Employee Benefit and Stock Plans

Most of our employees are eligible to participate in the KB Home 401(k) Savings Plan (“401(k) Plan”) under which we partially match employee contributions. The aggregate cost of the 401(k) Plan to us was $5.3 million in 2016, $4.6 million in 2015 and $3.8 million in 2014. The assets of the 401(k) Plan are held by a third-party trustee. The 401(k) Plan participants may direct the investment of their funds among one or more of the several fund options offered by the 401(k) Plan. As of November 30, 2016, 2015 and 2014, approximately 5%, 5% and 6%, respectively, of the 401(k) Plan’s net assets were invested in our common stock.

Approval of Amended KB Home 2014 Plan. At our Annual Meeting of Stockholders held on April 7, 2016, our stockholders approved the Amended KB Home 2014 Equity Incentive Plan (“Amended 2014 Plan”), authorizing, among other things, the issuance for grants of stock-based awards to our employees, non-employee directors and consultants of up to 7,500,000 additional shares above the original 4,800,000 shares our stockholders approved under the plan (or an aggregate issuance of 12,300,000 shares), plus any shares that were available for grant as of April 7, 2014 under our 2010 Equity Incentive Plan (“2010 Plan”), and any shares subject to then-outstanding awards under the 2010 Plan that subsequently expire or are canceled, forfeited, tendered or withheld to satisfy tax withholding obligations with respect to full value awards, or settled for cash. No new awards may be made under the 2010 Plan. Therefore, the Amended 2014 Plan is our only active equity compensation plan. Under the Amended 2014 Plan, grants of stock options and other similar awards reduce the Amended 2014 Plan’s share capacity on a 1-for-1 basis, and grants of restricted stock and other similar “full value” awards reduce the Amended 2014 Plan’s share capacity on a 1.78-for-1 basis. In addition, subject to the Amended 2014 Plan’s terms and conditions, a stock-based award may also be granted under the Amended 2014 Plan to replace an outstanding award granted under another plan of ours (subject to the terms of such other plan) with terms substantially identical to those of the award being replaced.

The Amended 2014 Plan provides that stock options and SARs may be awarded for periods of up to 10 years. The Amended 2014 Plan also enables us to grant cash bonuses and other stock-based awards. As of November 30, 2016, 2015, and 2014, in addition to awards outstanding under the Amended 2014 Plan, we had awards outstanding under the 2010 Plan and our Amended and Restated 1999 Incentive Plan, both of which provided for generally the same types of awards as the Amended 2014 Plan. We also had awards outstanding under our Performance-Based Incentive Plan for Senior Management, which provided for generally the same types of awards as the Amended 2014 Plan, but stock option awards granted under this plan had terms of up to 15 years years.

Stock-Based Compensation. With the approval of the management development and compensation committee, consisting entirely of independent members of our board of directors, we have provided compensation benefits to certain of our employees in the form of stock options, restricted stock, PSUs and SARs. Certain stock-based compensation benefits are also provided to our non-employee directors pursuant to the Director Plan. Compensation expense related to equity-based awards is included in selling, general and administrative expenses in our consolidated statements of operations.

The following table presents our stock-based compensation expense (in thousands):



	Years Ended November 30,
	2016		2015		2014
Stock options (a)	$	7,076	$	7,576	$	3,024
Restricted stock	2,630		2,499		1,750
PSUs	5,343		5,404		3,699
Director awards	1,801		1,664		(91		)
Total	$	16,850	$	17,143	$	8,382


(a)	Compensation expense associated with stock options was accelerated in 2015 as a result of retirement provisions being met for certain stock option recipients.

Stock Options. Stock option transactions are summarized as follows:



	Years Ended November 30,
	2016				2015				2014
	Options		Weighted Average Exercise Price		Options		Weighted Average Exercise Price		Options		Weighted Average Exercise Price
Options outstanding at beginning of year	12,635,644		$	19.39	11,735,042		$	20.45	10,531,938		$	21.11
Granted	1,012,686		16.21		1,262,000		14.92		1,273,647		14.62
Exercised	(551,898	)	13.95		(76,164	)	9.69		(36,665	)	7.92
Cancelled	(364,887	)	34.07		(285,234	)	45.80		(33,878	)	20.25
Options outstanding at end of year	12,731,545		$	18.95	12,635,644		$	19.39	11,735,042		$	20.45
Options exercisable at end of year	10,506,810		$	19.70	10,389,722		$	20.35	10,103,739		$	21.32
Options available for grant at end of year	7,034,523				1,554,195				3,514,077

The total intrinsic value of stock options exercised was $1.4 million for the year ended November 30, 2016, $.4 million for the year ended November 30, 2015 and $.3 million for the year ended November 30, 2014. The aggregate intrinsic value of stock options outstanding was $24.5 million, $16.4 million and $35.8 million at November 30, 2016, 2015 and 2014, respectively. The intrinsic value of stock options exercisable was $23.3 million at November 30, 2016, $16.4 million at November 30, 2015, and $31.7 million at November 30, 2014. The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the price of the option.

Stock options outstanding and stock options exercisable at November 30, 2016 are summarized as follows:



	Options Outstanding				Options Exercisable
Range of Exercise Price	Options	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Options	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life
$ 6.32 to $11.06	2,771,667	$	8.33	4.3	2,771,667	$	8.33
$11.07 to $14.95	2,595,011	14.60		8.1	1,370,933	14.41
$14.96 to $16.69	2,668,775	15.94		6.2	1,668,118	15.78
$16.70 to $28.10	2,609,550	23.24		1.2	2,609,550	23.24
$28.11 to $69.63	2,086,542	36.97		1.9	2,086,542	36.97
$ 6.32 to $69.63	12,731,545	$	18.95	4.4	10,506,810	$	19.70	3.5

The weighted average grant date fair value of stock options granted in 2016, 2015 and 2014 was $5.82, $5.49 and $5.07, respectively. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:



	Years Ended November 30,
	2016		2015		2014
Risk-free interest rate	1.3	%	1.4	%	1.6	%
Expected volatility factor	41.3	%	43.6	%	41.0	%
Expected dividend yield	.6	%	.7	%	.7	%
Expected term	5 years		5 years		5 years

The risk-free interest rate assumption is determined based on observed interest rates appropriate for the stock options’ expected term. The expected volatility factor is based on a combination of the historical volatility of our common stock and the implied volatility of publicly traded options on our stock. The expected dividend yield assumption is based on our history of dividend payouts. The expected term of employee stock options is estimated using historical data.

As of November 30, 2016, there was $4.4 million of total unrecognized stock-based compensation expense related to unvested stock option awards. This expense is expected to be recognized over a weighted average period of 1.7 years.

We record proceeds from the exercise of stock options as additions to common stock and paid-in capital. The tax shortfalls of $2.2 million in 2016, $1.7 million in 2015 and $1.2 million in 2014 resulting from the cancellation of stock awards were reflected in paid-in capital. In both 2016 and 2015, the consolidated statement of cash flows reflected $.2 million of excess tax benefits associated with the exercise of stock options. In 2014, the consolidated statement of cash flows reflected no excess tax benefit associated with the exercise of stock options.

Restricted Stock. From time to time, we grant restricted stock to various employees as a compensation benefit. During the restriction periods, these employees are entitled to vote and to receive cash dividends on such shares. The restrictions imposed with respect to the shares granted lapse in installments within, or in full at the end of, three years after their grant date if certain conditions are met.

Restricted stock transactions are summarized as follows:



	Years Ended November 30,
	2016				2015				2014
	Shares		Weighted Average per Share Grant Date Fair Value		Shares		Weighted Average per Share Grant Date Fair Value		Shares		Weighted Average per Share Grant Date Fair Value
Outstanding at beginning of year	416,977		$	15.88	355,294		$	15.81	219,628		$	16.23
Granted	453,703		15.73		285,006		15.19		219,835		15.34
Vested	(252,854	)	14.78		(204,663	)	14.83		(73,908	)	16.52
Cancelled	(13,207	)	15.12		(18,660	)	15.45		(10,261	)	18.55
Outstanding at end of year	604,619		$	16.24	416,977		$	15.88	355,294		$	15.81

As of November 30, 2016, we had $7.6 million of total unrecognized compensation cost related to restricted stock awards that will be recognized over a weighted average period of approximately three years.

Performance-Based Restricted Stock Units. On October 6, 2016, we granted PSUs to certain employees. Each PSU grant corresponds to a target amount of our common stock (“Award Shares”). Each PSU entitles the recipient to receive a grant of between 0% and 200% of the recipient’s Award Shares, and will vest based on our achieving, over a three-year period commencing on December 1, 2016 and ending on November 30, 2019, specified levels of (a) adjusted cumulative earnings per share (b) average adjusted return on invested capital and (c) revenue growth performance relative to a peer group of high-production public homebuilding companies. The grant date fair value of each such PSU was $16.21. On October 8, 2015, we granted PSUs to certain employees with similar terms as the 2016 PSU grants, except that the applicable performance period commenced on December 1, 2015 and ends on November 30, 2018. The grant date fair value of each such PSU was $14.92. On October 9, 2014, we granted PSUs to certain employees with similar terms as the 2016 PSU grants, except that the applicable performance period commenced on December 1, 2014 and ends on November 30, 2017. The grant date fair value of each such 2014 PSU was $14.62.

PSU transactions are summarized as follows:



	Years Ended November 30,
	2016				2015			2014
	Shares		Weighted Average per Share Grant Date Fair Value		Shares	Weighted Average per Share Grant Date Fair Value		Shares	Weighted Average per Share Grant Date Fair Value
Outstanding at beginning of year	820,209		$	15.52	628,209	$	15.70	385,049	$	16.39
Granted	369,281		13.81		192,000	14.92		243,160	14.62
Vested	(374,630	)	10.21		—	—		—	—
Cancelled	(5,000	)	16.21		—	—		—	—
Outstanding at end of year	809,860		$	17.19	820,209	$	15.52	628,209	$	15.70

The number of shares of our common stock actually granted to a recipient, if any, when a PSU vests will depend on the degree of achievement of the applicable performance measures during the applicable three-year period. The shares of our common stock that were granted under the terms of PSUs that vested in 2016 included an aggregate of 147,581 additional shares above the target amount awarded to the eligible recipients based on our achieving certain levels of average return on equity performance and revenue growth performance relative to a peer group of high-production homebuilding companies from December 1, 2012 through November 30, 2015. The PSUs do not have dividend or voting rights during the performance period. Compensation cost for PSUs is initially estimated based on target performance achievement and adjusted as appropriate throughout the performance period. Accordingly, future compensation costs associated with outstanding PSUs may increase or decrease based on the probability and extent of achievement with respect to the applicable performance measures. At November 30, 2016, we had $11.3 million of total unrecognized compensation cost related to unvested PSUs, which is expected to be recognized over a weighted-average period of approximately three years.

Stock Appreciation Rights. In 2008, we granted SARs to various employees. These cash-settled awards have been accounted for as liabilities in our consolidated financial statements. Each SAR represents a right to receive a cash payment equal to the positive difference, if any, between the grant price and the market value of a share of our common stock on the date of exercise. The SARs vested in equal annual installments over three years. At November 30, 2016, 2015 and 2014, we had 29,939 SARs outstanding, which are fully vested and will expire in July 2017.

Director Awards. We have granted Director Plan SARs and deferred common stock awards to our non-employee directors pursuant to the terms of the Director Plan and elections made by each director. All of these awards were fully vested as of November 30, 2016. Director Plan SARs, which have not been granted since April 2014 as they ceased being a component of non-employee director compensation after that date, are stock settled, have terms of up to 15 years and may be exercised when a respective director leaves the board or earlier if applicable stock ownership requirements have been met. Deferred common stock awards will be paid out at the earlier of a change in control or the date a respective director leaves the board. All Director Plan SARs were granted at an exercise price equal to the closing price of our common stock on the date of grant. At November 30, 2016, 2015 and 2014, our non-employee directors had, in aggregate, 452,983 of outstanding Director Plan SARs, and 485,632, 419,962 and 358,404, respectively, of outstanding deferred common stock awards. In addition, beginning in 2015, we have granted common stock on an unrestricted basis to our non-employee directors on the grant date pursuant to the Director Plan and elections made by each director.

Grantor Stock Ownership Trust. We have a grantor stock ownership trust (“Trust”), administered by a third-party trustee, that holds and distributes the shares of common stock acquired to support certain employee compensation and employee benefit obligations under our existing stock option plan, the 401(k) Plan and other employee benefit plans. The existence of the Trust does not impact the amount of benefits or compensation that is paid under these plans.

For financial reporting purposes, the Trust is consolidated with us, and therefore any dividend transactions between us and the Trust are eliminated. Acquired shares held by the Trust remain valued at the market price on the date of purchase and are shown as a reduction to stockholders’ equity in the consolidated balance sheets. The difference between the Trust share value and the market value on the date shares are released from the Trust is included in paid-in capital. Common stock held in the Trust is not considered outstanding in the computations of earnings per share. The Trust held 9,431,756 and 10,135,461 shares of common stock at November 30, 2016 and 2015, respectively. The trustee votes shares held by the Trust in accordance with voting directions from eligible employees, as specified in a trust agreement with the trustee.