Share-Based Compensation Plans

The Avon Products, Inc. 2010 Stock Incentive Plan (the "2010 Plan") and the Avon Products, Inc. 2013 Stock Incentive Plan (the “2013 Plan”), which are shareholder approved plans, provide 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. Following shareholder approval of the 2013 Plan in May 2013, there were no further awards made under the 2010 Plan. Under the 2010 Plan, the maximum number of shares that may be awarded was 32,000,000 shares, where the maximum number of shares was 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. Under the 2013 Plan, the maximum number of shares that may be awarded is 42,000,000 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 SAR, by each share subject to such an award and (ii) in the case of the grant of an award payable in shares other than an option or SAR by 3.13 multiplied by each share subject to such an award. Shares issued under share-based awards will be primarily funded with issuance of new shares.

We have issued stock options under the 2010 Plan, and stock appreciation rights, restricted stock units and performance restricted stock units under both the 2010 Plan and the 2013 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 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:



	2013		2012		2011
Compensation cost for stock options, stock appreciation rights, performance restricted stock units and restricted stock units	$	43.3	$	41.1	$	36.6
Total income tax benefit recognized for share-based arrangements	14.9		13.0		11.7

All of the compensation cost for stock options, stock appreciation rights, performance restricted stock units and restricted stock units for 2013, 2012 and 2011 was recorded in selling, general and administrative expenses. For the years ended December 31, 2013, 2012 and 2011, 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:



	2013	2012		2011
Risk-free rate⁽¹⁾	*	.7	%	1.8	%
Expected term⁽²⁾	*	4 years		4 years
Expected volatility⁽³⁾	*	38	%	38	%
Expected dividends⁽⁴⁾	*	5.0	%	3.0	%


*	There were no stock options granted in 2013.


(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 and $.23 during 2011 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 and $6.51 during 2011.

A summary of stock options as of December 31, 2013, and changes during 2013, is as follows:



	Shares (in 000’s)		Weighted- Average Exercise Price		Weighted- Average Contractual Term	Aggregate Intrinsic Value
Outstanding at January 1, 2013	26,290		$	31.00
Granted	—		—
Exercised	(1,216	)	15.73
Forfeited	(337	)	20.94
Expired	(3,194	)	29.22
Outstanding at December 31, 2013	21,543		$	32.27	3.5	$	5.6
Exercisable at December 31, 2013	19,869		$	32.73	3.2	$	5.6

At December 31, 2013, there was approximately $.7 of unrecognized compensation cost related to stock options outstanding. That cost is expected to be recognized over a weighted-average period of 0.9 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 2013, 2012 and 2011, were as follows:



	2013			2012			2011
Cash proceeds from stock options exercised	$	19.4		$	8.6		$	16.8
Tax (obligation) benefit realized for stock options exercised	(1.8		)	(3.7		)	1.3
Intrinsic value of stock options exercised	6.4			2.2			10.0

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 2011, we granted performance restricted stock units that would vest and settle 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 2012, we granted performance restricted stock units that would vest and settle after three years only upon the satisfaction of certain performance conditions. Several weeks after the original grant date, 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 have adjusted the compensation cost recognized to-date to reflect our estimated performance.

In 2013, we granted performance restricted stock units that would vest and settle after three years only upon the satisfaction of certain performance conditions. We currently believe that the achievement of the performance conditions is probable.

A summary of restricted stock and restricted stock units at December 31, 2013, and changes during 2013, is as follows:



	Restricted Stock And Units (in 000’s)		Weighted-Average Grant-Date Fair Value
January 1, 2013	3,467		$	23.18
Granted	2,323		20.36
Vested	(1,004	)	27.91
Forfeited	(552	)	22.03
December 31, 2013	4,234		$	20.67

A summary of performance restricted stock units at December 31, 2013, and changes during 2013, is as follows:



	Performance Restricted Stock Units (in 000’s)		Weighted-Average Grant-Date Fair Value
January 1, 2013⁽¹⁾	2,909		$	22.19
Granted	1,977		20.17
Vested	—		—
Forfeited	(503	)	21.34
December 31, 2013⁽¹⁾	4,383		$	22.19

(1) Based on initial target payout.

The total fair value of restricted stock units that vested during 2013 was $19.4, based upon market prices on the vesting dates. At December 31, 2013, there was approximately $64.4 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 2.0 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 2013, 40,000 of these restricted stock units vested, and 160,000 of these restricted stock units were outstanding at December 31, 2013. During 2013 and 2012, we recognized compensation cost of $1.4 and $1.4, respectively, for these restricted stock units. At December 31, 2013, there was $1.6 of unrecognized compensation cost related to these restricted stock units.