How to use variable and other incentive pay for the purpose of enhanced employee retention in a fiercely competitive labor market  2005 Elena Kozlovskaya AVON Russia Manufacturing Compensation&Benefits

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 Total Reward Strategy Goals: attracting motivation retention Key Principles: competitive strength controllability transparency

 Total Reward Strategy: 4 Key Components Compensation: Base Salary Incentives PDP-Bonuses Recognition Awards Benefits: Medical/Health Lunch vouchers Company transportation allowance Discount on Company’s goods Additional vacation days Company car Mobile phone Workspace environment: Respect Integrity Fairness Teamwork Accountability Communication Risk-taking Training and Development: Performance Development Process - PDP Technical training Leadership training Management skills Feedback and coaching Responsibility for projects

Compensation Philosophy To attract, motivate and retain associates, a company must provide a total compensation package that is highly competitive and related to individual and business performance Total compensation for an associate is determined by four factors: n Internal value of an individual position n External competitiveness n Individual performance measured by PDP n Business performance

Compensation Package n Base Salary n Base Salary - Pay for Competence n Incentives n Incentives - Performance-based variable pay plans that provide cash bonuses and stock options –Management Incentive Plan for Directors - MIP –Management Stock Option Plan - MSOP –Year end bonus for all associates - LIP n Awards n Awards - Cash compensation to individuals or teams for specific achievements that are outside the scope of normal responsibilities or significantly exceed them –PDP-Bonuses –Other Awards

What Is PDP? Progress ReviewPerformance Review Coaching & Mentoring (Ongoing) Performance & Development Planning Stage 1 - Performance and Development Planning  Setting goal and competency performance objectives  Creating the development plan  Conducting Career Development discussion  Conducting the performance planning discussion Stage 2 – Progress Review  Conducting the progress review meeting  Providing ongoing coaching and feedback  Giving development support Stage 3 - Performance Review  Assessment of performance  Completion of the PDP appraisal form  Conducting the performance review discussion

LTIP & MSOP What is the Purpose of LTIP & MSOP? n Recognize and reward for performance n Encourage each recipient to “Think and Act” like an owner n To lock in interest of recipient with interest of shareholders - create value for the company and shareholders n Enable recipient to build up an equity/ownership stake in the company

LTIP & MSOP What is a Stock Option? An opportunity to purchase a share of stock at a fixed price for a specified period of time. n Eligibility and participation is for all Directors and above n MSOP grants are limited to 30% of eligible participants –Granted, based on General Management proposals, to high performers, high potentials, and managers with critical skills –Participation in one year does not imply participation for the future years

How MIP Works n Promotes globalization –Balances Global and local performance n Measures sales as well as earnings n Focuses on key performance indicators n Attracts, retains, and rewards world-class talent –Competitive targets set to local markets

How MIP Works Award Opportunity Measures Performance Assessment Payout MIP Target Structure –Target bonuses expressed as a percent of base salary –Countries assigned to a structure based on local market data –Targets for new hires and promotions determined by external market data as well as internal equity Eligibility MIP Eligibility Based on local market practice

How MIP Works - Example Determine Country Financial Performance 50% of target award based on country net sales and operating profit performance using a grid with maximum payout of 200% of target Determine Corporate Financial Performance 20% of target award based on Global net sales and EPS performance using a grid with maximum payout of 200% of target MIPAward Step 2  Step 3 Establish Country Scorecard Performance 30% of target award based on country scorecard measuring KPI’s, unforeseen events, etc. with maximum payout of 200% of target  Step 1 

MIP Target: 8,5% of annual salary Components: European Operating Profit/ European Net Sales 50% Global Element – EPS/ Net Sales20% European Cash Flow from operations 10% European Gross Margin 10% European Order Fill Rate 10% 8,5% of annual salary - plan fulfillment up to 17% - outstanding results How MIP Works - Example PDP 1 → Total MIP Award = Calculated amount Х 1,15 PDP-Results Impact: Payment:

Base Salary – pay for competence Awards (incl.PDP- Bonuses)- pay for individual performance Incentives – pay for business performance reflecting individual performance Compensation Package

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