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Equity-Based Compensation, Profit Sharing and Deferred Compensation Plans | 12 Months Ended
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Dec. 31, 2012
Equity-Based Compensation, Profit Sharing and Deferred Compensation Plans |
10. | 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 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, depending upon the plan from which the shares were granted, based solely on continued employment or continued service as a Director. RSUs generally vest in separate tranches over a period of 2 years, based solely on continued employment or continued service as a Director. At December 31, 2012, there was an aggregate of 639,078 options and 82,619 RSUs outstanding, and there were an additional 172,107 available shares to be granted under existing equity-based compensation plans. Of the available shares to be granted, up to 83,967 shares may be granted in the form of RSUs. The following is a summary description of each of the Company’s equity-based compensation plans for any plan with grants outstanding at December 31, 2012:
| • |  | During 1996, the Company’s shareholders approved the Board of Directors’ adoption of the Management Long-Term Stock Option Plan (the “1996 Option Plan”). There were 2,000,000 Options authorized under the Management Long Term Stock Option Plan. All Options were granted at an exercise price equal to the closing price of the Company’s common stock on the New York Stock Exchange on the day prior to the date of grant. The outstanding Options expire 10 years after the dates upon which they were granted, and are fully vested as of December 31, 2012. There are no grants remaining available to issue from the 1996 Option Plan.
| • |  | During 1999, the Company’s shareholders approved the Board of Directors’ adoption of the 1998 Management Long-Term Stock Option Plan (the “1998 Option Plan”). There were 1,000,000 Options authorized under the 1998 Option Plan. All Options were granted at an exercise price equal to the closing price of the Company’s common stock on the New York Stock Exchange on the day prior to the date of grant. The Options expire 10 years after the dates upon which they were granted. The outstanding Options generally vest in 25% increments beginning on December 31, 2006, or later depending on the date of grant. There are no grants remaining available to issue from the 1998 Option Plan.
| • |  | During 1999, the Company’s shareholders approved the Board of Directors’ adoption of the 1998 Directors’ Long Term Stock Option Plan (the “1998 Directors’ Plan”). There were 150,000 Options to purchase shares of common stock authorized for grant to the Company’s outside directors under the 1998 Directors’ Plan. All Options were granted at an exercise price equal to the closing price of the Company’s common stock on the New York Stock Exchange on the day prior to the date of grant. The outstanding Options were granted for a 10-year period and are fully vested as of December 31, 2012. There are no grants remaining available to issue from the 1998 Directors’ Plan.
| • |  | During 2000, the Board approved the 2000 Broadly-Based Stock Option Plan (the “2000 Plan”). The Company did not seek approval from its shareholders for the 2000 Plan. There were 2,000,000 Options authorized under the 2000 Plan. All Options were granted at an exercise price equal to the closing price of the Company’s common stock on the New York Stock Exchange on the day prior to the date of grant. Grants under the 2000 Plan were available to both employees and members of the Board. The distribution of Options to key employees and members of the Board, in aggregate, were limited to 50% or less of the total options authorized under the 2000 Plan. Options granted under the 2000 Plan expire 10 years from the date of grant, and generally vest annually in 25% increments beginning on December 31, 2006, or later depending on the date of grant. There are no grants remaining available to issue from the 2000 Plan.
| • |  | During 2010, the Company’s shareholders approved the Board of Directors’ adoption of the 2010 Equity Incentive Plan (the “2010 Equity Plan”). The 2010 Equity Plan authorizes the Company to issue Options and RSUs to key management employees, including executive officers and Board members, to acquire up to an aggregate 700,000 shares of the Company’s common stock. Of the 700,000 aggregate shares available to issue, up to 240,000 may be granted in the form of RSUs. All Options are granted at an exercise price equal to the closing price of the Company’s common stock on the New York Stock Exchange on the day prior to the date of grant, and all RSUs are granted at a $0 exercise price. The Options are granted for a 10-year period. The RSUs generally vest annually in 50% increments beginning on December 31, 2011, or later as determined by the date of grant, and the Options generally vest as to 50% of the underlying shares in annual increments beginning on December 31, 2013, or later as determined by the date of grant. At December 31, 2012, there were 172,107 shares available to be granted under the 2010 Equity Plan, of which 83,967 may be granted as RSUs.
During 2012, the Company issued 84,073 Options and 4,585 RSUs under the 2010 Equity Plan. The exercise price of each Option granted was equal to the closing price of the Company’s common stock on the day immediately preceding the date of grant, and each RSU was granted at a $0 exercise price. Each Option was granted for a term of ten (10) years from the date of grant. The majority of the RSUs granted during 2012 under the 2010 Equity Plan will vest in 50% increments with the beginning vesting dates ranging from December 31, 2013 through December 31, 2016. The majority of the Options granted in 2012 will vest in 25% increments beginning on December 31, 2014. All Options and RSUs granted are subject to the grantee’s continued employment or continued service as a Director, as applicable. The following table provides additional information relative to NVR’s equity-based compensation plans for the year ended December 31, 2012:
|  | Options |  |  | Weighted Average Exercise Price |  |  | Weighted Average Remaining Contract Life (Years) |  |  | Aggregate Intrinsic Value |
Stock Options |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Outstanding at beginning of period |  |  | 737,702 |  |  | $ | 627.08 |  |  |  |  |  |  |  |  |
Granted |  |  | 84,073 |  |  |  | 808.53 |  |  |  |  |  |  |  |  |
Exercised |  |  | (148,578 | ) |  |  | 492.75 |  |  |  |  |  |  |  |  |
Forfeited |  |  | (34,119 | ) |  |  | 673.58 |  |  |  |  |  |  |  |  |
Expired |  |  | — |  |  |  | — |  |  |  |  |  |  |  |  |
Outstanding at end of period |  |  | 639,078 |  |  | $ | 679.70 |  |  |  | 7.1 |  |  | $ | 153,570 |
Exercisable at end of period |  |  | 124,763 |  |  | $ | 531.45 |  |  |  | 4.3 |  |  | $ | 48,477 |
RSUs (1) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Outstanding at beginning of period |  |  | 154,483 |  |  |  |  |  |  |  |  |  |  |  |  |
Granted |  |  | 4,585 |  |  |  |  |  |  |  |  |  |  |  |  |
Exercised |  |  | (73,414 | ) |  |  |  |  |  |  |  |  |  |  |  |
Forfeited |  |  | (3,035 | ) |  |  |  |  |  |  |  |  |  |  |  |
Outstanding at end of period |  |  | 82,619 |  |  |  |  |  |  |  |  |  |  | $ | 76,009 |
Vested at end of period |  |  | 73,101 |  |  |  |  |  |  |  |  |  |  | $ | 67,253 |
(1) | RSU grants were issued at a $0 exercise price.
To estimate the grant-date fair value of its stock options, the Company uses the Black-Scholes option-pricing model. The Black-Scholes 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 a U.S. Treasury Strip due in a number of years equal to the option’s expected term. NVR has concluded that its historical exercise experience is the best estimate of future exercise patterns to determine an option’s expected term. To estimate expected volatility, NVR analyzed the historic volatility of its common stock over a period equal to the option’s expected term. The fair value of the Options granted during 2012, 2011 and 2010 were estimated on the grant date using the Black-Scholes option-pricing model based on the following assumptions:
|  | 2012 |  | 2011 |  | 2010
Estimated option life |  | 4.95 years |  | 4.79 years |  | 5.02 years
Risk free interest rate (range) |  | 0.35% - 1.84% |  | 0.44% - 2.86% |  | 0.99% - 2.84%
Expected volatility (range) |  | 17.71% - 34.43% |  | 31.29% - 37.43% |  | 34.34% - 41.12%
Expected dividend rate |  | 0.00% |  | 0.00% |  | 0.00%
Weighted average grant-date fair value per share of options granted |  | $ 221.45 |  | $ 230.38 |  | $ 256.35
In accordance with ASC Topic 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. The weighted average fair value of the RSUs granted in the current year was $738.71 per share. 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. 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 equity-based compensation and requires that the compensation costs of equity-based awards be recognized net of estimated forfeitures. The impact on compensation costs due to changes in the expected forfeiture rate will be recognized in the period that they become known. In 2012, 2011, and 2010, the Company recognized $64,841, $64,473 and $53,136 in equity-based compensation costs, respectively, and approximately $23,900, $23,600 and $19,200 tax benefit related to equity-based compensation costs, respectively. In 2012, the Company reversed approximately $2,500 in stock-based compensation expense previously recorded to adjust for the actual forfeiture experience from prior forfeiture rate estimates. The reversal was made to the accounts originally charged as follows; approximately $1,950 and $450 from homebuilding general and administrative and cost of sales expense, respectively, and approximately $100 from NVRM general and administrative expense. In 2010, the Company reversed approximately $7,600 in stock-based compensation expense previously recorded to adjust for the actual forfeiture experience. The reversal was made as follows; approximately $6,600 and $400 from homebuilding general and administrative and cost of sales expense, respectively, and approximately $600 from NVRM general and administrative expense. As of December 31, 2012, the total unrecognized compensation cost for all outstanding Options and RSUs equals approximately $68,973, 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, 2018. 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 to option holders. Shares are relieved from the treasury account based on the weighted average cost of treasury shares acquired. During the years ended December 31, 2012, 2011 and 2010, 221,992; 333,380 and 359,765 shares, respectively, were issued from the treasury account for option exercises and vesting of RSUs. Information with respect to the vested RSUs and exercised options is as follows:
|  | 2012 |  |  | 2011 |  |  | 2010 |
Aggregate exercise proceeds (1) |  | $ | 73,211 |  |  | $ | 108,322 |  |  | $ | 78,626 |
Aggregate intrinsic value on exercise dates |  | $ | 101,334 |  |  | $ | 142,381 |  |  | $ | 165,007 |
(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, 2012, 2011 and 2010 was $9,575, $6,616 and $6,567, respectively. The ESOP purchased approximately 9,200 and 9,300 shares of NVR common stock in the open market for the 2012 and 2011 plan year contributions, respectively, using cash contributions provided by the Company. As of December 31, 2012, all shares held by the ESOP had been allocated to participants’ accounts. The 2012 plan year contribution was funded and fully allocated to participants in February 2013. 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 of our employees who are subject to the Company’s 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 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 152,223 and 152,964 shares of NVR common stock as of December 31, 2012 and 2011, respectively. During 2012, 741 shares of NVR common stock were issued from the rabbi trust related to deferred compensation for which the deferral period ended. There were no shares of NVR common stock contributed to the rabbi trust in 2012 or 2011. 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, 2012, 2011 and 2010.

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- Definition The entire disclosure for compensation-related costs for equity-based compensation, which may include disclosure of policies, compensation plan details, allocation of equity compensation, incentive distributions, equity-based arrangements to obtain goods and services, deferred compensation arrangements, employee stock ownership plan details and employee stock purchase plan details. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Staff Accounting Bulletin (SAB) -Number Topic 14 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 718 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6415400&loc=d3e5070-113901 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 505 -SubTopic 50 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6406099&loc=d3e25284-112666 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 718 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6415400&loc=d3e5047-113901 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher AICPA -Name Statement of Position (SOP) -Number 93-6 -Paragraph 53 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 718 -SubTopic 40 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6418621&loc=d3e17540-113929 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 123R -Paragraph 64, 65, A240 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 718 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=6415400&loc=d3e5444-113901 + Details
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