Share-Based Compensation Plans

The Avon Products, Inc. 2010 Stock Incentive Plan (the “2010 Plan”), which is shareholder approved, provides for several types of share-based incentive compensation awards including stock options, stock appreciation rights, restricted stock, restricted stock units and performance restricted stock units. Under the 2010 Plan, the maximum number of shares that may be awarded is 32,000,000 shares, where the maximum number of shares are reduced as follows: (i) in the case of the grant of an award of an option or Stock Appreciation Right (“SAR”), by each share of stock subject to such an award and (ii) in the case of the grant of an award payable in stock other than an option or SAR by 2.33 multiplied by each share of stock subject to such award. Shares issued under share-based awards will be primarily funded with issuance of new shares.

We have issued stock options, stock appreciation rights, restricted stock units and performance restricted stock units under the 2010 Plan. Stock option awards are granted with an exercise price equal to the closing market price of our stock at the date of grant. Those option awards and stock appreciation rights generally vest in thirds over the three-year period following each option grant date and have ten-year contractual terms. Restricted stock units generally vest and settle after three years. Performance restricted stock units generally vest after three years only upon the satisfaction of certain performance conditions.

For the years ended December 31:



	2011		2010		2009
Compensation cost for stock options, stock appreciation rights and restricted stock units	$	36.6	$	57.6	$	54.9
Total income tax benefit recognized for share-based arrangements	11.7		18.7		18.5

All of the compensation cost for stock options, stock appreciation rights, and restricted stock units for 2011, 2010, and 2009 was recorded in selling, general and administrative expenses. For the years ended December 31, 2011, 2010, and 2009, we have determined that we have a pool of windfall tax benefits.

Stock Options and Stock Appreciation Rights

The fair value of each option and stock appreciation right award is estimated on the date of grant using a Black-Scholes-Merton option pricing model with the following weighted-average assumptions for options granted during the years ended December 31:



	2011		2010		2009
Risk-free rate⁽¹⁾	1.8	%	1.9	%	1.6	%
Expected term⁽²⁾	4 years		4 years		4 years
Expected volatility⁽³⁾	38	%	38	%	35	%
Expected dividends⁽⁴⁾	3.0	%	3.0	%	4.0	%


(1)	The risk-free rate was based upon the rate on a zero coupon U.S. Treasury bill, for periods within the contractual life of the option, in effect at the time of grant.


(2)	The expected term of the option or stock appreciation right was based on historical employee exercise behavior, the vesting terms of the respective option or stock appreciation right and a contractual life of ten years.


(3)	Expected volatility was based on the weekly historical volatility of our stock price, over a period similar to the expected life of the option.


(4)	Assumed the current cash dividends of $.23 during 2011, $.22 during 2010 and $.21 during 2009 per share each quarter on our common stock for options and stock appreciation rights granted during those years.

The weighted-average grant-date fair values per share of options and stock appreciation rights granted were $6.51 during 2011, $7.91 during 2010 and $3.18 during 2009.

A summary of stock options and stock appreciation rights as of December 31, 2011, and changes during 2011, is as follows:



	Shares (in 000’s)		Weighted- Average Exercise Price		Weighted- Average Contractual Term	Aggregate Intrinsic Value
Outstanding at January 1, 2011	29,655		$	31.07
Granted	1,041		27.31
Exercised	(941	)	17.71
Forfeited	(373	)	22.56
Expired	(1,021	)	36.31
Outstanding at December 31, 2011	28,361		$	31.30	4.8	$	10.0
Exercisable at December 31, 2011	22,732		$	32.60	4.1	$	6.2

At December 31, 2011, there was approximately $6.8 of unrecognized compensation cost related to stock options and stock appreciation rights outstanding. That cost is expected to be recognized over a weighted-average period of 1.2 years. We recognize expense on stock options and stock appreciation rights using a graded vesting method, which recognizes the associated expense based on the timing of option vesting dates.

Cash proceeds, tax benefits, and intrinsic value related to total stock options and stock appreciation rights exercised during 2011, 2010 and 2009, were as follows:



	2011		2010		2009
Cash proceeds from stock options and stock appreciation rights exercised	$	16.8	$	23.9	$	13.1
Tax benefit realized for stock options and stock appreciation rights exercised	1.3		3.3		.9
Intrinsic value of stock options and stock appreciation rights exercised	10.0		14.6		5.0

Restricted Stock, Restricted Stock Units and Performance Restricted Stock Units

The fair value of restricted stock units and performance restricted stock units granted was determined based on the closing price of our common stock on the date of grant.

In March 2011 we granted performance restricted stock units that vest after three years only upon the satisfaction of certain performance conditions. We accrue compensation cost if it is probable that the performance conditions will be achieved and

reassess whether achievement of the performance conditions are probable at each reporting period. In the fourth quarter of 2011, we assessed that it is no longer probable that we would meet the specified performance conditions, and reversed the compensation cost recognized to-date.

A summary of restricted stock, restricted stock units, and performance restricted stock units at December 31, 2011, and changes during 2011, is as follows:



	Restricted Stock And Units (in 000’s)		Weighted- Average Grant-Date Fair Value
January 1, 2011	2,952		$	26.36
Granted	2,335		26.36
Vested	(769	)	35.56
Forfeited	(180	)	25.16
December 31, 2011	4,338		$	24.78

The total fair value of restricted stock units that vested during 2011 was $20.9, based upon market prices on the vesting dates. As of December 31, 2011, there was approximately $33.4 of unrecognized compensation cost related to restricted stock units and performance restricted stock units compensation arrangements. That cost is expected to be recognized over a weighted-average period of 2.0 years.