved top and bottom-line growth. Net sales and operating revenues increased 6.2%, to a record of $15.15 billion. Net earnings rose 4.4%, to a record of $623.4 million.
Units
Total used unit sales increased 6.5% and comparable store used unit sales increased 2.4%. Total wholesale unit sales increased 4.9%.
CarMax Auto Finance
CarMax Auto Finance (“CAF”) finished the year with income of $392.0 million, an increase of 6.7% over the prior year.
Share Repurchases
We continued our share repurchase program in fiscal 2016, buying back 16.3 million shares with a market value of $971.2 million.
Twelfth Year on Fortune
“Best Companies” List
We were named by Fortune magazine as one of its “100 Best Companies to Work For” for the twelfth year in a row.

Corporate Governance Highlights

PROXY ACCESS

In 2015, our board of directors proactively adopted proxy access amendments to our bylaws, enabling eligible CarMax shareholders to have their own director nominee included in the Company’s proxy materials along with candidates nominated by our board. 

KEY GOVERNANCE POLICIES

 
 
l Annual election of all directors 
l Majority voting for directors
l Substantial majority of directors are independent (10 of 11)
l Independent Board Chair 
l Board oversight of risk management program
l Annual “say on pay” vote
l Shareholder rights plan expired in 2012 and was not renewed
 


1


Annual Meeting of Shareholders
When
Tuesday, June 28, 2016, at 1:00 p.m., Eastern Time
Where
Hilton Richmond Hotel, Short Pump
12042 West Broad Street
Richmond, VA 23233
Who May Attend
All shareholders as of the record date may attend the meeting.
Record Date
 
April 22, 2016
Live Audio Webcast
Available at investors.carmax.com
 
 
Voting Matters and Board Recommendations
Agenda Item
Board Recommendation
Page of Proxy Statement
 
 
 
1.
Election of Eleven Directors
FOR each Director nominee
6
2.
Ratification of Auditors
FOR
20
3.
Advisory Approval of Executive Compensation
FOR
23
4.
Approval of Amended and Restated Stock Incentive Plan
FOR
53
5.
Shareholder Proposal for a Report on Political Contributions
AGAINST
62
 
 
Proposal One:
Election of Directors

We are asking you to vote “FOR” the following candidates for election to our Board of Directors.
Nominee
 
Age
 
Director
Since
 
Independent
 
Principal Occupation
 
Committee Membership
Ronald E. Blaylock
 
56
 
2007
 
Yes
 
Founder and Managing Partner of GenNx360 Capital Partners, a private-equity buyout fund
 
Compensation and Personnel
Alan B. Colberg
 
54
 
2015
 
Yes
 
President and Chief Executive Officer
of Assurant, Inc.
 
Audit Committee
Thomas J. Folliard
 
51
 
2006
 
No
 
Chief Executive Officer
of CarMax, Inc.
 
N/A


2


Rakesh Gangwal
 
62
 
2011
 
Yes
 
Former Chief Executive Officer of US Airways Group, Inc. and Worldspan Technologies, Inc., a provider of information technology services to the travel industry
 
Nominating and
Governance
Jeffrey E. Garten
 
69
 
2002
 
Yes
 
Chairman of Garten Rothkopf, an international consulting firm
 
Nominating and
Governance
Shira Goodman
 
55
 
2007
 
Yes
 
President, North American Operations of Staples, Inc.
 
Compensation and Personnel
W. Robert Grafton
 
75
 
2003
 
Yes
 
Retired Managing Partner-Chief Executive, Andersen Worldwide S.C.
 
Compensation and Personnel
Edgar H. Grubb
 
76
 
2007
 
Yes
 
Retired Executive Vice President and Chief Financial Officer of Transamerica Corporation, a leading insurance and financial services company
 
Nominating and
Governance
Marcella Shinder
 
49
 
2015
 
Yes
 
Chief Marketing Officer of Nielsen Holdings plc, a leading global performance management company
 
Audit
Mitchell D. Steenrod
 
49
 
2011
 
Yes
 
Senior Vice President and Chief Financial Officer of Pilot Travel Centers LLC, the nation’s largest operator of travel centers and truck stops
 
Audit
William R. Tiefel
 
82
 
2002
 
Yes
 
Chairman of the Board of CarMax, Inc., retired Vice Chairman of Marriott International, Inc. and Chairman Emeritus of The Ritz-Carlton Hotel Company, LLC
 
None
 
Proposal Two:
Ratification of Auditors
 
We are asking you to ratify the appointment by the Audit Committee of KPMG LLP (“KPMG”) as our independent auditors for fiscal 2017. The following table summarizes the fees billed by KPMG for fiscal 2016 and 2015.
 
 
Audit Fees
 
Audit-Related Fees
 
Tax Fees
 
Other Fees
 
Total Fees
Fiscal 2016
 
$1,591,134
 
$424,000
 
$266,822
 
$—
 
$2,281,956
Fiscal 2015
 
$1,459,600
 
$387,000
 
$346,900
 
$465,000
 
$2,658,500
Proposal Three:
Executive Compensation
 
We are asking you to approve, on an advisory basis, the compensation of our named executive officers as disclosed in this proxy statement. At our last two annual meetings, a significant majority of our shareholders supported our executive compensation program, with more than 97% and 91% of votes cast in 2015 and 2014, respectively, voting in favor of our program.
 
We strive to tie pay to performance. The following chart illustrates the relationship over the last three fiscal years between our net earnings and the total direct compensation (base salary, annual incentive bonus and long-term equity grants) paid to our Chief Executive Officer (“CEO”), as reported in our proxy statements.
 

3


Net Earnings and CEO Total Direct Compensation
 
 
We also strive to align the interests of our executives with the interests of our shareholders. The following charts illustrate how most of our CEO’s total direct compensation paid in fiscal 2016 was composed of our annual incentive bonus and long-term equity and how most of that performance-based compensation was tied to our long-term performance.
 
CEO Total Direct Compensation
CEO Performance-Based Compensation

 
You will find additional information on our executive compensation program beginning on page 24. This information includes a chart on page 25 describing changes we made to the compensation of our named executive officers in fiscal 2016.


4



Proposal Four:
Approval of Amended and Restated Stock Incentive Plan
 
We are asking that you approve amendments to the CarMax, Inc. 2002 Stock Incentive Plan, as amended and restated (the “Stock Incentive Plan”) to (a) increase the number of shares of the Company’s common stock reserved for issuance under the Stock Incentive Plan by 5,000,000 shares, (b) establish an annual limit on the total value of cash fees and equity compensation each non-employee director may receive, (c) extend the termination date of the Stock Incentive Plan from June 25, 2022 to June 28, 2026 and (d) otherwise approve the Stock Incentive Plan with these amendments.

You will find additional information regarding the Stock Incentive Plan and the proposed amendments beginning on page 53.
Proposal Five:
Shareholder Proposal for a Report on Political Contributions
 
The Board recommends a vote against this proposal, which would require that CarMax make certain political contribution disclosures. CarMax’s political contributions, while purposeful, are limited in amount; subject to the CarMax Corporate Political Contribution Policy and Board committee oversight; and already disclosed as required under state contribution disclosure laws. The Board believes that adoption of the shareholder proposal is both unnecessary and not in the best interest of shareholders.
Next Year’s Annual Meeting
 
 
Expected Date of 2017 Annual Meeting
 
June 26, 2017
 
Deadline for Shareholder Proposals
 
January 6, 2017

5


PROPOSAL ONE: ELECTION OF DIRECTORS
 
We are asking you to vote for the election of the eleven director nominees listed on the following pages. Our Board has nominated these individuals at the recommendation of our independent Nominating and Governance Committee. The Committee based its recommendation on, among other things, the results of an annual Board and peer evaluation process, as well as the integrity, experience and skills of each nominee. All of the nominees are current directors who were elected by shareholders at our 2015 annual meeting, except Mr. Colberg, who joined the Board in October 2015.
Our Board is declassified. This means that each director stands for election for a one-year term every year.
We appointed Mr. Colberg to the Board after conducting an extensive search for a director with, among other qualities, executive experience. The search was led by our Nominating and Governance Committee with the assistance of an outside search firm, which first brought Mr. Colberg to the Committee’s attention.
 
Our Board is declassified. Accordingly, each of our directors is standing for election to hold office until our 2017 annual meeting of shareholders.
 
Each nominee must receive a majority of the votes cast.
CarMax uses a majority vote standard for the election of directors. This means that to be elected in uncontested elections, each nominee must be approved by the affirmative vote of a majority of the votes cast.
 
Each nominee has consented to being named in this proxy statement and to serve if elected. If any nominee is not available to serve—for reasons such as death or disability—your proxy will be voted for a substitute nominee if the Board nominates one.
 
The following pages include information about the nominees. This information includes a summary of the specific experience, qualifications, attributes or skills that led to the conclusion that each person should serve as a CarMax director.
 
The Board recommends a vote FOR each of the nominees.
 


6


Ronald E. Blaylock
 
Director since: 2007
Age: 56
 
Independent
 
     
Alan B. Colberg
 
Director since: 2015
Age: 54

Independent
MR. BLAYLOCK is the founder and Managing Partner of GenNx360 Capital Partners, a private-equity buyout fund focused on industrial business-to-business companies. Prior to founding GenNx360 in 2006, Mr. Blaylock was chief executive officer of Blaylock & Company, a full-service investment banking firm that he founded in 1993. Previously, Mr. Blaylock held senior management positions with PaineWebber and Citigroup.
 
MR. COLBERG has been the President, Chief Executive Officer and Director of Assurant, Inc., a provider of diverse insurance products and related services, since 2015.  Mr. Colberg joined Assurant as Executive Vice President of Marketing and Business Development in March 2011. He was named Assurant’s President in 2014. Previously, Mr. Colberg worked for Bain & Company, Inc. for 22 years, founding Bain’s Atlanta office in 1996 and heading it until 2011. He also served as Bain’s global practice leader for financial services. 
Other Current Directorships
 
Other Current Directorships
Radio One, Inc. and W. R. Berkley Corporation.
 
Assurant, Inc.
Other Directorships within Past 5 Years
 
Other Directorships within Past 5 Years
None.
 
None.
Qualifications
 
Qualifications
Mr. Blaylock’s experience managing two successful investment enterprises, as well as his considerable finance experience, qualify him to serve on our Board. Mr. Blaylock’s years of relevant experience growing companies and serving on other public company boards enable him to provide additional insight to our Board.
 
Mr. Colberg’s chief executive experience at Assurant and senior leadership experience in the financial services, insurance and consulting industries qualify him to serve on our Board. Further, Mr. Colberg’s extensive background in corporate strategy and finance enables him to provide additional insight to our Board and its committees.

 


7


Thomas J. Folliard
 
Director since: 2006
Age: 51
 
Rakesh Gangwal
 
Director since: 2011
Age: 62
 
Independent
MR. FOLLIARD is the Chief Executive Officer of CarMax and was the President and Chief Executive Officer of CarMax from 2006 until February 2016. He joined CarMax in 1993 as senior buyer and became director of purchasing in 1994. Mr. Folliard was promoted to vice president of merchandising in 1996, senior vice president of store operations in 2000, executive vice president of store operations in 2001 and president and chief executive officer in 2006.
 
MR. GANGWAL is the former Chief Executive Officer of US Airways Group, Inc. and Worldspan Technologies, Inc. From 2003 to 2007, Mr. Gangwal served as chairman, president and chief executive officer of Worldspan Technologies, Inc., a provider of travel and information technology services to the travel and transportation industry. From 2002 to 2003, he was involved in various personal business endeavors, including private equity and consulting projects. From 1998 until his resignation in 2001, Mr. Gangwal served as president and chief executive officer of US Airways Group, Inc. and US Airways, Inc. and from 1996 to 1998, he was the president and chief operating officer of US Airways Group. He is a co-founder of IndiGo, India’s largest low-fare airline.
Other Current Directorships
 
Other Current Directorships
PulteGroup, Inc. and DAVIDsTEA, Inc.
 
Office Depot, Inc. and InterGlobe Aviation Limited (IndiGo)
Other Directorships within Past 5 Years
 
Other Directorships within Past 5 Years
None.
 
PetSmart, Inc. (2005-2015) and OfficeMax Incorporated (1998-2013).
Qualifications
 
Qualifications
As the chief executive of CarMax, Mr. Folliard leads the Company’s day-to-day operations and is responsible for establishing and executing the Company’s strategic plans. His significant experience in the auto retail industry, his tenure with CarMax and his motivational leadership of more than 22,000 CarMax associates qualify him to serve on our Board.
 
Mr. Gangwal’s experience as a chief executive officer, as well as his extensive background in corporate strategy, operations and technology management, qualify him to serve on our Board. Mr. Gangwal’s service as a board member of publicly traded retail companies further qualifies him to serve on our Board.



8


Jeffrey E. Garten
 
Director since: 2002
Age: 69
 
Independent
 
 
Shira Goodman
 
Director since: 2007
Age: 55
 
Independent
MR. GARTEN has been chairman of Garten Rothkopf, an international consulting firm, since 2005. He was the Juan Trippe Professor in the Practice of International Trade, Finance and Business at the Yale School of Management from 2005 to 2015 and the Dean of the Yale School of Management from 1995 to 2005. He was the United States Undersecretary of Commerce for International Trade from 1993 to 1995 and previously spent 13 years in investment banking with Lehman Brothers and Blackstone Group. He is a member of the board of overseers of the International Rescue Committee.
 
MS. GOODMAN has been the President, North American Operations of Staples, Inc., the world’s leading online, delivery and retail seller of business products, since February 2016. In her current position, she leads all of Staples’ U.S. and Canadian business units. Ms. Goodman joined Staples in 1992 and has held a variety of positions of increasing responsibility in general management, marketing and human resources, including serving as executive vice president, marketing from 2001 to 2009, executive vice president, human resources from 2009 to 2012, executive vice president, global growth from 2012 to 2014, and president, North American Commercial from 2014 to 2016. From 1986 to 1992, Ms. Goodman worked at Bain & Company in project design, client relationships and case team management.
Other Current Directorships
 
Other Current Directorships
Aetna Inc. and certain mutual funds of Credit Suisse Asset Management.
 
None.
Other Directorships within Past 5 Years
 
Other Directorships within Past 5 Years
Served on the board of managers of Standard & Poor’s LLC, a division of The McGraw-Hill Companies (2012-2015).
 
None.
Qualifications
 
Qualifications
Mr. Garten’s record as a distinguished business scholar and teacher, as well as his years of government service, investment banking work and service to other significant boards of directors, qualify him to serve on our Board. His appreciation of corporate governance, as well as his tenure as a CarMax Board member, provide wisdom, continuity and value to our Board.
 
Ms. Goodman has proven business acumen, having served in various leadership positions at an internationally renowned retailer. Ms. Goodman’s experiences in retail marketing, sales force management, human resources, and business growth at the world’s largest office products company all qualify her to serve on our Board. In her current position, Ms. Goodman is responsible for leading Staples business units that reported $18 billion in sales in its most recent fiscal year.
 

9


W. Robert Grafton
 
Director since: 2003
Age: 75
 
Independent
 
Edgar H. Grubb
 
Director since: 2007
Age: 76
 
Independent
MR. GRAFTON is the retired Managing Partner-Chief Executive, Andersen Worldwide S.C. Andersen Worldwide provided global professional auditing and consulting services through its two service entities, Arthur Andersen and Andersen Consulting. He is a retired certified public accountant and joined Arthur Andersen in 1963. He was elected a member of the Board of Partners, Andersen Worldwide in 1991 and chairman of the Board of Partners in 1994. He served as Managing Partner-Chief Executive from 1997 through 2000.
 
MR. GRUBB is the retired Executive Vice President and Chief Financial Officer of Transamerica Corporation, a leading insurance and financial services company. He joined Transamerica in 1989, became executive vice president in 1993 and retired in 1999. From 1986 to 1989, he was the senior vice president and chief financial officer of Lucky Stores, Inc.
Other Current Directorships
 
Other Current Directorships
None.
 
CSAA Insurance Group, an AAA affiliate providing auto and property coverage to AAA members in 23 states (where Mr. Grubb is a former chairman of the board) and Auto Club Partners, Inc., an affiliation of seven AAA clubs representing over 12 million members in the United States.
Other Directorships within Past 5 Years
 
Other Directorships within Past 5 Years
DiamondRock Hospitality Company (2004-2016) and SRA International, Inc. (2010-2011).
 
None.
Qualifications
 
Qualifications
Mr. Grafton’s extensive management and accounting experience, as well as his role as the chief executive of an international audit and consulting firm with more than 100,000 employees, qualify him to serve on our Board. His experience on other public company compensation committees and his years of service as a CarMax director provide significant and consistent leadership.
 
With extensive experience as the chief financial officer of a public company, Mr. Grubb provides CarMax with his comprehensive understanding of the complex financial and operational issues that public companies confront. His financial acumen, as well as his demonstrated leadership capabilities, qualify him to serve on our Board.
 


10


Marcella Shinder
 
Director since: 2015
Age: 49
 
Independent
 
Mitchell D. Steenrod
 
Director since: 2011
Age: 49
 
Independent
MS. SHINDER is the Chief Marketing Officer of Nielsen Holdings plc, a leading global performance management company. Prior to joining Nielsen in 2011, Ms. Shinder was with American Express, serving in a variety of executive roles including head of global marketing, head of brand management and social media, and general manager, small business charge cards, American Express OPEN. 
 
MR. STEENROD has been the Senior Vice President and Chief Financial Officer of Pilot Travel Centers LLC, the nation’s largest operator of travel centers and truck stops, since 2004. Mr. Steenrod joined Pilot Travel Centers in 2001 as controller and treasurer. In 2004, he was promoted to senior vice president and chief financial officer. Previously, he spent 12 years with Marathon Oil Company and Marathon Ashland Petroleum LLC in a variety of positions of increasing responsibility in accounting, general management and marketing.
Other Current Directorships
 
Other Current Directorships
None.
 
None.
Other Directorships within Past 5 Years
 
Other Directorships within Past 5 Years
None.
 
None.
Qualifications
 
Qualifications
Ms. Shinder’s experience as the chief marketing officer of a leading performance management company focused on consumer analytics qualifies her to serve on our Board. Further, Ms. Shinder’s deep experience with social media, digital marketing and branding enable her to provide additional insight to our Board and its committees.
 
 
Mr. Steenrod’s extensive retail industry and operational experience as well as his experience implementing successful growth strategies, including growing Pilot Travel Centers from more than 200 travel centers to over 500 branded locations over a span of 10 years, qualify him to serve on our Board. Additionally, Mr. Steenrod’s extensive financial and accounting experience, including his years of experience as a chief financial officer, strengthens our Board through his understanding of accounting principles, financial reporting rules and regulations, and internal controls.
 

11


 
William R. Tiefel
 
Director since: 2002
Age: 82
 
Independent
 
MR. TIEFEL has been the Chairman of the Board of CarMax since 2007. He is also the retired Vice Chairman of Marriott International, Inc. and Chairman Emeritus of The Ritz-Carlton Hotel Company, LLC since 2002. He joined Marriott Corporation in 1961. He was named president of Marriott Hotels and Resorts in 1989, president of Marriott Lodging in 1992 and vice chairman of Marriott International and chairman of The Ritz-Carlton Hotel Company in 1998.
 
Other Current Directorships
 
None.
 
Other Directorships within Past 5 Years
 
Lydian Private Bank (2005-2011). In September 2010, Lydian Private Bank became a party to a publicly available Office of Thrift Supervision Order to Cease and Desist regarding its banking practices.
 
Qualifications
 
Mr. Tiefel’s vast leadership experience with a customer-focused, service-oriented lodging and hospitality enterprise qualify him to serve on our Board. His considerable management roles have been valuable to the Board not only as a director, but also as the Board’s chairman. His steady leadership, as well as his tenure both as a director and as Chairman, provide continuity and value to our Board.
 
 


12


CORPORATE GOVERNANCE
 
CarMax is committed to good corporate governance. In this section of the proxy statement we describe our governance policies and practices and the role our Board plays in shaping them.
 
Overview
 
Our business and affairs are managed under the direction of the Board in accordance with the Virginia Stock Corporation Act, our articles of incorporation and our bylaws. The standing committees of the Board are the Audit Committee, the Compensation and Personnel Committee, and the Nominating and Governance Committee.
 
The Board and its committees direct our governance practices. The Board has made significant changes to those practices in recent years in response to shareholder feedback and based on evolving practices and the Board’s independent judgment.
We adopted a proxy access right for our shareholders in 2015
Most recently, in December 2015, the Board acted to adopt a proxy access right for eligible CarMax shareholders. Although CarMax did not receive any shareholder proposals or requests to adopt proxy access, the Board determined proxy access to be in the best interest of CarMax shareholders and proceeded to adopt the right. Additional information concerning the proxy access right and shareholder eligibility can be found on page 17.
 
The adoption of proxy access demonstrated the Board’s continued interest in adopting meaningful shareholder focused changes. In 2011, the Board approved a majority vote standard for the election of directors. In 2012, the Board allowed CarMax’s shareholder rights plan to expire without renewal. In 2013, we declassified our Board and established annual elections for all directors. In 2014, we adopted a mandatory director retirement policy providing that directors, with limited exceptions, may not stand for reelection after reaching age 76.

These changes supplement longstanding good governance practices, such as maintaining independent Board leadership and a largely independent Board (10 of 11 directors).

The Board has approved documents that memorialize our governance standards and practices. These documents include our bylaws, our corporate governance guidelines and a code of business conduct. These documents, each of which is described below, are available under the “Corporate Governance” link at investors.carmax.com.
Bylaws
Our bylaws regulate the corporate affairs of CarMax. They include provisions relating to shareholder meetings, voting, the nomination of directors and the proxy access right.
Corporate Governance Guidelines
Our corporate governance guidelines set forth the Board’s practices with respect to its responsibilities, qualifications, performance, access to management and independent advisors, compensation, continuing education, and management evaluation and succession. The guidelines also include director stock ownership requirements.
Code of Business Conduct
Our code of business conduct is a cornerstone of our compliance and ethics program. It applies to all CarMax associates and Board members. It includes provisions relating to honest and ethical conduct, compliance with laws, the handling of confidential information and diversity. It explains how to use our associate help line and related website, both of which allow associates to report misconduct anonymously. It also describes our zero-tolerance policy on retaliation for making such reports.
 
Any amendment to, or waiver from, a provision of this code for our directors or executive officers will be promptly disclosed under the “Corporate Governance” link at investors.carmax.com.
 

13


We will send you a printed copy of any of these documents, without charge, upon written request to our Corporate Secretary at CarMax, Inc., 12800 Tuckahoe Creek Parkway, Richmond, Virginia 23238.
 
Independence
 
Our Board, in consultation with the Nominating and Governance Committee, evaluates the independence of our directors at least annually. The most recent evaluation took place in April 2016. During this evaluation, the Board considered transactions between the directors (and their immediate family members) and the Company and its affiliates. The Board determined that all of our non-employee directors (Mses. Goodman and Shinder and Messrs. Blaylock, Colberg, Gangwal, Garten, Grafton, Grubb, Steenrod and Tiefel) are independent under the listing standards of the New York Stock Exchange (“NYSE”). Mr. Folliard is not independent because he is an executive officer of CarMax.
 
In assessing independence, the Board considered transactions not just between CarMax and the individual directors themselves (and their immediate family members), but also between CarMax and entities associated with the directors or their immediate family members. The Board’s review included the following transactions:

Ms. Goodman is an officer of Staples, Inc. CarMax purchased goods and services from Staples, Inc. in the ordinary course of business in fiscal 2016. The amount that CarMax paid to Staples, Inc. in each of the last three fiscal years did not exceed the greater of $1 million or 2% of the total revenue of Staples, Inc. in each year.

Each of Messrs. Blaylock, Gangwal and Garten are non-employee directors of companies that did business with CarMax in fiscal 2016. These companies are, respectively, RadioOne, Inc., Office Depot, Inc. and Aetna Inc. In addition, Mr. Gangwal was formerly a non-employee director of OfficeMax Incorporated, which did business with CarMax in fiscal 2016. All of these business relationships involved the supply of goods or services to CarMax in the ordinary course of business.

The Board determined that none of the relationships it considered impaired the independence of the non-employee directors.
 
Board Leadership Structure
 
CarMax has historically split the roles of CEO and Board chairman. Mr. Folliard has been our CEO since 2006, while Mr. Tiefel, a director since 2002, has served as the independent chairman of the Board since 2007. As our Board chairman, Mr. Tiefel is responsible for chairing Board meetings and meetings of shareholders, setting the agendas for Board meetings, presiding over executive sessions of the independent directors, and assisting management in representing CarMax to external groups as needed and as determined by the Board.

Mr. Folliard oversees the day-to-day affairs of CarMax and directs the formulation and implementation of our strategic plans. We believe that this leadership structure is currently the most appropriate for CarMax because it allows our CEO to focus primarily on our business strategy and operations while leveraging the experience of our chairman to direct the business of the Board. The Board periodically reviews this structure and elects its chairman annually.

Our Board recognizes that, depending on the circumstances, a different leadership model might be appropriate. The Board has no fixed policy on whether the roles of chairman and CEO should be separate or combined, which maintains flexibility based on CarMax’s needs and the Board’s assessment of the Company’s leadership. Our corporate governance guidelines provide that in the event the CEO is elected chairman, the Board will appoint a lead independent director to serve in accordance with the Company’s Lead Independent Director Job Description. In February 2016, the Company announced that Mr. Folliard expected to retire by the end of calendar year 2016. The Board expects to appoint Mr. Folliard as non-executive chairman of the Board following his retirement.
 
Board Committees
 
The Board has three standing committees: Audit, Compensation and Personnel, and Nominating and Governance. Each committee is composed solely of independent directors as that term is defined in applicable rules of the U.S. Securities and Exchange Commission (“SEC”) and the NYSE.


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Each committee is composed solely of independent directors.
In addition, all members of the Compensation and Personnel Committee qualify as “outside directors” within the meaning of Section 162(m) of the Internal Revenue Code and “non-employee directors” as defined by Rule 16b-3 under the Securities Exchange Act of 1934. Each committee has a charter that describes the committee’s responsibilities. These charters are available under the “Corporate Governance” link at investors.carmax.com or upon written request to our Corporate Secretary at CarMax, Inc., 12800 Tuckahoe Creek Parkway, Richmond, Virginia 23238.
The table below summarizes the responsibilities of the three committees.
Committee
Current Members
Responsibilities
Audit
Mitchell D. Steenrod (Chair)
Alan B. Colberg
Marcella Shinder


The Audit Committee assists in the Board’s oversight of:
 
§     the integrity of our financial statements;
§     our compliance with legal and regulatory requirements;
§     the independent auditors’ qualifications, performance and independence; and
§     the performance of our internal audit function.
 
The Audit Committee retains and approves all fees paid to the independent auditors, who report directly to the Committee. Each member of the Audit Committee is financially literate, with Messrs. Colberg and Steenrod considered audit committee financial experts under the standards of the NYSE and the SEC.
 
The Audit Committee’s report to shareholders can be found on page 21.
Compensation
and Personnel
W. Robert Grafton (Chair)
Ronald E. Blaylock
Shira Goodman
 
The Compensation and Personnel Committee assists in the Board’s oversight of:
 
§     our executive compensation philosophy;
§     our executive and director compensation programs, including related risks;
§     salaries, short- and long-term incentives and other benefits and perquisites for our CEO and other executive officers, including any severance agreements; and
§     the administration of our incentive compensation plans and all equity-based plans.
 
The Compensation and Personnel Committee has sole authority to retain and terminate its independent compensation consultant, as well as to approve the consultant’s fees.
 
The Compensation and Personnel Committee’s report to shareholders can be found on page 37.
Nominating
and Governance
Edgar H. Grubb (Chair)
Rakesh Gangwal
Jeffrey E. Garten
 
 
The Nominating and Governance Committee assists in the Board’s oversight of:
 
§    Board organization and membership, including by identifying individuals qualified to become members of the Board, considering director nominees submitted by shareholders, and recommending director nominees to the Board;
§    management succession planning, including for our CEO; and
§ our corporate governance guidelines.
 
 
Board and Committee Meetings
 
During fiscal 2016, our Board met five times and our Board committees met a combined 24 times. Each director attended 88% or more of the total number of meetings of the Board and the committees on which he or she served. The average attendance of all directors in fiscal 2016 was 99%. We expect our directors to attend the annual meeting of shareholders and all of our directors at the time of the 2015 annual meeting of shareholders did so.
 

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Our independent directors meet in executive session, without management present, at least once during each regularly scheduled Board meeting. As independent chairman, Mr. Tiefel presides over these executive sessions.
 
The table below lists the number of Board and committee meetings in fiscal 2016 and discloses each director’s attendance.
Director
Board
 
Audit
 
Compensation
and Personnel
 
Nominating
and Governance
Ronald E. Blaylock
5


5

Alan B. Colberg(a)
2

3


Thomas J. Folliard
5



Rakesh Gangwal
5



7
Jeffrey E. Garten
5



7
Shira Goodman
5


5

W. Robert Grafton(b)
5

9

1*

Edgar H. Grubb
5



7*
Marcella Shinder
5

11


Mitchell D. Steenrod(c)
5

12*


Thomas G. Stemberg(d)
2


3

William R. Tiefel(e)
5*

10


TOTAL MEETINGS
5

12

5

7
* Chairman
(a)
Mr. Colberg was elected to the Board on October 21, 2015.
(b)
Mr. Grafton was appointed chair of the Compensation and Personnel Committee on October 30, 2015 and concurrently stepped down as chair and as a member of the Audit Committee.
(c)
Mr. Steenrod was appointed chair of the Audit Committee on October 30, 2015.
(d)
Mr. Stemberg served as a director until his passing on October 23, 2015.
(e)
Mr. Tiefel stepped down from his seat on the Audit Committee following the January 26, 2016 meeting.

Selection of Directors
 
CRITERIA
 
The Board and the Nominating and Governance Committee believe that the Board should include directors with diverse backgrounds and that directors should have, at a minimum, high integrity, sound judgment and significant experience or skills that will benefit the Company.
We believe our Board should include directors with diverse backgrounds. 
In addition, the Committee takes into account a number of factors in assessing director nominees, including the current size of the Board, the particular challenges facing CarMax, the Board’s need for specific skills or perspectives, and the nominee’s character, reputation, experience, independence from management and ability to devote the requisite time.
Although we do not have a written policy with respect to the consideration of diversity in identifying director nominees, we consider and value diversity in our director selection process. Our code of business conduct defines diversity as the celebration of all people and their individual talents and the embracing of new ideas and new ways of thinking to maximize the potential of the overall organization. Through its consideration of the factors listed above, the Nominating and Governance Committee seeks directors with diverse backgrounds to maximize the potential of the Board. We believe that the diverse backgrounds and experiences of our current directors demonstrate the Committee’s success.
 
PROCESS
 
The Nominating and Governance Committee screens and recommends candidates for nomination by the Board. The Committee may consider input from several sources, including Board members, shareholders, outside search firms, and management. The


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Committee evaluates candidates in the same manner regardless of the source of the recommendation, using the criteria summarized above. Shareholders may send their recommendations for director candidates to the attention of our Corporate Secretary at CarMax, Inc., 12800 Tuckahoe Creek Parkway, Richmond, Virginia 23238.
 
In 2015, our board of directors adopted proxy access amendments to our bylaws, enabling eligible CarMax shareholders to have their own director nominee included in the Company’s proxy materials along with candidates nominated by our board. Our proxy access right permits an eligible shareholder, or a group of up to 20 shareholders, to nominate and include in CarMax’s proxy materials directors constituting up to 20% of the Board of Directors. To be eligible, the shareholder or shareholder group must have owned 3% or more of our outstanding capital stock continuously for at least three years and satisfy certain notice and other requirements set forth in our bylaws. Shareholders who wish to include director nominations in our proxy statement or nominate directors directly at an annual meeting must follow the instructions under “Shareholder Proposal Information” on page 70.

EVALUATION AND REFRESHMENT
 
In connection with the annual election of directors and at other times throughout the year, the Nominating and Governance Committee considers whether our Board has the right mix of skills and experience to meet the challenges facing CarMax. One of the processes that assists the Committee in its consideration is our Board’s annual evaluation process. The Board and each of its committees conducts a self-evaluation. In addition, the Chairman and the Committee preside over a peer evaluation process in which each individual director evaluates each other director. The results of these evaluations assist the Committee in determining both whether to nominate incumbent directors for reelection and whether to search for additional directors.
 
As part of its consideration, the Committee reviews both the age and tenure of incumbent directors. The average age of our directors is 62 and their average tenure on our Board is 8.1 years. In fiscal 2015, the Board adopted a mandatory director retirement policy providing that directors may not stand for reelection after reaching age 76. The Board may waive this limitation in appropriate circumstances and there is a limited grandfather period for directors serving prior to the adoption of this policy.
 
Board’s Role in Succession Planning
 
The Board oversees the recruitment, development and retention of executive talent. As part of its oversight, the Board regularly reviews short- and long-term succession plans for the Chief Executive Officer and other senior management positions. In assessing possible CEO candidates, the independent directors identify the skills, experience and other attributes they believe are required to be an effective CEO in light of CarMax’s business strategies, opportunities and challenges.

On February 1, 2016, the Company announced that, as the culmination of a multi-year management succession plan overseen by the Board, the Board had promoted William D. Nash, formerly executive vice president, human resources and administrative services, to president of the Company. Mr. Folliard will continue as the Company’s chief executive officer until his retirement, expected to occur prior to the end of 2016, at which time it is anticipated that Mr. Nash will assume the role of CEO.
 
The Board also considers its own succession. In doing so, the Nominating and Governance Committee and the Board take into account, among other things, the needs of the Board and the Company in light of the overall composition of the Board with a view to achieving a balance of skills, experience and attributes that would be beneficial to the Board’s oversight role.
 
Board’s Role in Risk Oversight
 
Our Board discharges its responsibility to oversee risks to CarMax through a risk governance framework designed to:
identify critical risks;
allocate responsibilities for overseeing those risks to the Board and its committees; and
evaluate the Company’s risk management processes.
 
The Board does not view risk in isolation. Rather, it considers risks in its business decisions and as part of CarMax’s business strategy. This consideration occurs in the ordinary course of the Board’s business and is not tied to any of the formal processes described below, although it is enhanced by those processes.

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The following table describes the components of CarMax’s risk governance framework.
Assignment of Risk Categories
to Board and its Committees
The Board has assigned oversight of certain key risk categories to either the full Board or one of its committees. For each category, management reports regularly to the Board or the assigned committee, as appropriate, describing CarMax’s strategies for monitoring, managing and mitigating risks that fall within that category.
 
Examples of the risk categories assigned to each committee and the full Board are described below. This list is not comprehensive and is subject to change:
 
§
Audit Committee: oversees risks related to financial reporting, compliance and ethics, information technology, and legal and regulatory issues.
 
§
Compensation and Personnel Committee: oversees risks related to human resources and compensation practices.
 
§
Nominating and Governance Committee: oversees risks related to government affairs and CarMax’s reputation.
 
§
Board: oversees risks related to the economy, competition, finance and strategy. 
Enterprise Risk Management
Risk Committee: We have a management-level Risk Committee, which is chaired by Thomas W. Reedy, our Executive Vice President and Chief Financial Officer (“CFO”), and includes as members more than ten other associates from across CarMax. The Risk Committee meets periodically to identify and discuss the risks facing CarMax.
 
Board Reporting: The Risk Committee delivers biannual reports to the Board identifying the most significant risks facing the Company.
 
Board Oversight: On an annual basis, Mr. Reedy, on behalf of the Risk Committee, discusses our procedures for identifying significant risks with the Audit Committee.
Other Processes that Support
Risk Oversight and Management 
The Board oversees other processes that are not intended primarily to support enterprise risk management, but that assist the Company in identifying and controlling risk. These processes include our compliance and ethics program, our internal audit function, pre-filing review of SEC filings by our management-level disclosure committee, and the work of our independent auditors.
 
We believe that our Board leadership structure, discussed in detail beginning on page 14, supports the Board’s risk oversight function. Our independent chairman and committee chairs set their respective agendas and lead their respective meetings to ensure strong risk oversight, while our CEO and his management team are charged with managing risk.
 
Related Person Transactions
 
Our Board has adopted a written Related Person Transactions Policy that applies to any transaction in which:
CarMax or one of its affiliates is a participant;
the amount involved exceeds $120,000; and
the related person involved in the transaction (whether a director, executive officer, owner of more than 5% of our common stock, or an immediate family member of any such person) has a direct or indirect material interest.
 
A copy of our policy is available under the “Corporate Governance” link at investors.carmax.com. The Audit Committee is responsible for applying the Company’s policy and reviewing any related person transaction that is required to be disclosed pursuant to SEC rules.
We did not have any related person transactions in fiscal 2016.
In reviewing related person transactions, the Audit Committee considers, among other things:
 
•    the related person’s relationship to CarMax;
 
•    the facts and circumstances of the proposed transaction;
the aggregate dollar amount involved in the transaction;
the related person’s interest in the transaction, including his or her position or relationship with, or ownership in, an entity that is a party to, or has an interest in, the transaction; and


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the benefits to CarMax of the proposed transaction and, if applicable, the terms and availability of comparable products and services from unrelated third parties.
 
The Audit Committee will approve or ratify a related person transaction only if it determines that: (i) the transaction serves the best interests of CarMax and its shareholders; or (ii) the transaction is on terms reasonably comparable to those that could be obtained in arm’s length dealings with an unrelated third party.
 
We did not have any related person transactions in fiscal 2016.
 
Shareholder Communication with Directors
 
Shareholders or other interested parties wishing to contact the Board or any individual director may send correspondence to CarMax, Inc., c/o Corporate Secretary, 12800 Tuckahoe Creek Parkway, Richmond, Virginia 23238, or may send an e-mail to chairman@carmax.com, which is monitored by Eric M. Margolin, our Corporate Secretary. Mr. Margolin will forward to the Board or appropriate Board member any correspondence that deals with the functions of the Board or its committees or any other matter that would be of interest to the Board. If the correspondence is unrelated to Board or shareholder matters, it will be forwarded to the appropriate department within the Company for further handling.
 


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PROPOSAL TWO: RATIFICATION OF THE APPOINTMENT OF
THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
We are asking you to ratify the Audit Committee’s appointment of KPMG LLP (“KPMG”) as CarMax’s independent registered public accounting firm for fiscal 2017. KPMG has served as our independent registered public accounting firm continuously since fiscal 2003 and has been appointed by the Audit Committee to continue as CarMax’s independent registered public accounting firm for fiscal 2017. The members of the Audit Committee and the Board believe that the continued retention of KPMG to serve as CarMax’s independent registered public accounting firm is in the best interests of CarMax and its shareholders.

The Audit Committee is directly responsible for the appointment, compensation, retention, and oversight of the independent registered public accounting firm retained to audit CarMax’s financial statements. The Audit Committee is also responsible for the audit fee negotiations associated with CarMax’s retention of KPMG. In accordance with the SEC-mandated rotation of the audit firm’s lead engagement partner, the Audit Committee and its chairperson are directly involved in the selection of KPMG’s lead engagement partner and were directly involved in the selection of KPMG’s current lead engagement partner, whose period of service began in fiscal 2016. Furthermore, in order to ensure continuing auditor independence, the Audit Committee periodically considers whether there should be a regular rotation of the independent registered public accounting firm.

Although we are not required to seek shareholder ratification, we are doing so as a matter of good corporate governance. If the shareholders do not ratify the appointment of KPMG, the Audit Committee will reconsider its decision. Even if the appointment is ratified, the Audit Committee, in its discretion, may change the appointment at any time during the year if it determines that a change would be in the best interests of CarMax and its shareholders.
 
We expect that representatives of KPMG will attend the annual meeting. They will be given the opportunity to make a statement if they desire to do so and to respond to appropriate questions.
 
The Board recommends a vote FOR Proposal Two.
 



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AUDIT COMMITTEE REPORT
 
The Audit Committee reports to and acts on behalf of CarMax’s Board of Directors by providing oversight of the integrity of the Company’s financial statements, the Company’s independent and internal auditors, and the Company’s compliance with legal and regulatory requirements. The Audit Committee operates under a written charter adopted by the Board, which is reviewed annually and is available under the “Corporate Governance” link at investors.carmax.com. The members of the Audit Committee meet the independence and financial literacy requirements of the NYSE and the SEC.
 
Management is responsible for the preparation, presentation and integrity of the Company’s financial statements and the establishment of effective internal controls over financial reporting. KPMG, the Company’s independent registered public accounting firm, is responsible for auditing those financial statements in accordance with the standards of the Public Company Accounting Oversight Board (“PCAOB”) and expressing an opinion on the conformity of CarMax’s audited financial statements with generally accepted accounting principles and on the effectiveness of CarMax’s internal controls over financial reporting.
 
In this context, the Committee has met and held discussions with management, KPMG and the Company’s internal auditors, meeting 12 times in fiscal 2016. These meetings have included regular private sessions with each of KPMG and the Company’s head of internal audit, as well as regular private sessions with each of the Company’s Chief Financial Officer, Controller, and General Counsel and Chief Compliance Officer. Management represented to the Committee that the Company’s fiscal 2016 consolidated financial statements were prepared in accordance with generally accepted accounting principles, and the Committee reviewed and discussed the fiscal 2016 consolidated financial statements with management and KPMG.
 
The Committee has discussed with KPMG the matters required to be discussed by applicable auditing standards, including significant accounting policies and the quality, not just the acceptability, of the accounting principles utilized. The Committee has also received from KPMG the written disclosures and the letter required by applicable requirements of the PCAOB regarding the independent auditor’s communications with the Audit Committee regarding independence, and the Audit Committee has discussed with KPMG the firm’s independence. The Audit Committee concluded that KPMG is independent from the Company and management.
 
In reliance on these reviews and discussions, the Committee recommended to the Board of Directors that the audited consolidated financial statements be included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 29, 2016, for filing with the SEC.
 
AUDIT COMMITTEE
 
Mitchell D. Steenrod, Chairman
Alan B. Colberg
Marcella Shinder


 


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AUDITOR FEES
AND PRE-APPROVAL POLICY
 
Auditor Fees and Services
 
The following table sets forth fees billed by KPMG for fiscal 2016 and 2015.
 
Years Ended February 29 and 28
Type of Fee
2016
 
2015
Audit Fees(a)
$
1,591,134

 
$
1,459,600

Audit-Related Fees(b)
424,000

 
387,000

Tax Fees(c)
266,822

 
346,900

All Other Fees(d)

 
465,000

TOTAL FEES
$
2,281,956

 
$
2,658,500

(a)
This category includes fees associated with the annual audit of CarMax’s consolidated financial statements and the audit of CarMax’s internal control over financial reporting. It also includes fees associated with quarterly reviews of CarMax’s unaudited consolidated financial statements.
(b)
This category includes fees associated with attestation services related to our asset-backed securitizations.
(c)
This category includes fees associated with tax compliance, consultation and planning services.
(d)
This category includes reimbursement of professional and administrative costs associated with a completed informal regulatory inquiry.

Approval of Auditor Fees and Services
 
The Audit Committee’s charter provides for pre-approval of audit and non-audit services to be performed by the independent auditors. The Committee typically pre-approves specific types of audit, audit-related and tax services, together with related fee estimates, on an annual basis. The Committee pre-approves all other services on an individual basis throughout the year as the need arises. The Committee has delegated to its chairman the authority to pre-approve independent auditor engagements in an amount not to exceed $50,000 per engagement. Any such pre-approvals are reported to and ratified by the entire Committee at its next regular meeting.
 
All audit, audit-related and tax services in fiscal 2016 were pre-approved by the Audit Committee or pre-approved by the Chairman pursuant to his delegated authority and subsequently ratified by the Audit Committee. In all cases, the Audit Committee concluded that the provision of such services by KPMG was compatible with the maintenance of KPMG’s independence.




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PROPOSAL THREE: ADVISORY RESOLUTION TO
APPROVE EXECUTIVE COMPENSATION
 
We are asking you to approve an advisory resolution approving the compensation of our named executive officers as disclosed in this proxy statement. This vote is commonly referred to as a “Say on Pay” vote and is required by Section 14A of the Securities Exchange Act of 1934. Although this resolution is not binding, we value your opinion and our Compensation and Personnel Committee will consider the outcome of this vote when making future decisions.
 
We believe our executive compensation program promotes the achievement of positive results for our shareholders, aligns pay and performance, and allows us to attract and retain the talented executives that drive our long-term financial success. We urge you to read the “Compensation Discussion and Analysis” section of this proxy statement beginning on page 24, which describes in more detail how our executive compensation program operates and how it is designed to achieve our compensation objectives. We also encourage you to review the “Summary Compensation Table” and other compensation tables and narratives, found on pages 38 through 50.
 
We have adopted a policy providing for an annual “Say on Pay” vote. Accordingly, the next advisory vote on the compensation of our named executive officers will occur in 2017.
 
Our Board recommends that, on an advisory basis, shareholders vote in favor of the following resolution:
 
RESOLVED, that the compensation of the named executive officers of CarMax, Inc. (the “Company”), as disclosed in the Company’s 2016 Proxy Statement pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the Compensation Discussion and Analysis, compensation tables and the narrative discussion that accompanies the compensation tables, is hereby APPROVED.
 
The Board recommends a vote FOR Proposal Three.
 


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COMPENSATION DISCUSSION AND ANALYSIS
 
Overview
 
The Compensation and Personnel Committee oversees an executive compensation program that is intended to drive the creation of long-term shareholder value. This section describes that program and details the compensation earned by our CEO and CFO and our three other most highly compensated executive officers . We refer to these five individuals, listed below, as our “named executive officers” or “NEOs”:
Thomas J. Folliard
Chief Executive Officer. Mr. Folliard joined CarMax in 1993 and served as President and Chief Executive Officer from 2006 to February 2016. He is also a member of our Board.
William D. Nash
President. Mr. Nash joined CarMax in 1997 and was promoted to his current position in February 2016.
Thomas W. Reedy
Executive Vice President and Chief Financial Officer. Mr. Reedy joined CarMax in 2003 and was promoted to his current position in 2012.
William C. Wood
Executive Vice President and Chief Operating Officer. Mr. Wood joined CarMax in 1993 and was promoted to his current position in February 2016.
Edwin J. Hill
Executive Vice President, Strategy and Business Transformation. Mr. Hill joined CarMax in 1995 and was promoted to his current position in 2016.
 

Executive Summary
 
FISCAL 2016 RESULTS

CarMax continued to deliver solid growth and performance in Fiscal 2016. Highlights of the year include the following:

We opened 14 stores in fiscal 2016. In fiscal 2017, we plan to open 15 stores. In fiscal 2018, we plan to open between 13 and 16 stores.
We achieved top and bottom-line growth, with record net sales and operating revenues of $15.15 billion and record net earnings of $623.4 million, increases of 6.2% and 4.4%, respectively.
Total used unit sales increased 6.5%, comparable store used unit sales increased 2.4%, and total wholesale unit sales increased 4.9%.
CAF income increased 6.7% to $392.0 million.
We continued our share repurchase program, buying back 16.3 million shares with a market value of $971.2 million.
We were named by Fortune magazine as one of its “100 Best Companies to Work For” for the twelfth year in a row.

MANAGEMENT SUCCESSION

As the culmination of a multi-year management succession plan, on February 1, 2016, Mr. Nash, formerly Executive Vice President, Human Resources and Administrative Services, was promoted to President of CarMax and Mr. Wood, formerly Executive Vice President, Stores, was promoted to Executive Vice President and Chief Operating Officer of CarMax.

Mr. Folliard will continue as CarMax’s Chief Executive Officer until his retirement, expected to occur prior to the end of 2016, at which time it is anticipated that Mr. Nash will assume the role of CEO. The Board expects to appoint Mr. Folliard as non-executive chairman of the Board following his retirement.


24



SUMMARY OF FISCAL 2016 COMPENSATION CHANGES

The following chart summarizes the key changes we made to the compensation of our named executive officers in fiscal 2016. 
Compensation
Category
Changes We Made
in Fiscal 2016
Why We Made
These Changes
Base Salary
5% increase for Mr. Folliard, 18.2% increase for Mr. Nash, 9.1% increase for Mr. Reedy and Mr. Wood, 5.0% increase for Mr. Hill
Based on individual performance in fiscal 2015 and to better align base salary among our executive vice presidents and with the 50th percentile of our blended peer/survey data. See pages 28 to 29 for more detail.
Annual Incentive Bonus
67.8% payout versus an 179.4% payout in fiscal 2015
Based on Company performance measured against pre-determined net income target set at the beginning of fiscal 2016. See pages 29 to 30 for more detail.
Long-Term Equity Award
7.7% increase in grant date fair value for Mr. Folliard, 11.5% increase for Messrs. Nash, Reedy and Wood, no increase for Mr. Hill
Based on individual performance in fiscal 2015 and to ensure the executives are provided the opportunity to achieve total compensation above the median of our blended peer/survey data for sustained shareholder value creation and above-target Company performance. See pages 30 to 32 for more detail.
 
Replacement of market stock units (“MSUs”) with performance stock units (“PSUs”)
The Committee replaced MSUs with PSUs for our executive officers to further strengthen the link between pay and the performance of the Company by directly tying equity payments to a meaningful and appropriate measure of earnings growth. See pages 30 to 31 for more detail. 
Management Succession Compensation Adjustment
23.1% increase to Mr. Nash’s base salary following his February 1, 2016 promotion to President
Mr. Nash’s base salary was increased following his promotion to reflect his new position. See page 29 for more detail.
 
Mr. Nash’s annual incentive bonus target was increased from 75% to 100% of his base salary for the portion of fiscal 2016 following his promotion to President
Mr. Nash’s target bonus amount applicable to the final month of fiscal 2016 was increased to reflect his new position. The bonus percentage applicable to the portion of the fiscal year before his promotion remained 75% of his prior base salary. See page 30 for more detail.
 
Performance drives pay at CarMax. Eighty-seven percent of our CEO’s total direct compensation (the sum of base salary, annual incentive bonus and long-term equity) earned in fiscal 2016 was performance-based. Our pay-for-performance philosophy is in place across our leadership team. In fiscal 2016, an average of 77% of the total direct compensation of our other named executive officers was performance-based. Compensation mix is discussed in more detail on pages 32 and 33.
 
How We Make Compensation Decisions
 
The Compensation and Personnel Committee oversees our executive and director compensation programs and determines all executive officer and director compensation.
 
COMPENSATION PHILOSOPHY AND OBJECTIVES
 
CarMax has a pay-for-performance philosophy. The Committee believes that the best way to implement this philosophy is by tying a significant portion of our executives’ total direct compensation to the attainment of both annual financial goals and multi-year stock price appreciation.
 
The Committee has established the following objectives for our executive compensation program:
Align the interests of executive officers with the financial interests of our shareholders.

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Encourage the achievement of our key strategic, operational and financial goals.
Link incentive compensation to Company and stock price performance, which the Committee believes promotes a unified vision for senior management and creates common motivation among our executives.
Attract, retain and motivate executives with the talent necessary to drive our long-term success.
Provide the Committee the flexibility to respond to the continually changing environment in which we operate.
 
The key elements of our executive compensation program are base salaries, annual incentive bonuses and long-term equity awards. The Committee generally makes determinations regarding long-term equity awards, base salaries and annual incentive bonuses at its March and April meetings. The Committee makes decisions regarding each element of pay to further the objectives described above. The specific ways in which each element of compensation supports these objectives are described beginning on page 28.
 
The Committee recognizes the impact that an adjustment to one element of compensation may have on other elements. For example, an increase in an officer’s base salary will result in a larger target annual incentive amount since that amount is determined as a percentage of base salary. Although the Committee considers these relationships between the various elements of compensation—and also considers each executive officer’s total compensation—decisions regarding any one element of compensation are not determinative of decisions regarding other elements.
 
The Committee generally considers the value of stock-based compensation as an element of our executive compensation program at the time of grant of an equity award, not at the time of exercise or vesting. Accordingly, the Committee does not consider the realized value of long-term equity compensation when designing and evaluating our executive compensation program.
 
COMPENSATION CONSULTANT
  
The Committee has engaged Frederic W. Cook & Co., Inc. (“FWC”), a compensation consultant, to obtain access to independent compensation data, analysis and advice. Pursuant to its charter, the Committee has the sole authority to hire, oversee and terminate FWC, as well as to approve FWC’s fees and any other terms of the engagement.
The Committee has retained an independent compensation consultant.
Committee members have direct access to FWC without going through management. FWC provides no services to CarMax other than those it provides to the Committee.
 
The Committee assessed FWC’s independence in April 2016 under SEC and NYSE standards and concluded that FWC was independent.

The Committee considered, among other factors:
whether FWC provided other services to CarMax;
the amount of fees paid by CarMax to FWC as a percentage of FWC’s total revenue;
FWC’s policies and procedures designed to prevent conflicts of interest;
any business or personal relationship between the individuals advising the Committee and any Committee member;
any CarMax stock owned by the individuals advising the Committee; and
any business or personal relationship between the individuals advising the Committee, or FWC itself, and an executive officer of CarMax.
 
FWC frequently attends Committee meetings and provides analysis and recommendations that inform the Committee’s decisions. FWC assisted the Committee in fiscal 2016 by analyzing and providing recommendations with regard to total direct compensation for the Company’s CEO, President and executive and senior vice presidents, including adjustments to Mr. Nash’s compensation made on his promotion to President. FWC provided general compensation advice throughout fiscal 2016, including analysis related to long-term equity awards, our internal pay equity (that is, the relationship between the compensation of our CEO and our other named executive officers), the composition of our peer group and the appropriate performance criteria for the fiscal 2016 annual incentive bonus.
 


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MANAGEMENT’S ROLE
 
Although management does not have any decision-making authority regarding executive compensation, management assists the Committee by recommending base salary levels, annual incentive bonus objectives and targets, and individual long-term equity awards for executives other than the CEO. Management also assists the Committee with the preparation of meeting agendas and prepares materials for those meetings as directed by the Committee.
 
The Committee has not delegated any authority with respect to the compensation of our executive officers and directors. The Committee, however, has delegated limited authority to our CEO and CFO to grant long-term equity awards to our non-executive officers between regularly scheduled Committee meetings in an amount not to exceed 75,000 shares or units. These awards are subject to our Employee Equity Grant Policy, which is available under the “Corporate Governance” link at investors.carmax.com. The Committee’s practice is to review and ratify any such grant at its next regularly scheduled meeting.
 
Notwithstanding the Committee’s use of outside advisers and management’s participation in the executive compensation process, the Committee makes all executive compensation decisions using its own independent judgment and analysis.
 
CONSIDERATION OF THE MOST RECENT ADVISORY “SAY-ON-PAY” VOTE
 
At our 2015 annual meeting, a significant majority of our shareholders approved our executive compensation program, with more than 97% of the votes cast in favor of the program. The Committee was pleased with this response, which improved on an already strong result at the 2014 annual meeting, at which more than 91% of the votes cast were in favor of the program.
97% of the votes cast on last year’s say-on-pay proposal approved CarMax’s executive compensation. 
Based on these results and the Committee’s independent judgment, the Committee made no material changes to the structure of our executive compensation program for fiscal 2016. However, as part of its commitment to pay-for-performance practices, the Committee approved the grant of performance-based PSUs (in lieu of the historical MSU grants) for fiscal 2016. This change is described on page 30.
 
PEER GROUP

Each year, the Committee reviews market compensation data provided by its independent consultant to determine whether the compensation opportunities of the named executive officers are appropriate and competitive.
 
The Committee used the following peer group of companies to benchmark the fiscal 2016 compensation disclosed in this proxy statement. The Committee selected this peer group in October 2013 based on an analysis by FWC and the Committee’s independent judgment. These peers fell within a reasonable range (both above and below CarMax) of comparative factors such as revenue, market capitalization, net income, assets and one- and three-year total shareholder return. These peers are generally “big box” retailers, specialty auto retailers or direct competitors.
Advance Auto Parts, Inc.
Kohl’s Corporation
AutoNation, Inc.
Lowe’s Companies, Inc.
AutoZone, Inc.
Macy’s, Inc.
Avis Budget Group, Inc.
PetSmart, Inc.
Dick’s Sporting Goods, Inc.
Ross Stores, Inc.
Dollar General Corporation
The Sherwin-Williams Company
eBay Inc.
Southwest Airlines Co.
Family Dollar Stores, Inc.
Staples, Inc.
Genuine Parts Company
Tractor Supply Company
Hertz Global Holdings, Inc.
 
 
In preparation for fiscal 2017 compensation decisions, the Committee re-evaluated this peer group in June 2015 based on an analysis by FWC and the Committee’s independent judgment. The Committee determined that the peer group remained appropriate, with the peers continuing to fall within a reasonable range (both above and below CarMax) of comparative factors such as revenue, market capitalization, net income, assets and one- and three-year total shareholder return. The Committee

27


selected The Gap, Inc. to replace PetSmart following PetSmart’s recent acquisition. The Committee added The Gap to the peer group based on the comparative factors mentioned above, as well as its frequent appearance as a peer to other companies within the CarMax peer group. The Committee will use the revised peer group to benchmark compensation practices for fiscal year 2017.

In addition to the peer group, the Committee uses broader survey data to benchmark compensation practices. In fiscal 2016, the Committee considered three national surveys produced by Equilar, Towers Watson and Mercer with a focus on executives within the retail/wholesale and automotive industries.
 
The Committee considers a blend of peer group data and broader survey data in benchmarking compensation. The Committee believes that this mix of data provides the most comprehensive view of executive compensation practices at companies against whom we compete for talent and allows the Committee to ensure that CarMax continues to provide appropriate and competitive compensation. This mix of data also allows the Committee to obtain broader market context with regard to certain positions that may not exist in a comparable form at every company in our peer group or that may not be classified as a named executive officer at every company in our peer group.
 
The Committee generally uses the 50th percentile of the blended peer/survey data as a reference in setting the base salaries and target annual incentive bonus opportunities of our named executive officers. The Committee uses long-term equity awards that are tied to objective performance metrics to further reward executive officers when CarMax performs well. If the Company delivers sustained performance gains, these long-term equity awards are targeted to provide an opportunity for total direct compensation beyond the median of the blended peer/survey data.

The Committee uses peer group and broader survey data as one of many factors in making compensation decisions. Other factors include individual performance, Company performance, tenure, internal pay equity and succession planning.
 
What We Pay and Why: Elements of Compensation
 
The key elements of compensation for our named executive officers are base salary, an annual incentive bonus and long-term equity awards. Together, these elements make up total direct compensation.
Base Salary
+
Annual Incentive
Bonus
+
Long-Term Equity Awards
=
Total Direct Compensation
 
This section describes these elements and details the amounts of each earned by our named executive officers in fiscal 2016.
 
BASE SALARY
 
We pay competitive base salaries to retain key officers and attract the new talent necessary for our long-term success. An executive officer’s base salary generally reflects the officer’s responsibilities, tenure and job performance, as well as the market for the officer’s services. The Committee reviews officer base salaries every year, generally in March or April. When the Committee reviews base salaries, it considers the reports and advice provided by FWC, its independent compensation consultant, and the peer group and survey data described above, as well as the recommendations provided by our CEO (except when setting the CEO’s base salary).
 
At the beginning of fiscal 2016, the Committee approved the following base salary adjustments.
Name
Prior Base Salary
($)
 
Fiscal 2016 Base Salary
($)
 
Percentage Increase
(%)
Thomas J. Folliard
1,195,446

 
1,255,218

 
5.0

William D. Nash
550,000

 
650,000

 
18.2

Thomas W. Reedy
595,794

 
650,000

 
9.1

William C. Wood
595,794

 
650,000

 
9.1

Edwin J. Hill
504,972

 
530,221

 
5.0

 


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The Committee increased Mr. Folliard’s base salary by 5% based on a review of his individual and Company performance in fiscal 2015 and to maintain alignment of his base salary with the 50th percentile of the blended peer/survey data described above under the heading “Peer Group.” The Committee approved Mr. Folliard’s recommendation to increase the base salaries of Mr. Nash, Mr. Reedy and Mr. Wood based on fiscal 2015 performance, to align salaries among our Executive Vice Presidents, and to better align Mr. Reedy and Mr. Wood’s salaries with the 50th percentile of the blended peer/survey data. The Committee also approved Mr. Folliard’s recommendation to increase Mr. Hill’s base salary by 5% based on the individual contribution that he made to CarMax’s performance in fiscal 2015.

On his promotion to President, effective February 1, 2016, the Committee increased Mr. Nash’s base salary by 23.1% to $800,000. This decision was made in recognition of his increased responsibilities and in consultation with FWC, who analyzed pay considerations related to the Company’s succession planning efforts, including the relationship between prospective CEO and outgoing CEO pay.
 
ANNUAL INCENTIVE BONUS
 
We pay annual incentive bonuses to drive the achievement of CarMax’s financial goals. The amount of the incentive bonus depends on our performance as measured against objective performance goals established by the Committee at the beginning of each fiscal year. Bonuses are not guaranteed.
 
We calculate bonuses using the following formula:
Base Salary
x
Target Percentage of
Base Salary
x
Performance Adjustment
Factor
=
Annual Incentive Bonus
 
Base salaries, which are the first component of this formula, are discussed above. The “target percentage of base salary” is an individual’s incentive bonus target expressed as a percentage of base salary. This percentage differs among our named executive officers depending on their level of responsibility and is set forth in a written agreement between each officer and the Company. Each named executive officer’s target percentage is listed in the table on page 30.
 
The last component of the bonus formula – the “performance adjustment factor” – is a percentage representing the Company’s success in meeting the performance goals set by the Committee at the beginning of each fiscal year.
 
The following chart describes how the Committee applied this formula in fiscal 2016.
Step One: Select
Performance Measure
The Committee determined in April 2015 that the performance goals for fiscal 2016 would be based on our fiscal 2016 net income, determined in conformity with U.S. generally accepted accounting principles. The Committee believes that tying performance goals to net income aligns management and shareholder interests.
Step Two: Select
Performance Targets
The Committee then established the following net income targets for fiscal 2016: $597.4 million as the threshold goal; $643.0 million as the target goal; $675.2 million as the premium goal; and $694.4 million as the maximum goal.
Step Three: Select
Performance Adjustment
Factors
The Committee then established the following performance adjustment factors for fiscal 2016:
§ 25% if the threshold goal of $597.4 million was achieved
§ 100% if the target goal of $643.0 million was achieved
§ 150% if the premium goal of $675.2 million was achieved
§ 200% if the maximum goal of $694.4 million was achieved

If the threshold performance goal was not achieved, no incentive bonus would be paid. The performance adjustment factors are determined using straight-line interpolation when our actual performance falls between two performance goals.

Step Four: Assess
Performance Against Targets and Determine Payouts
 
The Committee certified in April 2016 that CarMax had achieved net income for fiscal 2016 of $623.4 million, yielding a performance adjustment factor of 67.8%. The Committee multiplied this percentage by each named executive officer’s target incentive amount to determine each executive officer's fiscal 2016 bonus payout.
 
 
The following table shows each named executive officer’s base salary, incentive target percentage of base salary, and target and maximum bonus amounts. The table also shows each officer’s actual fiscal 2016 bonus.

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Name
Base Salary
($)
 
Incentive Target Percentage of Base Salary
(%)
 
Target Incentive Amount
($)
 
Actual Fiscal 2016 Incentive Bonus
 
Maximum Incentive Amount
($)
Thomas J. Folliard
1,255,218

 
150

 
1,882,827

 
1,276,557

 
3,765,654

William D. Nash(a)
650,000/800,000

 
75/100

 
513,542

 
348,181

 
1,027,084

Thomas W. Reedy
650,000

 
75

 
487,500

 
330,525

 
975,000

William C. Wood
650,000

 
75

 
487,500

 
330,525

 
975,000

Edwin J. Hill
530,221

 
50

 
265,110

 
179,745

 
530,220

(a)
A base salary of $650,000 and incentive target percentage of 75% were used to calculate the portion of Mr. Nash’s incentive bonus attributable to the first eleven months of fiscal 2016. For the portion of his incentive bonus attributable to the final month of fiscal 2016, his new base salary of $800,000 and incentive target percentage of 100% were used.
 
For the last five fiscal years, our average performance adjustment factor has been 108.5% (67.8%, 179.4%, 120.6%, 88.3% and 86.4% for fiscal 2016, 2015, 2014, 2013 and 2012), meaning that, on average for the past five years, we have paid our named executive officers an annual incentive bonus of 108.5% of their respective target incentive amounts for achievement against the targets established by the Committee.

The Committee determines all incentive bonuses in accordance with the CarMax, Inc. Annual Performance-Based Bonus Plan (“Bonus Plan”). We adopted the Bonus Plan as a mechanism to provide annual incentive compensation and it is intended to preserve the deductibility of this compensation in accordance with Section 162(m) of the Internal Revenue Code. The Bonus Plan provides that the maximum amount payable to any one individual in any one fiscal year is $5 million. In fiscal 2016, however, the Committee limited the maximum performance adjustment factor to 200%, ensuring that Mr. Folliard’s bonus could not exceed $3,765,654 and that no other individual bonus could exceed $1,027,084.
 
The Bonus Plan authorizes the Committee to reduce the amount of any bonus paid to a named executive officer below the amount that otherwise would be payable. The Committee may also decide not to pay a bonus even when performance goals have been satisfied. Under no circumstances, however, may the Committee increase the amount of any bonus payable under the Bonus Plan above what would be payable to an executive upon application of the relevant performance adjustment factor.
 
LONG-TERM EQUITY AWARDS
 
We grant long-term equity awards to tie our executives’ long-term compensation directly to CarMax’s stock price and to drive the achievement of our strategic goals. We also believe that long-term equity awards are an important retention tool.
 
In fiscal 2016, we granted our named executive officers two kinds of long-term equity awards: stock options and PSUs. Options accounted for 75% and PSUs accounted for 25% of the fair value awarded as long-term equity to our named executive officers in fiscal 2016. We granted these options and PSUs pursuant to the CarMax, Inc. 2002 Stock Incentive Plan (“Stock Incentive Plan”). The Committee introduced PSUs for fiscal year 2016, replacing MSU awards for our CEO and executive and senior vice presidents. The MSUs were tied solely to the performance of our stock while the PSUs are tied to CarMax earnings before interest and taxes, or EBIT, which the Committee considers a meaningful and appropriate measure of earnings growth. By measuring earnings growth using EBIT over a three-year time horizon, the Committee can assess core business earnings performance without regard to changes in the Company’s effective tax rate or level of interest expense, which are factors for purposes of determining the annual incentive bonus. The Committee believes the new PSU award further strengthens the link between pay and the performance of our executives.
 
Our long-term equity awards historically contained a modified single-trigger feature under which 50% of the award vested automatically upon a change-in-control and the remaining 50% vested automatically upon the one-year anniversary of the change in control. In January 2014, the Committee eliminated this single-trigger feature and replaced it with a double-trigger feature under which a change-in-control does not, on its own, trigger accelerated vesting of long-term equity awards. All long-term equity awards granted in fiscal 2015 and fiscal 2016 contain a double-trigger.
 
Stock Options
 
Each option represents the right to purchase one share of our common stock at the exercise, or “strike,” price. The strike price is equal to the volume-weighted average price of our common stock on the grant date. The Committee believes that the use of the


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volume-weighted average price, as opposed to the closing price, is more representative of the value of the common stock on the grant date because it incorporates all trades made on the grant date.
 
Our option awards generally vest in 25% increments over four years; that is, one quarter of the options granted vests on the first anniversary of the grant, another quarter vests on the second anniversary, and so forth. Limited circumstances may result in earlier vesting. The awards expire on the seventh anniversary of the grant date.
 
We believe that granting stock options supports our pay-for-performance philosophy by aligning management and shareholder interests. If our stock price does not rise, the options have no value. In addition to promoting alignment of management and shareholder interests, the four-year vesting schedule of our options ensures that our executives are appropriately focused on CarMax’s long-term strategic goals. This vesting schedule also operates as a retention tool.
 
Performance Stock Units
 
Depending on the Company’s achievement of performance goals over a three-year period, PSUs represent the right to receive between 0% and 200% of a targeted number of shares of our common stock. The number of shares delivered to each PSU holder will be determined based upon actual three-year cumulative EBIT performance compared to pre-determined three-year EBIT goals. Specifically, each PSU is multiplied by a percentage that represents the Company’s success in meeting the EBIT goals set by the Committee. If the threshold EBIT goal is met, each PSU is multiplied by 25%. The target multiplier is 100% and the maximum multiplier is 200%. The multiplier is determined using straight-line interpolation for EBIT performance that falls between the threshold and the target or between the target and the maximum. If the threshold performance goal is not achieved, no shares will be paid.

PSUs generally vest on the three-year anniversary of the grant date. Limited circumstances may result in earlier vesting.
 
The Committee considered PSUs to be a key component of our pay-for-performance philosophy in fiscal 2016 because the PSUs directly tie equity payments to a measure of CarMax’s earnings growth that the Committee believes to be an appropriate reflection of the Company’s performance. In addition, similar to our stock options, a PSU’s multi-year vesting schedule operates as a retention tool and ensures that our executives are appropriately focused on CarMax’s long-term strategic and financial goals.
 
In determining the number of options and PSUs to award, the Committee considers the named executive officer’s role at CarMax; benchmarking data; our recent financial performance; the performance of our common stock; the fair market value, expense and dilutive effect of any potential award; succession planning; and the importance of retaining the officer’s services. The Committee solicits the advice of its independent compensation consultant and the opinion of the Company’s CEO, except with respect to the CEO’s own award. The CEO generally gives the Committee an initial recommendation for annual long-term equity awards for the other named executive officers. The Committee reviews this recommendation and makes its own independent determination.

Fiscal 2016 Long-Term Equity Awards
 
In fiscal 2016, the Committee approved stock option and PSU awards for our named executive officers as noted below. This table also describes the long-term equity awards made in fiscal 2015.
 
Options and PSUs Granted in Fiscal 2016
 
Options and MSUs Granted in Fiscal 2015
Name
Number of
Stock
Options
(a)
 
Number of
PSUs
 
Total
Grant Date
Fair Value
($)
 
Number of
Stock
Options
(a)
 
Number of
MSUs
 
Total
Grant Date
Fair Value
($)
Thomas J. Folliard
254,731

 
24,111

 
6,999,982

 
369,039

 
29,348

 
6,500,004

William D. Nash
70,641

 
6,686

 
1,941,181

 
98,858

 
7,862

 
1,741,233

Thomas W. Reedy
70,641

 
6,686

 
1,941,181

 
98,858

 
7,862

 
1,741,233

William C. Wood
70,641

 
6,686

 
1,941,181

 
98,858

 
7,862

 
1,741,233

Edwin J. Hill
52,532

 
4,972

 
1,443,553

 
81,959

 
6,518

 
1,443,580

(a)
We grant limited stock appreciation rights (“SARs”) in tandem with each option. The SARs may be exercised only in the event of a change-in-control of the Company. Upon the exercise of the SAR and the surrender of the related option, the officer is entitled to receive

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an amount equal to the difference between the value of our common stock on the date of exercise and the exercise price of the underlying stock option. No free-standing SARs have been granted.

The Committee approved a 7.7% increase in the value of Mr. Folliard’s fiscal 2016 long-term equity award. The Committee approved this increase based on a review of Mr. Folliard’s individual performance as well as Company performance in fiscal 2015 and to provide Mr. Folliard long-term equity compensation at a competitive market rate versus the blended peer/survey data described above under the heading “Peer Group.”
 
The grant date fair value of the annual long-term equity awards provided to Messrs. Nash, Reedy and Wood was increased by 11.5% in fiscal 2016 after remaining essentially unchanged from fiscal 2013 through fiscal 2015. The Committee approved this increase based on each executive’s individual performance in fiscal 2015 and to ensure that the long-term equity component of their compensation would continue to offer an opportunity, depending on CarMax performance, for their total compensation to exceed the median for comparable executives as measured by the blended peer/survey data described above under the heading “Peer Group.” The Committee determined that Mr. Hill’s equity awards continued to provide competitive pay and therefore decided to maintain his awards at prior year levels.

Our Employee Equity Grant Policy requires us to grant our annual long-term equity awards three business days after we release the prior fiscal year’s year-end earnings information. The Committee complied with this requirement for options issued in fiscal 2016, granting the options listed above on April 8, 2015. To give the Board an opportunity to consider and approve our first issuance of PSUs, the Committee and the Board approved an exception to Employee Equity Grant Policy and granted the PSUs on April 15, 2015. The awards were priced using the volume-weighted average price of our common stock on the grant date, in accordance with our Stock Incentive Plan and our Employee Equity Grant Policy.
 
COMPENSATION MIX
 
As our executives assume more responsibility, we generally increase the percentage of their compensation that is performance-based. We do not have a pre-established policy or target for allocation between specific compensation components. The following charts, however, show that the majority of annual total direct compensation for both our CEO and our other named executive officers as a group is determined by our performance.

 
The table below illustrates how each named executive officer’s total direct compensation in fiscal 2016 was allocated between performance-based and fixed compensation, as well as the breakdown of performance-based compensation that was based on annual and long-term Company performance.


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Percentage of Total Direct
Compensation
 
Percentage of Performance-Based Compensation
 
Performance-
Based
 
Fixed
 
Annual
 
Long-
Term
Thomas J. Folliard
87%
 
13%
 
15%
 
85%
William D. Nash
78%
 
22%
 
15%
 
85%
Thomas W. Reedy
78%
 
22%
 
15%
 
85%
William C. Wood
78%
 
22%
 
15%
 
85%
Edwin J. Hill
75%
 
25%
 
11%
 
89%

ADDITIONAL ELEMENTS OF COMPENSATION
 
We provide our executive officers the benefits available to CarMax associates generally. We also provide the limited perquisites described below. These benefits and perquisites are intended to be part of a competitive compensation package.
 
Benefits Available to CarMax Associates Generally
 
Our executives and our full-time associates generally are eligible for health insurance coverage, life insurance, short- and long-term disability insurance, matching gifts to qualified charitable organizations, and a defined contribution, or 401(k), plan that we refer to as our Retirement Savings Plan. In addition, executives and CarMax associates generally who satisfied certain criteria as of December 31, 2008, may be eligible for benefits under our frozen Pension Plan. Additional details regarding these frozen benefits can be found in the “Pension Benefits in Fiscal 2016” table on page 43.
 
Non-Qualified Retirement Plans
 
Our executives and other highly-compensated associates are eligible to participate in two non-qualified retirement plans: the Retirement Restoration Plan (“RRP”) and the Executive Deferred Compensation Plan (“EDCP”). A description of these plans can be found in the narrative discussion following the “Nonqualified Deferred Compensation” table on pages 45 and 46. Details regarding the fiscal 2016 contributions to each named executive officer’s RRP and EDCP accounts, as well as the earnings and aggregate balances for those accounts, can be found in the “Nonqualified Deferred Compensation” table on page 45.
 
In addition to the RRP and the EDCP, executives and other highly compensated CarMax associates who satisfied certain criteria as of December 31, 2008, may be eligible for benefits under our frozen Benefit Restoration Plan. Additional details regarding these frozen benefits can be found in the “Pension Benefits in Fiscal 2016” table on page 43.
 
Company Transportation
 
We provide the use of a CarMax-owned vehicle to each of our named executive officers and to certain other eligible associates. For all associates using CarMax-owned vehicles, we bear the maintenance and insurance costs. We treat the personal use of a Company-owned vehicle as income to the associate. The associate pays the related income taxes.
 
We encourage our executive officers to use our plane for business travel. Our plane is also available for personal use by our Chief Executive Officer (Mr. Folliard), President (Mr. Nash) and Executive Vice Presidents (Messrs. Reedy and Wood) when we do not need the plane for business travel. Mr. Folliard is required to reimburse CarMax for the incremental costs associated with his personal use to the extent that those costs exceed $175,000 in any fiscal year. Messrs. Nash, Reedy and Wood are required to reimburse CarMax for the incremental costs associated with their respective personal uses of the plane to the extent that those costs exceed $70,000 in any fiscal year. Our executives bear all income taxes associated with their personal use of the plane.
 
We do not provide tax gross-ups on any of these transportation benefits.
 

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Tax and Financial Planning Services
 
We provide a tax and financial planning benefit to our named executive officers. This benefit was valued at $13,000 per year. Officers who forego this benefit may engage their own tax professional at the Company’s expense in an amount up to $10,000 per year. The Committee approved this benefit to reduce the amount of time and attention that our executive officers must spend on personal tax and financial planning, which permits them to focus on their responsibilities to CarMax, and to maximize the financial reward of the compensation that CarMax provides. Officers bear all income taxes associated with these tax and financial planning benefits. We do not provide tax gross-ups on these benefits.
 
Additional Information
 
SEVERANCE AGREEMENTS
 
We have severance agreements with each of our named executive officers. The Committee has determined that these agreements are beneficial to us because they contain restrictive covenants relating to confidential information, non-competition and non-solicitation of our associates. The Committee also believes that these agreements serve as a recruiting tool and better enable our current executives to focus on CarMax’s strategic and operating goals. The agreements provide for severance payments under certain circumstances, which are discussed in more detail under “Potential Payments Upon Termination or Change-in-Control on page 46. None of the severance agreements provide a guaranteed term of employment, nor do they provide tax gross-ups on any compensation or perquisite.
Our severance agreements do not provide tax gross-ups.
Under the terms of the severance agreements, the Committee establishes and approves each named executive officer’s annual base salary, which cannot be less than the minimum base salary set forth in each agreement unless across-the-board reductions in salary are implemented for all of our senior officers. Additionally, the Committee approves the performance measures and payment amounts that determine each named executive officer’s annual incentive bonus under the Bonus Plan.
 
The agreements provide further that each named executive officer is eligible to participate in our Stock Incentive Plan and to participate in all other incentive, compensation, benefit and similar plans available to our other executive officers.
 
Clawback and Forfeiture Provisions
 
The severance agreements contain a clawback provision. If any named executive officer engages in conduct for which he could be terminated for cause, with certain limitations, and the conduct directly results in the filing of a restatement of any financial statement that was previously filed with the SEC, the named executive officer shall, upon demand by the Company, repay with interest all compensation that was expressly conditioned on the achievement of certain financial results if the restated financial statements would have resulted in a lesser amount being paid.
 
In addition, at our 2012 annual meeting, we asked our shareholders to approve amendments to add clawback provisions to both our Bonus Plan and Stock Incentive Plan. Our shareholders approved these provisions, which provide that any award that is subject to recovery under any law, including the Dodd-Frank Wall Street Reform and Consumer Protection Act, will be subject to a clawback as required by such law or any CarMax policy adopted pursuant to such law.
 
In addition to the clawback provisions discussed above, our equity award agreements contain a forfeiture provision. If a named executive officer is terminated for cause, the officer’s unexercised vested and unvested options, unvested MSUs and unvested PSUs will be forfeited.
 
Change-in-Control and Severance Benefits
 
Each severance agreement provides for payments and other benefits in certain circumstances involving a termination of employment, including a termination of employment in connection with a change-in-control. Payments in connection with a change-in-control are subject to a double trigger; that is, the executive is not entitled to payment unless there is both a change-in-control and the executive is subsequently terminated without cause (or resigns for good reason). Our executives are not entitled to any severance payments as a result of voluntary termination (outside of the retirement context) or if they are


34


terminated for cause. Detailed information with respect to these payments and benefits can be found under the heading “Potential Payments Upon Termination or Change-in-Control” beginning on page 46.
 
The Committee believes that these severance benefits encourage the commitment of our named executive officers and ensure that they will be able to devote their full attention and energy to our affairs in the face of potentially disruptive and distracting circumstances. In the event of a potential change-in-control, our named executive officers will be able to analyze and evaluate proposals objectively with a view to the best interests of CarMax and its shareholders and to act as the Board may direct without fear of retribution if a change-in-control occurs. The Committee recognizes that the severance benefits may have the effect of discouraging takeovers and protecting our officers from removal because the severance benefits increase the cost that would be incurred by an acquiring company seeking to replace current management. The Committee believes, however, that the benefit to CarMax and its shareholders outweighs this concern.
 
RISK AND COMPENSATION POLICIES AND PRACTICES
 
The Compensation and Personnel Committee assesses CarMax’s compensation policies and practices each year to ensure that they do not create risks that are reasonably likely to have a material adverse effect on the Company. In fiscal 2016, management reviewed the compensation policies and practices for all CarMax associates (including store associates, store management, regional leadership teams, home office and CarMax Auto Finance associates, and executive officers). Management then presented a summary of its review at the Committee’s January 2016 meeting. The summary listed each compensation policy or practice applicable to the various groups of CarMax associates, including base salaries, annual incentive bonuses, long-term equity awards, sales bonuses, sales commissions and hourly pay. The summary also listed the potential risks associated with those policies or practices and the tools we employ to mitigate those risks, including the following:
Annual Incentive Bonuses: payments made to senior management are: (i) subject to a clawback provision; (ii) capped at 200% of the target incentive bonus amount or at the $5 million plan maximum, whichever is lower; and (iii) only paid when CarMax satisfies the objective metrics determined at the beginning of the year by an independent committee of non-employee directors.
Long-Term Equity Awards: equity awards: (i) are approved by an independent committee of non-employee directors; (ii) contain three and four-year vesting provisions; and (iii) for senior management, must be held in compliance with CarMax’s executive stock ownership guidelines.
Sales Bonuses: sales bonuses are monitored to ensure that associates are not overpaid based on inflated sales figures. Monitoring tools include: (i) centralized assignment of sales targets; (ii) centralized and non-negotiable vehicle pricing; (iii) electronic reporting of sales from each store to the home office; and (iv) performance of a daily vehicle inventory at each store.
Hourly Pay: hourly pay is tracked and managed through a centralized time management and reporting system.

Following discussion and a review of the summary noted above, the Committee determined that none of our compensation policies and practices create risks that are reasonably likely to have a material adverse effect on the Company.
 
STOCK OWNERSHIP GUIDELINES
 
To further align the long-term financial interests of our executives and our shareholders, the Committee has established the following stock ownership guidelines:
Subject Officers
Required to Own the Lesser of:
Chief Executive Officer and/or President
6 x Base Salary or 300,000 shares
Executive Vice President
3 x Base Salary or 100,000 shares
Senior Vice President
2 x Base Salary or 50,000 shares
 
Executives have five years from the date they first become subject to a particular level of stock ownership to meet the corresponding requirement. The Committee measures compliance on an annual basis at the end of each fiscal year. Acceptable forms of ownership include shares owned outright (by the executive or an immediate family member), vested stock options, PSUs and MSUs. Our stock ownership guidelines are available under the “Corporate Governance” link at investors.carmax.com.
 
As of February 29, 2016, all of our current named executive officers satisfied the ownership guidelines set forth above.

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PROHIBITION ON HEDGING AND PLEDGING
 
We have a policy prohibiting all CarMax associates from engaging in any hedging or pledging transactions involving CarMax stock. This prohibition applies to both our named executive officers and our non-employee directors.
 
TAX AND ACCOUNTING CONSIDERATIONS
 
Section 162(m) of the Internal Revenue Code generally disallows a tax deduction for compensation over $1 million paid in any fiscal year to the CEO or any of the three other highest paid executive officers (other than the CFO) unless that compensation is performance-based. Compensation under our Bonus Plan and stock options and PSUs granted pursuant to our Stock Incentive Plan may qualify as performance-based under Section 162(m). Although the Committee generally seeks to preserve the deductibility of compensation paid to our executive officers, the primary function of our executive compensation program is to drive the creation of long-term shareholder value.
 
Section 409A of the Internal Revenue Code imposes certain requirements on non-qualified deferred compensation, which can include long-term equity awards and severance. CarMax’s executive compensation programs generally are designed to comply with, or be exempt from, the requirements of that section so as to avoid potential adverse tax consequences that may result from non-compliance.
 
In developing CarMax’s executive compensation programs, the Committee also considers the accounting treatment of, and the expenses associated with, the Company’s long-term equity compensation practices.

FISCAL 2017 EQUITY GRANT TO MR. FOLLIARD

In March of 2016, the Committee approved the fiscal 2017 equity awards for our named executive officers as part of its annual compensation review. As Mr. Folliard is expected to retire before the end of calendar 2016, the Committee decreased the value of the equity compensation granted to Mr. Folliard from approximately $7.0 million in fiscal 2016 to approximately $3.5 million in fiscal 2017. In conjunction with the decrease in pay, the Committee also removed continued employment as a vesting condition to Mr. Folliard's fiscal 2017 equity awards. However, Mr. Folliard's fiscal 2017 option award will become exercisable in accordance with the same schedule as the option awards made to our other executive officers and the PSUs will be subject to the same performance requirements as the PSU awards made to our other executive officers.


36


COMPENSATION AND PERSONNEL COMMITTEE REPORT
 
The Compensation and Personnel Committee has reviewed and discussed the foregoing Compensation Discussion and Analysis with management. Based on this review and discussion, the Committee recommended to the CarMax, Inc. Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement and incorporated by reference into CarMax’s Annual Report on Form 10-K for the fiscal year ended February 29, 2016.
 
THE COMPENSATION AND PERSONNEL COMMITTEE
W. Robert Grafton, Chairman
Ronald E. Blaylock
Shira Goodman

37


COMPENSATION TABLES
 

Summary Compensation Table

The table below shows the compensation paid to or earned by our named executive officers in fiscal 2016, 2015 and 2014.
Name and Principal
Position
Fiscal
Year
 
Salary
($)
 
Stock
Awards
(a)
($)
 
Option
Awards
(a)
($)
 
Non-Equity
Incentive
Plan Comp-
ensation
(b)
($)
 
Change in
Pension
Value and
Nonqualified
Deferred
Comp-
ensation
Earnings
(c)
($)
 
All Other
Compen-
sation
(d)
($)
 
Total
($)
Thomas J. Folliard
2016
 
1,257,747
 
1,749,976
 
5,250,006
 
1,276,557
 
 
487,794
 
10,022,080
Chief Executive Officer
2015
 
1,191,062
 
1,624,999
 
4,875,005
 
3,216,945
 
384,705
 
403,382
 
11,696,098
2014
 
1,129,175
 
1,374,961
 
4,124,995
 
2,059,449
 
 
354,754
 
9,043,334
William D. Nash
2016
 
660,769
 
485,270
 
1,455,911
 
348,181
 
 
122,926
 
3,073,057
President
2015
 
546,002
 
435,319
 
1,305,914
 
740,025
 
67,206
 
88,688
 
3,183,154
2014
 
492,806
 
430,977
 
1,310,212
 
450,460
 
 
87,155
 
2,771,610
Thomas W. Reedy
2016
 
650,415
 
485,270
 
1,455,911
 
330,525
 
 
135,173
 
3,057,294
Executive VP and Chief Financial Officer
2015
 
594,244
 
435,319
 
1,305,914
 
801,640
 
57,764
 
103,926
 
3,298,807
2014
 
570,230
 
430,977
 
1,310,212
 
520,672
 
 
92,808
 
2,924,899
William C. Wood
2016
 
650,415
 
485,270
 
1,455,911
 
330,525
 
 
149,269
 
3,071,390
Executive VP and Chief Operating Officer
2015
 
594,244
 
435,319
 
1,305,914
 
801,640
 
142,232
 
115,065
 
3,394,414
2014
 
570,229
 
430,977
 
1,310,212
 
520,672
 
 
88,662
 
2,920,752
Edwin J. Hill
2016
 
531,289
 
360,868
 
1,082,685
 
179,745
 
 
87,806
 
2,242,393
Executive VP, Strategy and Business Transformation
2015
 
503,659
 
360,902
 
1,082,678
 
452,960
 
108,017
 
74,420
 
2,582,636
(a)
Represents the aggregate grant date fair value of the awards made in each fiscal year as computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718 (“ASC Topic 718”). These amounts do not correspond to the actual value that may be realized by each named executive officer. Additional information regarding outstanding awards, including exercise prices and expiration dates, can be found in the “Outstanding Equity Awards at Fiscal 2016 Year End” table on pages 41 and 42. The assumptions used in determining the grant date fair values of the awards are disclosed in Note 12 to our consolidated financial statements, which are included in our Annual Report on Form 10-K for the fiscal year ended February 29, 2016.
(b)
Represents the annual incentive bonus earned under our Bonus Plan.
(c)
Represents the aggregate increase in the actuarial value of accumulated benefits under our frozen Pension Plan and frozen Benefit Restoration Plan accrued during the relevant fiscal year.  In fiscal 2016, the actuarial value of these benefits for each of Messrs. Folliard, Nash, Reedy, Wood and Hill decreased by the following amounts, respectively: $137,855; $27,229; $20,192; $53,455 and $30,419. The “Pension Benefits in Fiscal 2016” table and its accompanying narrative on pages 43 and 44 contain additional details with respect to these amounts.
(d)
Further details are included in the “All Other Compensation in Fiscal 2016” table below.


38


All Other Compensation in Fiscal 2016
 
Name
Personal Use
of Company
Plane
(a)
($)
 
Personal Use
of Company
Automobile
(b)
($)
 
Retirement
Savings Plan
Contribution
(c)($)
 
Deferred
Compensation
Account
Contributions
(d)($)
 
Other(e)
($)
 
Total
($)
Thomas J. Folliard
175,000
 
2,269
 
17,455
 
272,569
 
20,501
 
487,794
William D. Nash
31,904
 
1,271
 
12,427
 
51,963
 
25,361
 
122,926
Thomas W. Reedy
 
8,132
 
17,433
 
85,691
 
23,917
 
135,173
William C. Wood
31,404
 
 
17,433
 
76,319
 
24,113
 
149,269
Edwin J. Hill
 
5,936
 
17,322
 
51,010
 
13,538
 
87,806
(a)
The compensation associated with the personal use of the Company plane is based on the aggregate incremental cost to CarMax of operating the plane. The cost is calculated based on the average variable costs of operating the plane, which include fuel, maintenance, travel expenses for the flight crews and other miscellaneous expenses. We divided the total annual variable costs by the total number of miles our plane flew in fiscal 2016 to determine an average variable cost per mile. The average variable cost per mile is multiplied by the miles flown for personal use to derive the incremental cost. This methodology excludes fixed costs that do not change based on usage, such as salaries and benefits for the flight crews, monthly service contracts, hangar rental fees, taxes, rent, depreciation and insurance. The costs associated with deadhead flights (i.e., flights that travel to a destination with no passengers as a result of an executive’s personal use) and incremental plane charters (i.e., plane charters, if any, that we pay for because our plane was not available for business use due to an executive’s personal use) are included in the incremental cost calculations for each executive. The personal use of the Company plane is treated as income to the executive. The related income taxes are calculated using Standard Industry Fare Level rates and are paid by the executive.
(b)
The value of the personal use of a Company automobile is determined based on the annual lease value method and excludes any expenses such as maintenance and insurance.
(c)
Includes the Company matching portion of each executive’s Retirement Savings Plan (“RSP”) contributions. Also includes a Company-funded contribution made regardless of an executive’s participation in the RSP, as well as an additional Company-funded contribution to those executives who met certain age and service requirements as of December 31, 2008, the date that our Pension Plan was frozen. These RSP benefits are offered on the same terms to all CarMax associates.
(d)
Includes the Company matching portion of each executive’s Retirement Restoration Plan (“RRP”) and Executive Deferred Compensation Plan (“EDCP”) contributions. Also includes a Company-funded contribution regardless of each executive’s participation in the RRP, as well as an additional Company-funded contribution to those executives who met certain age and service requirements as of December 31, 2008, the date that our Pension Plan was frozen. These RRP benefits are offered on the same terms to all CarMax associates whose salary exceeds the compensation limits imposed by Section 401(a)(17) of the Internal Revenue Code ($265,000 in 2016). Also includes a restorative contribution designed to compensate executives for any loss of Company contributions under the RSP and RRP due to a reduction in the executive’s eligible compensation under the RSP and RRP resulting from deferrals into the Executive Deferred Compensation Plan.
(e)
Represents the total amount of other benefits provided. None of the benefits individually exceeded the greater of $25,000 or 10% of the total amount of these benefits for the named executive officer. These other benefits include tax and financial planning services, which are described on page 34, and matching charitable gifts made by The CarMax Foundation as part of its matching gifts program (which is available to all CarMax associates).

39


Grants of Plan-Based Awards in Fiscal 2016

The following table lists grants of plan-based awards to each of our named executive officers during fiscal 2016.
 
 
 
 
Estimated Possible Payouts Under Non-Equity Incentive Plan Awards (a)
 
All Other Stock Awards: Number of Shares of Stock or
Units
(b)(#)
 
All Other Option Awards: Number of Securities Underlying
Options
(c) 
(#)
 
Exercise or Base Price of Option
Awards
(d)($/Sh)
 
Grant Date Closing
Price
($/Sh)
 
Grant Date Fair Value of Stock and Option
Awards
(e)
($)
Name
Approval
Date
Grant
Date
 
Threshold
($)
 
Target
($)
 
Maximum
($)
 
 
 
 
 
Thomas J. Folliard



470,707


1,882,827


3,765,654

















4/13/2015
4/15/2015







24,111








1,749,976


3/26/2015
4/8/2015









254,731


73.76


74.07


5,250,006

William D. Nash



128,386


513,542


1,027,084












4/13/2015
4/15/2015







6,686








485,270


3/26/2015
4/8/2015









70,641


73.76


74.07


1,455,911

Thomas W. Reedy



121,875


487,500


975,000












4/13/2015
4/15/2015







6,686








485,270


3/26/2015
4/8/2015









70,641


73.76


74.07


1,455,911

William C. Wood



121,875


487,500


975,000












4/13/2015
4/15/2015







6,686








485,270


3/26/2015
4/8/2015













70,641


73.76


74.07


1,455,911

Edwin J. Hill



66,278


265,110


530,220












4/13/2015
4/15/2015







4,972








360,868


3/26/2015
4/8/2015









52,532


73.76


74.07


1,082,685

(a)
Represents threshold, target and maximum payout levels under our Bonus Plan for fiscal 2016 performance. The actual amount of each named executive officer’s annual incentive bonus in fiscal 2016 is reported under the “Non-Equity Incentive Plan Compensation” column in the “Summary Compensation Table” on page 38. Additional information regarding the design of our Bonus Plan is included on pages 29 and 30.
(b)
Represents stock-settled performance stock units, which we refer to as “performance stock units” or “PSUs.” PSUs generally vest on the third anniversary of the grant date. Additional information regarding PSUs, including the formula used to convert PSUs to shares of our common stock upon vesting and settlement, is included on page 31.
(c)
Option awards generally vest in 25% increments annually over a four-year period. Additional information regarding stock options is included on pages 30 and 31. We granted limited stock appreciation rights, or “SARs,” in tandem with each option award. The SARs may be exercised only in the event of a change-in-control. To the extent a SAR is exercised, the related option must be surrendered. Upon the exercise of the SAR and the surrender of the related option, the officer is entitled to receive an amount equal to the difference between the value of our common stock on the date of exercise and the exercise price of the underlying stock option, multiplied by the number of shares of our common stock underlying such SAR.
(d)
All fiscal 2016 stock options were issued with an exercise price equal to the volume-weighted average price of our common stock on the grant date. Additional information regarding our use of the volume-weighted average price is included on page 32.
(e)
Represents the grant date fair value of the award as determined in accordance with ASC Topic 718.


40


Outstanding Equity Awards at Fiscal 2016 Year End
 
The following table lists outstanding equity awards previously granted to our named executive officers as of February 29, 2016.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Option Awards (a)
 
Stock Awards (b)(c)
Name
Grant
Date
 
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
 
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
 
Option
Exercise
Price
($/Sh)
 
Option
Expiration
Date
 
Number
of
Shares
or Units
of Stock
That
Have
Not
Vested
(#)
 
Market
Value of
Shares or
Units of
Stock
That
Have
Not
Vested
($)
Thomas J.
4/10/2012

203,577


67,858


31.76


4/10/2019






Folliard
4/15/2013

132,637


132,636


42.68


4/15/2020







4/15/2013












26,467


1,327,063


4/9/2014

92,260


276,779


44.96


4/9/2021







4/9/2014












29,348


1,396,894


4/8/2015



254,731


73.76


4/8/2022







4/15/2015












24,111


1,115,375

William D.
12/27/2011

14,952




30.24


12/27/2018






Nash
4/10/2012

77,133


25,710


31.76


4/10/2019







4/15/2013

42,130


42,128


42.68


4/15/2020







4/15/2013












8,296


415,964


4/9/2014

24,715


74,143


44.96


4/9/2021







4/9/2014












7,862


374,212


4/8/2015



70,641


73.76


4/8/2022







4/15/2015












6,686


309,294

Thomas W.
12/27/2011

14,952




30.24


12/27/2018






Reedy
4/10/2012

77,133


25,710


31.76


4/10/2019







4/15/2013

42,130


42,128


42.68


4/15/2020







4/15/2013












8,296


415,964


4/9/2014

24,715


74,143


44.96


4/9/2021







4/9/2014












7,862


374,212


4/8/2015



70,641


73.76


4/8/2022







4/15/2015












6,686


309,294

William C.
12/27/2011

3,738




30.24


12/27/2018






Wood
4/10/2012



25,710


31.76


4/10/2019







4/15/2013

42,130


42,128


42.68


4/15/2020







4/15/2013












8,296


415,964


4/9/2014

24,715


74,143


44.96


4/9/2021







4/9/2014












7,862


374,212


4/8/2015



70,641


73.76


4/8/2022







4/15/2015












6,686


309,294

Edwin J.
4/5/2011

64,894




32.69


4/5/2018






Hill
12/27/2011

14,952




30.24


12/27/2018







4/10/2012

52,873


17,624


31.76


4/10/2019







41



4/15/2013

34,908


34,907


42.68


4/15/2020







4/15/2013












6,889


345,416


4/9/2014

20,490


61,469


44.96


4/9/2021







4/9/2014












6,518


310,241


4/8/2015



52,532


73.76


4/8/2022







4/15/2015












4,972


230,005


(a)
Option awards generally vest in 25% increments annually over a four-year period. Additional information regarding stock options is included on pages 30 and 31. We granted limited stock appreciation rights, or “SARs,” in tandem with each option award. Additional information regarding SARs is included on pages 31 and 32 under the chart titled “Grants of Plan-Based Awards in Fiscal 2016.”
(b)
For awards granted before fiscal 2016, represents stock-settled restricted stock units, which we refer to as “market stock units” or “MSUs.” MSUs generally vest on the third anniversary of the grant date. The number of shares awarded for each MSU award is calculated by dividing the average closing price of our common stock during the final 40 trading days of the vesting period by the volume weighted average of our stock price on the date of grant. The resulting quotient is capped at two. The quotient is multiplied by the number of MSUs granted to yield the number of shares of stock awarded. To calculate the market value of the unvested MSUs in the table above, we assumed that the average closing price of our stock during the final 40 trading days of the three-year period was equal to the closing price of our stock on February 29, 2016, the last trading day of our fiscal year (which was $46.26).
(c)
For fiscal 2016 awards, represents stock-settled performance stock units, which we refer to as “performance stock units” or “PSUs.” PSUs generally vest on the third anniversary of the grant date. To calculate the number of shares awarded at vesting, each PSU is multiplied by a percentage that represents the Company’s success in meeting the EBIT goals set by the Committee. If the threshold EBIT goal is met, each PSU is multiplied by 25%. The target multiplier is 100% and the maximum multiplier is 200%. The multiplier is determined using straight-line interpolation for EBIT performance that falls between the threshold and the target or between the target and the maximum. If the threshold performance goal is not achieved, no shares will be paid. To calculate the market value of the unvested PSUs in the table above, we assumed that the multiplier was 100% and the value of each resulting share was equal to the closing price of our stock on February 29, 2016, the last trading day of our fiscal year (which was $46.26).


42


Option Exercises and Stock Vested in Fiscal 2016
 
The following table includes information with respect to the options exercised by, and the MSUs vested in, our named executive officers during fiscal 2016.
 
 
 
 
 
 
 
 
 
Option Awards
 
Stock Awards
Name
Number of Shares
Acquired on Exercise
(a)
(#)
 
Value Realized on
Exercise
(b)
($)
 
Number of Shares
Acquired on Vesting
(c)
(#)
 
Value Realized
on Vesting(d)
($)
Thomas J. Folliard
209,951


8,551,304


57,120


4,180,613

William D. Nash
99,788


4,319,091


21,358


1,563,192

Thomas W. Reedy
78,650


3,212,218


21,358


1,563,192

William C. Wood
153,241


6,277,885


21,358


1,563,192

Edwin J. Hill




14,640


1,071,502

(a)
Represents the number of shares of common stock underlying stock options exercised during fiscal 2016.
(b)
Amounts were calculated based on difference between (i) the closing price of the Company’s common stock on the exercise date and (ii) the exercise price of the stock options.
(c)
Represents the number of shares of common stock acquired on vesting of the underlying MSUs during fiscal 2016.
(d)
Amounts were calculated by multiplying the closing price of the Company’s common stock on the vesting date by the number of shares acquired on vesting.

Pension Benefits in Fiscal 2016
 
The following table lists the accumulated benefits, credited service and benefit payments for each named executive officer under our Pension Plan and Benefit Restoration Plan in fiscal 2016.
Name
Plan Name
 
Number of
Years
Credited Service
(a)
(#)
 
Present Value of
Accumulated
Benefit
(b)
($)
 
Payments
During Last
Fiscal Year
($)
Thomas J. Folliard
Pension Plan
 
16

 
307,513

 
 
Benefit Restoration Plan
 
16

 
1,434,095

 
William D. Nash
Pension Plan
 
15

 
225,859

 
 
Benefit Restoration Plan
 
15

 
41,809

 
Thomas W. Reedy
Pension Plan
 
6

 
119,284

 
 
Benefit Restoration Plan
 
6

 
149,262

 
William C. Wood
Pension Plan
 
19

 
342,888

 
 
Benefit Restoration Plan
 
19

 
274,393

 
Edwin J. Hill
Pension Plan
 
14

 
343,707

 
 
Benefit Restoration Plan
 
14

 
253,212

 
(a)
We have not granted any of our named executive officers extra years of service under either the Pension Plan or the Benefit Restoration Plan.
(b)
Determined assuming retirement at age 65. The discount rate (4.50%) and mortality assumptions used in calculating the present value of the accumulated benefit shown above were consistent with those used for our financial reporting purposes. Additional information regarding our assumptions is set forth in Note 10 to our consolidated financial statements, which are included in our Annual Report on Form 10-K for the fiscal year ended February 29, 2016.


43


PENSION PLAN

We froze our Pension Plan, a tax-qualified defined benefit plan, effective December 31, 2008. Prior to that date, this plan was generally available to all full-time associates upon completion of one year of service.
 
No additional benefits have accrued under the Pension Plan since it was frozen. Previously accrued benefits are determined under a formula that defines an annual annuity amount payable at termination or retirement. The benefit formula is the sum of (1) 0.85% times highest average earnings times years of service up to 35 years and (2) 0.65% times the excess of highest average earnings over Social Security Covered Compensation times years of service up to 35 years. Earnings are defined as total earnings including base pay, bonuses, overtime pay and commissions, but may not exceed the compensation limit imposed by the Internal Revenue Code. In the final year of benefit accruals, that compensation limit was $230,000. Highest average earnings are based on the highest five consecutive calendar years of earnings during the ten consecutive years before termination or December 31, 2008, if earlier. All participants are vested after five years of service. Benefits are payable at age 65 as a lifetime annuity or actuarially equivalent optional annuity. Actuarially reduced benefits are available to participants retiring after age 55 with at least ten years of service, or after age 62 with at least seven years of service.
 
BENEFIT RESTORATION PLAN
 
We froze our Benefit Restoration Plan, a non-qualified defined benefit plan, effective December 31, 2008. Prior to that date, this plan provided an alternate means of paying benefits to participants in the Pension Plan, including our named executive officers, who were prohibited from receiving additional benefits under the Pension Plan because of the Internal Revenue Code’s compensation limit.
 
No additional benefits have accrued under the Benefit Restoration Plan since it was frozen. Previously accrued benefits are generally determined and payable under the same terms and conditions as the Pension Plan without regard to Internal Revenue Code limitations on amounts of includable earnings and maximum benefits. Benefits paid are reduced by benefits payable under the Pension Plan. Participants must have 15 years of service to be eligible to receive benefits under the Benefit Restoration Plan, or upon termination meet the early retirement or normal retirement requirements of our Pension Plan.
 
EARLY RETIREMENT BENEFITS
 
As of February 29, 2016, Mr. Hill was eligible to retire with actuarially reduced benefits from the Pension Plan and the Benefit Restoration Plan because he is over age 55 and has at least ten years of service, and therefore has met the requirements for early retirement under our Pension Plan.


44


Nonqualified Deferred Compensation
 
The following table lists fiscal 2016 contributions to each named executive officer’s Retirement Restoration Plan (“RRP”) and Executive Deferred Compensation Plan (“EDCP”) accounts. The table also lists the aggregate earnings, withdrawals and distributions, and balances for each account.
Name
Plan
Name
 
Executive
Contributions
in Last Fiscal
Year
(a)($)
 
Registrant
Contributions
in Last Fiscal
Year
(b)($)
 
Aggregate
Earnings
in Last
Fiscal
Year
(c)($)
 
Aggregate
Withdrawals/
Distributions
($)
 
Aggregate
Balance
at Last
Fiscal
Year
End
 (d) 
($)
Thomas J. Folliard
RRP
 
209,669

 
272,569

 
(131,551
)
 
 
2,055,242

 
EDCP
 

 

 

 
 

William D. Nash
RRP
 
46,149

 
41,526

 
(13,344
)
 
 
262,691

 
EDCP
 
180,409

 
10,437

 
(30,106
)
 
 
469,978

Thomas W. Reedy
RRP
 
58,707

 
76,319

 
(36,469
)
 
 
440,464

 
EDCP
 

 
9,372

 
(17,962
)
 
58,619
 
199,896

William C. Wood
RRP
 
58,707

 
76,319

 
(15,490
)
 
 
545,254

 
EDCP
 

 

 
(160
)
 
 
1,844

Edwin J. Hill
RRP
 
26,559

 
34,526

 
(14,778
)
 
 
269,599

 
EDCP
 
181,184

 
16,484

 
(26,524
)
 
 
305,078

(a)
These amounts represent payroll deductions and are therefore included in the “Salary” and “Non-Equity Incentive Plan Compensation” columns of the “Summary Compensation Table” on page 38.
(b)
Company contributions are included in the “All Other Compensation” column of the “Summary Compensation Table” on page 38 and were credited to each executive’s account after the close of the fiscal year.
(c)
We do not pay above-market interest or preferential dividends on investments in the RRP or the EDCP. Earnings are determined by the performance of the mutual funds or other investment vehicles selected by each executive.
(d)
For each of Messrs. Folliard, Nash, Reedy, Wood and Hill, the following amounts were reported as compensation to each person in the “Summary Compensation Table” in prior fiscal years, respectively: $1,166,246; $368,225; $513,157; $341,675; and $173,348.

RETIREMENT RESTORATION PLAN
 
Our executives are eligible to participate in the RRP. The RRP is a nonqualified defined contribution plan that supplements the Retirement Savings Plan we offer to all of our associates. The RRP allows individuals whose benefits under the Retirement Savings Plan are limited due to the compensation limits imposed by Section 401(a)(17) of the Internal Revenue Code ($265,000 for 2016) to continue to defer portions of their compensation for retirement savings. Eligible associates may defer up to 5% of their combined salary and annual incentive bonus. As we do in our broadly available Retirement Savings Plan, we provide RRP participants with matching contribution and an additional Company-funded contribution to those participants meeting certain age and service requirements. RRP accounts are paid in a single lump sum payment at separation from service, subject to the requirements of Section 409A of the Internal Revenue Code.
 
EXECUTIVE DEFERRED COMPENSATION PLAN
 
Our executives are also eligible to participate in the EDCP. The EDCP is an additional nonqualified deferred compensation plan that permits eligible associates to elect to defer portions of their compensation to save for retirement or other life events. Eligible associates may defer up to 75% of their salary and up to 90% of their annual incentive bonus. We do not match funds deferred through this plan. The EDCP merely provides a mechanism for eligible associates to defer the taxation of income and related investment gains until the compensation is actually received at a later date. We do, however, provide a restorative contribution designed to compensate associates for any loss of Company contributions under the Retirement Savings Plan and RRP due to a reduction in eligible compensation, as defined under those plans, resulting from deferrals into the EDCP. EDCP accounts are paid based on the participant’s election at the time of the deferral, subject to the requirements of Section 409A of the Internal Revenue Code, and may be paid in a lump sum, a series of annual installments or a partial lump sum followed by a

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series of annual installments. Participants may elect to receive these distributions upon separation from service or upon the occurrence of one or more specified dates.
 
All RRP and EDCP accounts are considered unfunded general contractual obligations and are subject to the claims of our general, unsecured creditors.

Potential Payments Upon Termination or Change-in-Control
  
As discussed on pages 34 and 35, we have agreed to provide payments or other benefits to our named executive officers under various scenarios related to a termination of employment. This section describes those payments and benefits and the events that trigger them. For ease of reference, this section uses an abbreviation for the term “Change-in-Control” (“CIC”).
 
Our payment obligations under each employment or severance agreement are contingent upon the NEO satisfying the following obligations:
During his employment and for two years following his termination, the NEO must comply with the provisions of a covenant not to compete.
During his employment and for two years following his termination, the NEO may not solicit or induce our associates to leave us or hire any of our associates.
During his employment and at all times subsequent to the last day of his employment, the NEO must hold in strict confidence and safeguard any and all protected information, including our trade secrets.
The NEO must return our property and must execute an agreement releasing us from any claims.
 
TERMINATION SCENARIOS THAT CAN TRIGGER PAYMENTS AND BENEFITS
 
There are four categories of events related to a termination of employment that can trigger payments or other benefits under the agreements we have with our NEOs: (i) retirement; (ii) death and disability; (iii) involuntary termination; and (iv) voluntary termination. The following chart describes each category.
Category
Specific Event
Requirements
Retirement
Early Retirement
Termination due to early retirement occurs when an NEO voluntarily terminates his employment at a time when he is eligible for “early retirement” as this term is defined in our Pension Plan (generally, an NEO is eligible for early retirement after age 55 with at least ten years of service or after age 62 with at least seven years of service). The effective date of termination due to early retirement is the date set forth in a notice from the NEO to us, which must be given at least 90 days in advance. Mr. Hill is currently our only NEO eligible for early retirement.
Normal Retirement
Termination due to normal retirement occurs when an NEO voluntarily terminates his employment at a time when he is eligible for “normal retirement” as this term is defined in our Pension Plan (generally, an NEO is eligible for normal retirement after age 65 with at least five years of service). The effective date of termination is the date set forth in a notice from the NEO to us, which must be given at least 90 days in advance. None of our NEOs are currently eligible for normal retirement.