Equity-Based Compensation, Profit Sharing and Deferred Compensation Plans

12 Months Ended

Dec. 31, 2019

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Equity-Based Compensation, Profit Sharing and Deferred Compensation Plans

Equity-Based Compensation, Profit Sharing and Deferred Compensation Plans

Equity-Based Compensation Plans

Our equity-based compensation plans provide for the granting of Options and RSUs to key management employees, including executive officers and members of our Board of Directors ("Directors"). The exercise price of Options granted is equal to the closing price of our common stock on the New York Stock Exchange (the “NYSE”) on the day prior to the date of grant. Options are granted for a 10-year term and typically vest in separate tranches over periods of 3 to 6 years. RSUs generally vest in separate tranches over periods of 2 to 6 years. Grants are generally divided such that vesting for 50% of the grant is contingent solely on continued employment or service as a Director, while vesting for the remaining 50% of the grant is contingent upon both continued employment or service as a Director and the achievement of a performance metric based on our return on capital performance relative to a peer group during a 3-year period specified on the date of grant.

The following table provides a summary of each of our equity-based compensation plans with grants outstanding at December 31, 2019:

Equity-Based Compensation Plans	Shares Authorized	Options/RSUs Outstanding	Shares Available to Issue
2000 Broadly-Based Stock Option Plan	2,000	11	—
2010 Equity Incentive Plan (1)	700	109	6
2014 Equity Incentive Plan (2)	950	514	137
2018 Equity Incentive Plan (3)	275	131	144

(1) During 2010, our shareholders approved the 2010 Equity Incentive Plan (the “2010 Plan”). The 2010 Plan authorizes us to issue Options and RSUs to key management employees, including executive officers and Directors.  Of the 700 aggregate shares authorized to issue, up to 218 were available to grant in the form of RSUs.  There were 94 Options and 15 RSUs outstanding as of December 31, 2019. None of the remaining shares available to be issued under the 2010 Plan may be granted as RSUs.

(2) During 2014, our shareholders approved the 2014 Equity Incentive Plan (the “2014 Plan”). The 2014 Plan authorizes us to issue Options to key management employees, including executive officers and Directors.

(3) During 2018, our shareholders approved the 2018 Equity Incentive Plan (the "2018 Plan"). The 2018 Plan authorizes us to issue Options and RSUs to key management employees, including executive officers and Directors. Of the 275 aggregate shares authorized to issue, all may be granted in the form of Options and up to 40 may be granted in the form of RSUs. None of the grants outstanding as of December 31, 2019 have been granted in the form of RSUs.

During 2019, we issued 26 Options and 1 RSUs under the following equity-based compensation plans:

	2010 Plan	2014 Plan
Options Granted
Options (4)	13	—
Performance-based Options (5)	12	1
Total Options Granted	25	1
RSUs Granted
RSUs (6)	1	—
Performance-based RSUs	—	—
Total RSUs Granted	1	—

(4) Options granted vest over four years in 25% increments on beginning on either December 31, 2021 or December 31, 2022, based on the date of grant. Vesting for the Options is contingent solely upon continued employment or continued service as a Director.

(5) Options granted vest over four years in 25% increments beginning on either December 31, 2021 or December 31, 2022, based on the date of grant. Vesting for the performance-based Options is contingent upon both continued employment or

continued service as a Director and our return on capital performance during the three year periods beginning 2019 or 2020, based on the grant's vesting period.

(6) Service-only RSUs granted vest over two years in 50% increments on January 28, 2020 and 2021. Vesting for the RSUs is contingent solely upon continued employment.

The following table provides additional information relative to our equity-based compensation plans for the year ended December 31, 2019:

	Shares		Weighted Avg. Per Share Exercise Price		Weighted Avg. Remaining Contract Life (years)	Aggregate Intrinsic Value
Stock Options
Outstanding at December 31, 2018	1,049		$	1,766.87
Granted	26		2,778.19
Exercised	(271	)	1,010.52
Forfeited	(55	)	2,377.25
Outstanding at December 31, 2019	749		$	2,030.42	6.3	$	1,331,593
Exercisable at December 31, 2019	353		$	1,122.70	4.3	$	946,842
RSUs
Outstanding at December 31, 2018	21
Granted	1
Vested	(5	)
Forfeited	(2	)
Outstanding at December 31, 2019	15					$	58,528
Vested, but not issued at December 31, 2019	—					$	—

 

To estimate the grant-date fair value of our Options, we use 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, we use U.S. Treasury STRIPS which mature at approximately the same time as the option’s expected holding term. For expected volatility, we have concluded that our 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 2019, 2018 and 2017 was estimated on the grant date using the Pricing Model, based on the following assumptions:  

	2019			2018			2017
Estimated option life (years)	5.55			5.06			5.26
Risk free interest rate (range)	1.51%-2.73%			2.19%-3.13%			1.53%-2.38%
Expected volatility (range)	19.17%-22.01%			16.57%-20.05%			15.09%-17.95%
Expected dividend rate	—		%	—		%	—		%
Weighted average grant-date fair value per share of options granted	$	661.01		$	687.81		$	494.17

The grant date fair value per share of $2,517.06 for the RSUs was the closing price of our common stock on the day immediately preceding the date of grant.

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 which are subject to a performance condition are treated as a separate award from the “service-only” Options and RSUs, and compensation expense is recognized when it becomes probable that the stated performance target will be achieved. We currently believe that it is probable that the stated performance condition will be satisfied at the target level and are 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.

We recognize forfeitures of equity-based awards as a reduction to compensation costs in the period in which they occur. In 2019, 2018 and 2017, we recognized $78,532, $75,701, and $44,562 in equity-based compensation costs, respectively, and approximately $16,800, $17,200, and $17,100 in tax benefit related to equity-based compensation costs, respectively.

As of December 31, 2019, the total unrecognized compensation cost for all outstanding Options and RSUs equaled approximately $209,000. The unrecognized compensation cost will be recognized over each grant’s applicable vesting period with the latest vesting date being December 31, 2025. The weighted-average period over which the unrecognized compensation will be recorded is equal to approximately 2.4 years.

We settle 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, 2019, 2018 and 2017, we issued 276, 188 and 165 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,
	2019		2018		2017
Aggregate exercise proceeds	$	274,028	$	174,110	$	140,525
Aggregate intrinsic value on exercise dates	$	593,162	$	355,318	$	206,890

Profit Sharing Plans

We have 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 our Directors. The combined plan contribution for the years ended December 31, 2019, 2018 and 2017 was approximately $20,300, $19,500 and $16,700, respectively. The ESOP purchased approximately 5 and 7 shares of our common stock in the open market for the 2019 and 2018 plan year contributions, respectively, using cash contributions provided by the Company. As of December 31, 2019, all shares held by the ESOP had been allocated to participants’ accounts. The 2019 plan year contribution was funded and fully allocated to participants in February 2020.

Deferred Compensation Plans

We have 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 we would realize a tax deduction for the amounts paid, and ii) to enable certain employees who are subject to our stock holding requirements to acquire shares of our 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 our 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 107 shares of NVR common stock as of both December 31, 2019 and 2018. Shares held by the Deferred Comp Plans are treated as outstanding shares in our earnings per share calculation for each of the years ended December 31, 2019, 2018 and 2017.