UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No.  )

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KB HOME

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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KB HOME
10990 Wilshire Boulevard
Los Angeles, California 90024
(310) 231-4000

 

 

 

 

February 25, 2011

 

Dear Fellow Stockholder:

 

Your officers and directors join me in inviting you to attend the 2011 Annual Meeting of Stockholders of KB Home at 9:00 a.m., Pacific Time, on April 7, 2011 at The Wedgewood Ballroom of The Fairmont Miramar Hotel in Santa Monica, California.

 

The expected items of business for the meeting are described in detail in the attached Notice of 2011 Annual Meeting of Stockholders and Proxy Statement. We also will discuss our 2010 results and our plans for the future.

 

We look forward to seeing you on April 7.

 

Sincerely,

 

 

Jeffrey T. Mezger

President and Chief Executive Officer

 

Notice of 2011 Annual Meeting of Stockholders

 

 

 

 

 

By Order of The Board of Directors,

 

 

Brian J. Woram

Executive Vice President, General Counsel and Secretary

Los Angeles, California

February 25, 2011

Table of Contents

 

 

Only stockholders of record on February 11, 2011, authorized proxy holders of stockholders of record on February 11, 2011, and invited guests of the Board of Directors may attend the Annual Meeting. An admission ticket and picture identification (such as a valid driver’s license or passport) will be required to attend the Annual Meeting. A professional business dress code will be observed at the Annual Meeting.

 

If you are eligible and wish to attend the Annual Meeting, please send your request for an admission ticket in writing to William A. (Tony) Richelieu, Assistant Corporate Secretary, KB Home, 10990 Wilshire Boulevard, 7th Floor, Los Angeles, California 90024. All requests must be in writing and received on or before Friday, March 25, 2011 and include the following information:

 

 

Please note any special assistance needs in your admission ticket request. Once your request is processed, an admission ticket will be mailed to you at the address provided.

 

Internet Availability of Materials

 

In past years, we have mailed our proxy materials for our annual meetings of stockholders. This year, we are making our proxy materials available primarily via the Internet, and we encourage voting online or by telephone. These proxy materials include our Proxy Statement, our Annual Report and a voting instruction form. We are doing this to speed the delivery of proxy materials to our stockholders, to lower the costs of the Annual Meeting and to reduce the impact on the environment from printing and mailing proxy materials.

 

On February 25, 2011, we mailed a Notice of Internet Availability (“Notice”) that provides instructions on how to access and view our Proxy Statement, our Annual Report and other proxy materials, and to vote online or by telephone. To request a printed copy of our proxy materials, please follow the instructions on the Notice. Stockholders who previously elected to receive proxy materials electronically will continue to receive these materials and the Notice by e-mail, unless we are told otherwise.

 

Please note that you cannot vote your shares by marking the Notice and returning it.

KB HOME
10990 Wilshire Boulevard
Los Angeles, California 90024
(310) 231-4000

 

Proxy Statement
for the
2011 Annual Meeting of Stockholders

 

Attending the Annual Meeting
Date:		Thursday, April 7, 2011
Place:		The Wedgewood Ballroom The Fairmont Miramar Hotel 101 Wilshire Boulevard Santa Monica, CA 90401
To Attend:		You must have an admission ticket and valid picture identification, as described above on page i. A professional business dress code will be observed. Parking is available at the meeting location. You may be subject to a security check
Note:		No cameras, recording equipment, electronic devices, large bags, briefcases or packages will be permitted at the Annual Meeting. Additional rules of conduct will apply at the meeting

 

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	•	Audit and Compliance (“Audit Committee”)
	•	Management Development and Compensation (“Compensation Committee”)
	•	Nominating and Corporate Governance (“Nominating/Governance Committee”)

 

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The Board believes that separate individuals should hold the positions of Chairman of the Board and Chief Executive Officer, and that the Chairman should not be an employee of KB Home. The Board has been led by an independent Non-Executive Chairman since 2007. Under our Corporate Governance Principles, the Chairman of the Board is responsible for coordinating the Board’s activities, including the scheduling of meetings and executive sessions of the non-employee directors and the relevant agenda items in each case (in consultation with the Chief Executive Officer as appropriate). The Board believes this leadership structure has enhanced the Board’s oversight of and independence from our management, the ability of the Board to carry out its roles and responsibilities on behalf of our stockholders, and our overall corporate governance compared to our prior combined Chairman/Chief Executive Officer leadership structure.

 

The Board has delegated its risk oversight responsibilities to the Audit Committee, as described below under the heading “Board Committee Responsibilities and Related Matters,” other than risks relating to employee compensation. In accordance with the Audit Committee’s charter, each of our senior financial and accounting, legal and internal audit executives report directly to the Audit Committee regarding material risks to our business, among other matters, and the Audit Committee meets in executive sessions with each such executive and with representatives of our independent registered public accounting firm. The Audit Committee Chair reports to the full Board regarding material risks as deemed appropriate.

 

As part of the responsibilities and duties delegated to it by the Board, as described below under the heading “Board Committee Responsibilities and Related Matters,” the Compensation Committee provides oversight with respect to risks that may arise from our employee compensation arrangements, plans, programs and policies. This oversight is provided on an ongoing basis through the Compensation Committee’s review and, to the degree appropriate, specific approval of these arrangements, plans, programs and policies as they are being developed by our senior human resources personnel. In this capacity, the Compensation Committee focuses on maintaining for our executives and other employees a competitive balance of fixed salaries, benefits, and annual and long-term incentives aligned with our operational and strategic goals. In addition, the Compensation Committee has adopted policies, including our equity-based award grant policy (described below under the heading “Equity-Based Award Grant Policy”), has provided guidance in the design of our employee compensation arrangements, plans, and programs, and has established limits on incentive-based employee compensation payouts to mitigate employee compensation-related risks to our business. The Compensation Committee Chair reports to the full Board regarding material risks as deemed appropriate. In view of this oversight and based on our assessment, we do not believe that our present employee compensation arrangements, plans, programs and policies are likely to have a material adverse effect on us.

 

The chart below shows the current members of the standing Board Committees as of the date of this Proxy Statement and the number of meetings each Board Committee held during our 2010 fiscal year. Mr. Mezger does not serve on any Board Committees.

 

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The Board has delegated certain responsibilities and authority to each standing Board Committee as described below. At each regularly scheduled Board meeting, each Board Committee Chair (or another designated Board Committee member) reports to the full Board on his or her Board Committee’s activities.

 

Audit Committee. The Audit Committee is responsible for general oversight of our (a) accounting and reporting practices; (b) internal control over financial reporting and disclosure controls and procedures; (c) audit process, including our independent registered public accounting firm’s qualifications, independence, retention, compensation and performance, and the performance of our internal audit department; and (d) compliance with legal and regulatory requirements and management of matters in which we have or may have material liability exposure. In addition, the Audit Committee is authorized to act on behalf of the Board with respect to our incurring, guaranteeing or redeeming debt or debt securities.

 

The Audit Committee also oversees the preparation of a required report to be included in our annual proxy statement and is charged with the duties and responsibilities listed in its charter. The Audit Committee’s report is provided below under the heading “Audit and Compliance Committee Report.” The Audit Committee is a separately designated standing audit committee as defined in Section 3(a)(58)(A) of the Securities Exchange Act of 1934.

 

The Board has determined that each current member of the Audit Committee is independent under our Corporate Governance Principles (as described below under the heading “Director Independence”), NYSE listing standards and Securities and Exchange Commission (“SEC”) rules. The Board has also determined that each current member of the Audit Committee is financially literate under NYSE listing standards, and that Ms. Lora qualifies as an “audit committee financial expert” under SEC rules.

 

Compensation Committee. The Compensation Committee is responsible for (a) the evaluation and compensation of our CEO; (b) the compensation of our senior executive management (other than our CEO), which consists of our CEO’s direct reports and any designated “executive officers” (as that term is defined in Rule 3b-7 of the Securities Exchange Act of 1934); (c) oversight of our efforts to attract, develop, promote and retain qualified senior executive management; and (d) the evaluation and determination of non-employee director compensation and benefits. The Compensation Committee oversees the preparation of the compensation discussion and analysis to be included in our annual proxy statement, recommends to the Board whether to so include the compensation discussion and analysis, provides an accompanying report to be included in our annual proxy statement, and is charged with the duties and responsibilities listed in its charter. These duties and responsibilities include advising the Board on any non-binding vote or similar advisory action by stockholders with respect to executive compensation. The compensation discussion and analysis for this Proxy Statement is provided below under the heading “Compensation Discussion and Analysis,” and the Compensation Committee’s report is provided below under the heading “Management Development and Compensation Committee Report.”

 

The Board has determined that each current Compensation Committee member is independent under our Corporate Governance Principles and NYSE listing standards, is a “non-employee director” under SEC rules and is an “outside director” under Section 162(m) of the Internal Revenue Code (the “Code”).

 

Overview of Executive Officer and Non-Employee Director Compensation Processes and Procedures.  Under our By-laws, the Board has the authority to fix the compensation of our executive officers and non-employee directors. The Board has delegated this authority to the Compensation Committee, as provided in the Compensation Committee’s charter. Per its charter, the Compensation Committee annually reviews and approves the goals and objectives relevant to our CEO’s compensation, evaluates his performance in light of those goals and objectives and other criteria, and, either as a committee or together with the other independent directors (as directed by the Board), determines and approves our CEO’s compensation based on the

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evaluation. The Compensation Committee also evaluates, in conjunction with our CEO, the performance of our senior executive management, and reviews and approves their compensation.

 

The Compensation Committee exercises the Board’s authority with respect to our employee compensation and benefits plans (including our employee equity compensation plans) and policies, except to the extent that the Board, in its discretion, reserves its authority. This delegation includes the authority to select eligible participants, recommend and approve grants and awards, set performance targets and other award eligibility criteria, approve an aggregate incentive pool for any annual or long-term incentive awards, interpret the plans’ terms, delegate certain responsibilities and adopt or modify as necessary any rules and procedures to implement the plans, including any rules and procedures that condition the approval of grants and awards. The Compensation Committee also periodically reviews our compensation and benefits plans and, from time to time, will recommend to the Board new material plans or modifications to existing plans. The Compensation Committee’s exercise of this authority, including specific considerations applied and determinations made, with respect to the compensation and benefits awarded to our named executive officers is discussed below under the heading “Executive Compensation.”

 

The Compensation Committee, from time to time, reviews and makes recommendations to the Board regarding non-employee director compensation and benefits consistent with the goals of recruiting the highest caliber directors to serve on the Board, aligning directors’ and stockholders’ interests, and fairly paying directors for the work required to serve stockholder interests given our size, scope and complexity of operations.

 

In its oversight of executive officer and non-employee director compensation, the Compensation Committee seeks assistance from our management and has engaged its own outside compensation consultant, Semler Brossy Consulting Group LLC (“Semler Brossy”), as further described below under the heading “Compensation Discussion and Analysis.” The Compensation Committee may delegate to a subcommittee or to our management any duties and responsibilities as the Compensation Committee deems to be appropriate and in our best interests, but it cannot delegate to our management the authority to grant equity-based awards.

 

Compensation Committee Interlocks and Insider Participation. All current Compensation Committee members served throughout our 2010 fiscal year. No member of the Compensation Committee during our 2010 fiscal year was part of a “compensation committee interlock” as described under SEC rules. In addition, none of our executive officers served as a director or member of the compensation committee of another entity that would constitute a “compensation committee interlock.”

 

Nominating/Governance Committee. The Nominating/Governance Committee is responsible for (a) providing oversight of our corporate governance policies and practices; (b) identifying, evaluating and recommending to the Board individuals who are qualified to become directors; and (c) performing ongoing assessments of the Board’s size, operations, structure, needs and effectiveness. The Nominating/Governance Committee also reviews and makes recommendations to the full Board on proposed changes to our Certificate of Incorporation and By-laws, periodically assesses and recommends action with respect to stockholder rights plans and other stockholder protections, reviews and approves or ratifies (as applicable) “related party transactions,” as further described below under the heading “Certain Relationships and Related Party Transactions,” and is charged with the duties and responsibilities listed in its charter.

 

The Board has determined that each current member of the Nominating/Governance Committee is independent under our Corporate Governance Principles and NYSE listing standards.

 

 

We believe our directors should possess the highest personal and professional ethics, integrity, judgment and values, and be committed to representing the long-term interests of our stockholders. Our directors should also have an inquisitive and objective perspective, and be able and willing to dedicate the time necessary to Board and Board Committee service.

 

The Nominating/Governance Committee regularly assesses the skills and characteristics of current and potential directors and may consider the attributes listed to the right, among others.

 

The Nominating/Governance Committee and the Board determined that each individual that the Board will present at the Annual Meeting as a director nominee possesses the characteristics described above in the first paragraph under the heading “Director Qualifications,” as well as certain specific qualifications, which are described below with other biographical information under “Proposal 1: Election of Directors.”

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Director Independence

Selected Director Attributes

•   Personal qualities, accomplishments and reputation in the business community

•   Financial literacy, financial and accounting expertise and significant business, academic or government experience in leadership positions or at senior policy-making levels

•   Geographical representation in areas relevant to our business

•   Diversity of background and personal experience

•   Fit of abilities and personality with those of current and potential directors in building a Board that is effective, collegial and responsive to the needs of our business

•   Independence and an absence of conflicting time commitments

 

In making its independence determinations, the Board considered television, radio and billboard advertising expenditures we made at market rates with CBS Corporation (at which Mr. Moonves serves as President and Chief Executive Officer). These expenditures were made in the ordinary course of our business and the business of CBS Corporation and fell well within the categorical independence standards contained in our Corporate Governance Principles. Mr. Moonves was deemed to not have a direct or indirect material interest in the expenditures, and did not participate in the transactions in an individual capacity. The Board also considered a potential land purchase transaction between us and Forestar Group Inc., for which Mr. Jastrow serves as non-executive chairman, involving a relatively small acquisition of finished lots. Mr. Jastrow was deemed not to have a direct or indirect material interest in the potential transaction.

 

 

The Nominating/Governance Committee is responsible for identifying and evaluating director candidates based on the perceived needs of the Board at the time made. Director candidate identification and evaluation may occur at regular or special meetings of the Nominating/Governance Committee and at any point during the year. The general qualifications for director candidates are described above under the heading “Director Qualifications,” and attributes that the Nominating/Governance Committee may consider are described above in the box titled “Selected Director Attributes.” Among other attributes, the Nominating/Governance Committee may consider a director candidate’s diversity of background and personal experience. In this context, diversity may encompass a candidate’s particular race, ethnicity, national origin and gender, geographic residency, educational and professional history, community or public service, expertise or knowledge base and/or other tangible and intangible aspects of the candidate’s constitution in relation to the personal characteristics of current directors and other potential director candidates. The Nominating/Governance Committee, however, does not have a formal policy specifying how diversity of background and personal experience should be applied in identifying or evaluating director candidates, and a candidate’s background and personal experience, while important, does not necessarily outweigh other attributes or factors the Nominating/Governance Committee may consider in evaluating any particular candidate.

 

The Nominating/Governance Committee has retained professional search firms from time to time to assist it with recruiting potential director candidates to the Board based on criteria the Nominating/Governance Committee provides to the firm. These firms help identify, evaluate and select director candidates and are typically paid an agreed upon fee plus expenses for their work. Current directors or other persons may recommend candidates to the Nominating/Governance Committee. Ms. Alexander was recommended as a candidate by current directors prior to her election to the Board on October 7, 2010. A professional search firm was not involved in recruiting her to the Board.

 

Any security holder may recommend a director candidate for the Nominating/Governance Committee’s consideration by submitting the candidate’s name and qualifications to us in care of the Corporate Secretary at the address listed above under the heading “Corporate Governance Highlights.” Director candidates recommended by a security holder are considered in the same manner as any other recommended candidates.

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The Board sets non-employee director compensation based on recommendations from the Compensation Committee, which has retained Semler Brossy to assist it with designing our non-employee director compensation program. Non-employee director compensation is currently provided under our 2009 Non-Employee Director Compensation Plan (“Director Compensation Plan”). Mr. Mezger is not paid for his service as a director.

 

Director Compensation Plan

 

 

The Board set the following compensation under the Director Compensation Plan for the 2010-2011 Director Year, as recommended by Semler Brossy and approved by the Compensation Committee.

 

 

 

Committee-Related Fees and Meeting Fees. The differences between the Board Committee-related retainers reflect the Board’s judgment of each Board Committee’s respective workload. The Non-Executive Chairman of the Board is not eligible for any Board Committee-related retainers. Meeting fees are payable for attendance at Board or Board Committee meetings, beginning on the third additional meeting above its number of regularly scheduled meetings, subject to approval by the Non-Executive Chairman of the Board (as to Board meetings) or the relevant Board Committee Chair. No meeting fees were paid to our non-employee directors during our 2010 fiscal year.

 

Director Compensation Plan Stock Options and Stock Units. Each stock option represents a right to receive a payment equal to the positive difference between a stock option’s exercise price and the closing price of our common stock on an exercise date. Each stock unit represents a right to receive a payment equal to the fair market value of one share of our common stock on a payment date and cash payments at the same time and in the same amount as any common stock cash dividend. Stock options and stock units are settled in cash unless payment in shares of our common stock is approved by our stockholders; stock options are therefore similar in nature to cash-settled stock appreciation rights. Stock options and stock units vest one year after the date of grant, and, except as described below under the heading “Director Equity-Based Compensation Granted Before

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the 2010-2011 Director Year,” stock options have a 10-year term. A non-employee director cannot exercise vested stock options until the director has met the non-employee director stock ownership requirement or, if earlier, has left the Board.

 

Vested stock options held by a non-employee director must be exercised before the end of the stock options’ respective term or, if earlier, before the third anniversary of the date the non-employee director leaves the Board. A non-employee director can elect to receive payout of stock units upon leaving the Board or, if the director has met the non-employee director stock ownership requirement, immediately after the one-year vesting date or at a specified date after the stock units vest, but before the director leaves the Board. The non-employee director stock ownership requirement is described below under the heading “Stock Ownership Requirements.”

 

Director Equity-Based Compensation Granted Before the 2010-2011 Director Year

 

Under the Director Compensation Plan, any stock options granted to our non-employee directors before the 2010-2011 director year are vested, have a 15-year term and must be exercised before the end of such term or, if earlier, within one year of the date a non-employee director leaves the Board, and any stock units so granted will be paid out only upon a non-employee director’s leaving the Board, reflecting in each case the terms under which these awards were originally granted. These stock options, if exercised, and stock units will be paid out in cash as described above.

 

Chairman Retainer

 

Mr. Bollenbach is paid an annual cash retainer of $300,000 for his service as the Non-Executive Chairman of the Board. He may keep any such retainer payment if removed from the Board without cause.

 

Indemnification Agreements

 

We have entered into agreements with each of our non-employee directors that provide them with indemnification and advancement of expenses to supplement that provided under our Certificate of Incorporation and insurance policies, subject to certain requirements and limitations.

 

Expenses

 

We pay the non-employee directors’ expenses, including travel, accommodations and meals, for attending Board and Board Committee meetings and our annual meetings of stockholders and other activities related to our business.

 

Director Compensation During Fiscal Year 2010

 

 

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Directors’ Legacy Program. We established a Directors’ Legacy Program in 1995 to recognize our and our directors’ interests in supporting worthy educational institutions and other charitable organizations. In making adjustments to our philanthropic activities, the Board elected in 2007 to close the program to new participants. Ms. Alexander and Messrs. Bollenbach, Johnson and Mezger do not participate in the program. Under the program, we will make a charitable donation on each participating director’s behalf of up to $1,000,000. Directors vest in the full donation in five equal annual installments of $200,000, and therefore must serve on the Board for five consecutive years to donate the maximum amount. A participating director may allocate the donation to up to five qualifying institutions or organizations. Donations are paid in ten equal annual installments directly to designated organizations after a participating director’s death with proceeds from the life insurance policies we maintain on each participating director’s life. Participating directors and their families do not receive any proceeds, compensation or tax savings associated with the program.

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At the Annual Meeting, the Board will present as nominees and recommend to stockholders that Messrs. Bollenbach, Finchem, Jastrow, Johnson, McCaffery, Mezger, Moonves and Nogales and Mmes. Alexander and Lora each be elected as a director to serve for a one-year term ending at our 2012 Annual Meeting of Stockholders. Each nominee is currently a director, has consented to being nominated and has agreed to serve as a director if elected. Other than Ms. Alexander, each nominee is standing for re-election. Ms. Alexander was elected to the Board on October 7, 2010. Should any of these nominees become unable to serve as a director prior to the Annual Meeting, the individuals named as proxies for the Annual Meeting will, unless otherwise directed, vote for the election of such other person as the Board may recommend in place of such nominee.

 

On the date of the Annual Meeting, following the election of directors, the Board will have ten members.

 

Vote Required

 

Under our By-laws, the election of each director nominee will require a majority of votes cast at the Annual Meeting to be in favor of the nominee (i.e., the votes cast for a nominee’s election must exceed the votes cast against the nominee’s election).

 

Consistent with this director election standard, our Corporate Governance Principles require that each director nominee in an uncontested election at an annual meeting of stockholders receive more votes cast for than against his or her election or re-election in order to be elected or re-elected to the Board. An “uncontested election” is one in which no director candidates on the ballot were nominated by a stockholder in accordance with our By-laws. This election is an uncontested election.

 

Our Corporate Governance Principles also provide that a director nominee who fails to win election or re-election to the Board in an uncontested election is expected to tender his or her resignation from the Board. If an incumbent director fails to receive the required vote for election or re-election in an uncontested election, the Nominating/Governance Committee will act promptly to determine whether to accept the director’s resignation and will submit its recommendation for consideration by the Board. The Board expects the director whose resignation is under consideration to abstain from participating in any decision regarding that resignation. The Nominating/Governance Committee and the Board may consider any factors they deem relevant in deciding whether to accept a director’s resignation.

 

Your Board recommends a vote FOR the election to the Board of each of the nominees.

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A brief summary of each current director’s and director nominee’s principal occupation, recent professional experience, the specific qualifications identified as part of the Board’s determination that each such individual should serve on the Board, and directorships at other public companies for at least the past five years, if any, is provided below.

 

 

 

 

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The Audit Committee has appointed Ernst & Young LLP as our independent registered public accounting firm to audit our consolidated financial statements for our fiscal year ending November 30, 2011. During our 2010 fiscal year, Ernst & Young LLP served as our independent registered public accounting firm and also provided certain other audit-related services, as further discussed below under the heading “Independent Auditor Fees and Services.” Representatives of Ernst & Young LLP are expected to attend the Annual Meeting, be available to respond to appropriate questions and, if they desire, make a statement.

 

If Ernst & Young LLP’s appointment is not ratified, the Audit Committee will reconsider whether to retain Ernst & Young LLP, but still may retain them. Even if the appointment is ratified, the Audit Committee, in its discretion, may change the appointment at any time during the year if it determines that such a change would be in our and our stockholders’ best interests.

 

Vote Required

 

Approval of the ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for our fiscal year ending November 30, 2011 requires the affirmative vote of the majority of shares of common stock present or represented, and entitled to vote thereon, at the Annual Meeting.

 

Your Board recommends a vote FOR the ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for our fiscal year ending November 30, 2011.

 

At our last annual meeting, our stockholders approved the KB Home 2010 Equity Incentive Plan. On January 27, 2011, our Board approved, subject to stockholder approval, an amendment (the “Plan Amendment”) to Section 3.1 of the 2010 Plan to increase the number of shares of our common stock available for awards under the 2010 Plan by an additional 4,000,000 shares. The Plan Amendment revises the first sentence of Section 3.1 (a) by replacing the words “Three Million Five Hundred Thousand (3,500,000)” with the words “Seven Million Five Hundred Thousand (7,500,000).” With the Plan Amendment, the first sentence of Section 3.1(a) is as follows:

 

“3.1 Number of Shares.

 

(a) Subject to adjustment as provided in Section 3.1(b) and Section 13.2, a total of Seven Million Five Hundred Thousand (7,500,000) Shares shall be authorized for grant under the Plan.”

 

Except for the Plan Amendment, no other changes are proposed for the 2010 Plan. Per NYSE listing standards and the 2010 Plan’s terms, the Plan Amendment will not take effect unless our stockholders approve it. Accordingly, we are asking for approval of the Plan Amendment.

 

Reason for the Plan Amendment

 

In our 2010 fiscal year, we offered to certain officers and employees the opportunity to replace stock appreciation rights (“SARs”) we had previously granted to them as long-term incentive awards in 2007, 2008 and 2009 with non-qualified options to purchase shares of our common stock issued under the 2010 Plan (“Exchange Offers”). At the time they were granted, each of the relevant SARs in the Exchange Offers could be settled only in cash. Each stock option issued to replace a SAR has an exercise price equal to the replaced SAR’s exercise price and the same number of underlying shares, vesting schedule and expiration date as each such SAR. The Exchange Offers did not include a re-pricing or any other changes impacting the value of the awards to the participating officers and employees, and no additional grants or awards were made to participants as part of the offers. All of the SARs we received in the Exchange Offers were canceled, and with

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the Exchange Offers and SARs forfeited due to employee departures, virtually all SARs previously granted to our officers and employees have now been canceled.

 

We conducted the Exchange Offers in an effort to reduce the variability in the expense recorded for employee equity-based compensation by replacing the SARs, which were accounted for as liability awards, with the stock options, which are accounted for as equity awards. In accounting for equity awards, the grant-date fair value of an award is expensed over its vesting period and does not fluctuate based on changes in the market price of shares of our common stock. In contrast, in accounting for liability awards, the amount of compensation expense recorded for a given period fluctuates compared to prior periods based on changes in the market price of shares of our common stock, and these fluctuations could be substantial. As a result, prior to the Exchange Offers, the variability in expense we recorded due to the SARs at times caused significant fluctuations in our reported financial results that obscured our operating performance. By conducting the Exchange Offers, we were able to eliminate much of this variability and provide stockholders and investors with a clearer view of our performance. The Exchange Offers will also help us conserve cash that may otherwise have been paid in connection with SAR exercises.

 

In order to complete the Exchange Offers, we issued a total of 2,041,735 stock options under the 2010 Plan. These issuances, in combination with awards of stock options and restricted stock in our 2010 fiscal year for ordinary course long-term incentive compensation awards and new hire awards, have reduced the total remaining unused capacity of the 2010 Plan to 43,701 shares as of February 14, 2011. To align the interests of our officers and employees to those of our stockholders and to help ensure that we can continue to appropriately attract, motivate and retain the services of highly qualified talent to improve our performance through the ownership of equity-based awards, we believe it is important and in our and our stockholders’ best interests to increase the 2010 Plan’s available share capacity per the Plan Amendment.

 

The proposed increase in the 2010 Plan’s available share capacity by 4,000,000 additional shares under the Plan Amendment is intended to replace the shares subject to the stock options issued in the Exchange Offers, which we believe provided a significant benefit to our stockholders, and to enable us to meet our expected equity compensation needs for the next two to three years. We believe this additional available share capacity amount represents a reasonable degree of potential equity dilution while giving us the ability to continue to award equity compensation, which we see as critical in order to compete successfully against other companies in providing stockholder-aligned long-term incentives to attract and retain executive talent. We are not proposing any other changes to the 2010 Plan as we believe it currently provides a number of leading governance and compensation terms, as described in the summary below.

 

Summary of the 2010 Plan

 

A copy of the 2010 Plan was filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended February 28, 2010, and the following summary of the 2010 Plan’s material terms is qualified in its entirety by reference to the full text. Stockholders are urged to read the full 2010 Plan.

 

Size of the Share Pool. If our stockholders approve the Plan Amendment, the 2010 Plan will authorize the issuance of 7,500,000 shares of our common stock, assuming no cancelations or forfeitures of outstanding awards. As of February 14, 2011, this number represents 3,456,299 shares subject to outstanding awards, 43,701 shares available for, but not yet subject to a grant or award, plus the additional 4,000,000 shares authorized by the Plan Amendment. This pool of shares may be used for all types of awards under a fungible pool formula. This formula provides that the authorized share limit under the 2010 Plan will be reduced by (a) one share for every one share subject to a stock option, stock-settled SARs or other similar award, and (b) 1.78 shares for every one share subject to a restricted stock award or other similar “full-value” award. If our stockholders do not approve the Plan Amendment, the 2010 Plan’s total authorized share issuance will remain at 3,500,000 shares, with a total remaining unused capacity, as of February 14, 2011, of 43,701 shares. If our stockholders do not approve the Plan Amendment, we may use cash-settled SARs and phantom shares, among other types of cash-based awards, as incentive compensation vehicles in lieu of stock options and restricted stock, as we did in 2007, 2008 and 2009 when we had a limited number of shares available for equity compensation awards. Doing so, however, would result in greater variability in our compensation expense, which we sought to minimize through the Exchange Offers for the reasons and benefits discussed above under the heading “Reason for the Plan Amendment.”

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Key Terms. The 2010 Plan authorizes the Compensation Committee (or, if our Board determines, another committee of independent directors of the Board, which in either case we will refer to in this proposal as the “Committee”) to grant awards and otherwise administer and interpret the 2010 Plan, and any award agreements and general programs adopted thereunder. In addition, the 2010 Plan includes the following terms:

 

 

Eligibility. All employees, non-employee directors and consultants of KB Home and its affiliates are eligible to receive awards under the 2010 Plan, as determined by the Committee or the Board. As of the date of this proxy statement, we have nine non-employee directors and approximately 1,300 employees and consultants who are eligible to participate in the 2010 Plan.

 

Administration. Unless the Board assumes the role of the Committee or otherwise limits the Committee’s authority, the Committee has the power to make grants of awards under the 2010 Plan, to determine the types, sizes, price, timing and vesting restrictions of awards, and to administer and interpret the 2010 Plan. The Committee shall also have the limited power to delegate certain of its powers and responsibilities under the 2010 Plan, subject to the restrictions described above, and only to the extent consistent with our equity-based award grant policy (as described below under the heading “Equity-Based Award Grant Policy”) and applicable law.

 

Types of Awards. The 2010 Plan authorizes the grant of stock options, shares of restricted stock, SARs, restricted stock units, stock payments and general performance-based awards. Following is a brief description of each type of award:

 

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Cancellation, Forfeiture, Expiration or Cash Settlement of Awards. If an award expires or is canceled, forfeited or settled for cash, then any shares subject to such award may, to the extent of such expiration, cancellation, forfeiture or cash settlement, be used again for new grants under the 2010 Plan. However, as noted above, any shares tendered or withheld to satisfy the grant or exercise price or tax withholding obligation pursuant to any award may not be used again for new grants. Any shares that again become available for grant will be added back in the same manner in which they were initially deducted (i.e., one-for-one or 1.78-for-one).

 

Performance-Based Compensation. Awards may be granted to employees who are “covered employees” under Section 162(m) of the Code that are intended to be “performance-based compensation” so as to preserve the tax deductibility of the awards for federal income tax purposes. These performance-based awards may be either equity or cash awards, or a combination of both. Holders are only entitled to receive payment for a Section 162(m) performance-based award for any given performance period to the extent that pre-established performance goals set by the Committee are satisfied. These pre-established performance goals must be based on one or more of the following performance criteria which are the same criteria our stockholders approved last year for our Annual Incentive Plan for Executive Officers:

 

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With respect to particular performance-based awards, the Committee is permitted to make certain equitable and objectively determinable adjustments to the performance goals, provided that any awards that are intended to qualify as “performance-based compensation” must be made in accordance with the requirements of Section 162(m) of the Code. Upon certification of achievement of the performance goals for a particular performance period set forth in an award that is intended to qualify as “performance-based compensation,” the Committee may reduce or eliminate, but not increase, the amount specified in the original award. Generally, a holder of a performance-based award must be employed by or providing services to us throughout an applicable performance period in order to be eligible to receive any payment pursuant to an award that is intended to qualify as “performance-based compensation.”

 

Payment Methods. Holders may satisfy any payment obligations associated with awards with (a) cash or a check, (b) shares of our common stock issuable pursuant to the award or held for a sufficient period of time (and without encumbrances) and having a fair market value equal to the required payment, or (c) other acceptable property or legal consideration, as determined by the Committee.

 

Transferability. No award may be transferred other than to certain permitted transferees by will or the laws or descent and distribution or, with the consent of the Committee, pursuant to a domestic relations order.

 

Adjustments. Equitable adjustments to the terms of the 2010 Plan and any awards will be made as necessary to reflect any stock splits, spin-offs, extraordinary stock dividends or similar transactions.

 

Substitute Awards. The 2010 Plan provides for “substitute awards” to be issued if we assume or substitute awards under the 2010 Plan for outstanding equity awards previously granted by another company, whether in connection with a merger, combination, consolidation, acquisition or other corporate transaction. Certain equitable exceptions apply to the terms of the 2010 Plan in order to facilitate the issuance of such awards.

 

Amendment and Termination. The Board or the Committee may terminate, amend or modify the 2010 Plan. However, the additional approval of our stockholders will be required to (a) increase the number of shares of our common stock available for grant, (b) reduce the exercise price of any option or SAR, (c) cancel an option or SAR in exchange for cash or any other award that has a lower exercise price or that provides additional value to the holder, (d) materially modify the requirements for eligibility to participate in the 2010 Plan, (e) materially increase the benefits accruing to participants in the 2010 Plan, or (f) make other material changes that require stockholder approval under applicable stock exchange rules.

 

Term. No new awards may be granted under the 2010 Plan following the tenth anniversary of its approval by our stockholders.

 

Federal Income Tax Consequences

 

If a holder is granted a nonqualified stock option under the 2010 Plan, the holder should not have taxable income on the grant of the option. Generally, the holder should recognize ordinary income at the time of exercise in an amount equal to the fair market value of a share of our common stock at such time, less the exercise price paid. The holder’s basis in the common stock for purposes of determining gain or loss on a subsequent sale or disposition of such shares generally will be the fair market value of our common stock on the date the holder exercises such option. Any subsequent gain or loss generally will be taxable as a capital

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gain or loss. We generally should be entitled to a federal income tax deduction at the time and for the same amount as the holder recognizes ordinary income.

 

A holder of an incentive stock option will not recognize taxable income upon grant. Additionally, if the applicable employment-related requirements are met, the holder will not recognize taxable income at the time of exercise. However, the excess of the fair market value of our common stock received over the option price is an item of tax preference income potentially subject to the alternative minimum tax. If any of the requirements for incentive stock options under the Code are not met, the incentive stock option will be treated as a nonqualified stock option and the tax consequences described above for nonqualified stock options will apply. Once an incentive stock option has been exercised, if the stock acquired upon exercise is held for a minimum of two years from the date of grant and one year from the date of exercise, the gain or loss (in an amount equal to the difference between the fair market value on the date of sale and the exercise price) upon disposition of the stock will be treated as a long-term capital gain or loss, and we will not be entitled to any deduction. If the holding period requirements are not met, the excess of the fair market value on the date of exercise over the exercise price (less any diminution in value of the stock after exercise) will be taxed as ordinary income and we will be entitled to a deduction to the extent of the amount so included in the income of the holder. Appreciation in the stock subsequent to the exercise date will be taxed as long term or short term capital gain, depending on whether the stock was held for more than one year after the exercise date.

 

The current federal income tax consequences of other awards authorized under the 2010 Plan generally follow certain basic patterns: SARs are taxed and deductible in substantially the same manner as nonqualified stock options; restricted stock subject to a substantial risk of forfeiture results in income recognition equal to the excess of the fair market value over the price paid, if any, only at the time the restrictions lapse (unless the recipient elects to accelerate recognition as of the date of grant through an election under Section 83(b) of the Code); RSUs, stock-based performance awards and other types of awards are generally subject to tax at the time of payment based on the fair market value of the award on that date. Compensation otherwise effectively deferred is taxed when paid. In each of the foregoing cases, we will generally have a corresponding deduction at the time the holder recognizes income, subject to Section 162(m) of the Code with respect to covered employees.

 

Section 162(m) of the Code denies a deduction to any publicly held corporation for compensation paid to covered employees in a taxable year to the extent that compensation to such covered employee exceeds $1,000,000. Qualified “performance-based compensation” is disregarded for purposes of the deduction limitation. The 2010 Plan has been designed to meet the requirements of Section 162(m) of the Code, but it is possible that compensation attributable to awards under the 2010 Plan (when combined with all other types of compensation received by a covered employee from us or because of other factors) may not comply with all of the requirements of Section 162(m) of the Code, thereby preventing us from taking a deduction.

 

2010 Plan Benefits

 

No determination has been made as to the types or amounts of awards that will be granted to specific individuals under the 2010 Plan if the Plan Amendment is approved. If the Plan Amendment is not approved, few, if any, awards are likely to be made under the 2010 Plan given the extremely limited remaining unused available share capacity. Accordingly, as previously noted and given the importance of providing long-term incentives to attract and retain highly qualified talent, we may turn to using cash-settled SARs and phantom shares, among other types of cash-based awards, as incentive compensation vehicles, though doing so would result in greater variability in our compensation expense and the associated negative impacts discussed above under the heading “Reason for the Plan Amendment.” It would also limit our ability over time to deploy cash for inventory and other investments in our business operations, potentially restricting our ability to achieve strategic goals. Information on equity-based awards made under the 2010 Plan to each of our named executive officers in our 2010 fiscal year is provided below under the headings “Summary Compensation Table” and “Grants of Plan-Based Awards During Fiscal Year 2010.” All current executive officers as a group have received an aggregate of 2,011,538 stock options and 18,429 shares of restricted stock under the 2010 Plan, and all of our other current employees as a group (including our current officers who are not executive officers) have received an aggregate of 1,286,666 stock options and no shares of restricted stock under the 2010 Plan. Our current non-employee directors have not received any awards under the 2010 Plan. Information on equity-based awards made to each of our non-employee directors under the Director Compensation Plan in our 2010 fiscal year is provided above under the heading “Director Compensation During Fiscal Year 2010.”

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Vote Required

 

Approval of the Plan Amendment requires the affirmative vote of the majority of shares of common stock present or represented, and entitled to vote thereon, at the Annual Meeting. To meet NYSE listing standards, however, more than 50% of the outstanding shares of our common stock must cast a vote on this proposal.

 

 

Your Board recommends that you vote FOR this proposal to approve the Amendment to the KB Home 2010 Equity Incentive Plan.

 

Pursuant to Section 14A of the Securities Exchange Act of 1934, we are seeking an advisory vote from our stockholders to approve our named executive officer compensation, as set forth below. We and the Board welcome our stockholders’ views on this subject, and will carefully consider the outcome of this vote consistent with the best interests of all stockholders. As an advisory vote, however, the outcome is not binding on us or the Board.

 

Specifically, we are seeking a vote on the following resolution:

 

RESOLVED, that the stockholders of KB Home approve, on an advisory basis, the compensation paid to its named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and narrative discussion set forth below under the heading “Executive Compensation.”

 

As discussed below under the heading “Compensation Discussion and Analysis,” our executive compensation and benefit programs are designed to attract, motivate and retain a talented management team and to appropriately reward individual contributions to the achievement of our strategic goals. We and the Board believe this approach establishes a solid alignment of our executives’ and stockholders’ interests, which we think is borne out by the following operational and financial achievements we made in our 2010 fiscal year amid extremely challenging market and economic conditions:

 

 

While we are pleased with these accomplishments that have brought us closer to full-year profitability, we are mindful that our performance has suffered during the prolonged housing market downturn that began in mid-2006. Accordingly, and in addition to the steps we have taken to restore profitability, we have put in place a number of responsible and stockholder-focused compensation policies, programs and practices, including the following:

 

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Vote Required

 

Approval of this advisory vote requires the affirmative vote of the majority of shares of common stock present or represented, and entitled to vote thereon, at the Annual Meeting.

 

 

Your Board recommends a vote FOR the resolution above to approve named executive officer compensation.

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Pursuant to Section 14A of the Securities Exchange Act of 1934, we are seeking an advisory vote from our stockholders on whether to hold the above advisory vote on named executive officer compensation as frequently as every year, every two years or every three years. We and the Board welcome our stockholders’ views on this subject, and will carefully consider the outcome of this vote consistent with the best interests of all stockholders. As an advisory vote, however, the outcome is not binding on us or the Board.

 

The Board recommends that the advisory vote to approve named executive officer compensation be held each year as part of our annual stockholders meetings. The Board believes an annual advisory vote can provide relatively timely feedback on our executive compensation arrangements, plans, programs and policies.

 

Regardless of the frequency with which we do hold such an advisory vote, the Board encourages stockholders to contact the Board or our management to more fully express their views on executive compensation matters through the Corporate Secretary as described above under the heading “Corporate Governance Highlights,” or through our investor relations professionals.

 

Please note that you may cast your advisory vote as to your preferred frequency of an advisory vote on named executive officer compensation by choosing any one of the following three options: an advisory vote every year; an advisory vote every two years; or an advisory vote every three years. You may also abstain from voting on this item. Your vote on this proposal is not a vote to approve or to vote against the Board’s recommended frequency. Accordingly, we are seeking a vote on the following resolution:

 

RESOLVED, that the stockholders of KB Home, on an advisory basis, prefer that an advisory vote on the compensation of KB Home’s named executive officers as disclosed pursuant to Section 14A of the Securities Exchange Act of 1934 be provided to stockholders every (a) year, (b) two years, or (c) three years.

 

Vote Required

 

The frequency option (i.e., every year, every two years or every three years) that receives a plurality of votes cast on this proposal will be deemed the preferred option of stockholders. However, because this vote is advisory and not binding, the Board may decide to hold an advisory vote to approve named executive officer compensation more or less frequently than the deemed preferred option.

 

 

Your Board recommends that you cast your vote FOR the option of one year for the frequency of an advisory vote to approve named executive officer compensation.

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The following table shows, as of February 14, 2011, the beneficial ownership of our common stock by each current director and each of the current executive officers named below in the “Summary Compensation Table,” and by all current directors and executive officers as a group. Except as stated in footnote (d) to the table, beneficial ownership is direct and each director and executive officer has sole voting and investment power over his or her shares.

 

 

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The following table shows each stockholder known to us as of February 14, 2011 to beneficially own more than five percent of our common stock:

 

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We have established stock ownership requirements for our non-employee directors and senior executive management to better align their interests with those of our stockholders. Our Corporate Governance Principles require each of our non-employee directors to own at least $250,000 in value of our common stock or common stock equivalents within five years of joining the Board. Our Executive Stock Ownership Policy requires executives at various management levels to own from 6,000 to 150,000 shares, depending on position. The policy, as applied to our named executive officers, is discussed further below under the heading “Equity Stock Ownership Policy.”

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The Management Development and Compensation Committee of the Board of Directors has reviewed and discussed the following “Compensation Discussion and Analysis” with KB Home management. Based on this review and discussion, the Management Development and Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement.

 

Management Development and Compensation Committee

 

 

 

 

Our executive compensation and benefit programs are focused on attracting, motivating and retaining a talented management team to execute our KBnxt operational business model. We believe our dedicated implementation of the core Built-to-Order^tm principles of our KBnxt operational business model provides us with a distinct competitive advantage over other homebuilders. We therefore design, with the Compensation Committee’s oversight, the compensation and benefits for our named executive officers (each, an “NEO”) and other senior executives to reward individual contributions to the achievement of our KBnxt strategic goals, while taking into account our recent and expected financial performance and broader industry and economic conditions. We believe this approach promotes a clear alignment of executive and stockholder interests.

 

In our 2010 fiscal year, we continued to face a difficult operating environment amid the prolonged housing market downturn that began in mid-2006. With a persistent oversupply of homes available for sale and soft demand for new homes, a generally poor economic and employment environment, turbulent financial and credit markets, tightened consumer mortgage lending standards, and the mixed impact of government programs and actions directed at supporting homeownership, we and other homebuilders have experienced a severe drop in net orders, revenues and profitability over the last five years and up to the present time.

 

To manage our business through these difficult circumstances, we have focused on the following three primary strategic goals: restoring and maintaining the profitability of our homebuilding operations; generating cash and maintaining a strong balance sheet; and positioning our business to capitalize on future growth opportunities. In pursuing these goals during the mid-2006 to 2009 period, we significantly reduced our overhead, inventory and community count to better align our operations with diminished home sales activity, improved our construction cycle times and operating efficiencies, and redesigned and re-engineered our product line to improve its affordability for homebuyers and to improve our margins. As a result of our strategic actions over this period, we began our 2010 fiscal year with a strong and liquid balance sheet, holding over $1 billion in cash, and an operational footprint better positioned in housing markets with perceived strong long-term growth prospects.

 

Based on the operational transformations we made through our 2009 fiscal year, we entered 2010 with restoring and maintaining the profitability of our homebuilding operations as our highest priority, notwithstanding a cautious outlook for the year stemming from continued uncertainty as to when a meaningful housing market recovery would take hold. We determined that future profitability would require greater revenue growth driven by a larger inventory base from which additional sales and deliveries of our higher-margin and well-received new products could be made. Accordingly, with our financial strength and seeing a number of attractive opportunities, in 2010 we implemented a targeted land acquisition initiative to acquire ownership or control of well-priced land parcels that met our investment standards and were located in our existing markets having the best perceived growth prospects.

 

We believe we made significant progress during our 2010 fiscal year in strengthening a solid foundation to achieve long-term future growth and profitability. We generated in the second half of the year homebuilding operating income of $37.5 million and net income on a cumulative basis, compared to a homebuilding

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operating loss of $123.6 million for the corresponding year-earlier period. We reduced our pretax loss from $311.2 million in 2009 to $76.4 million in 2010. We narrowed our net loss from $101.8 million in 2009 to $69.4 million in 2010, reflecting a higher housing gross margin and lower overhead expenses. Our housing gross margin increased due to, among other factors, improved operating efficiencies and reduced direct construction costs achieved through the value-engineering innovations we developed for our new product designs, including The Open Series. We reduced our year-over-year debt balance by $44.8 million and ended the year with cash, cash equivalents and restricted cash above $1 billion,while investing approximately $560 million in land and land development to help expand our inventory of lots owned or controlled on a year-over-year basis and to establish a strong operational platform in 30 major markets that positions us to increase our active community count for the first time in many years and to generate potential future revenues. We garnered continued recognition as an industry leader on sustainable building practices, and record customer satisfaction levels based on J.D. Power and Associates and our internal surveys. Our Annual Report provides further details on our 2010 fiscal year performance.

 

Our executive compensation decisions in our 2010 fiscal year sought a balance between our financial and operational achievements and the prevailing tough and uncertain business conditions in the general economy and in the homebuilding industry. Below is a summary of our key executive compensation objectives and our approach to addressing them during the year.

 

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Base Salaries. Other than for new hires, the Compensation Committee annually reviews and approves the base salaries of our CEO and our other NEOs. Base salaries for new hires are usually determined as part of the hiring process. The Compensation Committee approves NEO base salaries based on several factors, including an NEO’s experience, specific responsibilities, performance and expected future contributions; our current and expected financial and operational results; equity of salary relative to our executives who are at the same internal management level; market rates to ensure competitiveness; and our general budgetary guidelines for base salaries as set by the Compensation Committee. In subjectively weighing these factors, the Compensation Committee maintained 2010 base salaries for Messrs. Mezger, Barnard and Hollinger at 2008 or earlier levels, and approved the starting base salaries for Messrs. Kaminski and Woram at the time each joined us in 2010.

 

Reflecting our philosophy of aligning pay with operational and financial performance and stockholder return, base salaries make up a relatively small portion of NEO compensation. The majority of NEO compensation, particularly the compensation for our CEO, consists of performance-based annual and long-term incentives.

 

2010 Annual Incentives. As shown in the table below, each of Messrs. Mezger, Kaminski and Hollinger was eligible for an annual incentive if at least one of three objective performance goals was achieved in 2010, subject to the Compensation Committee’s discretion to reduce the actual payout of any annual incentive based on its subjective evaluation of our overall performance and these NEOs’ individual performance.

 

 

The three objective performance goals were the following: (a) 2010 fiscal year pretax loss not exceeding $200 million, excluding inventory impairments and other non-recurring items; or (b) 2010 fiscal year home deliveries equal to or greater than 7,500; or (c) lot pipeline for 2011 home deliveries equal to 10,000 lots by our 2010 fiscal year end. If any of the performance goals were achieved, each NEO was eligible to receive their respective maximum annual incentive payout, subject to the Compensation Committee exercising its discretion to reduce the actual payout using the respective threshold and target payout levels described above as an informal framework to guide its decision-making. The performance goals were designed to align with our primary strategic goal for 2010 of restoring and maintaining the profitability of our homebuilding operations, with a focus on increasing our ownership or control of well-priced land parcels to promote future growth in revenues and home deliveries. They also reflected our expectations of difficult housing market conditions and an uncertain and generally weak economic environment in 2010; accordingly, the Compensation Committee determined that each performance goal was substantially uncertain to be met and would, to the extent achieved, represent a strong performance result for the year.

 

For the 2010 NEO annual incentives, each respective target payout level was the amount each NEO received as an annual incentive in 2009 or, for Mr. Kaminski, an amount established in connection with his hiring and reflecting a partial year basis; each respective maximum payout level was set at or near 200% of the relevant target level; and each respective threshold payout level was set at 25% of the relevant target level. In approving the annual incentive payout levels, the Compensation Committee determined that they were appropriate to motivate and retain the eligible NEOs given the challenging homebuilding business environment, and that the relatively higher levels for our CEO appropriately reflected Mr. Mezger’s unique and critical role in setting and driving the implementation of our KBnxt operational business model and our primary strategic goals across all facets of our business, his efforts to transform and position our operations to achieve long-term profitability in this difficult and turbulent environment, and his overall responsibility for our performance.

 

The Compensation Committee determined that we achieved the pretax loss performance goal, as our 2010 fiscal year pretax loss, excluding inventory impairments and other non-recurring items, was $56.4 million.

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Accordingly, each NEO was eligible for an annual incentive payout at the NEO’s respective maximum payout level as set forth in the table above.

 

In evaluating and approving these NEOs’ actual annual incentive payouts, the Compensation Committee on a subjective basis also took into account a broad range of factors encompassing our overall financial and operational performance and individual performance. In particular, the Compensation Committee considered the significant narrowing of our net loss for the year compared to our 2009 fiscal year, the generation of homebuilding operating income in each of the last two quarters of our 2010 fiscal year, the maintenance of a total cash balance above $1 billion, and the positioning of our operations through organizational restructuring and land acquisition and development activities (including the year-over-year expansion in our inventory of lots owned or controlled) to provide a solid platform for future growth as housing markets recover. For Mr. Mezger, the Compensation Committee and the Board determined that he provided strong and decisive leadership that was vital to our achieving these results, and noted that he has significantly enhanced our differentiation from other large production homebuilders through his efforts in positioning us as a leader in sustainable building practices.

 

For Mr. Hollinger, the Compensation Committee considered that he provided critical leadership and oversight of our accounting and financial reporting process in serving as our principal financial officer for almost half of the year. During this time, he helped us to preserve balance sheet flexibility and a total cash balance above $1 billion while supporting investments in future growth, in addition to performing his duties as our chief accounting officer. He was also a key contributor to the Company’s cost savings efforts throughout the year. For Mr. Kaminski, the Compensation Committee determined that in the relatively short time he has served as our chief financial officer, he has quickly become grounded in our operational strategy and taken ownership of our strategic planning process, solidified our finance team, enhanced our investor relations strategy, and been instrumental in positioning us to achieve our profitability goals.

 

Weighing our overall financial performance and prevailing and expected business conditions, though, the Compensation Committee used its discretion to reduce the annual incentive payouts to our NEOs to the following amounts: Mr. Mezger $2,750,000; Mr. Kaminski $360,000; and Mr. Hollinger $350,000. The Compensation Committee did not apply any specific weighting or formula with respect to determining our NEOs’ actual annual incentive payouts.

 

Mr. Barnard was not originally selected to be eligible for a 2010 annual incentive based on considerations of his expected role and responsibilities with us. Due to executive officer transitions during 2010, however, Mr. Barnard’s duties were expanded and he made notable contributions to implementing certain of our operational goals. Therefore, in January, 2011, the Compensation Committee approved a discretionary bonus to Mr. Barnard of $150,000 in recognition of his work in 2010. Mr. Woram was eligible for a guaranteed bonus of $325,000 in lieu of an annual incentive for 2010 per the terms of his hiring in July, 2010. He also received a hiring bonus of $426,971. Mr. Silcock, whose employment with us terminated on December 14, 2009, was not eligible for an annual incentive in 2010.

 

New Hire Incentive Awards. In connection with their joining us in 2010, the Compensation Committee approved incentive award grants to each of Messrs. Kaminski and Woram in the form of stock options and restricted stock. For Mr. Kaminski, the Compensation Committee approved a total grant-date fair value of $300,000; for Mr. Woram, the Compensation Committee approved a total grant-date fair value of $530,000. Each of these awards were granted in July and split 75%/25% in stock options and restricted stock, consistent with the split awarded for the 2010 long-term incentive awards granted to our NEOs in October, 2009. These grants to Messrs. Kaminski and Woram are shown below under the heading “Grants of Plan-Based Awards During Fiscal Year 2010.”

 

2011 Fiscal Year Long-Term Incentives. To promote retention and alignment with stockholders’ interests, we provide long-term incentives to our NEOs that consist primarily of grants of equity-based vehicles settled in cash or stock and typically grant these incentives in October each year. For the 2011 fiscal year long-term incentives, our approach was affected by the low number of shares available for grant under our 2010 Plan stemming from our efforts to minimize the variability of compensation expenses associated with prior grants of cash-settled SARs, as discussed above under the heading “Compensation in Context: Fiscal Year 2010.” Therefore, our 2011 fiscal year long-term incentive grants, which were made in October, 2010, consisted of stock options that vest in equal annual installments over a three-year period and awards of restricted cash that vest in full after three years, subject in each case to a recipient’s continued employment with us through the

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applicable vesting periods. These awards are shown below under the heading “Grants of Plan-Based Awards During Fiscal Year 2010.”

 

In light of the important purpose long-term incentives serve to motivate and retain top executive talent, a key consideration for the Compensation Committee in approving the 2011 fiscal year long-term incentives for our NEOs was the low intrinsic value (and consequently low retention value) of our past long-term incentive awards. The exercise price of most of our outstanding employee stock options is higher, and in some cases substantially higher, than the current market price of our common stock, greatly undercutting the retention value of these awards. Based on these considerations and subjective evaluations of each NEO’s current performance (with the key aspects as described above under the heading “2010 Annual Incentives”) and expected future contributions and role, the Compensation Committee approved grants of stock options and awards of restricted cash to each of our NEOs, except for Messrs. Barnard and Silcock. Both Messrs. Mezger and Hollinger were granted almost the same number of stock options as each was granted last October for their 2010 long-term incentives, resulting in each receiving an award with a lower aggregate grant-date fair value compared to those prior grants due to a decline in the price of our common stock, reflecting the Compensation Committee’s recognition of their significant individual achievements in 2010 and to motivate future performance, balanced against our profitability goal, the current business environment and constrained capacity of shares available for grant. The aggregate amount of stock options and awards of restricted cash granted as 2011 fiscal year long-term incentives to Messrs. Kaminski and Woram were based in each case on values approved in connection with their hiring — $800,000 for Mr. Kaminski and $750,000 for Mr. Woram. Accordingly, as 2011 long-term incentives the Compensation Committee approved the following grants of stock options and awards of restricted cash: Mr. Mezger 240,000 stock options, 260,000 performance stock options (as described below under the heading “CEO Performance Options”) and $500,000;
Mr. Kaminski 118,000 stock options and $260,000; Mr. Woram 111,000 stock options and $242,000; and Mr. Hollinger 60,000 stock options and $260,000.

 

As with the 2010 fiscal year long-term incentives, the Compensation Committee approved the granting of 2011 fiscal year long-term incentives other than Mr. Mezger’s performance options without specific performance-vesting requirements. The Compensation Committee took this approach based on the importance of motivating and retaining top executive talent in a difficult business environment and its view that stock options, the value of which rise and fall in line with the market price of our common stock, are inherently performance-based and stockholder-aligned incentives.

 

In January, 2010, the Compensation Committee approved a grant to Mr. Barnard of 90,000 stock options that will vest in full in two years if Mr. Barnard continues to be employed with us through the vesting date. This grant of stock options aligns with Mr. Barnard’s anticipated role and responsibilities in overseeing the implementation of certain operational efficiency, product development and sustainability initiatives during the vesting period and was made in lieu of his receiving any other long-term incentives in 2010. As Mr. Silcock’s employment with us ended on December 14, 2009, he was not eligible for any 2011 fiscal year long-term incentives.

 

2011 CEO Performance Options. Consistent with the policy it adopted in January, 2010 to make the vesting of a majority of future grants of equity compensation to our CEO contingent on the achievement of one or more long-term objective performance metrics, the Compensation Committee granted 260,000 performance stock options to Mr. Mezger as part of his 2011 long-term incentive award. The timing and extent to which the performance options vest, if at all, depends on our achieving (as determined by the Compensation Committee) any of the following as of the end of our fiscal year in any of 2011, 2012 or 2013: (a) positive cumulative operating margin results measured from December 1, 2010 to the end of any one these fiscal years (excluding the impact of inventory and joint venture impairments and land option contract abandonments); (b) cumulative operating margin results that are better than the 50th percentile of a comparator group of homebuilding industry companies within the global industry classification standard homebuilding sub-industry index; or (c) customer satisfaction scores that are above the mean average score of the homebuilders covered in a third party survey. If none of the performance metrics is determined by the Compensation Committee to have been achieved by the end of our 2013 fiscal year, a portion of the performance stock options may vest if the Compensation Committee determines that the second or third performance metric described above has been achieved at a threshold level of 60% of the applicable performance metric goal. Accordingly, depending on how close the achievement was relative to the goal (provided it is above the 60% threshold level), up to one half of the performance stock option award will vest based on the second performance metric, and up to

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one half of the performance stock option award will vest based on the third performance metric, in each case per the following table (with performance between 60% and 100% of an applicable performance goal interpolated linearly):

 

 

If the Compensation Committee determines that none of the performance metrics have been achieved at a 60% threshold level, none of the performance stock options will vest.

 

“Over-Cap” Equity-Based Awards. In prior years, our annual incentive arrangements with certain senior executives limited the amount of annual incentive payouts they could receive in cash and required that they receive amounts over the specified cap in the form of restricted stock or phantom shares. These equity-based awards were granted on the date the cash portion of the annual incentive was paid, and vested on the earlier of the third anniversary of the grant date and the recipient’s termination of employment, other than a voluntary termination or a termination for cause. On July 12, 2010, Messrs. Mezger and Hollinger vested in “over-cap” phantom shares that were originally granted to them on July 12, 2007 based on a stock price of $36.19 as follows: Mr. Mezger 55,264, and Mr. Hollinger 1,037. Each received a cash payout equal to the phantom shares each held multiplied by the closing price of our stock on the vesting date, $10.85.

 

SAR Exchange Offers. In our 2010 fiscal year, the Compensation Committee approved two separately conducted Exchange Offers under which certain officers and employees were given the opportunity to replace cash-settled SARs previously granted to them as long-term incentive awards in 2007, 2008 and 2009 with non-qualified options to purchase shares of our common stock issued under the 2010 Plan. We conducted the Exchange Offers in an effort to reduce the variability in the reporting of compensation expense for the SARs under applicable accounting rules, which variability could be substantial and obscure the reporting of our operating performance. By replacing the SARs with the stock options, we were able to eliminate much of this variability and provide stockholders and investors with a clearer view of our operating results. The Exchange Offers will also help us conserve cash that may otherwise have been paid in connection with SAR exercises. The Exchange Offers are further discussed above under the heading “Proposal 3: Approve an Amendment to the KB Home 2010 Equity Incentive Plan.” The Exchange Offers did not include a re-pricing or any other changes impacting the value of the awards to the participating officers and employees, and no additional grants or awards were made to participants as part of the offers. In order to complete the Exchange Offers according to their terms, we issued a total of 2,041,735 stock options under the 2010 Plan. Messrs. Mezger, Barnard and Hollinger received stock options in one or both of the Exchange Offers, as shown below under the heading “Grants of Plan-Based Awards During Fiscal Year 2010.”

 

Benefits. The majority of our health and welfare benefits are made available to all full-time employees, including our NEOs. During 2010, as in years past, our NEOs also received a supplemental benefit that reimburses them for any qualified out-of-pocket medical, dental and vision expenses that exceed amounts payable under our standard medical, dental and vision plans. In addition, in 2010, certain of our NEOs were provided with a death-related benefit and participated in our Deferred Compensation Plan and Retirement Plan, each as described below under the heading “Severance, Change in Control and Post-Termination Arrangements.” These benefits are offered to attract key executive talent and to promote retention. Mr. Mezger participates in a program under which he is credited with a specific number of vacation hours that remains fixed throughout his employment with us, regardless of actual vacation time taken. When his employment with us ends, he is entitled to receive a payout of these vacation hours that is based on his then-current annual base salary.

 

Perquisites. We provide very few perquisites to our NEOs. In connection with Mr. Kaminski’s hiring and relocation from Detroit to Los Angeles in May, 2010, we agreed to pay for certain relocation expenses, including temporary housing for up to six months, and for any personal income tax liability associated with such relocation-related payments. In our 2010 fiscal year, Mr. Kaminski received $47,594 under this

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arrangement. In connection with Mr. Woram’s hiring and relocation from Dallas to Los Angeles in July, 2010, we agreed to pay for certain relocation expenses, including temporary housing for up to six months, and for any personal income tax liability associated with such relocation-related payments. In our 2010 fiscal year, Mr. Woram received $69,515 under this arrangement.

 

Severance Arrangements. Mr. Mezger’s Employment Agreement provides him with certain severance benefits, and all of our current NEOs participate in our Executive Severance Plan, which provides certain severance benefits for non-change in control situations ranging from one to two times salary and bonus depending on a participant’s internal management level. Messrs. Kaminski and Woram, however, will not be eligible to receive benefits under our Executive Severance Plan until they have completed at least one year of employment with us. These severance arrangements are discussed further below under the heading “Potential Payments upon Termination of Employment or Change in Control.” We have adopted a policy under which we will obtain stockholder approval before paying severance benefits to an executive officer under a future severance arrangement in excess of 2.99 times the sum of the executive officer’s then-current base salary and target bonus. Future severance arrangements do not include severance arrangements existing at the time we adopted the policy in July, 2008 or any severance arrangement we assume or acquire unless, in each case, the severance arrangement is changed in a manner that materially increases its severance benefits.

 

Change in Control Arrangements. Since 2001, we have maintained a Change in Control Severance Plan (“CIC Plan”) that upon a change in control provides participants with certain severance-related payments, accelerated vesting of equity awards and full vesting in any benefits under our Death Benefit Only Plan (if a participant also participates in that plan). Our current NEOs and a very limited number of our other senior executive management participate in the CIC Plan. The CIC Plan is intended to enable and encourage our management to focus its attention on obtaining the best possible deal for our stockholders in a change in control scenario and to make objective evaluations of all possible transactions, without being distracted by the possible impact such transactions may have on job security and benefits; to promote management continuity; and to provide income protection in the event of involuntary loss of employment. In addition, if we experience a change in control, the vesting is accelerated for any unvested benefits under our Deferred Compensation Plan and our Retirement Plan, each of which is discussed below, and under certain of our employee benefit plans, including our equity compensation plans. The payments to which each of our NEOs may be entitled upon a change in control is further discussed below under the heading “Potential Payments Upon Termination of Employment or Change in Control.”

 

Death Benefits. Our Death Benefit Only Plan, in which Messrs. Mezger and Hollinger participate, provides a death benefit to the participant’s designated beneficiary of $1 million (plus an additional “gross-up” amount sufficient to pay taxes on the benefit and the additional amount). We closed the Death Benefit Only Plan to new participants beginning in 2004, and only term life insurance, with a $750,000 benefit level payable to an executive’s designated beneficiaries, has been made available to incoming eligible executives. We maintain this term life insurance benefit for Messrs. Kaminski and Woram. We also maintain this type of coverage for Mr. Barnard, but under an age-related provision of the policy, the benefit level was reduced to $488,000 as of September 1, 2010. We also maintain a life insurance death benefit for Mr. Mezger of $400,000.

 

Retirement Programs. Our 401(k) Savings Plan, a qualified defined contribution plan, is the only program we offer to all full-time employees that provides post-employment benefits. Our current NEOs and certain other senior executives also have the opportunity to participate in an unfunded nonqualified Deferred Compensation Plan, which allows pretax contributions of base salary and annual incentive compensation. We provide a dollar-for-dollar match of Deferred Compensation Plan and 401(k) Savings Plan contributions on up to an aggregate amount of six percent of a participant’s base salary. NEO deferrals under the Deferred Compensation Plan are shown below under the heading “Non-Qualified Deferred Compensation During Fiscal Year 2010.” We offer the Deferred Compensation Plan to give participating executives the ability to defer amounts above the contribution limits applicable to our 401(k) Savings Plan.

 

We maintain a Retirement Plan for certain executives that has been closed to new participants since 2004. Messrs. Mezger, Barnard and Hollinger participate in the Retirement Plan. The Retirement Plan provides each vested participant with a specific annual dollar amount for 20 years, with payments beginning upon the later of the participant reaching age 55; the tenth anniversary of the date the participant commenced his or her participation; or the termination of the participant’s employment with us. Mr. Mezger’s original annual benefit

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amount under the Retirement Plan was $450,000. For the other NEO participants, the original annual benefit amount under the Retirement Plan was $100,000. For each participant, the annual benefit amount is increased by the same annual cost-of-living adjustments that are applied to federal social security benefits, starting with the plan year ending November 30, 2006. Vesting generally requires five years of participation and, once vested, the participant is entitled to his or her full benefit per the payout terms stated above. Details of NEO participation in the Retirement Plan are provided below under the heading “Pension Benefits During Fiscal Year 2010.”

 

As with our non-employee directors, we have entered into agreements with each of our NEOs, other executive officers and certain other senior executives that provide them with indemnification and advancement of expenses to supplement that provided under our Certificate of Incorporation and insurance policies, subject to certain requirements and limitations.

 

Section 162(m) of the Code generally disallows a tax deduction for compensation over $1 million paid to our highest paid executives unless it is qualifying performance-based compensation. We generally design compensation plans in order to maintain federal tax deductibility for executive compensation under Section 162(m) of the Code, and the Compensation Committee considers the potential Section 162(m) impact when approving the compensation paid to our NEOs. The Compensation Committee, however, will approve compensation that may not be deductible under Section 162(m) of the Code where it believes it is in our and our stockholders’ best interests to do so.

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Equity Stock Ownership Policy. We have an executive stock ownership policy that establishes specific levels of stock ownership that designated executives are expected to achieve within five years of joining us and is intended to encourage, and has encouraged, our executives to increase their ownership of our common stock over time and to align their interests with our stockholders’ interests. The targeted stock ownership levels for our NEOs range from 20,000 to 150,000 shares, depending on position. Survey data and multiples of average base salaries per internal management level were used to determine expected ownership levels. Stock ownership may include shares of our common stock owned outright or owned indirectly through our 401(k) Savings Plan, and 60% of unvested restricted stock grants or phantom share rights. Phantom share rights are included so that executives subject to the policy are not penalized if there are a limited number of shares available for grant under our existing stockholder-approved equity compensation plans. Once required ownership levels are achieved, they must be maintained throughout employment. Our policy provides both financial incentives to achieve ownership requirements and material consequences for non-compliance. Our NEOs are currently in compliance with the policy.

 

Prohibition on Hedging/Pledging of KB Home Securities. To further align their interests with those of stockholders, our senior executives are prohibited from engaging in short sales of our securities and from buying or selling puts or calls on, or any other financial instruments that are designed to hedge or offset decreases or increases in the value of, our securities (including without limitation derivatives, prepaid variable forward contracts, equity swaps, collars and exchange funds).

 

Equity-Based Award Grant Policy. Our equity-based award grant policy governs the timing and establishes certain internal controls over the grant of equity-based awards. The policy requires that the Compensation Committee (or the Board) approve all grants of equity-based awards, and their terms. The policy does not permit any delegation of granting authority to our management. The grant date of any equity-based award will be the date on which the Compensation Committee met to approve the grant unless a written resolution sets a later date. The exercise price of any stock option award will not be less than the closing price of our common stock on the grant date.

 

Recovery of Compensation. Under his Employment Agreement, our CEO must repay certain bonus and incentive- or equity-based compensation he receives if we are required to restate our financial statements as a result of his misconduct, consistent with Section 304 of the Sarbanes-Oxley Act of 2002. We will also recoup equity-based compensation to the extent required under the Dodd-Frank Act.

 

																															Change in
																															Pension Value
																															and
																															Nonqualified
																										Non-Equity					Deferred
																Stock					Option					Incentive Plan					Compensation					All Other
			Fiscal			Salary					Bonus					Awards					Awards					Compensation					Earnings					Compensation					Total
Name and Principal Position(a)			Year			($)					($)(b)					($)(c)					($)(c)					($)(d)					($)(e)					($)(f)					($)
Jeffrey T. Mezger President and Chief Executive Officer			2010			$	1,000,000				$	0				$	0				$	2,295,750				$	2,750,000				$	618,113				$	66,518				$	6,730,381
			2009				1,000,000					0					0					3,500,000					2,750,000					747,377					83,699					8,081,076
			2008				1,000,000					0					875,000					2,625,000					2,750,000					141,666					70,482					7,462,148
Jeff J. Kaminski Executive Vice President and Chief Financial Officer			2010				266,891					0					75,000					766,797					360,000					0					51,670					1,520,358
Brian J. Woram Executive Vice President, General Counsel and Secretary			2010				202,933					751,971					132,500					907,157					0					0					79,262					2,073,823
Glen W. Barnard Senior Vice President, KBnxt Group			2010				300,001					150,000					0					598,122					0					148,423					26,762					1,223,308
			2009				300,001					0					0										300,000					202,354					21,907					824,262
			2008				299,168					45,000					0										375,000					13,716					29,582					762,466
William R. Hollinger Senior Vice President and Chief Accounting Officer			2010				365,000					0					0					275,490					350,000					139,956					28,946					1,159,392
			2009				365,000					0					162,500					487,500					390,000					205,116					31,348					1,641,464
			2008				363,750					0					175,000					525,000					370,000					25,877					29,784					1,489,411
Former NEO
Raymond P. Silcock*			2010				25,000					0					0					0					0					0					0					25,000
			2009				136,538					200,000					300,000					900,000					0					0					6,276					1,542,814

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