In this proxy statement, “CarMax,” the “company,” “we,” “our” and “us” refer to CarMax, Inc. and its wholly owned subsidiaries, unless the context requires otherwise.

1. Why am I receiving these materials?

The company is making this proxy statement, the fiscal 2012 annual report to shareholders and a form of proxy (the “proxy materials”) available to you in connection with the solicitation of proxies by the board of directors for use at the annual meeting of shareholders of the company to be held on Monday, June 25, 2012, at 1:00 p.m. Eastern Time, and at any postponements or adjournments thereof. You are invited to attend the annual meeting and are requested to vote on the proposals described in this proxy statement. The annual meeting will be held at the Richmond Marriott West Hotel, 4240 Dominion Boulevard, Glen Allen, Virginia 23060.

2. Why did I receive a notice in the mail regarding the Internet availability of proxy materials instead of a full set of proxy materials?

As permitted by the Securities and Exchange Commission (“SEC”), we have elected to provide access to our proxy materials primarily over the Internet rather than mailing paper copies of those materials to each shareholder. On or about May 11, 2012, we will mail a Notice of Internet Availability of Proxy Materials (the “Notice”) to our shareholders, which provides website and other information for the purpose of accessing our proxy materials. All shareholders will have the ability to access the proxy materials on the website referred to in the Notice or request a printed or electronic set of the proxy materials. Instructions on how to access the proxy materials over the Internet or to request a printed copy may be found in the Notice. In addition, shareholders may request to receive proxy materials in printed form by mail or electronically by email on an ongoing basis. We encourage you to take advantage of the availability of the proxy materials on the Internet to help reduce the cost and environmental impact of the annual meeting.

3. How can I get electronic access to the proxy materials?

The Notice provides you with instructions regarding how to:

Choosing to receive proxy materials by email will save the company the cost of printing and mailing documents to you and will reduce the impact of the company’s annual meeting on the environment. If you choose to receive future proxy materials by email, you will receive an email message next year with instructions containing a link to those materials and a link to the proxy voting website. Your election to receive proxy materials by email will remain in effect unless and until you rescind it.

4. What items will be voted on at the 2012 annual meeting?

You will be voting on the following six items of business:

You may also be asked to vote on any other business that may properly come before the annual meeting or any postponements or adjournments thereof.

5. What are the board’s voting recommendations?

Our board of directors recommends that you vote:

6. Who is entitled to vote?

All shareholders who owned CarMax common stock at the close of business on April 20, 2012, are entitled to vote at the annual meeting. Each share of common stock is entitled to one vote. There were 228,195,276 shares of CarMax common stock outstanding on that date.

7. How many votes must be present to hold the annual meeting?

In order for us to conduct the annual meeting, a majority of our outstanding shares of common stock as of April 20, 2012, must be present in person or by proxy. This is referred to as a quorum. Abstentions and shares held by banks, brokers or nominees that are voted on any matter are included in determining whether a quorum exists.

8. What is the difference between a shareholder of record and a beneficial owner of shares held in street name?

Shareholder of Record. If your shares are registered directly in your name with the company’s transfer agent, American Stock Transfer & Trust Company, LLC (“AST”), you are

the shareholder of record with respect to those shares and we sent the Notice directly to you. If you request copies of the proxy materials by mail, you will receive a proxy card.

Beneficial Owner of Shares Held in Street Name. If your shares are held in an account at a brokerage firm, bank, broker-dealer or other similar organization, then you are the beneficial owner of shares held in “street name,” and the Notice was forwarded to you by that organization. The organization holding your account is considered the shareholder of record for purposes of voting at the annual meeting. As a beneficial owner, you have the right to direct that organization on how to vote the shares held in your account. If you request copies of the proxy materials by mail, you will receive a voting instruction form.

9. How do I vote my shares?

If you are a shareholder of record or a participant in our Amended and Restated 2002 Employee Stock Purchase Plan (the “ESPP”), you may vote in any of the following ways:

If you are a beneficial owner of shares held in street name, you may vote in any of the following ways:

For both shareholders of record and beneficial owners of shares held in street name (other than ESPP participants), online and telephone voting is available through 11:59 p.m. ET on Sunday, June 24, 2012. For shares held by ESPP participants in an ESPP account, online and telephone voting is available through 11:59 p.m. ET on Wednesday, June 20, 2012.

10. What will happen if I do not return a proxy or give specific voting instructions?

Shareholders of Record. If you are a shareholder of record and you:

Beneficial Owners of Shares Held in Street Name or Participants in the ESPP. If you are a beneficial owner of shares held in street name or a participant in the ESPP and you do not provide the organization that holds your shares with specific voting instructions, under the rules of various national and regional securities exchanges, the organization that holds your shares may generally vote your shares on routine matters but cannot vote your shares on non-routine matters. If the organization that holds your shares does not receive instructions from you on how to vote your shares on a non-routine matter, the organization will not have the authority to vote your shares on this matter. This is generally referred to as a “broker non-vote.”

11. What proposals are considered “routine” or “non-routine”?

The election of directors (Proposal One), the advisory approval of the company’s executive compensation (Proposal Three), the approval of the Revised Stock Incentive Plan (Proposal Four), the approval of the Revised Bonus Plan (Proposal Five), and the advisory shareholder proposal to declassify the company’s Board of Directors (Proposal Six) are considered non-routine matters. A broker or other nominee cannot vote without instructions on non-routine matters, and therefore there may be broker non-votes on Proposals One, Three, Four, Five and Six.

The ratification of the selection of KPMG as the company’s independent registered public accounting firm (Proposal Two) is considered a routine matter. A broker or other nominee generally may vote on routine matters, and therefore we expect no broker non-votes in connection with Proposal Two.

12. What if I change my mind after I vote?

You may revoke your proxy at any time before it is exercised by submitting a subsequent vote using the same methods described in Question 9.

13. How many votes are needed to approve each of the six proposals?

Proposal One: The four nominees must be approved by the affirmative vote of a majority of the votes cast. Abstentions and broker non-votes will not be counted in determining the number of votes cast for this proposal.

Proposal Two: The ratification of the selection of KPMG as our independent registered public accounting firm must be approved by the affirmative vote of a majority of the votes cast. Abstentions and broker non-votes will not be counted in determining the number of votes cast for this proposal.

Proposal Three: The advisory vote on executive compensation must be approved by the affirmative vote of a majority of the votes cast. Abstentions and broker non-votes will not be counted in determining the number of votes cast for this proposal.

Proposal Four: To be adopted, the Revised Stock Incentive Plan proposal must be approved by the affirmative vote of a majority of the votes cast. Under New York Stock Exchange (“NYSE”) listing standards, the total votes cast on the proposal must also represent more than 50% of all shares of common stock entitled to vote on the proposal. Shareholders may direct that their votes be cast for or against the proposal, or shareholders may abstain from voting on this proposal. Abstentions will have the same effect as votes cast against the proposal under NYSE listing standards. Broker non-votes will not be counted in determining the number of votes cast for this proposal.

Proposal Five: To be adopted, the Revised Bonus Plan proposal must be approved by the affirmative vote of a majority of the votes cast. Abstentions and broker non-votes will not be counted in determining the number of votes cast for this proposal.

Proposal Six: The advisory vote regarding the declassification of the company’s Board of Directors must be approved by the affirmative vote of a majority of the votes cast. Abstentions and broker non-votes will not be counted in determining the number of votes cast for this proposal.

14. Who can attend the annual meeting?

The annual meeting is open to all holders of CarMax common stock as of April 20, 2012. Shareholders who plan to attend the annual meeting may be asked to present valid picture identification, such as a driver’s license or passport. If you are a beneficial shareholder, you must bring a copy of a brokerage statement indicating ownership of CarMax shares as of April 20, 2012. If you are an authorized proxy or if you want to vote in person the shares that you hold in street name, you must present the proper documentation from your bank or broker. Cameras, recording devices and other electronic devices will not be permitted at the annual meeting.

15. Who pays the cost of proxy solicitation?

CarMax pays the cost of soliciting proxies. We will solicit proxies from our shareholders, and, after the initial solicitation, some of our employees or agents may contact shareholders by telephone, by email or in person. We have retained Georgeson, Inc. to solicit proxies for a fee of $7,500 plus reasonable expenses. We will also reimburse banks, brokerage firms and other custodians, nominees and fiduciaries for their reasonable expenses in sending proxy materials to the beneficial owners of our common stock.

16. Who will count the votes?

Representatives from AST, our transfer agent, will tabulate the votes and act as inspector of election at the annual meeting.

17. Could other matters be decided at the annual meeting?

Management and our board of directors are not aware of any matters that may come before the annual meeting other than the six proposals disclosed in this proxy statement. If other matters do properly come before the annual meeting, the named proxies will vote in accordance with their best judgment.

18. How do I make a shareholder proposal for the 2013 annual meeting?

Pursuant to SEC rules, for a shareholder proposal to be considered for possible inclusion in the 2013 proxy statement, the corporate secretary of CarMax must receive the proposal in writing no later than January 11, 2013. CarMax plans to hold its 2013 annual meeting on or about June 24, 2013.

Pursuant to our Bylaws, if you wish to bring any matter for consideration before the 2013 annual meeting that is not included in the 2013 proxy statement, you must notify our corporate secretary in writing at CarMax, Inc., 12800 Tuckahoe Creek Parkway, Richmond, Virginia 23238, no earlier than the close of business on

December 12, 2012, and no later than the close of business on January 11, 2013. Regarding each matter, your notice must meet the conditions set forth in Section 1.3 of our Bylaws. A copy of our Bylaws is available under the “Corporate Governance” link at investor.carmax.com and also will be provided without charge to any shareholder upon written request to our corporate secretary. If we do not receive proper notice prior to the close of business on January 11, 2013, the chairman of the annual meeting will exclude the matter and it will not be acted upon at the 2013 annual meeting.

Our board of directors is divided into three classes with staggered three-year terms. The Nominating and Governance Committee has recommended, and our board of directors has approved, the following nominees for election as directors:

Your proxy will be voted to elect each of the nominees unless you tell us otherwise or the vote is otherwise prohibited. 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. Each nominee has consented to being named in this proxy statement and to serve if elected.

In 2011, our board approved the adoption of a majority vote standard for the election of our directors. Accordingly, pursuant to our Bylaws, directors must be elected by a majority of the votes cast in an uncontested election, meaning that the number of votes cast “for” a director nominee must exceed the number of votes cast “against” that nominee. In an uncontested election, any nominee who does not receive a majority of the votes cast “for” his or her election is required to tender his or her resignation promptly following the failure to receive the required vote. The Board is required to decide whether to accept such resignation. In contested elections, the required vote would be a plurality of votes cast.

The board of directors recommends a vote FOR each of the nominees listed below. Biographical and professional information, including information regarding each person’s specific experience, qualifications, attributes or skills that led to the conclusion that this person should serve as a CarMax director, about the nominees and the other directors of the company whose terms of office do not expire this year follows.

Our business and affairs are managed under the direction of the board of directors in accordance with the Virginia Stock Corporation Act, our Articles of Incorporation and our Bylaws. The standing committees of the board of directors are the Audit Committee, the Compensation and Personnel Committee and the Nominating and Governance Committee.

Corporate Governance Policies and Practices

The board of directors is actively involved in shaping our corporate governance. The board oversees the company’s compliance with the governance reforms initiated by the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the related rules and regulations proposed and adopted by the SEC and the NYSE. In response to the various laws, rules and regulations applicable to the company, and its own views on corporate governance, the board has adopted corporate governance guidelines and a code of business conduct applicable to all company personnel, including members of the board.

Our corporate governance guidelines set forth the practices of the board with respect to its responsibilities, qualifications, performance, access to management and independent advisors, compensation (including director stock ownership guidelines), orientation and continuing education, and management evaluation and succession.

Our code of business conduct contains provisions relating to honest and ethical behavior, including the handling of conflicts of interest between personal and professional relationships, corporate opportunities, the handling of confidential information, fair dealing, protection and proper use of company assets, compliance with laws and other matters. 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 investor.carmax.com.

The corporate governance guidelines, code of business conduct and the charters of the Audit Committee, the Compensation and Personnel Committee, and the Nominating and Governance Committee are also available under the “Corporate Governance” link at investor.carmax.com. A printed copy of these documents is available to any shareholder without charge upon written request to our corporate secretary at CarMax, Inc., 12800 Tuckahoe Creek Parkway, Richmond, Virginia 23238.

Director Independence

As part of our corporate governance guidelines, the board has adopted categorical standards to assist it in evaluating the independence of each director and determining whether relationships between directors and the company or its subsidiaries (either directly or as a partner, shareholder or officer of an organization that has a relationship with the company) are material. In April 2012, our board of directors, after consultation with and upon the recommendation of the Nominating and Governance Committee, affirmatively determined, in its business judgment, that Messrs. Blaylock, Gangwal, Garten, Grafton, Grubb, Steenrod, Stemberg and Tiefel and Ms. Goodman, Ms. Stephenson and Ms. Stewart are each independent directors under our independence guidelines and the NYSE independence standards because each director: (1) has no material relationship with the company and (2) satisfies the independence criteria set forth in our independence guidelines and the NYSE listed company manual. In addition, based on our guidelines and the NYSE standards, the board determined that Mr. Folliard is not independent because he is an executive officer of CarMax.

Executive Sessions

Our corporate governance guidelines provide that executive sessions, where solely the non-executive directors meet, are to be held at each regularly scheduled board meeting and that non-executive directors may designate, on an annual basis, a director to preside at these sessions. Our non-executive directors met in executive session at each of our regularly scheduled board meetings in fiscal 2012. Effective June 2011, the board re-elected Mr. Tiefel as its independent chairman of the board and designated him to serve as the presiding director for executive sessions.

Board and Committee Meeting Attendance; Committee Membership

Pursuant to our corporate governance guidelines, directors are expected to attend meetings of the board and of the board committees of which they are members.

Our board of directors met four times in fiscal 2012. Each director attended 100% of the total number of meetings of the board and of the standing committees on which he or she served. All directors attended the 2011 annual meeting of shareholders, with Ms. Goodman attending via webcast.

The table below provides, for fiscal 2012, membership information and the number of meetings held by the board of directors and each of the board’s committees. The numbers in each column indicate the number of meetings each director attended within each category.

Committees of the Board

Audit Committee

The Audit Committee operates under a written charter adopted by the board. This charter sets forth the requirements for membership and the committee’s authority, duties and responsibilities. The Audit Committee assists in the board’s oversight of (1) the integrity of our consolidated financial statements, (2) our compliance with legal and regulatory requirements, (3) the independent auditors’ qualifications and independence and (4) the performance of our internal audit function and the independent auditors. The Audit Committee retains, and approves all fees paid to, the independent auditors. The Audit Committee also pre-approves all non-audit engagements of the independent auditors. Each member of the Audit Committee is independent and financially literate, with Messrs. Grafton and Steenrod considered audit committee financial experts, in accordance with the applicable rules of the NYSE, the

SEC and our corporate governance guidelines. The committee’s report to shareholders can be found on page 50.

Compensation and Personnel Committee

The Compensation and Personnel Committee operates under a written charter adopted by the board. This charter sets forth the requirements for membership and the committee’s authority, duties and responsibilities. The Compensation and Personnel Committee’s duties include (1) the review and approval of the company’s overall executive compensation philosophy, (2) the review and approval of salaries, short- and long-term incentives and other benefits and perquisites for our CEO and other executive officers, (3) the oversight of the administration of our short- and long-term incentive compensation plans and all equity-based plans, (4) the review and approval of the terms of any severance, change-in-control or employment agreements with our executive officers and

(5) the ongoing analyses of our executive and director compensation programs. Each member of the Compensation and Personnel Committee is independent in accordance with the applicable rules of the NYSE, the SEC and our corporate governance guidelines. The committee’s report to shareholders can be found on page 28.

Nominating and Governance Committee

The Nominating and Governance Committee operates under a written charter adopted by the board. This charter sets forth the requirements for membership and the committee’s authority, duties and responsibilities. The Nominating and Governance Committee (1) identifies individuals qualified to become members of the board, (2) recommends to the board nominees for director to be presented at the annual meetings of shareholders and nominees to fill vacancies on the board, (3) leads the board in the oversight of management succession planning, including succession planning for the CEO, (4) develops and recommends to the board our corporate governance guidelines and (5) considers director nominees submitted by shareholders in accordance with the procedures outlined on page 17. Each member of the Nominating and Governance Committee is independent in accordance with the applicable rules of the NYSE and our corporate governance guidelines.

Board Leadership Structure

Historically at CarMax, two separate individuals have served in the roles of CEO and board chairman. Mr. Folliard has been our CEO since 2006, while Mr. Tiefel, a board member 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 and presiding over executive sessions of the independent directors. Mr. Folliard manages and oversees the day-to-day affairs of the company and directs the formulation and implementation of the company’s strategic plans. We believe that this leadership structure is currently the most appropriate for CarMax.

Our board recognizes that, depending on the circumstances, other leadership models might be appropriate. Our corporate governance guidelines state that the board has no fixed policy as to whether the roles of chairman and CEO should be separate, and the board remains free to make this choice in the manner it judges most appropriate for CarMax. These guidelines also provide that in the event that the CEO also serves as chairman, the board will appoint a lead independent director to serve in accordance with the company’s Lead Independent Director Charter, which is available under the “Corporate Governance” link at investor.carmax.com. The board periodically reviews its leadership structure and elects its chairman annually.

Board’s Role in Risk Oversight

Our board is responsible for oversight of enterprise risk. Management is responsible for day-to-day risk management and for implementing our enterprise risk management program. Management discharges this responsibility in part through the company’s Risk Committee, which is chaired by Tom Reedy, our Executive Vice President and Chief Financial Officer, and includes more than ten other members from across the company. The Risk Committee meets periodically to identify, discuss and assess the significant risks facing the company.

Our board oversees the company’s enterprise risk management program using several means. First, the board receives and reviews biannual reports from the Risk Committee identifying the most significant risks facing the company. Second, the board has assigned oversight of certain key risk categories to either the full board or a board committee. For each category, management reports regularly to the full board or the assigned committee, as appropriate, describing CarMax’s strategies for monitoring, managing and mitigating risks that fall within that category. Our committee charters provide that each committee will review (a) the risks and exposures over which the committee has been delegated oversight responsibility by the board and (b) the steps management has taken to monitor, manage and mitigate such risks and exposures. Finally, in accordance with its charter and NYSE listing standards, our Audit Committee has primary responsibility for oversight of the company’s procedures for identifying significant risks or

exposures. On an annual basis, Mr. Reedy, on behalf of the Risk Committee, discusses these procedures with the Audit Committee.

We believe that, in accordance with the process detailed above, our board exercises effective oversight of CarMax’s enterprise risk management program.

Risk and Compensation Policies and Practices

In assessing whether risks arising from CarMax’s compensation policies and practices were reasonably likely to have a material adverse effect on the company, management reviewed the company’s compensation policies and practices for all employees, the potential risks presented by those policies and practices, and the factors that mitigate those risks. As part of its review, management considered the compensation arrangements currently in place for our store associates, store management, regional leadership teams, home office and CarMax Auto Finance associates, and executive officers. Following this review, management determined that none of CarMax’s compensation policies and practices create risks that are reasonably likely to have a material adverse effect on the company.

Management then presented a summary of its review to the company’s Compensation and Personnel Committee for discussion at the committee’s January 2012 meeting. At that meeting, the committee and management discussed management’s summary and the risk mitigation tools employed by the company. The summary listed each compensation policy or practice applicable to the various groups of CarMax associates, the potential risks presented by that policy or practice and the risk mitigation tools employed by the company to mitigate the related risks.

The compensation practices and policies covered by the summary included payments in the forms of base salaries, annual bonuses, equity and equity-based awards, sales bonuses, sales commissions and hourly pay. The risk mitigation tools covered by the summary included the following:

Following discussion with management and a review of the summary noted above, the Compensation and Personnel Committee concurred with management’s determination that none of CarMax’s compensation policies and practices create risks that are reasonably likely to have a material adverse effect on the company.

Nominating and Governance Committee Process for Identifying Director Nominees

Candidates for election to our board of directors are considered in order to fill a vacancy on the board or if the board determines that it would be beneficial to add an individual with specific skills or expertise. In identifying potential candidates for nomination to the board, the committee may consider input from several sources, including members of the Nominating and Governance Committee, other board members, the CEO, outside search firms and shareholder recommendations. Nominee candidates are evaluated in the same manner regardless of the source of the recommendation. The Nominating and Governance Committee will conduct an initial evaluation of each candidate. If suitable, the candidate will be interviewed by the committee and may also meet with other board members and company management. If the committee determines a nominee would be a valuable addition to the board, it will make a recommendation to the full board.

Nominating and Governance Committee Criteria for Selection of Directors; Consideration of Diversity

The board and the Nominating and Governance Committee believe that the board should be comprised of directors with varied, complementary backgrounds and that directors should have, at a minimum, business or other relevant expertise that may be useful to the company. The board and Nominating and Governance Committee also believe that directors should possess the highest personal and professional ethics and should be willing and able to devote the requisite amount of time to company business.

When considering nominees for director, the Nominating and Governance Committee takes into account a number of factors, including:

As noted above, in considering director nominees, the Nominating and Governance Committee believes that the board should be comprised of directors with varied, complementary backgrounds, with a particular emphasis on character, judgment, skill, education, relevant business experience, integrity, reputation and other personal attributes or special talents. We address and value diversity through our consideration of these factors in our director selection process. While we do not have a written policy with respect to the consideration of diversity in identifying director nominees, our consideration of the factors noted above has yielded a diverse, qualified, experienced and skilled CarMax board of directors.

Process for Shareholder Nomination of Directors

The Nominating and Governance Committee will consider nominees for director suggested by shareholders using the previously described criteria and considering the additional information referred to below. For the 2013 annual meeting, written notice to nominate a director for election must be received no earlier than the close of business on December 12, 2012, and no later than the close of business on January 11, 2013.

Under our Bylaws, a shareholder wishing to nominate a director at a shareholders’ meeting must deliver written notice to our corporate secretary stating his or her intention to make a nomination. For an annual meeting, the notice must be received no earlier than the close of business 150 days prior to and no later than the close of business 120 days prior to the anniversary of the date the company mailed its proxy materials for the prior year’s annual meeting. However, if the date of the annual meeting has changed by more than 30 days from the prior year, the notice must be received a reasonable time before the company mails its proxy materials, which time shall be not (a) earlier than the close of business 120 days prior to such annual meeting and (b) later than the close of business on the later of the ninetieth day prior to such meeting or the tenth day following the first public announcement by the company of the date of such meeting. For a special meeting, the notice must be received no later than the close of business on the seventh day following the date on which notice of a special meeting for the election of directors is first given to shareholders.

A shareholder’s notice of a proposed director nominee should be sent to our corporate secretary at CarMax, Inc., 12800 Tuckahoe Creek Parkway, Richmond, Virginia 23238, and must meet the requirements described in Section 2.3 of our Bylaws. A copy of our Bylaws is available under the “Corporate Governance” link at investor.carmax.com and also will be provided without charge to any shareholder upon written request to our corporate secretary.

Process for Shareholder or Interested Party Communication with Directors

Shareholders or other interested parties wishing to contact the board of directors 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, and 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.

Section I. Overview

Executive Summary

In fiscal 2012, we again achieved record earnings, with meaningful contributions from across our business. Highlights of the year included:

At the outset of fiscal 2012, our named executive officers received an increase in base salary of 3.5%, the same increase generally given to salaried associates throughout the company. Annual bonuses to our named executive officers were paid at the 86.4% level for fiscal 2012, a reflection of our solid earnings performance, but with results slightly below our 100% target. Fiscal 2012 annual equity awards to our named executive officers were flat to the fiscal 2011 awards, as the same number of options and MSUs were awarded to each officer on a year-over-year basis. Due to an increase in our stock price, the valuation of this year’s awards was 27% greater than those provided in fiscal 2011. We believe that these compensation decisions demonstrate, and are consistent with, our pay-for-performance philosophy.

The Compensation and Personnel Committee

At the direction of the board of directors, the Compensation and Personnel Committee oversees all of our executive and director compensation plans, policies and programs. In fiscal 2012, the following three independent directors served on the committee: Messrs. Stemberg (its chairman), Blaylock and Grubb. As part of its oversight function, the committee reviews and determines all named executive officer compensation, whether short- or long-term, or cash- or equity-based. The committee’s role is detailed in its charter, which is available under the “Corporate Governance” link at investor.carmax.com.

Compensation Philosophy and Objectives

The committee oversees an executive compensation program designed to reflect CarMax’s pay-for-performance philosophy and that supports and reinforces the company’s key operating and strategic objectives. The committee has established the following objectives for our executive compensation program:

Consideration of the Most Recent Advisory “Say-on-Pay” Vote

At the 2011 annual meeting of shareholders, we conducted our first advisory shareholder vote on executive compensation. More than 98% of the votes cast were voted to approve the compensation of our named

executive officers as disclosed in last year’s proxy statement. The committee was gratified by this shareholder response, and, based upon these results and the committee’s independent judgment, the committee decided to maintain the company’s current pay-for-performance pay practices into fiscal 2013.

The Named Executive Officers

This Compensation Discussion and Analysis describes and analyzes the key features of our executive compensation program, particularly as they relate to our named executive officers. For fiscal 2012, our named executive officers were:

Management’s Role in the Executive Compensation Process

Although management does not have any decision-making authority regarding executive compensation, it assists the committee by recommending appropriate base salary levels (except for the CEO), performance objectives and targets, and individual equity award amounts. Management also assists the committee with the preparation of the committee’s 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 the company’s executive officers and non-employee directors. However, the committee has delegated limited authority to the company’s CEO and CFO to grant equity awards (in an amount not to exceed 75,000 shares or units between regularly scheduled committee meetings) to the company’s non-executive officer employees. Any such awards are subject to the company’s Employee Equity Grant Policy (the “Grant Policy”), which may be found at investor.carmax.com under the “Corporate Governance” link.

Compensation Consultants and the Peer Group

The committee has retained the services of Hay Group, an independent compensation consultant, in order to obtain access to independent compensation data, analysis and advice. Hay Group provides no other services to the company. Notwithstanding the committee’s use of outside advisors and management’s participation in the executive compensation process, all executive compensation determinations are made by the committee, using its independent judgment and analysis.

In October 2011, Hay Group, at the direction of the committee, performed a comprehensive analysis of (a) the composition of the company’s proxy peer group and (b) the total direct compensation for our named executive officers and certain executives. As part of the peer group study, Hay Group advised the committee regarding the appropriate mix of companies to use in analyzing and assessing the CarMax executive compensation program. Based upon Hay Group’s advice and the committee’s independent judgment, the committee selected the 18 public companies noted below as its new peer group, 13 of which had been in the company’s prior peer group. These peers fall within a reasonable range (both above and below CarMax) of comparative factors such as revenue, market capitalization, net income, total shareholder return, and return on investment, and these peers are generally specialty auto retailers, direct competitors or hard goods retailers. The composition of our peer group may vary from year to year.

Hay Group’s total direct compensation study compared the value of each of our executive’s direct compensation to the corresponding compensation awarded to similarly situated personnel within the peer group noted above, as well as to the compensation awarded to executives from a broader group of retail companies. This competitive market data provides a frame of reference for the committee when evaluating executive compensation. The committee finds it useful to review these companies’ compensation practices in considering and determining CarMax’s own compensation policies and practices.

The committee generally tries to set base salaries that are competitive within the peer group. The committee

employs annual incentive bonuses and stock-based awards to further reward executive officers with total direct compensation above the median of the peer group when the company performs well. The failure to (a) achieve pre-determined earnings per share targets or (b) increase the company’s stock price will result in reduced or no realized compensation from the annual incentive bonus and stock-based awards compensation programs. The committee does not use peer group data as its sole determinant in making compensation decisions. This data is one of many factors that inform the committee’s compensation decisions. Other factors include individual performance, company performance, level of seniority and succession planning.

Each of the three key elements of total direct compensation promotes one or more compensation objectives set forth above. Competitive base salaries help us to attract, retain and motivate executives. Our annual incentive bonus, which is tied to earnings per share, helps to align the interests of our executive officers with the financial interests of our shareholders and encourages the achievement of the company’s financial goals. The stock-based awards directly tie an executive’s long-term compensation to the company’s stock price, as well as encourage the achievement of our strategic, operational and financial goals.

The committee considers each key element of compensation when designing and evaluating our executive compensation program. This consideration

ensures that the program will meet its specified objectives. The committee recognizes the impact that an adjustment to one key element of compensation may have on other elements. For example, an increase in a named executive officer’s base salary will result in a larger target incentive amount. However, decisions regarding any one key element of compensation are not determinative of decisions that will be made regarding the other key elements. Further, committee decisions regarding stock-based awards and committee decisions regarding base salaries and annual incentive bonuses are generally made at separate committee meetings. Notwithstanding the independence of these decisions, each committee decision regarding the key elements of compensation is made in furtherance of the objectives of the program.

In April 2011, Mr. Folliard recommended that the committee increase the base salaries for each of the other named executive officers (other than Mr. Browning, due to his upcoming retirement) by 3.5%, based upon the contributions that each officer made to the company’s performance during fiscal 2011. The committee agreed with Mr. Folliard’s recommendation.

In April 2011, the committee conducted a review of Mr. Folliard’s performance. As part of this performance review, the committee considered, among other factors, the company’s earnings performance, store growth plans and execution, management development, culture and cost management. Based on Mr. Folliard’s performance review and consistent with the base salary increases for the named executive officer group, the committee increased Mr. Folliard’s base salary by 3.5% to $1,040,000.

In October 2011, Mr. Folliard recommended that the committee increase the base salaries of each of Messrs. Reedy and Wood from $445,000 to $500,000. Mr. Folliard made this recommendation based upon the expanded roles and responsibilities that each executive assumed at that time. Following Mr. Browning’s retirement, Mr. Reedy became responsible for the management of the company’s finance operation, CarMax Auto Finance, in addition to his CFO duties. Mr. Wood, who previously had responsibility for all sales operations at the company’s stores, took on additional management responsibilities related to merchandising, our store business offices and service operations. In addition to Mr. Folliard’s recommendation, the committee considered the advice of Hay Group regarding these base salary increases. Following its independent consideration, the committee approved these base salary increases.

Annual Incentive Bonus

Pursuant to our Annual Performance-Based Bonus Plan, as amended and restated, we may provide annual incentive bonuses to our executive officers. Payments, if any, made under this plan are directly tied to the achievement of certain pre-defined financial performance goals. We adopted the Bonus Plan as a mechanism to provide this annual incentive compensation and to preserve the deductibility of this compensation in accordance with Section 162(m) of the Internal Revenue Code and related regulations.

The amount of the incentive bonus depends on our actual performance as measured against objective performance goals established by the committee at the beginning of each fiscal year. In April 2011, the committee determined that the threshold, target and maximum performance goals for fiscal 2012 would be based on our fiscal 2012 earnings per share. The committee believes that earnings per share is an appropriate measure for the performance goal because stock price appreciation is generally based on earnings growth. Accordingly, the interests of our management and our shareholders will be aligned.

Each named executive officer’s individual incentive bonus target is set forth in a written agreement with the company, is directly tied to his level of authority and is expressed as a percentage of his base salary. Each named executive officer’s base salary, incentive target percentage, and target and maximum incentive bonus amounts for fiscal 2012 is set forth in the table below.

(a)   In light of his October 2011 retirement, Mr. Browning will be paid a pro-rata bonus for fiscal 2012.

If the committee determines that an executive officer is eligible for payment under the Bonus Plan because our performance goals have been met, the exact bonus amount is determined by multiplying the target incentive amount by a performance adjustment factor. The performance adjustment factors established by the committee for fiscal 2012 pursuant to the Bonus Plan were:

If the threshold performance goal is not achieved, no incentive bonus is paid, as was the case in each of fiscal 2009 and 2008. The performance adjustment factors are

prorated when our actual performance exceeds a lower performance goal but not the next higher performance goal. The Bonus Plan provides that the maximum annual amount payable is the lesser of 200% of the executive’s base salary or $2,000,000. However, the committee limited the maximum performance adjustment factor to 150% for fiscal 2012.

Under the Bonus Plan, the committee may reduce the amount of any bonus award paid to a named executive officer below the amount that otherwise would be payable upon application of the relevant adjustment factor and may 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 adjustment factor.

Performance Targets

In April 2011, the committee established the following diluted earnings per share targets for fiscal 2012: $1.67 as the threshold performance goal; $1.82 as the target performance goal; and $1.94 as the maximum performance goal under the Bonus Plan. In April 2012, the committee certified that CarMax had achieved diluted earnings per share for fiscal 2012 of $1.79, which was between our threshold and target goals. Accordingly, based on the bonus formula, the performance adjustment factor for fiscal 2012 was 86.4%.

During the last five fiscal years, the average performance adjustment factor has been 87% (86.4%, 150%, 200%, 0% and 0% for fiscal 2012, 2011, 2010, 2009 and 2008 respectively), meaning that, on average for the past five years, we have paid our named executive officers an annual incentive bonus award of 87% of their respective target incentive amounts.

Stock-Based Awards

In fiscal 2010, the company modified its stock-based compensation program. The key changes resulted in our diminished reliance on stock options as the sole form of executive equity pay and the introduction of stock-settled restricted stock units (which we refer to as “market stock units” (“MSUs”)) to enhance our long-term pay practices. Unlike options, MSUs retain some of their value even when our stock price falls below the MSU’s grant date price and therefore serve as a retention tool and provide additional associate motivation even in down-market environments. At the executive officer and vice president levels, 75% of the fair value of each equity grant was delivered in the form of stock options and 25% was delivered in the form of MSUs. Additionally, for those associates who had previously received restricted stock, we began awarding cash-settled restricted stock units in their place, in an effort to limit shareholder dilution and conserve the number of shares allocated to our Stock Incentive Plan. We maintained each of these equity compensation practices in fiscal 2012.

In determining the number of options and MSUs to award, the committee considers the named executive officer’s role at CarMax; our recent financial

performance; the performance of our common stock; the fair market value, expense and dilutive effect of any potential award; as well as succession planning and the retention of the services of the officer. To assist in this endeavor, the committee solicits the insight of the company’s CEO, as well as its independent compensation advisors. Generally, the CEO provides an initial recommendation of annual equity awards to the committee. The committee reviews this recommendation and then makes its own independent determination of the annual equity awards.

Equity awards provided to the named executive officers remained flat, as the same number of options and MSUs were awarded to each officer on a year-over-year basis. Due to an increase in our stock price, the fiscal 2012 awards had a grant date fair value that was 27% greater than those provided in fiscal 2011.

Section III. Additional Elements of Compensation

We provide our executive officers with the benefits and perquisites described below, which are intended to be a part of a competitive compensation package.

Retirement Plans

We provide all associates, including our named executive officers, with the opportunity to participate in our 401(k) Plan. We also provide eligible associates, namely those individuals whose benefits under our 401(k) Plan are limited due to the compensation limits imposed by the Internal Revenue Code, the opportunity to participate in our Retirement Restoration Plan. Further, we provide a nonqualified deferred compensation benefit, our Executive Deferred Compensation Plan, to permit eligible associates to defer receipt of a portion of their base salary and/or bonus to a future date. A description of the terms of each plan can be found in the narrative discussion following the “Nonqualified Deferred Compensation” table on page 36 (Note that our 401(k) Plan is a tax-qualified plan). Additionally, details regarding the fiscal 2012 contributions to each named executive officer’s Retirement Restoration Plan and Executive Deferred Compensation Plan accounts, as well as the earnings and aggregate balances for those accounts, can be found in the “Nonqualified Deferred Compensation” table.

During fiscal 2009, we froze our Pension Plan and Benefit Restoration Plan, which were retirement plans that we previously offered. As a result, as of December 31, 2008, no additional benefits will accrue under the Pension Plan or the Benefit Restoration Plan. Additional details regarding these frozen benefits can be found in the “Pension Benefits in Fiscal 2012” table on page 34.

Health and Welfare Plans

We provide a variety of competitive health and welfare plans to our associates and executives, including medical, dental and vision care; life, accidental death and dismemberment and dependent life insurance; short-term and long-term disability insurance; and paid time off. Additionally, each executive officer is encouraged to participate, at their own cost, in our executive physical program, which provides screening, preventative and general medical care.

Company Transportation

We provide a car allowance and the use of a CarMax-owned vehicle for each of our named executive officers. We offer a similar benefit to each of our regional vice presidents. We also provide the use of a CarMax-owned vehicle, on the same terms as provided to the named executive officers, to certain other eligible associates. For all associates using CarMax-owned vehicles, we bear the maintenance and insurance costs. The IRS treats both the monthly vehicle allowance and the personal use of company-owned vehicles as income to the associate and the related taxes are paid by the associate.

Our executive officers are encouraged to use our plane for business travel. Additionally, our plane is available for personal use by Messrs. Folliard, Browning, Dolan and Kunkel when we do not need the plane for business travel (given his October 2011 retirement, our plane is no longer available to Mr. Browning for his personal use). Our policy regarding personal use requires that Mr. Folliard reimburse the company for the incremental costs associated with his personal use to the extent that the incremental costs exceed $125,000 in any fiscal year. The policy requires that Messrs. Browning, Dolan and Kunkel reimburse the company for the incremental costs associated with their respective personal use of the plane to the extent that the incremental costs exceed $35,000 in any fiscal year. All income taxes associated with an executive’s personal use of the plane are borne by the executive.

Tax and Financial Planning Services

We provide a tax and financial planning benefit to our named executive officers. Officers who elect the services of the company’s tax and financial advisory firm must pay the income taxes associated with this benefit, which is valued at $14,000 per year. Officers who forego this benefit may opt to engage their own tax professional, which expense will be borne by the company in an amount up to $5,000 ($10,000 for the CEO), with the officer paying the taxes associated with this income. The committee approved this benefit to reduce the amount of time and attention that our executive officers must spend on these matters, which permits them to focus on their responsibilities to us, and to maximize the financial reward of the compensation that we provide.

Stock Ownership Guidelines

In April 2011, the committee adopted revised stock ownership guidelines for our executive officers. No later than five years after becoming a senior vice president, executive vice president or CEO, each officer must hold shares of our common stock equal in value to the amounts set forth below.

Shares owned outright, in-the-money stock options, restricted stock and MSUs are included in determining compliance with the share ownership requirements. As of February 29, 2012, all of our named executive officers exceeded the ownership thresholds set forth in these guidelines. The stock ownership guidelines are available under the “Corporate Governance” link at investor.carmax.com. Further, pursuant to our Policy Against Insider Trading, all CarMax associates, including our named executive officers, are prohibited from engaging in any hedging transactions with CarMax stock.

Tax Considerations

The company does not provide tax gross-ups on any compensation or perquisites provided to its named executive officers.

Section 162(m) of the Internal Revenue Code generally disallows a deduction by publicly held corporations for compensation in excess of $1 million paid to the CEO or any of the three other most highly compensated officers (other than the CFO). Certain performance-based compensation qualifies for an exemption under Section 162(m) and is not subject to the deduction limit. Compensation under our Bonus Plan and stock options granted pursuant to our Stock Incentive Plan currently qualify for the exemption. The committee continues to monitor its executive compensation plans and policies with a view toward preserving the deductibility of executive compensation while maintaining the ability to attract and retain those executives necessary to assist us in reaching our goals and objectives.

Section IV. Employment and Severance Agreements

We have entered into an employment or a severance agreement with each of our named executive officers. The committee has determined that these written agreements are beneficial to us because they contain restrictive covenants relating to the protection of our confidential information and covenants not to compete and not to solicit our employees. These restrictive covenants continue for a period of two years following the end of the executive officer’s employment. Additionally, the committee believes that these agreements better enable our named executive officers to focus their efforts on the company’s strategic and operating goals.

Mr. Folliard’s employment agreement was for an initial term of two years, with automatic extensions for additional one-year periods following the end of the initial term (or any subsequent renewal period), unless either CarMax or Mr. Folliard provides written notice of intent not to renew at least 90 days before the end of the then-current term. The severance agreements with the other named executive officers do not have a specified term of agreement.

Under the terms of the employment and 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. Each named executive officer is also 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 employment and 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 (or other governmental agency), the named executive officer shall

forfeit and, upon demand by the company, repay all compensation that was expressly conditioned upon the achievement of certain financial results if the restated financial statements would have resulted in a lesser amount being paid.

In addition to the clawback provision contained in each of these agreements, our equity award agreements also contain a forfeiture provision. If a named executive officer is terminated for cause, the officer’s unexercised vested and unvested options are forfeited. Further, all unvested MSUs and restricted stock are also forfeited upon a termination for cause.

Change-in-Control and Severance Benefits

Each employment and severance agreement provides for the termination of employment due to retirement, death or disability (as those terms are defined in each agreement). The agreements also provide for the termination of employment by us without “cause” and termination by the executive officer for “good reason” (as those terms are defined in each agreement). Termination under any of these circumstances will entitle the executive officer to receive certain payments and other benefits.

The agreements also provide for payments and benefits following the termination of employment in these circumstances in connection with a change-in-control or a

sale of all or substantially all of the assets of the company in a single transaction or a series of related transactions (an “asset sale”). 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 37. The executive officers are not entitled to any severance payments as a result of voluntary termination (outside of the retirement context) or if they are terminated for cause.

The committee believes that these severance benefits encourage the commitment and availability 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; however, the committee believes that the benefit to the company outweighs this concern.