40. Share-based payments

The cost of transactions settled with employees in phantom shares is measured by reference to the fair value of the liability as of the balance sheet date.

The fair value of the liability is estimated based upon the Bank’s shares price on the (WSE) as of the balance sheet date and expected number of phantom shares to which full rights will be acquired.

The cost of phantom share-based payments is recognized in personnel expenses together with the accompanying increase in the value of liabilities towards employees presented in ‘Provisions’.

The accumulated cost recognized for transactions settled in phantom shares for each balance sheet date until the vesting date reflects the extent of elapse of the vesting period and the number of rights to shares the rights to which – in the opinion of the Bank’s Management Board for that date based on best available estimates of the number of phantom shares – will be eventually vested.

The system of variable remuneration is addressed to Employees defined in the Bank as persons in managerial positions, who have a significant impact on the risk profile of the Bank and who are key employees for the fulfillment of the Bank’s strategy, risk management and long-term increase of the Bank’s income.

The aim of the system is to support the execution of the Bank’s operational strategy, its risk management and to limit conflict of interests.

Under the system the participant who is a member of the Management Board may receive an individual bonus, while a participant who is not a member of the Management Board may receive a bonus based on the bonus pool approach ensuring comprehensive performance measurement at an individual level, organizational unit and results of the entire Bank as well as risk assessment’ verification of the Participant’s compliant behaviour with respect to law provisions and standards adopted by the Bank.

The compensation consists of cash payment and cash-settled share based payment realized in the form of phantom shares as cash equivalent amounting to the value of granted phantom shares.

In order to meet the requirements concerning the rules of establishing the policy of variable remuneration components for individuals holding managerial positions (Regulation of the Minister of Development and Finance on the risk management system and internal control system, remuneration policy and a detailed method of estimating internal capital in banks of 6 March 2017 (Official Journal from 2016, item 1988, 1948, 1997 and 2260 and from 2017, item 85), the Bank’s subsidiaries, Pekao Bank Hipoteczny S.A., Pekao Leasing Sp. z o.o., Pekao Investment Banking S.A, , Pekao Faktoring Sp. z o.o,. Pekao Direct Sp. z o.o. and Pekao Towarzystwo Funduszy Inwestycyjnych S.A. use a variable remuneration system for the management.

Within the system participant can receive the bonus depending on the performance and results of work of the participant, of the business unit and the company’s results in the area of responsibility of the person, taking into account the results of the whole company, as well as verification of the compliance of Participant’s behaviour with respect to law provisions and standards adopted by the company.

At least 40 % components of variable renumerations is settled and paid in the time-period of 3 to 5 years since the granting date.

The companies measure the future employees benefits at fair value of accepted liabilities, in accordance with IAS 19 ‘Employee benefits’. Results of liabilities meassurement at fair value are presented in income statement as personnel expenses.

During the reporting period ending on 31 December 2021 the Bank had the following share-based payments transactions

Since January 2019, the System of Variable Remuneration for the Management Team has been in force, reflecting the provisions of the resolution of the General Meeting of the Bank on adjusting the remuneration of members of the management board to the requirements of the Act on the principles of determining the remuneration of persons managing certain companies.

For the System 2017, 2018, 2019, 2020, 2021 the fair value of the program was estimated based upon the Bank’s shares price on the WSE as of the balance sheet date and expected number of phantom shares to which the rights will be acquired.

For the System 2021, as of 31 December 2021 the Bank prepared the program valuation, presuming that the phantom shares were granted on 31 December 2021. This value will be changed at the actual date of granting the program.

The carrying amount of liabilities for cash-settled phantom shares amounted to PLN 48 420 thousand as at 31 December 2021 (as at 31 December 2020 – PLN 46 701 thousand).

The total intrinsic value of liabilities for vested rights to phantom shares amounted to PLN 42 096 thousand as at 31 December 2021 (as at 31 December 2020 – PLN 21 644 thousand).

The remuneration expenses for 2021 relating to the system of variable remuneration in the form of phantom shares amounted to PLN 13 555 thousand (in 2020 – PLN 13 173 thousand).

The table below presents changes in the number of Bank’s phantom shares.

The table above does not present the number of shares granted in respect of System 2021. This number will be determined in 2022 after evaluationl of the financial statements for 2021 by the Supervisory Board. The hypothetical number of shares determined on the basis of the base value of the granted bonus to each of the program participants and arithmetic mean of the Bank’s share price on the WSE in December 2021 amounts to 176 490.

The carrying amount of liabilities for cash-settled phantom shares amounted to PLN 7 404 thousand as at 31 December 2021 (as at 31 December 2020 – PLN 5 216 thousand).

The remuneration expenses for 2021 relating to the system of variable remuneration in the form of phantom shares amounted to PLN 4 498 thousand (in 2020 – PLN 2 757 thousand).