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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

(Amendment No.     )

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

Check the appropriate box:

KLA-Tencor Corporation

(Name of Registrant as Specified In Its Charter)

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

Payment of Filing Fee (Check the appropriate box):

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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

November 7, 2012

To the Stockholders:

YOUR VOTE IS IMPORTANT

NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of KLA-Tencor Corporation (“we” or the “Company”), a Delaware corporation, will be held on Wednesday, November 7, 2012 at 12:00 p.m., local time, in Building Three of our Milpitas facility, located at Three Technology Drive, Milpitas, California 95035, for the following purposes:

The foregoing items of business are more fully described in the Proxy Statement accompanying this Notice.

Only stockholders of record at the close of business on September 18, 2012 are entitled to notice of, and to vote at, the Annual Meeting and any adjournment or postponement thereof.

Sincerely,

Richard P. Wallace

President and Chief Executive Officer

Milpitas, California

This Notice of Annual Meeting of Stockholders, Proxy Statement and form of proxy are being distributed and made available on or about September     , 2012.

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KLA-TENCOR CORPORATION

2012 ANNUAL MEETING OF STOCKHOLDERS – PROXY STATEMENT

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ANNUAL MEETING OF STOCKHOLDERS

OF

KLA-TENCOR CORPORATION

To be held on November 7, 2012

PROXY STATEMENT

QUESTIONS AND ANSWERS REGARDING PROXY MATERIALS

The Board of Directors (the “Board”) of KLA-Tencor Corporation (“KLA-Tencor,” the “Company” or “we”) is providing these proxy materials to you in connection with KLA-Tencor’s Annual Meeting of Stockholders to be held on Wednesday, November 7, 2012 at 12:00 p.m., local time (the “Annual Meeting”). As a stockholder of record, you are invited to attend the Annual Meeting, which will be held in Building Three of our Milpitas facility, located at Three Technology Drive, Milpitas, California 95035. The purposes of the Annual Meeting are set forth in the accompanying Notice of Annual Meeting of Stockholders and this Proxy Statement.

These proxy solicitation materials, together with our Annual Report for fiscal year 2012, were first made available on or about September    , 2012 to all stockholders entitled to vote at the Annual Meeting. KLA-Tencor’s principal executive offices are located at One Technology Drive, Milpitas, California 95035, and our telephone number is (408) 875-3000.

A copy of our Annual Report on Form 10-K for fiscal year 2012 is available free of charge on the Internet from the website of the Securities and Exchange Commission (the “SEC”) at http://www.sec.gov, as well as on our website at http://ir.kla-tencor.com.

This year, relying on the SEC rule that allows companies to furnish their proxy materials over the Internet, we are again mailing to our stockholders a notice regarding the Internet availability of the proxy materials instead of a paper copy of the proxy materials. All stockholders will have the ability to access the proxy materials over the Internet and request to receive a paper copy of the proxy materials by mail. Instructions on how to access the proxy materials over the Internet or to request a paper copy may be found in the notice. In addition, the notice contains instructions on how you may request to access proxy materials in printed form by mail or electronically on an ongoing basis.

Your notice regarding the Internet availability of the proxy materials, proxy card or voting instruction card will contain instructions on how to:

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Our proxy materials are also available on our website at the following address: http://www.kla-tencor.com/annualmeeting.

Your notice regarding the Internet availability of the proxy materials, proxy card or voting instruction card will contain instructions on how you may request to access proxy materials electronically on an ongoing basis. Choosing to access your future proxy materials electronically will help us conserve natural resources and reduce the costs of printing and distributing our proxy materials. If you choose to access future proxy materials electronically, you will receive an e-mail with instructions containing a link to the website where those materials are available and a link to the proxy voting website. Your election to access proxy materials by e-mail will remain in effect until you terminate it.

Stockholders receiving a notice regarding the Internet availability of the proxy materials will find instructions in that notice about how to obtain a paper copy of the proxy materials. Stockholders receiving notice of the availability of the proxy materials by e-mail will find instructions in that e-mail about how to obtain a paper copy of the proxy materials. Stockholders who have previously submitted a standing request to receive paper copies of our proxy materials will receive a paper copy of the proxy materials by mail.

You may request delivery of a single copy of our future proxy statements and annual reports by writing to the address provided in the answer to Question 7 below or calling our Investor Relations department at the telephone number below. Stockholders may also request electronic delivery of future proxy statements by writing to the address below, by calling our Investor Relations department at (408) 875-3600 or via our website at http://ir.kla-tencor.com.

Certain stockholders who share an address are being delivered only one copy of this Proxy Statement. You may receive additional copies of this Proxy Statement without charge by sending a written request to KLA-Tencor Corporation, Attention: Investor Relations, One Technology Drive, Milpitas, California 95035. Requests may also be made by calling our Investor Relations department at (408) 875-3600.

QUESTIONS AND ANSWERS REGARDING THE ANNUAL MEETING

You may vote at the Annual Meeting if our records showed that you owned shares of KLA-Tencor Common Stock as of the close of business on September 18, 2012 (the “Record Date”). At the close of business on that date, we had a total of              shares of Common Stock issued and outstanding, which were held of record by approximately              stockholders. As of the Record Date, we had              shares of Preferred Stock outstanding. You are entitled to one vote for each share that you own.

The Annual Meeting will be held if a majority of the outstanding Common Stock entitled to vote is represented at the Annual Meeting. If you have returned valid proxy instructions or attend the Annual Meeting in person, your Common Stock will be counted for the purpose of

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determining whether there is a quorum, even if you wish to abstain from voting on some or all matters at the Annual Meeting.

In addition to such other business as may properly come before the Annual Meeting or any adjournment thereof, the following four proposals will be presented at the Annual Meeting:

QUESTIONS AND ANSWERS REGARDING PROXY SOLICITATION AND VOTING

Most stockholders do not own shares registered directly in their name, but rather are “beneficial holders” of shares held in a stock brokerage account or by a bank or other nominee (that is, shares held “in street name”). Those stockholders should refer to Question 11 below for instructions regarding how to vote their shares.

If, however, your shares are registered directly in your name with our transfer agent, you are considered, with respect to those shares, the stockholder of record, and these proxy materials are being sent directly to you. You may vote in the following ways:

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Whichever of these methods you select to transmit your instructions, the proxy holders will vote your shares in accordance with those instructions.

If you vote by mail, telephone or Internet without giving specific voting instructions, your shares will be voted FOR Proposal One (the election of the four nominees listed herein for the Board), FOR Proposal Two (the ratification of the appointment of our independent registered public accounting firm), FOR Proposal Three (the approval of an amendment to our Amended and Restated Certificate of Incorporation to declassify our Board), and FOR Proposal Four (the advisory approval of our executive compensation). When proxies are properly dated, executed and returned (whether by returned proxy card, telephone or Internet), the shares represented by such proxies will be voted at the Annual Meeting in accordance with the instructions of the stockholder. However, if no specific instructions are given, the shares will be voted in accordance with the recommendations of our Board and as the proxy holders may determine in their discretion with respect to any other matters that properly come before the meeting.

If your shares are held in a stock brokerage account or by a bank or other nominee, you are considered the beneficial owner of shares held “in street name,” and your broker or nominee is considered the stockholder of record with respect to those shares. Your broker or nominee should be forwarding these proxy materials to you. As the beneficial owner, you have the right to direct your broker how to vote, and you are also invited to attend the Annual Meeting. However, since you are not the stockholder of record, you may not vote these shares in person at the Annual Meeting. If a broker, bank or other nominee holds your shares, you will receive instructions from them that you must follow in order to have your shares voted.

You may change your vote at any time prior to the vote at the Annual Meeting. To change your proxy instructions if you are a stockholder of record, you must:

If you are the beneficial owner of shares held in street name, you should contact the broker, bank or other nominee that holds your shares for instructions regarding how to change your vote.

KLA-Tencor is making this proxy solicitation, and we will pay the entire cost of this solicitation, including preparing, assembling, printing, mailing and distributing the notices and

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these proxy materials and soliciting votes. We have retained the services of D.F. King & Company to aid in the solicitation of proxies from brokers, bank nominees and other institutional owners. We estimate that we will pay D.F. King fees of approximately $7,500 (plus reimbursement of out-of-pocket expenses) for this solicitation activity, forwarding solicitation material to beneficial and registered stockholders and processing the results. Certain of our Directors, officers and regular employees, without additional compensation, may solicit proxies personally or by telephone.

Yes, but only on a limited range of proposals. If your shares are held in a stock brokerage account or by a bank or other nominee, you are considered the “beneficial” owner of shares held “in street name,” and these proxy materials are being forwarded to you by your broker or nominee (the “record holder”) along with a voting card. As the beneficial owner, you have the right to direct your record holder how to vote your shares, and your record holder is required to vote your shares in accordance with your instructions. Record holders do not have discretion to vote your shares on the election of directors, on the amendment to our Amended and Restated Certificate of Incorporation to declassify our Board, or on the advisory vote to approve our executive compensation, in each case in the absence of specific instructions from you (the beneficial owner). Therefore, if you do not give instructions to your record holder, the record holder will only be entitled to vote your shares in its discretion on Proposal Two (the ratification of the appointment of our independent registered public accounting firm).

Shares that are voted “FOR,” “AGAINST,” “WITHHELD” or “ABSTAIN” are treated as being present for purposes of determining the presence of a quorum and are also treated as shares entitled to vote at the Annual Meeting (“Votes Cast”).

For Proposal One (the election of Directors), you are only able to vote your shares as either “FOR” or “WITHHELD.” Shares that are voted without giving specific voting instructions will be voted as described in the answers to Questions 10 and 14. Accordingly, abstentions will not be relevant to or impact the election of Directors.

For Proposal Two (the ratification of the appointment of our independent registered public accounting firm), Proposal Three (the amendment to our Amended and Restated Certificate of Incorporation to declassify our Board) and Proposal Four (the advisory vote to approve our executive compensation), you are able to vote your shares as “FOR,” “AGAINST” or “ABSTAIN.” Since abstentions will be counted for Proposals Two, Three and Four for purposes of determining both (i) the presence or absence of a quorum for the transaction of business and (ii) the total number of Votes Cast with respect to the proposal, an abstention on Proposal Two, Three or Four will have the same effect as a vote against that proposal.

Proposals Two and Four are non-binding advisory votes, for which our Board and its committees will give careful consideration to the voting results.

For all proposals, shares that are subject to a broker non-vote are counted for purposes of determining whether a quorum exists but not for purposes of determining whether a proposal has passed.

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The Board recommends that stockholders vote as follows:

We are not aware of any matters to be presented other than those described in this Proxy Statement. In the unlikely event that any matters not described in this Proxy Statement are properly presented at the Annual Meeting, the proxy holders will use their own judgment to determine how to vote.

If the Annual Meeting is adjourned or postponed, the proxy holders can vote your shares on the new meeting date as well, unless you have properly revoked your proxy instructions.

We intend to announce preliminary voting results at the Annual Meeting and publish final results in a Current Report on Form 8-K to be filed with the SEC within four business days of the Annual Meeting.

QUESTIONS AND ANSWERS REGARDING STOCKHOLDER PROPOSALS, DIRECTOR NOMINATIONS BY STOCKHOLDERS AND RELATED BYLAW PROVISIONS

A stockholder may only present a matter from the floor of a meeting of stockholders for consideration at that meeting if certain procedures set forth in our bylaws are followed, including delivery of advance notice by such stockholder to us. We only received one timely notice with respect to the Annual Meeting regarding the presentation by a stockholder of business from the floor of the meeting, and that notice was subsequently withdrawn by the proposing stockholder. Accordingly, we do not expect to acknowledge any business presented from the floor at the Annual Meeting.

You may submit proposals for consideration at future stockholder meetings. For a stockholder proposal to be considered for inclusion in our proxy statement for next year’s annual meeting of stockholders (which is expected to be held in November 2013), our Corporate Secretary must receive the written proposal at our principal executive offices no later than May 30, 2013.

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Such proposals also must comply with SEC regulations under Rule 14a-8 regarding the inclusion of stockholder proposals in company-sponsored proxy materials. Proposals should be addressed to:

Corporate Secretary

KLA-Tencor Corporation

One Technology Drive

Milpitas, California 95035

Fax: (408) 875-4266

For a stockholder proposal that is not intended to be included in our proxy statement under Rule 14a-8, the stockholder must provide the information required by our bylaws and give timely notice to our Corporate Secretary in accordance with our bylaws, which, in general, require that the notice be received by our Corporate Secretary:

If the date of the stockholders’ meeting is moved more than 30 days before or 60 days after November 7, 2013, then notice of a stockholder proposal that is not intended to be included in our proxy statement under Rule 14a-8 must be received no earlier than the close of business 120 days prior to the meeting and no later than the close of business on the later of the following two dates:

You may propose director candidates for consideration by the Board’s Nominating and Governance Committee. Any such recommendations should include the nominee’s name and qualifications for Board membership and should be directed to our Corporate Secretary at the address of our principal executive offices set forth in Question 21 above.

In addition, our bylaws permit stockholders to nominate directors for election at an annual meeting of stockholders. To nominate a director, the stockholder must deliver the information required by our bylaws and a statement by the nominee acknowledging that he or she will owe a fiduciary obligation to KLA-Tencor and its stockholders.

A stockholder may send a proposed director candidate’s name and information to the Board at any time. Generally, such proposed candidates are considered at the first or second Board meeting prior to the annual meeting.

To nominate an individual for election at an annual meeting of stockholders, the stockholder must give timely notice to our Corporate Secretary in accordance with our bylaws, which, for next year’s annual meeting of stockholders, will generally require that the notice be received by our Corporate Secretary between the close of business on July 10, 2013 and the close of business on August 9, 2013, unless the annual meeting is moved by more than 30 days before or 60 days after November 7, 2013, in which case the deadline will be as described in Question 21 above.

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For a free copy of our bylaws, please contact our Investor Relations department at (408) 875-3600. A copy of our bylaws is also available free of charge on the Internet on our website at http://ir.kla-tencor.com and from the SEC’s website at http://www.sec.gov.

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PROPOSAL ONE:

ELECTION OF DIRECTORS

Background

We currently have a classified Board consisting of 11 directors divided into three classes, designated Class I, Class II and Class III. At each annual meeting, a class of Directors is elected for a full term of three years to succeed those Directors whose terms expire at that annual meeting. At this Annual Meeting, the terms of the Class II Directors are expiring.

Subject to approval of Proposal Three below (the amendment to our Amended and Restated Certificate of Incorporation to declassify our Board), commencing with our 2013 annual meeting of stockholders, directors will be elected annually for one-year terms. However, directors elected prior to our 2013 annual meeting of stockholders (including those directors elected at this Annual Meeting under this Proposal One) will continue to serve the balance of their existing three-year terms. If Proposal Three is not approved, our Board will remain classified, and directors will continue to be elected for three-year terms.

The three incumbent Class I Directors are Robert M. Calderoni, John T. Dickson and Kevin J. Kennedy. The Class I Directors will serve until the annual meeting of stockholders to be held in 2014 or until their respective successors are duly elected and qualified.

The four incumbent Class II Directors are Robert P. Akins, Robert T. Bond, Kiran M. Patel and David C. Wang. These Directors are up for re-election at the Annual Meeting.

The four incumbent Class III Directors are Edward W. Barnholt, Emiko Higashi, Stephen P. Kaufman and Richard P. Wallace. The Class III Directors will serve until the annual meeting of stockholders to be held in 2013 or until their respective successors are duly elected and qualified.

Nominees

The term of the four current Class II Directors will expire on the date of the Annual Meeting. The four incumbent Class II Directors are nominated for election at the Annual Meeting. The Nominating and Governance Committee, consisting solely of independent Directors as determined under the rules of the NASDAQ Stock Market, recommended the Class II Director nominees as set forth in this Proposal One. Based on that recommendation, the members of the Board resolved to nominate such individuals for election.

The four candidates nominated by the Board for election as Class II Directors by the stockholders are:

If elected, the nominees for Class II Directors will serve as Directors until our annual meeting of stockholders in 2015, each until his successor is duly elected and qualified. If any nominee declines to serve or becomes unavailable for any reason, or a vacancy occurs before the election,

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the proxies may be voted for such substitute nominees as the Board may designate. As of the date of this Proxy Statement, the Board is not aware of any nominee who is unable or who will decline to serve as a Director.

Vote Required and Recommendation

If a quorum is present and voting, the four nominees for Class II Directors receiving the highest number of affirmative votes will be elected as Class II Directors. Votes withheld from any Director and broker non-votes are counted for purposes of determining the presence or absence of a quorum but have no other legal effect on the selection of nominees for Directors. In accordance with our corporate governance policies, anyone who is elected as a Director in any uncontested election by a plurality and not a majority of votes cast is expected to promptly tender his or her resignation to the Board, subject to acceptance by the Board, after certification of the election results. The Nominating and Governance Committee will make a recommendation to the Board whether to accept or reject the resignation or take some other appropriate action, taking into account any stated reasons why stockholders withheld votes and any other factors that the Nominating and Governance Committee determines in its sole discretion are relevant to such decision. The Board will in its sole discretion act on the recommendation of the Nominating and Governance Committee within 90 days after the date of certification of the election results. The Director who tenders his or her resignation will not participate in the decisions of the Nominating and Governance Committee or the Board regarding his or her resignation.

The Board unanimously recommends a vote “FOR” each of the Class II Director nominees, with the Directors who are nominees abstaining.

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INFORMATION ABOUT THE BOARD OF DIRECTORS AND ITS COMMITTEES

The Board of Directors

Our Board held a total of seven meetings during the fiscal year ended June 30, 2012. All Directors other than Mr. Wallace meet the definition of independence within the meaning of the NASDAQ Stock Market director independence standards.

The Board has three standing committees: the Audit Committee; the Compensation Committee; and the Nominating and Governance Committee. The Board has determined that each of the members of each of the Committees has no material relationship with the Company (including any relationship that, in the opinion of the Board, would interfere with the exercise of independent judgment as a Director) and is independent within the meaning of the NASDAQ Stock Market director independence standards, including, in the case of the Audit Committee, the heightened “independence” standard required for such Committee members.

Each Committee meets regularly and has a written charter approved by the Board, all of which are available on our website at http://ir.kla-tencor.com. The Board and each Committee regularly review the Committee charters. In addition, at each quarterly Board meeting, a member of each Committee reports on any significant matters addressed by the Committee.

During the fiscal year ended June 30, 2012, each of the incumbent Directors attended at least 75% of the aggregate of (a) the total number of meetings of the Board held during the period for which such person served as a Director and (b) the total number of meetings held by all Committees of the Board on which such Director served (during the periods that such Director served), with the exception of Mr. Akins, who attended nine of the 13 applicable Board and Committee meetings during the year (i.e., 69%). Mr. Akins has maintained an excellent attendance record at Board and Committee meetings during his tenure as a Director of the Company, attending 100%, 88% and 93% of the applicable meetings during fiscal years 2009, 2010 and 2011 (Mr. Akins’ first three full fiscal years of Board service), respectively, and, during fiscal year 2012, he attended seven of the eight regularly scheduled quarterly meetings (i.e., 88%) of the Board and Compensation Committee (the Committee on which he served). Three of the four meetings that Mr. Akins did not attend during fiscal year 2012 were special meetings (including two separate meetings of the Board and Compensation Committee that were held on one day), which in each case were scheduled on short notice at times that, though unavailable for Mr. Akins, were available for a majority of the applicable Board or Committee members. Throughout fiscal year 2012, Mr. Akins participated in major decisions of the Board and communicated with his fellow Directors and with Company management before and after the meetings that he was unable to attend in order to remain apprised of, and provide feedback regarding, the activities of the Board and Compensation Committee.

Although we do not have a formal policy mandating attendance by members of the Board at our annual meetings of stockholders, we do have a formal policy encouraging their attendance at such meetings. Ten of the eleven members of our Board attended our annual meeting of stockholders held on November 3, 2011.

For more information regarding the responsibilities of our Board Committees, please refer to the various charters which can be found, along with our Standards of Business Conduct, Corporate Governance Standards and other governance-related information, on our corporate governance website located at http://ir.kla-tencor.com.

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Board Leadership Structure

KLA-Tencor currently separates the positions of Chief Executive Officer and Chairman of the Board. Since October 2006, Mr. Barnholt, one of our independent Directors, has served as our Chairman of the Board. The responsibilities of the Chairman of the Board include: setting the agenda for each Board meeting, in consultation with the Chief Executive Officer; chairing the meetings of the Board; presiding at executive sessions; facilitating and conducting, with the Nominating and Governance Committee, the annual self-assessments by the Board and each standing committee of the Board; and conducting, with the Compensation Committee, a formal evaluation of the Chief Executive Officer in the context of the annual compensation review.

Separating the positions of Chief Executive Officer and Chairman of the Board allows our Chief Executive Officer to focus on our day-to-day business, while allowing the Chairman of the Board to lead the Board in its fundamental role of providing advice to and independent oversight of management. The Board believes that having an independent Director serve as Chairman of the Board is the appropriate leadership structure for the Company at this time.

However, our Corporate Governance Standards permit the roles of the Chairman of the Board and the Chief Executive Officer to be filled by the same or different individuals. This provides the Board with flexibility to determine whether the two roles should be combined in the future based on KLA-Tencor’s needs and the Board’s assessment of the Company’s leadership from time to time. Our Corporate Governance Standards provide that, in the event that the Chairman of the Board is not an independent Director, the independent members of the Board will designate a “lead independent director.”

Board’s Role in Oversight of Risk

Our Board, as a whole and through its committees, has responsibility for the oversight of risk management. In its oversight role, our Board has the responsibility to satisfy itself that the risk management processes designed and implemented by management are adequate and functioning as designed. The involvement of the Board in working with management to establish our business strategy at least annually is a key part of its oversight of risk management, its assessment of management’s appetite for risk and its determination of what constitutes an appropriate level of risk for KLA-Tencor. In addition, the Board conducts a comprehensive review of the Company’s overall risk environment and its risk management efforts at least once per year. The Board and its committees also regularly receive updates from management (including representatives of our legal and internal audit teams) regarding certain risks that we face, including industry, business, macroeconomic, litigation and other operating risks.

While our Board is ultimately responsible for risk oversight at KLA-Tencor, our Board has delegated to the Audit Committee the primary responsibility for the active oversight of our enterprise risk management activities. Our Audit Committee is not only responsible for overseeing risk management of financial matters, the adequacy of our risk-related internal controls, financial reporting and internal investigations, but its charter also provides that the Committee will discuss at least annually KLA-Tencor’s risk assessment, enterprise risk management processes and major financial exposures, as well as the steps our management has taken to monitor and control those exposures. Our Audit Committee reports its findings and activities to the Board at each quarterly Board meeting.

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In addition, our other Board committees each oversee certain aspects of risk management. Our Compensation Committee oversees risks related to our compensation policies and practices, and our Nominating and Governance Committee oversees governance related risks, such as Board independence and conflicts of interest, as well as management and director succession planning. The Committees report their findings and activities to the Board.

While the Board is responsible for risk oversight, management is responsible for risk management. KLA-Tencor maintains an effective internal controls environment and has processes to identify and manage risk, including an Executive Risk Council comprised of representatives from our legal, human resources, finance, internal audit, compliance and operational teams. This council reports to our Chief Executive Officer and has oversight of the various risk assessment, monitoring and controls processes across the Company.

Audit Committee

From the beginning of fiscal year 2012 through the date of this Proxy Statement, the Audit Committee has consisted of Ms. Higashi and Messrs. Bond, Calderoni, Patel and Wang, with Mr. Calderoni serving as the Chairman of the Committee.

The Board has determined that, of the current members of the Audit Committee, each of Mr. Calderoni, Ms. Higashi and Mr. Patel is an “audit committee financial expert” within the meaning of the rules and regulations promulgated by the SEC.

The Audit Committee is responsible for appointing and overseeing the work of our independent registered public accounting firm, approving the services performed by our independent registered public accounting firm, and reviewing and evaluating our accounting principles and system of internal accounting controls. In addition, our Vice President of Internal Audit, who is supervised by our Chief Financial Officer, formally reports into the Audit Committee and provides updates at each quarterly meeting. The Audit Committee held eight meetings during the fiscal year ended June 30, 2012.

The Board has determined that each of the members of the Audit Committee: (1) meets the definition of independence within the meaning of NASDAQ’s director independence standards, (2) meets the definition of audit committee member independence within the meaning of Rule 10A-3 under the Securities Exchange Act of 1934 and (3) has no material relationship with KLA-Tencor (including any relationship that, in the opinion of the Board, would interfere with the exercise of independent judgment as a Director).

Compensation Committee

From the beginning of fiscal year 2012 through the date of this Proxy Statement, the Compensation Committee has consisted of Messrs. Akins, Barnholt, Dickson, Kaufman and Kennedy, with Mr. Kennedy serving as the Chairman of the Committee.

The Compensation Committee reviews and either approves or recommends to the full Board (depending upon the compensation plan and the executive involved) our executive compensation policy and administers our employee equity award plans. The Compensation Committee also reviews and, except with respect to our Chief Executive Officer and Chairman of the Board, has the authority to approve the cash and equity compensation for our executive officers and for members of the Board. See “Compensation Discussion and Analysis – Compensation Approval Procedures” for more information concerning the procedures and

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processes the Compensation Committee follows in setting such compensation and implementing the various cash and equity compensation programs in effect for such individuals, including the retention of an independent compensation consultant to provide relevant market data and advice. The Compensation Committee held six meetings during the fiscal year ended June 30, 2012.

Risk Considerations in Our Compensation Programs

Our management conducted an extensive review and analysis of the design and operation of KLA-Tencor’s compensation practices, policies and programs for all employees, including the Named Executive Officers, to assess the risks associated with such practices, policies and programs. Our Compensation Committee has reviewed the results of that analysis, including underlying plan data and a risk assessment of significant elements of our compensation program. Based on this review and assessment, we and our Compensation Committee do not believe our compensation program encourages excessive or inappropriate risk-taking for the following reasons:

Nominating and Governance Committee

From the beginning of fiscal year 2012 through the date of this Proxy Statement, the Nominating and Governance Committee has consisted of Messrs. Barnholt, Bond, Dickson and Kaufman, with Mr. Barnholt serving as the Chairman of the Committee.

The Nominating and Governance Committee is primarily responsible for identifying and evaluating the qualifications of all candidates for election to the Board, as well as reviewing corporate governance policies and procedures and assessing stockholder proposals related to governance matters. The Nominating and Governance Committee held four meetings during the fiscal year ended June 30, 2012.

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The Nominating and Governance Committee assesses the appropriate size and composition of the Board, the effectiveness of its leadership structure, and whether any vacancies on the Board are expected. In the event that vacancies are anticipated, or otherwise arise, the Nominating and Governance Committee considers potential candidates that may come to its attention through current members of the Board, professional search firms, management, stockholders or other persons. In evaluating properly submitted stockholder recommendations, the Nominating and Governance Committee uses the evaluation standards discussed in further detail below and seeks to achieve a balance of knowledge, experience and capability on the Board.

It is the Nominating and Governance Committee’s policy to consider candidates for the Board recommended by, among other persons, stockholders who have owned at least one percent (1%) of our outstanding shares for at least one year and who state that they have an intent to continue as a substantial stockholder for the long term. Stockholders wishing to nominate candidates for the Board must notify our General Counsel in writing of their intent to do so and provide us with certain information set forth in Article II, Section 11 of our bylaws and all other information regarding nominees that is required to be provided pursuant to Regulation 14A of the Securities Exchange Act of 1934, or as otherwise requested by the Nominating and Governance Committee.

Several years ago, we instituted a governance policy applicable to uncontested Director elections, which policy currently remains in effect. Under this policy, anyone who is elected as a Director in any uncontested election by a plurality and not a majority of votes cast is expected to promptly tender his or her resignation to the Board, subject to acceptance by the Board, after certification of the election results. The Nominating and Governance Committee will make a recommendation to the Board whether to accept or reject the resignation or take some other appropriate action, taking into account any stated reasons why stockholders withheld votes and any other factors which the Nominating and Governance Committee determines in its sole discretion are relevant to such decision. The Board will in its sole discretion act on the recommendation of the Nominating and Governance Committee within 90 days after the date of certification of the election results. The Director who tenders his or her resignation will not participate in the decisions of the Nominating and Governance Committee or the Board regarding his or her resignation.

Director Qualifications and Diversity

The Board believes that the skill set, backgrounds and qualifications of our Directors, considered as a group, should provide a significant composite mix of diversity in experience, knowledge and abilities that will allow the Board to fulfill its responsibilities. In addition, the Board believes that there are certain attributes that every Director should possess, such as demonstrated business or academic achievements, the highest ethical standards and a strong sense of professionalism. Accordingly, the Board and the Nominating and Governance Committee consider the qualifications of Directors and Director candidates individually and in the broader context of the Board’s overall composition and KLA-Tencor’s current and future needs.

In considering candidates for Director nomination, including evaluating any recommendations from stockholders as set forth above, the Nominating and Governance Committee only considers candidates who have demonstrated executive experience or significant high level experience in accounting, legal or a technical field or industry applicable to KLA-Tencor. In

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addition, as set forth in our Corporate Governance Standards, the Nominating and Governance Committee takes into account all factors it considers appropriate when evaluating Director candidates, which may include strength of character, mature judgment, career specialization, diversity and the extent to which the candidate would fill a present need on the Board. With respect to new Board members, it is the standard practice of the Nominating and Governance Committee to engage a third-party recruiting firm to identify a slate of individuals for consideration as Board candidates based on the above-mentioned criteria.

In addition, the Nominating and Governance Committee annually reviews with the Board the appropriate skills and characteristics required of Directors in the context of the current composition of the Board. In seeking a diversity of background, the Nominating and Governance Committee seeks a variety of occupational and personal backgrounds on the Board in order to obtain a range of viewpoints and perspectives. This annual assessment enables the Board to update the skills and experience it seeks in the Board as a whole, and in individual Directors, as KLA-Tencor’s needs evolve and change over time.

In evaluating Director candidates, including incumbent Directors for renomination to the Board, the Nominating and Governance Committee has considered all of the criteria described above. When assessing an incumbent Director, the Nominating and Governance Committee also considers the Director’s past performance on and contributions to the Board. Among other things, the Nominating and Governance Committee has determined that it is important to have individuals with the following skills and experiences on the Board:

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INFORMATION ABOUT THE DIRECTORS AND THE NOMINEES

Our Board and its Nominating and Governance Committee believe that all of the Directors and nominees listed below are highly qualified and have the skills and experience required for service on our Board. The following table sets forth certain information with respect to our Directors and nominees as of the date of this Proxy Statement, including biographies that reflect their significant experiences, qualifications and skills:

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PROPOSAL TWO:

RATIFICATION OF APPOINTMENT OF

PRICEWATERHOUSECOOPERS LLP AS OUR

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

FOR THE FISCAL YEAR ENDING JUNE 30, 2013

Audit Committee Recommendation

The Audit Committee has the sole authority to retain or dismiss our independent auditors. The Audit Committee has selected PricewaterhouseCoopers LLP, an independent registered public accounting firm, to audit our consolidated financial statements for our fiscal year ending June 30, 2013. Before making its determination, the Audit Committee carefully considered that firm’s qualifications as independent auditors.

The Board, following the Audit Committee’s determination, unanimously recommends that the stockholders vote for ratification of such appointment.

Although ratification by stockholders is not required by law, the Board has determined that it is desirable to request approval of this selection by the stockholders. If the stockholders do not ratify the appointment of PricewaterhouseCoopers LLP, the Audit Committee may reconsider its selection.

Attendance at the Annual Meeting

Representatives of PricewaterhouseCoopers LLP are expected to be present at the Annual Meeting with the opportunity to make a statement if they desire to do so, and are expected to be available to respond to appropriate questions.

Fees

The aggregate fees billed by PricewaterhouseCoopers LLP, KLA-Tencor’s independent registered public accounting firm, in fiscal years 2012 and 2011 were as follows:

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Pre-Approval Policies and Procedures

The Audit Committee has adopted a policy regarding non-audit services provided by PricewaterhouseCoopers LLP. First, the policy ensures the independence of our auditors by expressly naming all services that the auditors may not perform and reinforcing the principle of independence regardless of the type of service. Second, certain non-audit services such as tax-related services and acquisition advisory services are permitted but limited in proportion to the audit fees paid. Third, the Chair of the Audit Committee pre-approves non-audit services not specifically permitted under this policy, and the Audit Committee reviews the annual plan and any subsequent engagements. All non-audit fees were approved by the Audit Committee pursuant to its pre-approval policies and procedures.

On a quarterly basis, management provides written updates to the Audit Committee with regard to audit and non-audit services, the amount of audit and non-audit service fees incurred to date, and the estimated cost to complete such services.

Independence Assessment by Audit Committee

Our Audit Committee considered and determined that the provision of the services provided by PricewaterhouseCoopers LLP as set forth herein is compatible with maintaining PricewaterhouseCoopers LLP’s independence and approved all non-audit related fees and services.

Vote Required and Recommendation

If a quorum is present and voting, the affirmative vote of the majority of Votes Cast is needed to ratify the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm, to audit our consolidated financial statements for our fiscal year ending June 30, 2013.

The Board unanimously recommends a vote “FOR” the ratification of the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the fiscal year ending June 30, 2013.

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PROPOSAL THREE:

APPROVAL OF AN AMENDMENT TO

OUR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION

TO DECLASSIFY OUR BOARD OF DIRECTORS

Background

The Board is submitting for stockholder approval an amendment to our Amended and Restated Certificate of Incorporation (the “Charter Amendment”) that would phase in the declassification of our Board and provide for the annual election of directors. Our Board approved the amendment on August 2, 2012, subject to stockholder approval.

Our current classified Board structure has been in place since 1989, when our predecessor KLA Instruments Corporation first adopted the structure. Over the years, the Board has periodically considered the advantages and disadvantages of maintaining a classified Board structure and, until now, has consistently concluded that this structure was in the best interests of the Company and its stockholders. Proponents of a classified board structure believe it provides increased board stability, improved long-term planning and an enhanced ability to protect stockholder value and resist abusive tactics in a potential hostile takeover. However, the Board recognizes that corporate governance standards have evolved and that many investors and commentators now believe that the election of directors is the primary means for stockholders to influence corporate governance policies and increase the Board’s and management’s accountability to stockholders. As a result, after careful consideration, our Board determined that it is appropriate to propose declassifying the Board, commencing with our 2013 annual meeting of stockholders.

Currently, our Amended and Restated Certificate of Incorporation divides Board members into three classes, with the Directors in each class being elected for a three-year term. The terms of the three classes are staggered so that only one class of Directors is nominated for election at any one annual meeting of stockholders. If the Charter Amendment is approved, commencing with the class of Directors standing for election at our 2013 annual meeting of stockholders, Directors will stand for election for one-year terms, expiring at the next succeeding annual meeting of stockholders. The Directors who are elected at this Annual Meeting under Proposal One, whose terms will expire in 2015, and the Directors who were elected at our 2011 annual meeting of stockholders, whose terms will expire in 2014, will continue to hold office until the end of the terms for which they were elected. All Directors will be elected on an annual basis beginning with our 2015 annual meeting of stockholders. In all cases, each Director will hold office until his or her successor has been elected and qualified or until the Director’s earlier resignation or removal. The Board has adopted corresponding amendments to our Amended and Restated Bylaws, which will become effective if the Charter Amendment is approved by stockholders. However, if the Charter Amendment is not approved, our Board will remain classified.

Presently, because the terms of the Directors are staggered, the Directors are removable only for cause. Even if the Charter Amendment is approved at the Annual Meeting, Directors would continue to be removable only for cause until our 2015 annual meeting of stockholders. However, following that 2015 annual meeting (which will mark the first meeting at which all of the Directors are up for election for one-year terms and will thus mark the time at which our Board will be fully declassified), consistent with Delaware law for corporations without classified boards, Directors will be removable “with or without cause” upon the affirmative vote of a majority of the outstanding shares entitled to vote generally in the election of directors.

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Appendix A shows the proposed changes to Sections 1(c), 1(d) and 1(e) of Article Eighth of our Amended and Restated Certificate of Incorporation, with deletions indicated by strikeouts and additions indicated by underlining.

Vote Required and Recommendation

The affirmative vote of a majority of the outstanding shares of KLA-Tencor Common Stock entitled to vote generally on the election of directors is required to approve the Charter Amendment. Any action other than a vote for this proposal, such as an abstention or failure to return a proxy card, will have the same effect as a vote against this proposal.

The Board unanimously recommends a vote “FOR” the approval of the proposed amendment to our Amended and Restated Certificate of Incorporation to declassify our Board of Directors.

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PROPOSAL FOUR:

ADVISORY APPROVAL OF OUR EXECUTIVE COMPENSATION

Background

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, enables KLA-Tencor’s stockholders to vote to approve, on a non-binding advisory basis, the compensation of our Named Executive Officers (as that term is defined on page 44 of this Proxy Statement) as disclosed in the “Compensation Discussion and Analysis” section, the Summary Compensation Table and the other related tables and disclosure in this Proxy Statement. This vote is required pursuant to Section 14A of the Securities Exchange Act of 1934, as amended. As we disclosed last year following our 2011 annual meeting of stockholders, the Board has determined, consistent with the feedback from our stockholders, that we will hold this vote every year, until the Board decides to hold the next advisory vote regarding the frequency of the advisory votes on executive compensation.

As described in greater detail under the heading “Compensation Discussion and Analysis,” we seek to closely align the interests of our Named Executive Officers with the interests of our stockholders by focusing on a philosophy of “pay-for-performance.” Our compensation programs are designed to support our business goals and to promote both short-term and long-term financial and strategic achievement.

We urge stockholders to read the “Compensation Discussion and Analysis” section of this Proxy Statement, which describes in more detail how our executive compensation policies and procedures operate and are designed to achieve our compensation objectives, as well as the Summary Compensation Table and other related compensation tables and disclosure in this Proxy Statement, which provide detailed information on the compensation of our Named Executive Officers. The Compensation Committee and the Board believe that the policies and procedures articulated in the “Compensation Discussion and Analysis” are effective in achieving our goals and that the compensation of our Named Executive Officers as reported in this Proxy Statement has supported and contributed to our recent and long-term success.

Nature of Vote; Recommendation

This vote is advisory and therefore not binding on KLA-Tencor, our Board of Directors or the Compensation Committee. The vote on this resolution is not intended to address any specific element of compensation, but rather relates to the overall compensation of our Named Executive Officers, as described in this Proxy Statement in accordance with the compensation disclosure rules of the SEC.

Accordingly, we ask our stockholders to approve the following resolution at the Annual Meeting:

“RESOLVED, that KLA-Tencor Corporation’s stockholders approve, on an advisory basis, the compensation of the Named Executive Officers, as disclosed pursuant to Item 402 of Regulation S-K in the Company’s Proxy Statement for the 2012 Annual Meeting of Stockholders pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the Compensation Discussion and Analysis, the Summary Compensation Table and the other related tables and disclosure.”

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While this advisory vote on executive compensation is non-binding, the Board and the Compensation Committee value the opinion of KLA-Tencor’s stockholders and will carefully assess the voting results and consider the impact of such vote on our compensation policies and decisions.

Vote Required

The affirmative vote of a majority of the shares of KLA-Tencor Common Stock present in person or represented by proxy and entitled to be voted on the proposal at the Annual Meeting is required for advisory approval of this proposal.

The Board unanimously recommends a vote “FOR” the approval, on an advisory basis, of the compensation of our Named Executive Officers, as disclosed in this Proxy Statement.

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OUR CORPORATE GOVERNANCE PRACTICES

At KLA-Tencor, we believe that strong and effective corporate governance procedures and practices are an extremely important part of our corporate culture. In that spirit, we have summarized several of our corporate governance practices below.

Adopting and Maintaining Governance Standards

The Board has adopted, and regularly reviews and updates as necessary, a set of Corporate Governance Standards to establish a framework within which it will conduct its business and to guide management in its running of the Company. The governance standards, portions of which are summarized below, can be found on our website at http://ir.kla-tencor.com.

Monitoring Board Effectiveness

It is important that our Board and its Committees are performing effectively and in the best interests of KLA-Tencor and our stockholders. The Board is responsible for annually assessing its effectiveness and the effectiveness of each of its Committees in fulfilling their respective obligations, and each Committee is responsible for reviewing the Board’s assessment of that Committee’s effectiveness. In addition, our Nominating and Governance Committee is charged with overseeing an annual review of the Board and its membership.

Conducting Formal Independent Director Sessions

At the conclusion of each regularly scheduled Board meeting, the independent Directors meet in executive session without KLA-Tencor management or any non-independent Directors.

Hiring Outside Advisors

The Board and each of its Committees may retain outside advisors and consultants of their choosing at our expense, without management’s consent.

Avoiding Conflicts of Interest

We expect our Directors, executives and employees to conduct themselves with the highest degree of integrity, ethics and honesty. Our credibility and reputation depend upon the good judgment, ethical standards and personal integrity of each Director, executive and employee. In order to provide assurances internally and to our stockholders, we have implemented Standards of Business Conduct which provide clear conflict of interest guidelines to our employees, as well as an explanation of reporting and investigatory procedures.

Providing Transparency

We believe it is important that stockholders understand our governance practices. In order to help ensure transparency of our practices, we have posted information regarding our corporate governance procedures on our website at http://ir.kla-tencor.com.

Communications with the Board

Stockholders may communicate with the Board by writing to us at KLA-Tencor Corporation, Attention: Investor Relations, One Technology Drive, Milpitas, California 95035. Stockholders who would like their submission directed to a member of the Board may so specify, and the communication will be forwarded, as appropriate.

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Standards of Business Conduct; Whistleblower Hotline and Website

The Board has adopted Standards of Business Conduct for all of our employees and Directors, including our principal executive and senior financial officers, and we have prepared and made available versions of our Standards of Business Conduct translated into French, German, Hebrew, Japanese, Korean and Chinese (Simplified and Traditional) in an effort to maximize the accessibility and understandability of these important guidelines to our employees. You can obtain a copy of our Standards of Business Conduct via our website at http://ir.kla-tencor.com, or by making a written request to us at KLA-Tencor Corporation, Attention: Investor Relations, One Technology Drive, Milpitas, California 95035. We will disclose any amendments to the Standards of Business Conduct, or waiver of a provision therefrom, on our website at the same address.

In addition, we have established a hotline and website for use by employees, as well as third parties such as vendors and customers, to report actual or suspected wrongdoing and to answer questions about business conduct. The hotline and website are both operated by an independent third party, which provides tools to enable individuals to submit reports in a number of different languages and, where permitted by law, on an anonymous basis.

Ensuring Auditor Independence

KLA-Tencor has taken a number of steps to ensure the continued independence of our outside auditors. Our independent auditors report directly to the Audit Committee, which also has the ability to pre-approve or reject any non-audit services proposed to be conducted by our outside auditors.

Compensation Committee Interlocks and Insider Participation

The Compensation Committee currently consists of Messrs. Kennedy (Chair), Akins, Barnholt, Dickson and Kaufman. None of these individuals was an officer or employee of KLA-Tencor at any time during fiscal year 2012 or at any other time. During fiscal year 2012, there was no instance where an executive officer of KLA-Tencor served as a member of the Board or compensation committee of any entity and an executive officer of that entity served on our Board or Compensation Committee.

Stockholder Nominations to the Board

Please see “INFORMATION ABOUT THE BOARD OF DIRECTORS AND ITS COMMITTEES – Nominating and Governance Committee.”

Majority Voting Policy

Please see “PROPOSAL ONE: ELECTION OF DIRECTORS – Vote Required and Recommendation.”

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DIRECTOR COMPENSATION

Employee Directors

Members of the Board who are employees of the Company do not receive any additional compensation for their services as Directors.

Outside Directors

Non-employee members of the Board (“Outside Directors”) receive a combination of equity and cash compensation as approved by the Compensation Committee (or, in the case of the compensation of the Chairman of the Board, as recommended by the Compensation Committee and approved by the Board). Equity compensation to Outside Directors is provided under our 2004 Equity Incentive Plan and, to the extent consisting of stock options, may also be provided under our 1998 Outside Director Option Plan, both of which were approved by our stockholders.

Outside Director Restricted Stock Unit Awards

In August 2011, based on a review of market data regarding director compensation, the Compensation Committee approved an increase, from $100,000 to $120,000, in the fair market value of the Directors’ annual restricted stock unit award (and the Board approved the change with respect to its impact on the Chairman of the Board’s compensation).

Accordingly, each Outside Director was awarded restricted stock units at the November 3, 2011 annual meeting of stockholders covering shares of our Common Stock with an aggregate fair market value of $120,000 based on the market closing price of our Common Stock on the date of the award ($47.26 per share). As a result, each Outside Director at that time received a restricted stock unit award covering 2,539 shares of Common Stock (other than the Chairman of the Board, who received 1.5 times that number as described below). The restricted stock units awarded to the Outside Directors at the November 3, 2011 annual meeting of stockholders were made with respect to their Board service for fiscal year 2012. The restricted stock units will vest upon completion of one year of Board service measured from the date of grant, and the underlying shares will be issued immediately at that time.

This policy will also be in effect with respect to the Annual Meeting.

If a new Outside Director joins the Board after the date of an annual meeting of stockholders, his or her first restricted stock unit award will be granted promptly after he or she joins the Board and will be prorated to take into account the period of time from the last annual meeting of stockholders to the date the new Outside Director joined the Board.

Cash Compensation

For fiscal year 2012, each Outside Director received an annual retainer fee of $75,000 (other than the Chairman of the Board, who received two times that amount as described below), paid quarterly, and meeting fees of $2,500 for each Board meeting attended in person, $1,250 for each Board meeting attended by telephone conference call, $1,500 for each Committee meeting attended in person, and $750 for each Committee meeting attended by telephone conference call. Each Committee Chair also received an additional annual retainer. For fiscal year 2012, the additional annual retainer paid to the Chairman of the Audit Committee was

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$30,000, the additional annual retainer paid to the Chairman of the Compensation Committee was $20,000, and the additional annual retainer paid to the Chairman of the Nominating and Governance Committee was $10,000. Outside Directors also are reimbursed for their reasonable expenses incurred in attending Board and Committee meetings.

The cash compensation component of the Outside Director compensation program will continue to remain in effect unchanged for fiscal year 2013.

Outside Director Stock Options

Effective November 15, 2007, Outside Directors no longer receive stock options as a component of their compensation. Accordingly, we did not issue any stock options to the Outside Directors during fiscal year 2012. However, we retain the flexibility in the future to grant stock options to the Outside Directors if we deem such grants to be appropriate or advisable.

Non-Executive Chairman

For fiscal year 2012, our policy was that, if the Chairman of the Board was not an executive of the Company (as was the case, with Mr. Barnholt serving as Chairman), the Chairman’s annual retainer fee would be two times the regular level for Outside Directors, and the Chairman’s equity awards would be 1.5 times the regular level for Outside Directors. This policy will continue to remain in effect for fiscal year 2013.

Deferred Compensation

Each Outside Director is entitled to defer all or a portion of his or her director fees, pursuant to our Executive Deferred Savings Plan, a nonqualified deferred compensation plan. Amounts credited to the plan may be allocated by the participant among a variety of investment funds. For further information regarding our Executive Deferred Savings Plan, including the list of investment funds available under the plan during fiscal year 2012, please refer to the section of this Proxy Statement entitled “Nonqualified Deferred Compensation.” Of the current Outside Directors, only Messrs. Barnholt, Bond, Patel and Wang participated in this plan during fiscal year 2012 (with only Mr. Wang making new contributions during the fiscal year).

Stock Ownership Guidelines

We have adopted a policy, approved by the Board, pursuant to which each Outside Director is expected to own a specified minimum number of shares of our Common Stock. By the later of (a) November 13, 2012 or (b) the fourth anniversary of the date on which an individual becomes an Outside Director, each Outside Director is expected to own at least a number of shares of our Common Stock with a market value of at least three (3) times the standard annual cash retainer paid to the Outside Directors, as that retainer may be changed from time to time. Shares of Common Stock underlying unvested restricted stock units held by the Directors will count toward this ownership requirement. As of the Record Date,          of our current Outside Directors was in compliance with this stock ownership requirement.

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Director Compensation Table

The following table sets forth certain information regarding the compensation earned by or awarded to each Outside Director during fiscal year 2012 who served on our Board during the year.

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INFORMATION ABOUT EXECUTIVE OFFICERS

Set forth below are the names, ages and positions of the executive officers of KLA-Tencor as of the date of this Proxy Statement.

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Principal Stockholders

As of September 18, 2012, based on our review of filings made with the SEC, we are aware of the following entities being beneficial owners of more than 5% of our Common Stock:

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Directors and Management

The following table sets forth the beneficial ownership of our Common Stock as of September 18, 2012 by all current Directors, each of the Named Executive Officers set forth in the Summary Compensation Table, and all current Directors and executive officers as a group. Except for shares held in brokerage accounts which may from time to time, together with other securities held in those accounts, serve as collateral for margin loans made from those accounts, none of the shares reported as beneficially owned are currently pledged as security for any outstanding loan or indebtedness. Shares that, as of September 18, 2012, have not yet been issued under outstanding restricted stock units (and that are not scheduled to vest within 60 days after September 18, 2012) due to applicable performance or service-vesting requirements that have not yet been satisfied are not included in the table below but are indicated in footnote 14 to such table:

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Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers, Board members, and persons who own more than ten percent of a registered class of our equity securities to file reports of ownership and changes in ownership with the SEC, and such persons are also required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. Based solely on our review of the copies of such forms received by us, we believe that during fiscal year 2012 all of our executive officers, Board members and greater than ten percent stockholders complied with all applicable Section 16(a) filing requirements.

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EXECUTIVE COMPENSATION AND OTHER MATTERS

COMPENSATION DISCUSSION AND ANALYSIS

Compensation Philosophy and Design Principles

The philosophy of the Compensation Committee on executive compensation is that it should be designed to:

The Compensation Committee’s philosophy is reflected in the following executive compensation design principles:

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Named Executive Officers

This Compensation Discussion and Analysis section provides a comprehensive review of our executive compensation philosophy and program, including our program design for fiscal year 2012. The discussion in this section focuses on the compensation of our “Named Executive Officers” for fiscal year 2012, who were:

Overview: Our Commitment to Pay-for-Performance

The Compensation Committee and the Independent Board Members¹ have structured our executive compensation program to compensate our executive officers for performance and, over the long term, to provide compensation that is market competitive and supports our retention efforts.

Fiscal Year 2012 Highlights

The Company performed very well in both absolute and relative terms in fiscal year 2012, largely driven by our close collaborations with customers and our market leadership resulting from our significant investment over time in next-generation technology development.

Our fiscal year 2012 performance is highlighted by the following achievements:

¹ The “Independent Board Members” refers to all of the members of our Board other than our Chief Executive Officer and is the group that makes all determinations regarding our Chief Executive Officer’s compensation. For purposes of this Compensation Discussion and Analysis section, references to the Compensation Committee include the Independent Board Members when discussing determinations of Chief Executive Officer compensation.

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Pay-for-Performance

We structure our executive compensation program so that a meaningful percentage of compensation is tied to the achievement of challenging levels of Company performance. Our fiscal year 2012 executive compensation program was developed during the first quarter of fiscal year 2012, in the midst of a period of challenging demand and limited visibility for the semiconductor capital equipment industry. The performance-based elements of our fiscal year 2012 program were tied to objectives that were considered challenging in light of anticipated market conditions.

The Compensation Committee believes that the payouts under our fiscal year 2012 compensation program are reasonable in light of the Company’s overall financial and strategic performance. We have historically used Operating Margin Percentage as a key performance metric in our compensation program, as we believe that it reflects a number of important competitive and business elements such as product acceptance, market share and cost discipline and is therefore an excellent barometer of our overall performance. Our fiscal year 2012 Operating Margin Percentage was 33.1%, considerably higher than the Company’s plan of 30.0%.

Our fiscal year 2012 annual short-term incentive bonus plan was structured to pay out 100% of the executives’ target bonus amounts if the Company were to successfully achieve its target level of performance. The payout formula under the fiscal year 2012 plan was structured as follows:

² For purposes of our fiscal year 2012 short-term incentive bonus plan and our fiscal year 2011 and 2012 performance share awards, “operating margin percentage” is calculated for the applicable fiscal year as (a) the Company’s total revenues less total costs and operating expenses, including stock-based compensation charges but excluding expenses related to acquisitions (such as deal-related amortization), restatement and restructuring related items and certain discrete tax items, divided by (b) the Company’s total revenues.

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The Named Executive Officers’ fiscal year 2012 performance share awards are tied to the Company’s two-year weighted-average target Operating Margin Percentage over fiscal years 2012 and 2013. A determination will be made as to the extent to which they are earned after the end of fiscal year 2013.

To illustrate our pay-for-performance philosophy, the following charts reflect the portion of our executive officers’ actual fiscal year 2012 compensation represented by each of the major elements of our compensation program³:

CEO Pay Mix – Fiscal Year 2012 (Actual)		All Other NEOs Pay Mix – Fiscal Year 2012 (Actual)

In each case, a significant portion of the executives’ actual overall compensation is derived from the performance-based components of our program.

The following table tracks Mr. Wallace’s actual compensation⁴ in each of the last five fiscal years against Company revenues and net income:

CEO Pay-for-Performance (Fiscal Years 2008-2012)

³ For purposes of the charts below, (a) the fiscal year 2012 short-term incentive bonus amounts are included at the actual amount earned for the year, (b) the fiscal year 2012 performance share awards are included at their target grant date fair value (i.e., their maximum earnable amount), assuming that such awards will be fully earned, and (c) the fiscal year 2012 restricted stock units with only service-based vesting criteria are included at their grant date fair value.

⁴ This includes base salary paid, short-term incentive bonuses earned, the grant date fair value of any service-based restricted stock units granted and, for performance share awards, the grant date fair value of the number of shares actually earned (if any). As above, for this chart, the fiscal year 2012 performance share awards are again included at their target grant date fair value based on an assumption that they will be fully earned following the completion of fiscal year 2013.

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This data further demonstrates the strong correlation sought by the Compensation Committee between pay and performance within our executive compensation program.

Investor Outreach and Changes to Our Fiscal Year 2013 Executive Compensation Program

In November 2011, we held our initial advisory vote on the compensation of our Named Executive Officers (the “say-on-pay” proposal). In anticipation of that vote, Company management engaged in discussions with a number of our stockholders, including teleconferences and face-to-face meetings, in order to solicit feedback from investors regarding our executive compensation practices and business strategies. The Compensation Committee and Company management considered this feedback, as well as commentary issued by various institutional advisors, in developing our fiscal year 2013 executive compensation program.

Approximately 70% of the votes cast on our first say-on-pay proposal voted in support of the compensation paid to our Named Executive Officers for fiscal year 2011. Of the approximately 30% of votes that were cast against the proposal, the significant majority of those votes were cast by a family of institutional funds that, to our understanding, voted against our say-on-pay proposal on the basis of their objection to our overall level of equity usage in our company-wide compensation program (i.e., our aggregate dilution rate). In view of the feedback that we gathered through management’s engagement efforts with stockholders and our review of institutional advisor analyses, we have modified several significant elements of our fiscal year 2013 compensation program, such as:

For fiscal year 2013, we have adopted a cash-based long-term incentive program. Though our Named Executive Officers are not participating in this program, it will significantly reduce our overall share usage. In the first quarter of fiscal year 2013, we have issued restricted stock units covering up to 0.8 million shares of our Common Stock, compared to 2.15 million shares during the first quarter of the prior year.

We have adopted an expanded group of 28 companies whose compensation practices will be reviewed in developing and evaluating our executive compensation program, to better reflect the compensation levels, practices and programs offered by the broad range of companies with which we compete for talent.

Our fiscal year 2013 performance shares are tied to a three-year performance period, an increase from the two-year period used for the prior year’s awards.

For our fiscal year 2013 performance shares, we are using relative cash flow margin (versus our expanded compensation peer group) as the performance metric, replacing Operating Margin Percentage (which was the sole metric for last year’s awards and is also a key metric under our annual bonus program).

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The fiscal year 2013 service-based restricted stock units will vest 25% per year over four years, and the performance shares (if earned) will vest in two equal installments on the third and fourth anniversaries of the award grant date (subject to the executive’s continued employment through the applicable vesting date).

The Company and the Compensation Committee are confident that the program changes described above will retain the important connection between pay and performance that has been a feature of KLA-Tencor’s historical compensation structure, while also being responsive to investor feedback.

Because our executive compensation for fiscal year 2012 was developed and approved at the beginning of our fiscal year (before our November 2011 annual meeting of stockholders and the communications surrounding it), the changes described above have been implemented for our executive compensation program for fiscal year 2013 and are therefore not reflected in this year’s detailed Compensation Discussion and Analysis for fiscal year 2012. However, these changes will be fully reflected and discussed in the Compensation Discussion and Analysis section of our fiscal year 2013 Proxy Statement.

Compensation Committee Decision Making – Process Overview and Market Data

Overview

The Compensation Committee utilizes a broad-based approach to the determination of executive compensation packages. The Compensation Committee has full authority for determining the compensation of our executive officers, other than the Chief Executive Officer, for whom the Committee makes compensation recommendations to the Independent Board Members for approval.

During multiple meetings (both with and without Company management present) and with the assistance of Semler Brossy Consulting Group, LLC, the Compensation Committee’s independent compensation consultant (the “Independent Consultant”), the Compensation Committee engaged in extensive deliberation in developing the fiscal year 2012 executive compensation program, seeking to establish compensation packages and target performance levels aimed at rewarding strong financial performance and long-term success of the Company.

The Compensation Committee took into account many factors, including a broad range of market data and the cyclical nature of our business. In addition, the Compensation Committee conducted an individual analysis for each executive officer that incorporated a review of each officer’s performance and individualized total compensation report.

Market Data

Our ability to continue to attract and retain outstanding contributors, including our core executive team, is essential to our continuing success. Therefore, the Compensation Committee reviewed a number of different data sources (including peer group and broader market data) to ensure we were offering compensation packages that were competitive with those offered by other employers seeking to attract the same talented individuals. The Compensation Committee used, in addition to the data described below in this section, a single

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list of peer group companies, representing a spectrum of companies within our industry. Our fiscal year 2012 peer group was comprised of Applied Materials, Inc., ASML Holdings, Lam Research Corporation, Novellus Systems, Inc., Teradyne, Inc. and Varian Semiconductor Equipment, Inc. Following the Compensation Committee’s determination of our fiscal year 2012 executive compensation program, Applied Materials acquired Varian Semiconductor and Lam Research purchased Novellus Systems, and the Compensation Committee has since expanded the Company’s compensation peer group to 28 companies for purposes of developing and benchmarking our fiscal year 2013 executive compensation program.

For our fiscal year 2012 program, the Compensation Committee reviewed information developed by its Independent Consultant regarding the compensation levels, programs and practices of our peer group to obtain comparative data and identify compensation trends and practices. The Compensation Committee also reviewed data from the Radford Global Technology Survey, with a focus on high technology companies with revenue between $1 billion to $3 billion (and, to a lesser extent, $3 billion and above).

Though the Compensation Committee referred to percentile data in its analysis, as well as allocations between annual and long-term compensation, the Compensation Committee did not employ specific equations for determining compensation amounts based on such data. Rather, the Compensation Committee’s emphasis was on establishing compensation packages for the executive officers that would be competitive with those offered by other employers, appropriately reflect each officer’s skill set and experience, and encourage retention of top performers.

Elements of Executive Compensation

The primary elements of our compensation packages are base salary, an annual short-term incentive bonus plan and long-term incentives.

Base Salary:

The Compensation Committee annually reviews the base salaries of the executive officers as part of the overall compensation review. With respect to base salary, the Compensation Committee’s objective is to offer a level of fixed cash compensation, as part of a total cash compensation package, that will enable us to attract and retain top talent. Because the compensation review is based on competitive market analysis, the Compensation Committee does not intend or expect to approve base salary increases for each Named Executive Officer every year.

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For fiscal year 2012, the Compensation Committee approved base salaries as set forth in the table below. In the cases where fiscal year 2012 base salaries were increased, the raises were approved in order to ensure that total cash compensation packages remained competitive with packages offered by other companies to similarly situated officers.

Short-Term Incentive Bonus Plan:

Fiscal Year 2012 Executive Incentive Plan:

Our Executive Incentive Plan (the “Bonus Plan”) is administered in conformity with Section 162(m) of the Internal Revenue Code to ensure we are able to take a corporate income tax deduction for bonuses earned under the plan and provides the Named Executive Officers with an opportunity to earn annual performance-based cash compensation based on the Company’s achievement of key financial and strategic Company goals as well as individual performance.

In August 2011, the Compensation Committee approved each executive officer’s target bonus percentage, as well as the Company performance targets and bonus potentials (including threshold, target and maximum payout levels) in effect for fiscal year 2012 under the Bonus Plan. In establishing the officers’ target awards for fiscal year 2012, the Compensation Committee considered a wide range of market data (described under “Compensation Committee Decision Making–Process Overview and Market Data” above) regarding market-competitive total target cash compensation and internally appropriate bonus targets relative to each executive officer’s role.

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Under the fiscal year 2012 Bonus Plan, the Company was required to achieve a threshold level of Operating Margin Percentage in order for the plan to be funded.⁵ Upon achievement of that threshold level of Operating Margin Percentage, a participant’s actual bonus amount would then be determined based upon the Company’s Operating Margin Percentage and the assessment by the Compensation Committee of the Company’s performance as measured against a defined “balanced scorecard.”

The balanced scorecard takes into account our strategic objectives of operational excellence, customer focus, growth and talent (each of which is addressed in more detail below), and applies scores for the Company’s performance against a variety of specific goals within each of those variables. The use of the balanced scorecard is designed to ensure that the quality of the Company’s operating results is high and that those results support the sustainability of the Company’s business model. The scorecard is tracked throughout the year, then formally presented to the Compensation Committee following the conclusion of the fiscal year for assessment as to the Company’s success in achieving its annual goals.

For fiscal year 2012, the pre-established quantitative goals and objectives were set at levels that, based on historical and anticipated performance and the then-prevailing macroeconomic conditions, the Compensation Committee believed would be very challenging to achieve. While many of the metrics are quantitative in nature, some are qualitative and therefore introduce a degree of discretion and subjective judgment into the bonus determination process. We believe that the use of the expanded measures of financial and strategic success, as represented by the balanced scorecard framework, serves to closely align the interests of our executive officers with those of our stockholders.

Specifically, the fiscal year 2012 Bonus Plan terms were structured as follows:

⁵ The satisfaction of this pre-determined threshold level of Operating Margin Percentage would trigger full funding of the Bonus Plan, and of each participant’s maximum potential bonus opportunity, for purposes of Section 162(m) of the Internal Revenue Code.

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In addition, the Compensation Committee had the discretion to adjust the actual bonus amount to between 80% and 120% of the amount otherwise payable to an executive pursuant to the payout grid described above, based on the Compensation Committee’s assessment of the executive’s individual performance for fiscal year 2012.

Following the completion of fiscal year 2012, the Compensation Committee reviewed the Company’s performance against the primary strategic objectives set forth in the fiscal year 2012 balanced scorecard – Operational Excellence, Customer Focus, Growth and Talent – which were assessed as follows:

Operational Excellence

The Compensation Committee considered numerous factors, such as the Company’s performance against its operational plan of record, management of assets and fixed costs, and achievement of targeted improvements in the Company’s business model. The Compensation Committee reviewed the Company’s new product development and execution and its expansion of global manufacturing activities, as well as the Company’s fiscal year 2012 operating and gross margins, which met or exceeded the Company’s plan for the year and were strong relative to industry peers.

Customer Focus

The Compensation Committee assessed the Company’s success in preserving and building market share, differentiating its products and collaborating with customers. The Company strengthened its market leadership position in the process control market, as evidenced by record levels of new orders for wafer inspection and metrology tools and from foundry customers for the year. The Company’s collaboration efforts included advanced product and technology development programs with customers and industry organizations on key issues such as the anticipated transition to 450 millimeter wafers, three-dimensional (3D) structures and extreme ultra-violet (EUV) lithography.

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Growth

The Compensation Committee primarily focused on the Company’s growth rate versus its peers, where the Company aimed to achieve a year-over-year growth rate at least five (5) percentage points higher than its peer group (as identified under “Compensation Committee Decision Making – Process Overview and Market Data” above). The Company’s revenues remained flat year-over-year in fiscal year 2012, compared to a 21% year-over-year decline in revenues for the Company’s peers over the equivalent period. The Compensation Committee also considered the Company’s growth in industries outside of the Company’s core semiconductor capital equipment market such as the light-emitting diode (LED) and photovoltaic industries, which slowed their rate of adoption of process control during the year due to challenging economic conditions within those industries.

Talent

The Compensation Committee assessed the Company’s success in retaining top talent, meeting its hiring goals and demonstrating solid employee engagement. The Company posted low levels of employee turnover, both generally (4.6%) and among top talent (2.1%), and early career hires represented approximately 65% of the Company’s global external hires during the year. In addition, the results from the Company’s third annual employee engagement survey improved, exceeding the benchmarks for high-technology companies in most aspects, including the important measures of intent to stay and how employees rate KLA-Tencor compared to other companies.

The Company’s fiscal year 2012 Operating Margin Percentage equaled 33.1%, and the Compensation Committee awarded the Company a balanced scorecard score of “3+” based on the Committee’s assessment of the factors discussed above. As a result, the payouts under the fiscal year 2012 Bonus Plan generated by the plan’s payout grid were 118% of the participants’ target bonus amounts, before adjusting for individual performance.

The Bonus Plan also contains an element of individual performance assessment, giving the Compensation Committee the discretion to increase or decrease each executive officer’s bonus amount based on the officer’s individual performance by applying an “individual performance multiplier” of between 80% and 120%. In applying this discretion, the Compensation Committee conducted a specific performance assessment of each executive officer, with input from Mr. Wallace (except with respect to his own compensation), based on the officer’s performance against a set of pre-established individual goals, and established the individual multipliers for the Named Executive Officers as set forth in the table below.

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The following table sets forth each Named Executive Officer’s target bonus (as a percentage of base salary and in dollars, based on actual salary paid during the year), as well as the bonus payout multiple generated by the Bonus Plan’s payout grid based on the Company’s performance, the individual performance multiplier assigned to the officer and the actual bonus amount paid to the officer:

Long-Term Incentives:

The purpose of the long-term incentive component of our executive compensation program is to align long-term management and stockholder interests and strengthen retention through service-based and performance-based awards with four-year vesting provisions. The long-term incentives offered by the Company have historically been in the form of equity awards.

Since the beginning of fiscal year 2007, the long-term incentive awards to our executive officers have been comprised entirely of performance shares and restricted stock units. The Compensation Committee believes that equity awards in the form of performance shares and restricted stock units are aligned with stockholder interests, provide a major incentive for recipients to build stockholder value and significantly strengthen our retention efforts. However, in response to investor feedback, as highlighted under the section entitled “Investor

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Outreach and Changes to Our Fiscal Year 2013 Executive Compensation Program,” we recently adopted a cash-based long-term incentive program as part of our fiscal year 2013 employee compensation program. Though our Named Executive Officers are not participating in this program, it will significantly reduce our overall share usage going forward.

Fiscal Year 2011 Performance Shares – Performance Criteria Satisfaction Assessment:

As described in our fiscal year 2011 Proxy Statement, each executive officer’s fiscal year 2011 annual award was divided into two equally sized grants: one of which was a performance share award, and the other of which was a restricted stock unit award with vesting tied solely to continued service with us.

The fiscal year 2011 performance share awards were subject to a two-year performance period based on the Company’s two-year weighted-average Operating Margin Percentage over fiscal years 2011 and 2012. The terms of the fiscal year 2011 performance shares, including the target performance and payout levels, actual results and vesting schedule, are summarized in the following table:

The following table sets forth the minimum and target/maximum shares achievable by each Named Executive Officer, as well as the actual number of shares awarded to the officer, with respect to the fiscal year 2011 performance share awards (note that the officers’ fiscal year 2011 service-based restricted stock unit awards, which were in addition to the fiscal year 2011 performance shares and were fully described in our fiscal year 2011 Proxy Statement and other filings with the SEC, are not included in the table below):

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Annual Equity Grants for Fiscal Year 2012:

The size of each executive officer’s annual equity award represents the target equity value that the Compensation Committee aims to deliver to each executive officer as part of his annual compensation. That target value is established with reference to market data from the Radford Global Technology Survey and our peer group provided by the Independent Consultant regarding the dollar value of annual grants made to similarly situated executives, as well as the officer’s role and responsibilities within the Company, contributions to the Company over time and criticality to the Company’s ongoing success.

Each executive officer’s fiscal year 2012 annual award was divided into two equally sized grants: one of which was a performance share award, and the other of which was a restricted stock unit award with vesting tied solely to continued service with us. Similar to the fiscal year 2011 equity awards, the shares covered by the fiscal year 2012 performance share awards are subject to a two-year performance period based on the Company’s two-year weighted-average Operating Margin Percentage over fiscal years 2012 and 2013 and therefore can only be earned following the completion of fiscal year 2013. The target two-year weighted average Operating Margin Percentage that the Compensation Committee set for the fiscal year 2012 performance share awards was established at a level that would require very strong operational performance and was considered difficult to achieve at the time, given anticipated market conditions.

All of the executive officers’ fiscal year 2012 annual equity awards (the restricted stock unit awards and any performance share awards that may be earned) are also subject to a four-year service-based vesting period. Fifty percent (50%) of the shares will vest on the two-year anniversary of the date of the award (or, for performance shares, the first fifty percent (50%) of the shares will vest on the date that such shares are determined to have been earned, if that date is later than the two-year anniversary of the award date), and the remaining fifty percent (50%) will vest on the four-year anniversary of the date of the award, in each case subject to the individual’s continued employment with us.

The following table sets forth the minimum and target/maximum shares achievable by each Named Executive Officer, as well as the actual number of shares awarded to the officer (to the extent known at this time), with respect to the performance share and restricted stock unit awards comprising such officer’s annual equity award for fiscal year 2012: