6.	Equity-Based Compensation Expense

The Company’s shareholders approved the NVR, Inc. 2014 Equity Incentive Plan (the “2014 Plan”) at the Company’s Annual Meeting of Shareholders held on May 7, 2014. The 2014 Plan authorizes the Company to issue non-qualified stock options (“Options”) to key management employees, including executive officers and Board members, to acquire up to an aggregate 950,000 shares of the Company’s common stock.

During the second quarter of 2014, the Company issued 623,350 Options under the 2014 Plan. The 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. Each of the Options granted will vest over four years in 25% increments on December 31, 2016, 2017, 2018 and 2019. The vesting for 331,675 of the Options granted is contingent both upon continued employment or continued service as a Director and the Company’s return on capital performance during 2014 through 2016. The vesting for the other 291,675 Options granted is contingent solely upon continued employment or continued service as a Director. The Options expire ten years from the date of grant.

The Company also issued 47,100 Options under the NVR, Inc. 2010 Equity Incentive Plan (the “2010 Plan”) during the six months ended June 30, 2014. The Options granted will vest in 25% increments on December 31, 2016, 2017, 2018 and 2019, based solely on continued employment. The Options expire ten years from the date of grant. The Company also issued 16,283 restricted share units (“RSUs”) from the 2010 Plan during the six months ended June 30, 2014. The RSUs vest in 33% increments beginning on December 31, 2016, based solely on continued employment. The weighted average fair value per share of the RSUs granted was $1,153.41.

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 2014 was estimated on the grant date using the Pricing Model, based on the following assumptions:


Estimated average holding period (years)		5.16
Risk free interest rate (range)		1.064% - 2.489%
Expected volatility (range)		18.585% - 30.571%
Expected dividend rate		0.00%
Grant-date fair value per share of options granted		$267.71

In accordance with ASC 718, Compensation – Stock Compensation, the fair value of the non-vested equity shares is measured as if they were vested and issued on the grant date. Additionally, under ASC 718, service only restrictions on vesting of non-vested equity shares are not reflected in the fair value calculation at the grant date.

Compensation cost for Options 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 expense, the Options which are subject to a performance condition are treated as a separate award from the “service-only” Options, and compensation expense for Options 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 accordingly. Compensation cost is recognized within the income statement in the same expense line as the cash compensation paid to the respective employees. ASC 718 also requires the Company to estimate forfeitures in calculating the expense related to stock-based compensation, and requires the compensation costs of stock-based awards to be recognized net of estimated forfeitures. Total equity-based compensation expense, net of forfeitures, recognized during the three months ended June 30, 2014 and 2013 was $15,938 and $10,589, respectively, and for the six months ended June 30, 2014 and 2013 was $26,641 and $18,652, respectively.

As of June 30, 2014, the total unrecognized compensation cost for all outstanding Options and RSUs was approximately $229,300, net of estimated forfeitures. The unrecognized compensation cost will be recognized over each grant’s applicable vesting period, with the latest vesting date being December 31, 2019. Unrecognized compensation costs may change depending upon 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.


				Weighted Avg.
	Options			Exercise Price
Outstanding at December 31, 2013		667,036		$	740.18
Granted		670,450			1,094.24
Exercised		(92,303	)		656.45
Forfeited		(16,387	)		830.02

Outstanding at June 30, 2014		1,228,796		$	938.45

Exercisable at June 30, 2014		183,983		$	629.72

The table above does not include 55,990 outstanding RSUs, which were issued at a $0 exercise price. None of the outstanding RSUs were exercisable as of June 30, 2014.