Equity-Based Compensation

The Company’s shareholders approved the NVR, Inc. 2018 Equity Incentive Plan (the "2018 Plan") at the Company’s Annual Meeting of Shareholders held on May 2, 2018. The 2018 Plan authorizes the Company to issue Options and restricted share units ("RSUs") to key management employees, including executive officers and members of our Board of Directors ("Directors"), to acquire up to an aggregate 275 shares of the Company’s common stock. Of the 275 aggregate shares available to issue, all may be granted in the form of Options and up to 40 may be granted in the form of RSUs.

During the second quarter of 2018, the Company issued 332 Options and 16 RSUs under the NVR, Inc. 2010 Equity Incentive Plan (the "2010 Plan"), the NVR, Inc. 2014 Equity Incentive Plan (the "2014 Plan"), and the 2018 Plan as follows:



	2010 Plan	2014 Plan	2018 Plan
Options Granted
Options - service-only (1)	4	90	72
Options - performance-based (2)	—	94	72
Total Options Granted	4	184	144

RSUs Granted
RSUs - service-only (3)	8	—	—
RSUs - performance-based (4)	8	—	—
Total RSUs Granted	16	—	—

(1) Of the 166 service-only Options granted, 34 will vest over two years in 50% increments on December 31, 2020 and 2021; the remaining 132 Options will vest over four years in 25% increments on December 31, 2020, 2021, 2022, and 2023. Vesting for the Options is contingent solely upon continued employment or continued service as a Director.

(2) Of the 166 performance-based Options granted, 34 will vest over two years in 50% increments on December 31, 2020 and 2021; the remaining 132 performance-based Options will vest over four years in 25% increments on December 31, 2020, 2021, 2022, and 2023. Vesting for the performance-based Options is contingent upon both continued employment or continued service as a Director and the Company's return on capital performance during 2018 through 2020.

(3) The service-only RSUs granted will vest over two years in 50% increments on December 31, 2022 and 2023. Vesting for the RSUs is contingent solely upon continued employment.

(4) The performance-based RSUs granted will vest over two years in 50% increments on December 31, 2022 and 2023. Vesting for the performance-based RSUs is contingent upon both continued employment and the Company's return on capital performance during 2018 through 2020.

In addition to the above equity grant, the Company also issued 8 Options under the 2014 Plan during the six months ended June 30, 2018. The Options granted will vest annually over four years in 25% increments beginning on December 31, 2020. Vesting for 50% of the Options granted is contingent upon both continued employment and the Company's return on capital performance during 2018 through 2020, while vesting for the other 50% of the Options granted is contingent solely upon continued employment.

All Options were granted at an exercise price equal to the closing price of the Company’s common stock on the day prior to the date of grant, and expire ten years from the date of grant.

The following table provides additional information relative to NVR's equity-based compensation plans for the six months ended June 30, 2018:



Options	Shares		Weighted Average Per Share Exercise Price
Outstanding at December 31, 2017	916		$	1,119.92
Granted	340		3,023.76
Exercised	(91	)	949.64
Forfeited	(27	)	1,300.09
Outstanding at June 30, 2018	1,138		$	1,697.50
Exercisable at June 30, 2018	371		$	959.65

RSUs
Outstanding at December 31, 2017	10
Granted	16
Vested	(5	)
Forfeited	—
Outstanding at June 30, 2018	21
Vested, but not issued at June 30, 2018	—

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 2018 was estimated on the grant date using the Pricing Model, based on the following assumptions:



		2018
Estimated option life (years)		5.06
Risk-free interest rate (range)		2.19% - 2.99%
Expected volatility (range)		16.57% - 18.83%
Expected dividend rate		—%
Weighted average grant date fair value per share of Options granted		$689.47

The grant date fair value per share of $3,022.99 for the RSUs granted during 2018 was the closing price of the Company's common stock on the day immediately preceding the grant date.

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 Options and RSUs that are subject to a performance condition are treated as a separate award from the “service-only” Options and RSUs, and compensation expense for Options and RSUs subject to a performance condition is recognized when it becomes probable that the stated performance target will be achieved. The Company currently believes that it is probable that the performance condition will be satisfied at the target level and is recognizing compensation expense related to such Options and RSUs accordingly. Compensation cost is recognized within the income statement in the same expense line as the cash compensation paid to the respective employees.

The Company recognizes forfeitures of equity-based awards as a reduction to compensation costs in the period in which they occur. Total equity-based compensation expense recognized during the three and six months ended June 30, 2018 was $18,595 and $28,104, respectively. During the three and six months ended June 30, 2017, total equity-based compensation expense recognized was $10,878 and $21,467, respectively.

As of June 30, 2018, the total unrecognized compensation cost for all outstanding Options and RSUs was approximately $347,900. The unrecognized compensation cost will be recognized over each grant’s applicable vesting period, with the latest vesting date being December 31, 2023. Unrecognized compensation costs may change depending on the satisfaction of the performance-based metric, discussed above. The weighted-average period over which the unrecognized compensation will be recorded is equal to approximately 2.8 years.