Equity-Based Compensation, Profit Sharing and Deferred Compensation Plans

Equity-Based Compensation Plans

NVR’s equity-based compensation plans provide for the granting of non-qualified stock options to purchase shares of NVR common stock (“Options”) and restricted share units (“RSUs”) to key management employees, including executive officers and Board members, of the Company. The exercise price of Options granted is equal to the closing price of the Company’s common stock on the New York Stock Exchange (the “NYSE”) on the day prior to the date of grant, and RSUs are issued at a $0 exercise price. Options are granted for a ten-year term and typically vest in separate tranches over periods of 3 to 6 years. The vesting for certain Options is contingent solely on continued employment or service as a Director, while vesting for other Options is contingent upon both continued employment or service as a Director and the achievement of a performance metric as discussed further in the summary description of the 2014 Equity Incentive Plan below. RSUs generally vest in separate tranches over periods of 2 to 4 years, based solely on continued employment or continued service as a Director.

The following table provides a summary of each of the Company’s equity-based compensation plans for any plan with grants outstanding at December 31, 2017:



Equity-Based Compensation Plans	Shares Authorized	Options/RSUs Outstanding	Shares Available to Issue
1998 Management Long-Term Stock Option Plan	1,000	6	—
2000 Broadly-Based Stock Option Plan	2,000	89	—
2010 Equity Incentive Plan (1)	700	218	38
2014 Equity Incentive Plan (2)	950	613	276

(1)

During 2010, the Company’s shareholders approved the 2010 Equity Incentive Plan (the “2010 Plan”). The 2010 Plan authorizes the Company to issue Options and RSUs to key management employees, including executive officers and Board members. Of the 700 aggregate shares available to issue, up to 240 may be granted in the form of RSUs. There were 208 Options and 10 RSUs outstanding as of December 31, 2017. Of the 38 shares available to be issued under the 2010 Plan, substantially all may be granted as RSUs.

(2)

During 2014, the Company’s shareholders approved the 2014 Equity Incentive Plan (the “2014 Plan”). The 2014 Plan authorizes the Company to issue Options to key management employees, including executive officers and Board members. Option grants under the 2014 Plan are generally divided such that vesting for 50% of the Option grant is solely contingent upon continued employment or continued service as a Director, while vesting for the remaining 50% of the Option grant is contingent upon both continued employment or service as a Director and the achievement of a performance metric. The performance metric is based on the Company’s return on capital performance relative to a peer group during a specified three year period based on the date of Option grant, with the initial performance period being 2014 through 2016. Based on the Company's return on capital performance, the initial performance period metric was met. Future vesting of Option grants subject to the initial performance period are subject only to continued employment or continued service as a director. Options granted under the 2014 Plan vest annually over four years in 25% increments beginning on December 31, 2016, or later based on the date of grant.

During 2017, the Company issued 19 Options under the 2014 Plan. Substantially all of the Options granted in 2017 will vest annually over four years in 25% increments beginning on December 31, 2019. Vesting for 15 of the Options granted is contingent both upon continued employment or continued service as a director and the Company’s return on capital performance. Vesting for the other 4 Options granted under the 2014 Plan is contingent solely upon continued employment or continued service as a director.

The Company also issued 11 Options under the 2010 Plan during 2017. Substantially all of the 2010 Plan Options granted during 2017 will vest annually over four years in 25% increments beginning on December 31, 2019. The vesting for the Options granted under the 2010 Plan is based solely on continued employment.

The following table provides additional information relative to NVR’s equity-based compensation plans for the year ended December 31, 2017:



	Shares		Weighted Avg. Per Share Exercise Price		Weighted Avg. Remaining Contract Life (years)	Aggregate Intrinsic Value
Stock Options
Outstanding at December 31, 2016	1,076		$	1,048.38
Granted	30		2,431.54
Exercised	(159	)	886.41
Forfeited	(31	)	1,099.68
Outstanding at December 31, 2017	916		$	1,119.92	6.0	$	2,187,430
Exercisable at December 31, 2017	461		$	957.50	5.0	$	1,176,843

RSUs
Outstanding at December 31, 2016	16
Granted	—
Vested	(6	)
Forfeited	—
Outstanding at December 31, 2017	10					$	34,945
Vested, but not issued at December 31, 2017	5					$	18,344

To estimate the grant-date fair value of its Options, the Company uses the Black-Scholes option-pricing model (the “Pricing Model”). The Pricing Model estimates the per share fair value of an option on its date of grant based on the following factors: the option’s exercise price; the price of the underlying stock on the date of grant; the estimated dividend yield; a risk-free interest rate; the estimated option term; and the expected volatility. For the risk-free interest rate, the Company uses U.S. Treasury STRIPS which mature at approximately the same time as the option’s expected holding term. For expected volatility, NVR has concluded that its historical volatility over the option’s expected holding term provides the most reasonable basis for this estimate.

The fair value of the Options granted during 2017, 2016 and 2015 was estimated on the grant date using the Pricing Model, based on the following assumptions:



	2017			2016			2015
Estimated option life (years)	5.26			5.27			5.17
Risk free interest rate (range)	1.53%-2.38%			0.86%-2.21%			1.04%-2.07%
Expected volatility (range)	15.09%-17.95%			15.91%-23.49%			17.00%-26.79%
Expected dividend rate	—		%	—		%	—		%
Weighted average grant-date fair value per share of options granted	$	494.17		$	320.21		$	296.50

In accordance with ASC 718, Compensation – Stock Compensation, the fair value of the RSUs is measured as if they were vested and issued on the grant date. Additionally, under ASC 718, service-only restrictions on vesting of RSUs are not reflected in the fair value calculation at the grant date. As a result, the fair value of the RSUs was the closing price of the Company’s common stock on the day immediately preceding the date of grant. There were no RSUs granted during 2017.

Compensation cost for Options and RSUs is recognized on a straight-line basis over the requisite service period for the entire award (from the date of grant through the period of the last separately vesting portion of the grant). For the recognition of equity-based compensation, the RSUs are treated as a separate award from the Options. Additionally, the Options which are subject to a performance condition are treated as a separate award from the “service-only” Options, and compensation expense is recognized when it becomes probable that the stated performance target will be achieved. The Company currently believes that it is probable that the current open performance condition will be satisfied at the target level and is recognizing compensation expense related to such Options accordingly. Compensation cost is recognized within the income statement in the same expense line as the cash compensation paid to the respective employees.

In connection with the adoption of ASU 2016-09 on January 1, 2017, the Company made the election to recognize forfeitures of equity-based awards as a reduction to compensation costs in the period in which they occur. For the years ended December 31, 2016 and 2015, the Company estimated forfeitures based on its historical forfeiture rate. In 2017, 2016 and 2015, the Company recognized $44,562, $43,598, and $54,091 in equity-based compensation costs, respectively, and approximately $17,100, $17,000, and $19,700 in tax benefit related to equity-based compensation costs, respectively.

As of December 31, 2017, the total unrecognized compensation cost for all outstanding Options and RSUs equaled approximately $100,000. The unrecognized compensation cost will be recognized over each grant’s applicable vesting period with the latest vesting date being December 31, 2023. The weighted-average period over which the unrecognized compensation will be recorded is equal to approximately 1.9 years.

The Company settles Option exercises and vesting of RSUs by issuing shares of treasury stock. Shares are relieved from the treasury account based on the weighted average cost of treasury shares acquired. During the years ended December 31, 2017, 2016 and 2015, the Company issued 165, 83 and 131 shares, respectively, from the treasury account for Option exercises and vesting of RSUs. Information with respect to the vested RSUs and exercised Options is as follows:



	Year Ended December 31,
	2017		2016		2015
Aggregate exercise proceeds (1)	$	140,525	$	38,106	$	85,948
Aggregate intrinsic value on exercise dates	$	206,890	$	96,600	$	99,288


(1)	Aggregate exercise proceeds include the Option exercise price received in cash or the fair market value of NVR stock surrendered by the optionee in lieu of cash.

Profit Sharing Plans

NVR has a trustee-administered, profit sharing retirement plan (the “Profit Sharing Plan”) and an Employee Stock Ownership Plan (“ESOP”) covering substantially all employees. The Profit Sharing Plan and the ESOP provide for annual discretionary contributions in amounts as determined by the NVR Board of Directors. The combined plan contribution for the years ended December 31, 2017, 2016 and 2015 was approximately $18,400, $16,700 and $17,900, respectively. The ESOP purchased approximately 6 and 9 shares of NVR common stock in the open market for the 2017 and 2016 plan year contributions, respectively, using cash contributions provided by the Company. As of December 31, 2017, all shares held by the ESOP had been allocated to participants’ accounts. The 2017 plan year contribution was funded and fully allocated to participants in February 2018.

Deferred Compensation Plans

The Company has two deferred compensation plans (“Deferred Comp Plans”). The specific purpose of the Deferred Comp Plans is to i) establish a vehicle whereby named executive officers may defer the receipt of salary and bonus that otherwise would be nondeductible for Company tax purposes into a period where the Company would realize a tax deduction for the amounts paid, and ii) to enable certain employees who are subject to the Company’s stock holding requirements to acquire shares of the Company’s common stock on a pre-tax basis in order to more quickly meet, and maintain compliance with those stock holding requirements. Amounts deferred into the Deferred Comp Plans are invested in NVR common stock, held in a rabbi trust account, and are paid out in a fixed number of shares upon expiration of the deferral period.

The rabbi trust account held 109 shares of NVR common stock as of both December 31, 2017 and 2016. Shares held by the Deferred Comp Plans are treated as outstanding shares in the Company’s earnings per share calculation for each of the years ended December 31, 2017, 2016 and 2015.