EMPLOYEE BENEFIT PLANS

Deferred Compensation Plans

The Company has a 401(k) plan for all employees who have been with the Company for a period of six months or more. The Company matches portions of employees’ voluntary contributions. Additional employer contributions in the form of profit sharing may also be made at the Company’s discretion. The Company recorded $13.3 million, $10.8 million and $8.5 million of expense for matching contributions in fiscal 2016, 2015 and 2014, respectively.

The Company’s Supplemental Executive Retirement Plan (SERP) is a non-qualified deferred compensation program that provides benefits payable to certain management employees upon retirement, death or termination of employment. Under the SERP, the Company accrues an unfunded benefit based on a percentage of the eligible employees’ salaries, as well as an interest factor based upon a predetermined formula. The Company’s liabilities related to the SERP were $28.3 million and $27.9 million at September 30, 2016 and 2015, respectively. The Company recorded $4.6 million, $4.4 million and $3.9 million of expense for this plan in fiscal 2016, 2015 and 2014, respectively.

The Company has a deferred compensation plan available to a select group of employees which allows participating employees to contribute compensation into the plan on a before tax basis and defer income taxation on the contributions until the funds are withdrawn from the plan. The participating employees designate investments for their contributions; however, the Company is not required to invest the contributions in the designated investments. The Company’s net liabilities related to the deferred compensation plan were $46.7 million and $41.1 million at September 30, 2016 and 2015, respectively. The Company records as expense the amount that the employee contributions would have earned had the funds been invested in the designated investments. Related to this plan, the Company recorded expense of $4.0 million in fiscal 2016, a reduction in expense of $1.7 million in fiscal 2015 and expense of $1.6 million in fiscal 2014.

Employee Stock Purchase Plan

The Company’s Employee Stock Purchase Plan provides eligible employees the opportunity to purchase common stock of the Company at a discounted price of 85% of the fair market value of the stock on the designated dates of purchase. The price to eligible employees may be further discounted depending on the average fair market value of the stock during the period and certain other criteria. Under the terms of the plan, the total fair market value of common stock that an eligible employee may purchase each year is limited to the lesser of 15% of the employee’s annual compensation or $25,000. Under the plan, employees purchased 89,652 shares for $2.2 million in fiscal 2016, 82,446 shares for $1.7 million in fiscal 2015 and 77,216 shares for $1.4 million in fiscal 2014. At September 30, 2016, the Company had 3.3 million shares of common stock reserved for issuance pursuant to the Employee Stock Purchase Plan.

Incentive Bonus Plan

The Company’s Incentive Bonus Plan provides for the Compensation Committee to award short-term performance bonuses to senior management based upon the level of achievement of certain criteria. For fiscal 2016, 2015 and 2014 the Compensation Committee approved awards whereby certain executive officers could earn performance bonuses based upon percentages of the Company’s pre-tax income. Compensation expense related to these plans was $14.2 million in fiscal 2016 and $11.8 million in both fiscal 2015 and 2014.

Stock-Based Compensation

The Company’s Stock Incentive Plan, together with its Restricted Stock Unit Agreement, provides for the granting of stock options and restricted stock units to executive officers, other key employees and non-management directors. Restricted stock awards may be based on performance (performance-based) or on service over a requisite time period (time-based).

During fiscal 2015, the Board of Directors and the Company’s stockholders authorized an increase of 25.0 million shares to the common stock reserved for issuance under the D.R. Horton, Inc. Stock Incentive Plan. At September 30, 2016, the Company had 37.1 million shares of common stock reserved for issuance pursuant to the Stock Incentive Plan.

The discussion that follows provides further information regarding stock-based compensation granted during fiscal 2016, 2015 and 2014. At September 30, 2016, there were 22.3 million shares available for future grants under the Stock Incentive Plan.

Stock Options

Stock options are granted at exercise prices which equal the market value of the Company’s common stock at the date of the grant. The options outstanding at September 30, 2016 vest over periods of 2 to 9.75 years from the initial grant date and expire 10 years after the dates on which they were granted.

The following table provides additional information related to stock option activity during fiscal 2016, 2015 and 2014.



	Year Ended September 30,
	2016				2015				2014
	Stock Options		Weighted Average Exercise Price		Stock Options		Weighted Average Exercise Price		Stock Options		Weighted Average Exercise Price
Outstanding at beginning of year	15,337,656		$	17.50	19,478,811		$	17.37	18,962,536		$	15.91
Granted	—		—		—		—		3,856,166		23.85
Exercised	(3,504,989	)	31.21		(3,636,655	)	28.75		(2,687,724	)	16.30
Cancelled or expired	(436,750	)	18.45		(504,500	)	19.89		(652,167	)	17.68
Outstanding at end of year	11,395,917		$	16.69	15,337,656		$	17.50	19,478,811		$	17.37
Exercisable at end of year	6,645,967		$	14.99	6,859,889		$	16.51	7,207,978		$	16.27

The aggregate intrinsic value of options exercised during fiscal 2016, 2015 and 2014 was $39.2 million, $44.6 million and $18.0 million, respectively. The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the option exercise price.

The aggregate intrinsic value of options outstanding and exercisable at September 30, 2016 was $154.0 million and $101.1 million, respectively. Exercise prices for options outstanding at September 30, 2016 ranged from $9.03 to $23.86. The weighted average remaining contractual lives of options outstanding and exercisable at September 30, 2016 were 4.8 and 4.6 years, respectively.

The Company did not grant stock options during fiscal 2016 or 2015. The stock options granted in fiscal 2014 were awarded to approximately 520 recipients, vest over periods of 3 to 5 years and expire 10 years after the dates on which they were granted.

The Company measures and recognizes compensation expense for stock options at an amount equal to the fair value of the options. The weighted average fair value of options granted in fiscal 2014 was $11.21 per share. The fair value of the options was determined on the date of grant using the Black-Scholes option pricing model based on the following weighted average assumptions:



	Year Ended
	September 30, 2014
Risk free interest rate	2.01%
Expected life (in years)	6.48
Expected volatility	48.80%
Expected dividend yield	0.63%

For fiscal 2016, 2015 and 2014, compensation expense related to stock options was $20.5 million, $28.9 million and $25.5 million, respectively. At September 30, 2016, there was $23.8 million of unrecognized compensation expense related to unvested stock option awards. This expense is expected to be recognized over a weighted average period of 2.1 years.

Performance-Based Restricted Stock Units (RSUs)

The Company granted performance-based RSUs to certain executive officers during fiscal 2016, 2015 and 2014 that vest at the end of a three-year performance period. These performance-based awards are accounted for as either liability awards or equity awards depending on the specific terms of each award.

Performance-Based RSU Liability Awards — During fiscal 2014, a target number of 350,000 performance-based RSU liability awards were granted to the Company’s Chairman and its former Chief Executive Officer. The number of units that vested at September 30, 2016, the end of the three-year performance period, was based on the recipient’s completed years of service and the Company’s relative position as compared to its peers in achieving certain performance criteria. Based on the achievement of the service and performance criteria, 406,250 performance-based RSUs were earned and vested on September 30, 2016. The Compensation Committee also had the discretion to reduce the final payout from the amount earned and could determine if the award was paid in cash, equity or a combination of both. At September 30, 2016, the Company’s liability for these awards was $12.3 million. In November 2016, the Compensation Committee approved the payout of these performance-based RSUs in the form of 406,250 shares of common stock to satisfy the award.

Performance-Based RSU Equity Awards — During fiscal 2016 and 2015, performance-based RSU equity awards were granted to the Company’s Chairman, its Chief Executive Officer and its Chief Operating Officer. The number of units that ultimately vest depends on the Company’s relative position as compared to its peers at the end of the three-year period in achieving certain performance criteria and can range from 0% to 200% of the number of units granted. The performance criteria are total shareholder return, return on investment, SG&A expense containment and gross profit. The performance-based RSUs have no dividend or voting rights during the performance period. Each of these performance-based RSUs represents the contingent right to receive one share of the Company’s common stock if the vesting conditions are satisfied. Compensation expense related to these grants is based on the Company’s performance against the peer group, the elapsed portion of the performance period and the grant date fair value of the award.

The following table provides additional information related to the performance-based RSUs outstanding at September 30, 2016.



Grant Date	Vesting Date	Target Number of Performance Units	Grant Date Fair Value per Unit		Compensation Expense Year Ended September 30,
Grant Date	Vesting Date	Target Number of Performance Units	Grant Date Fair Value per Unit		2016		2015		2014
					(In millions)
November 2013	September 2016	350,000	$	19.64	$	4.4	$	5.2	$	2.6
November 2014	September 2017	290,000	23.62		4.1		3.4		—
November 2015	September 2018	330,000	30.81		4.0		—		—
					$	12.5	$	8.6	$	2.6

Time-Based Restricted Stock Unit (RSU) Equity Awards

Time-based RSUs represent the contingent right to receive one share of the Company’s common stock if the vesting conditions are satisfied. The time-based RSUs have no dividend or voting rights during the vesting period.

During fiscal 2016 and 2015, time-based RSUs were granted to the Company’s executive officers, other key employees and non-management directors (collectively, approximately 570 and 580 recipients, respectively). These awards vest annually in equal installments over periods of three to five years. RSUs generally result in less dilution to shareholders than stock options, which have been granted to key employees in the past. RSUs also provide an immediate, tangible value to the recipient and better diversification than stock options alone, which promotes the retention of key employees over the multi-year vesting period.

The following table provides additional information related to time-based RSU activity during fiscal 2016 and 2015.



	Year Ended September 30,
	2016				2015
	Number of Restricted Stock Units		Weighted Average Grant Date Fair Value		Number of Restricted Stock Units		Weighted Average Grant Date Fair Value
Outstanding at beginning of year	1,978,262		$	25.60	26,668		$	21.49
Granted	2,117,330		23.14		2,036,900		26.02
Vested	(423,427	)	25.57		(12,221	)	21.48
Cancelled	(193,932	)	25.05		(73,085	)	26.06
Outstanding at end of year	3,478,233		$	24.12	1,978,262		$	25.60

For fiscal 2016 and 2015, the Company’s compensation expense related to time-based RSUs was $18.7 million and $9.4 million, respectively, and at September 30, 2016, there was $56.0 million of unrecognized compensation expense related to unvested time-based RSU awards. This expense is expected to be recognized over a weighted average period of 3.8 years.