exv10w40






EXHIBIT 10.40




KB HOME

2010 EQUITY INCENTIVE PLAN

STOCK OPTION AGREEMENT




     This Stock Option Agreement (“Agreement”) is made on October 7, 2010 (“Award Date”) by and
between KB Home, a Delaware corporation (“Company”), and Jeffrey T. Mezger (“Holder”). Capitalized
terms used in this Agreement and not defined herein have the respective meanings given to them in
the KB Home 2010 Equity Incentive Plan (“Plan”).



A G R E E M E N T




     1. Subject to the terms of the Plan and this Agreement, the Company hereby grants to Holder
an option (“Option”) to purchase from the Company an aggregate of 260,000 shares of Common Stock,
$1.00 par value per share, of the Company, at the purchase price of $11.06 per share, the Option to
be exercisable as hereinafter provided. A copy of the Plan is attached hereto and/or is available
upon request, and is made a part hereof.



     2. The Option shall vest and be exercisable if Holder does not experience a Termination of
Service prior to any of the applicable dates described in this Section 2 and if, and only if, the
performance goal, as set forth in this Section 2, has been satisfied.



          The performance goal with respect to the Option shall be that the Management Development and
Compensation Committee of the Company’s Board of Directors (the “Committee”) has determined that
one of the following three performance metrics has been achieved as of KB Home’s November 30 fiscal
year end in any of 2011, 2012, and 2013 (each, a “measurement date”):





	 	(a)	 	Positive Cumulative Operating Margin: The Company has
achieved in any one performance period (as described in this subsection (a))
positive cumulative operating margin. Cumulative operating margin shall be
calculated as the sum of the Company’s consolidated total operating income over
a performance period, excluding the impact of inventory and joint venture
impairments and land option contract abandonments, divided by the Company’s
consolidated total revenue over the same performance period. The first
performance period shall be from December 1, 2010 through November 30, 2011.
The second performance period shall be from December 1, 2010 through November
30, 2012. The third performance period shall be from December 1, 2010 through
November 30, 2013. The performance goal for the Award will be satisfied in
full under this Agreement if and upon the Committee’s determination of the
achievement in any performance period of the Positive Cumulative Operating
Margin performance metric as described in this subsection (a);
	 
	 	(b)	 	Relative Operating Margin: The Company’s cumulative
operating margin over a performance period is greater than the 50th percentile
relative to the cumulative operating margin of the companies included in the
global industry classification standard homebuilding sub-industry index on the
Award Date, excluding companies that produce manufactured or prefabricated
homes, companies in bankruptcy, companies that do not build homes, and
companies














 






	 	 	 	that do not have shares of stock that trade on a national securities
exchange registered with the Securities and Exchange Commission (or a successor
federal agency) (each such company, a “GICS Index Comparator Company”), based
on most recent data available for such GICS Index Comparator Companies as of
the Company’s November 30 fiscal year end that encompasses four fiscal quarters
(with respect to the first performance period), eight fiscal quarters (with
respect to the second performance period) or twelve fiscal quarters (with
respect to the third performance period), as the case may be for each such GICS
Index Comparator Company. If any GICS Index Comparator Company after the Award
Date merges, is acquired or is involved in a business combination transaction
and the surviving company is a GICS Index Comparator Company, data for the
surviving company shall be included in evaluating the achievement of this
performance metric. If any GICS Index Comparator Company after the Award Date
merges, is acquired or is involved in a business combination transaction that
results in any such case in a surviving company that is not a GICS Index
Comparator Company, or if any GICS Index Comparator Company is involved in a
“going private” transaction, files for bankruptcy or about which data is no
longer publicly available, data for any such GICS Index Comparator Company (A)
to the extent available and encompassing one or more full fiscal quarterly
periods for any such GICS Index Comparator Company shall be included in
evaluating the achievement of this performance metric with respect to the
particular performance period in which the applicable event occurs, so long as
there is data available for at least one such full fiscal quarterly period
ending within twelve months of the end of such performance period; and (B)
shall not be included in evaluating the achievement of this performance metric
for the performance period or periods (as the case may be) following the
performance period in which the applicable event occurs; provided that in no
event will data for any such GICS Index Comparator Company that was included in
evaluating the achievement of this performance metric in any prior performance
period be retroactively removed with respect to evaluating the achievement of
this performance metric with respect to any such prior measurement period. The
performance goal for the Award will be satisfied in full under this Agreement
if and upon the Committee’s determination of the achievement in any one
performance period of the Relative Operating Margin performance metric
described in this subsection (b); or
	 
	 	(c)	 	Relative Customer Satisfaction: Based on the most
recently released pre-measurement date results of a survey conducted by an
independent firm, as of any one of the measurement dates, the Company’s average
(mean) customer satisfaction rating for the number of markets in which the
Company has active operations and which are covered by the survey is above the
average (mean) customer satisfaction ratings of the homebuilders covered in the
survey relative to the number of markets in which such homebuilders have active
operations and are covered by the survey; provided that if no such survey is
available at any applicable measurement date, this item may be measured by
objective data underlying customer satisfaction, as determined by the Committee
in its sole discretion. The performance goal for the Award will be satisfied
in full under this Agreement if and upon the Committee’s




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	 	 	 	determination of the
achievement as of any one applicable measurement date of the Relative Customer
Satisfaction performance metric described in this subsection (c).






	 	 	 	All determinations with respect to the achievement of the foregoing performance
metrics shall be made by the Committee no later than ninety days after each
measurement date.
	 
	 	 	 	If any of the three foregoing performance metrics is determined by the Committee to
have been achieved at the first measurement date, one-third of the Option will vest
on the date of determination and the remaining two-thirds will vest in equal
installments on the second and third anniversaries of the Award Date subject to
Holder not experiencing a Termination of Service prior to any such vesting dates.
If none of the three foregoing performance metrics is determined by the Committee to
have been achieved at the first measurement date, but at least one is determined by
the Committee to have been achieved at the second measurement date, two-thirds of
the Option will vest on the date of determination and the remaining one-third will
vest on the third anniversary of the Award Date subject to Holder not experiencing a
Termination of Service prior to any such vesting dates. If none of the three
foregoing performance metrics is determined by the Committee to have been achieved
at the first or at the second measurement dates, but at least one is determined by
the Committee to have been achieved at the third measurement date, the Option will
then vest in full on the date of determination subject to Holder not experiencing a
Termination of Service prior to such date. If none of the three foregoing
performance metrics is determined by the Committee to have been achieved by the
third measurement date, (i) up to one half of the Option will vest if and on the
date that the Committee determines that the Relative Operating Margin at the third
measurement date is within at least 60% of its applicable performance metric goal
(as the goal is above the 50th percentile; 60% of that goal is equal to
above the 30th percentile); and (ii) up to one-half of the Option will
vest if and on the date the Committee determines that Relative Customer Satisfaction
at the third measurement date is within at least 60% of its applicable performance
metric goal as described above, in each case of (i) and (ii) subject to subject to
Holder not experiencing a Termination of Service prior to the third measurement date
and in accordance with the following table (with performance between 60% and 100% of
achievement interpolated linearly):





	 	 	 
	Performance Metric Achievement	 	Range of Performance Option Vesting
	Actual % of Performance Goal Achieved	 	% of Eligible Award
	 
	60% -70%
	 	25% -44%
	70% -80%
	 	44% -63%
	80% -90%
	 	63% -81%
	90% -100%
	 	81% to 100%







	 	 	 	If none of the three performance metrics as described in this Section 2 have
been achieved (whether in full or at an applicable qualifying 60% threshold level at
the third measurement date), notwithstanding any other provision of this Agreement
(including without limitation Section 3 below), the Option shall not vest or




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	 	 	 	become
exercisable and Holder shall immediately forfeit all rights, title and interests in
and to any portion of the Option.





     3. Without limiting the generality of Section 1 above, it is understood and agreed that the
Option is subject to the following additional terms and conditions and to the terms and conditions
of the Plan:



          (a) 100% of the Option will vest and become immediately exercisable, and the performance goal
in Section 2 above shall be deemed satisfied in full, upon Holder’s Retirement. “Retirement” means
severance from employment with the Company and its Affiliates for any reason other than a leave of
absence, termination for cause, death or disability, at such time as the sum of Holder’s age and
years of service with the Company and its Affiliates equals at least 65 or more, provided that
Holder is then at least 55 years of age. The Company shall have the sole right to determine
whether Holder’s severance from employment constitutes a Retirement.




          (b) The Committee, in its discretion, may deem the performance goal in Section 2 above to be
satisfied and accelerate the vesting of the balance, or some lesser portion of the balance, of the
unvested Option at any time, subject to the limitations on acceleration of vesting set forth in the
Plan. If and to the extent so accelerated, the applicable balance of the Option shall vest as of
the date or upon the occurrence of the condition specified by the Committee.




          (c) The Option, to the extent vested, shall in any event cease to be exercisable and shall
expire and terminate to the extent not exercised on the earlier of (1) the close of business on
October 7, 2020; (2) ninety calendar days after Holder’s Termination of Service for any reason
other than for cause (as determined by the Company) or Retirement; (3) the date specified in
subsection (c)(1) of this Section 3 in the event of Holder’s Retirement, or (4) five calendar days
after the date of Holder’s Termination of Service if for cause (as determined by the Company).
Notwithstanding the foregoing, in the event of the death or disability of Holder, the performance
goal in Section 2 shall be deemed satisfied in full, Holder shall be credited with one additional
year of service vesting, and the Option (to the extent vested based on Holder’s service and the
additional credited year of service vesting at the time of Holder’s disability or death) will
terminate on the earlier of (x) one year from the date of disability or death or (y) the date
specified in subsection(c)(1) of this Section 3.




          (d) The Option may not be sold, pledged, assigned or transferred in any manner other than as
permitted by the Plan.




          (e) Holder shall have none of the rights of a stockholder of the Company with respect to
shares of Common Stock subject to the Option unless and until Holder becomes the record owner of
such shares following exercise of the Option in accordance with the terms of this Agreement.




     4. Any exercise of the vested Option shall be made by giving the Company written or electronic
notice of exercise specifying the number of shares to be purchased. The notice of exercise shall
be accompanied by any additional documents required under the Plan and by full payment of the
purchase price and any applicable withholding taxes. Payment may be made by (a) cash or check, (b)
shares of Common Stock owned by Holder (which are not the subject of any pledge or other security
interest) having a Fair Market Value (as defined in the Plan) on the date of



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delivery equal to the
aggregate payment required, or (c) delivery of a written or electronic notice that Holder has
placed a market sell order with a broker with respect to shares then issuable upon exercise of the
Option, and that the broker has been directed to pay a sufficient portion of the net proceeds of
the sale to the Company in satisfaction of the aggregate payment required (so long as payment of
such net proceeds is then made to the Company upon settlement of such sale); provided that Holder
may elect to have the Company withhold shares otherwise issuable upon exercise of the Option in
satisfaction of any applicable tax withholding obligation.



     5. Neither the execution and delivery hereof nor the granting of the Option shall confer upon
Holder any right to be employed or engaged in any capacity by the Company or any Affiliate, or to
continue in such employment or engagement, or shall interfere with or restrict in any way the
rights of the Company and any Affiliate, which rights are hereby expressly reserved, to discharge
Holder at any time.



     6. The Option is subject to all of the terms and conditions of the Plan, including without
limitation, any terms, rules, or determinations made by the Committee pursuant to its authority
under the Plan and Plan provisions on adjustment of awards, non-transferability, satisfaction of
tax requirements and compliance with other laws.



     7. The Company may impose such restrictions, conditions or limitations as it determines
appropriate as to the timing and manner of any resales by Holder or other subsequent transfers by
Holder of any shares of Common Stock issued to Holder as a result of the exercise of this Option,
including without limitation (a) restrictions under an insider trading or other Company policy,
(b) restrictions designed to delay and/or coordinate the timing and manner of sales by Holder and
others following a public offering of the Company’s stock, (c) stock ownership or holding
requirements and (d) restrictions as to the use of a specified brokerage firm for such resales or
other transfers.



     8. Any notice given hereunder to the Company shall be addressed to the Company at its
corporate headquarters, attention Senior Vice President, Human Resources, and any notice given
hereunder to Holder shall be addressed to Holder at Holder’s address as shown on the records of the
Company.



     9. Holder agrees to be bound by the terms and conditions of this Agreement and of the Plan and
that in the event of any conflict in terms between this Agreement and the terms of the Plan, the
terms of the Plan shall prevail.



     10. This Agreement will be construed, administered and enforced in accordance with the laws of
the State of California. This Agreement and the grant of the Option evidenced hereby shall be
subject to rescission by the Company if an executed original of this Agreement is not received by
the Company within four weeks of the Award Date.



     11. The Option is intended to be exempt from the requirements of Section 409A of the Code, and
this Agreement shall be interpreted in a manner consistent with such intent. Notwithstanding
anything to the contrary in the Plan or in this Agreement, Holder agrees that Holder shall be
solely responsible for the satisfaction of all taxes, interest and penalties that may be imposed on
Holder or for Holder’s account in connection with the Option (including without limitation any
taxes, interest and penalties under Section 409A), and neither the Company nor its Affiliates shall
have any obligation to reimburse, indemnify or otherwise hold Holder harmless from any or all of
such taxes, interest or penalties.



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     IN WITNESS WHEREOF, the Company, by its duly authorized officer, and Holder have executed this
Agreement as of the day and year first above written.



	 	 	 	 	 
	 	KB HOME

 	 
	 	By:  	/S/ THOMAS F. NORTON
 	 
	 	 	Thomas F. Norton 	 
	 	 	Senior Vice President, Human Resources 	 
	 
	 	HOLDER:

 	 
	 	By:  	/S/ JEFFREY T. MEZGER
 	 
	 	 	Jeffrey T. Mezger 	 
	 	
Date: 	
 11-4-2010	 
	 




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