Share-Based Compensation Plans

The Avon Products, Inc. 2010 Stock Incentive Plan (the "2010 Plan"), which is a shareholder approved plan, 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 granted to Associates generally vest and settle after three years. Restricted stock units awarded to non-management directors generally vest in approximately one year and settle upon a director's departure from the Board of Directors. Performance restricted stock units generally vest after three years only upon the satisfaction of certain performance conditions.

For the years ended December 31:



	2012		2011		2010
Compensation cost for stock options, stock appreciation rights and restricted stock units	$	41.1	$	36.6	$	57.6
Total income tax benefit recognized for share-based arrangements	13.0		11.7		18.7

All of the compensation cost for stock options, stock appreciation rights, and restricted stock units for 2012, 2011, and 2010 was recorded in selling, general and administrative expenses. For the years ended December 31, 2012, 2011, and 2010, we have determined that we have a pool of windfall tax benefits.

Stock Options

The fair value of each option 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:



	2012		2011		2010
Risk-free rate⁽¹⁾	.7	%	1.8	%	1.9	%
Expected term⁽²⁾	4 years		4 years		4 years
Expected volatility⁽³⁾	38	%	38	%	38	%
Expected dividends⁽⁴⁾	5.0	%	3.0	%	3.0	%


(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 was based on historical employee exercise behavior, the vesting terms of the respective option and a contractual life of 10 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 then-current cash dividends of $.23 during 2012, $.23 during 2011 and $.22 during 2010 per share each quarter on our common stock for options granted during those years.

The weighted-average grant-date fair values per share of options granted were $3.55 during 2012, $6.51 during 2011 and $7.91 during 2010.

A summary of stock options as of December 31, 2012, and changes during 2012, is as follows:



	Shares (in 000’s)		Weighted- Average Exercise Price		Weighted- Average Contractual Term	Aggregate Intrinsic Value
Outstanding at January 1, 2012	28,361		$	31.30
Granted	1,775		18.24
Exercised	(556	)	15.50
Forfeited	(377	)	23.63
Expired	(2,913	)	29.69
Outstanding at December 31, 2012	26,290		$	31.00	4.3	$	2.2
Exercisable at December 31, 2012	22,580		$	31.76	3.8	$	.1

At December 31, 2012, there was approximately $3.8 of unrecognized compensation cost related to stock options outstanding. That cost is expected to be recognized over a weighted-average period of 1.3 years. We recognize expense on stock options 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 exercised during 2012, 2011, and 2010, were as follows:



	2012			2011		2010
Cash proceeds from stock options exercised	$	8.6		$	16.8	$	23.9
Tax (obligation)/ benefit realized for stock options exercised	(3.7		)	1.3		3.3
Intrinsic value of stock options exercised	2.2			10.0		14.6

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.

In March 2012, we granted performance restricted stock units that vest after three years only upon the satisfaction of certain performance conditions. Later in March 2012, we amended one of these performance conditions associated with this award. As a result, the incremental compensation cost associated with this modification totaled $.9, of which $.3 was recognized in 2012. We currently believe that the achievement of the performance conditions is probable.

A summary of restricted stock and restricted stock units at December 31, 2012, and changes during 2012, is as follows:



	Restricted Stock And Units (in 000’s)		Weighted-Average Grant-Date Fair Value
January 1, 2012	3,317		$	23.88
Granted	1,792		18.13
Vested	(1,233	)	17.41
Forfeited	(409	)	24.07
December 31, 2012	3,467		$	23.18

A summary of performance restricted stock units at December 31, 2012, and changes during 2012, is as follows:



	Performance Restricted Stock Units (in 000’s)		Weighted-Average Grant-Date Fair Value
January 1, 2012⁽¹⁾	1,021		$	27.72
Granted	1,998		19.45
Vested	—		—
Forfeited	(110	)	23.80
December 31, 2012⁽¹⁾	2,909		$	22.19

(1) Based on target payout

The total fair value of restricted stock units that vested during 2012 was $22.8, based upon market prices on the vesting dates. At December 31, 2012, there was approximately $43.7 of unrecognized compensation cost related to restricted stock, restricted stock units and performance restricted stock units compensation arrangements. That cost is expected to be recognized over a weighted-average period of 1.8 years.

In addition to the amounts in the table above, in April 2012 we granted 200,000 restricted stock units that will be funded with treasury shares, outside of the 2010 Plan, in reliance upon The New York Stock Exchange rules. These restricted stock units have a weighted-average grant-date fair value of $21.69 and vest and settle ratably over five years. During 2012, we recognized compensation cost of $1.4 for these restricted stock units. At December 31, 2012, there was $2.9 of unrecognized compensation cost related to these restricted stock units.