Compensation Policy for the Members of the Management Board and the Supervisory Board

COMPENSATION SYSTEM FOR THE MEMBERS OF THE MANAGEMENT BOARD

The principles of compensation for the Members of the Company’s Management Board defined in the Resolution of the Extraordinary GM of TAURON November 21, 2019, on the principles of determining the compensation of the Members of the Management Board and waiving resolution no. 5 of the Extraordinary General Meeting of the Company under the name: TAURON Polska Energia S.A. of December 15, 2016, on the principles of determining the compensation of the Members of the Management Board and waiving resolution no. 36 of the Ordinary General Meeting of the Company under the name: TAURON Polska Energia S.A. of May 29, 2017, on the amendment of resolution no. 5 of the Extraordinary General Meeting of December 15, 2016 and waiving resolution no. 26 of the Ordinary General Meeting of the Company under the name: TAURON Polska Energia S.A. of May 8, 2019 on the amendment of resolution no. 5 of the Extraordinary General Meeting of December 15, 2016, were in force at the Company in 2020.

The principles of determining the compensation were specified in detail in the resolution of the Company’s Supervisory Board of December 19, 2016 on determining the compensation of the Members of the Management Board of TAURON Polska Energia S.A., as subsequently amended. Until July 14, 2020, the Policy of compensation for the members of the supervisory and management authorities, including the description of the principles for determining such policy at TAURON Polska Energia S.A., adopted by the Company’s Supervisory Board on October 23, 2017, had been in force at TAURON.

With a view to complying with the provisions of the Act of October 16, 2019, on amending the Act on the public offering and the conditions for introducing financial instruments to an organized trading system and on public companies and certain other acts, the General Meeting of the Company adopted a resolution on July 15, 2020, on the adoption of the “Policy of Compensation for Members of the Management Board and Supervisory Board of TAURON Polska Energia S.A.” (Compensation Policy).

The model of compensation covered by the Compensation Policy assumes a two-component system for determining the compensation of the Members of the Company’s Management Board, where the total compensation of a Member of the Company’s Management Board is composed of a fixed part constituting the monthly base compensation and a variable part constituting the supplementary compensation for the Company’s financial year, dependent on achieving specific management objectives (KPI).

The system of compensating the Members of the Company’s Management Board assumes linking the variable part of the compensation with the outstanding management objectives stemming from the provisions of the Act of June 9, 2016 on the principles for determining compensation of the management personnel of certain companies, as subsequently amended, and set, based upon these provisions, by the GM and the Supervisory Board of the Company. The goal of adopting, in the compensation system, of the dependence of the compensation’s variable part on achieving the management goals set to be accomplished is aimed, in particular, at implementing the adopted Strategy, the directions of the Company’s expansion and the financial plans taking into account the Company’s long-term interests. Furthermore, it shapes a new organizational culture of the Company.

Taking into account the applicable regulations, the level of compensation of the Members of the Company’s Management Board is determined by the Company’s Supervisory Board within the range determined by the Company’s GM. The variable compensation of the Members of the Company’s Management Board constitutes up to 60% of the fixed compensation for the financial year, assuming the management objectives, set by the GM and detailed by the Supervisory Board for the given financial year, have been achieved.

The variable compensation for achieving the financial management objectives is granted based on the data from the audited consolidated financial statements of the Company for the given financial year. The variable compensation for achieving the non-financial management objectives is due in connection with achieving specific goals in the given financial year based on the assessment of their achievement by the Company’s Supervisory Board.

The overall management objectives set by the GM include:

1. achieving EBITDA at the level approved in the Material and Financial Plan for the given financial year;
2. achieving the Net debt/EBITDA ratio at the level approved in the Material and Financial Plan for the given financial year;
3. maintaining the rating of TAURON Polska Energia S.A. at an investment grade level;
4. achieving of the effects of the implemented restructuring programs or programs aimed at improving the efficiency of TAURON Capital Group;
5. implementation of the Strategy, investment projects in accordance with the optimal schedule and budget from the point of view of project profitability and the condition of TAURON Capital Group;
6. implementation of the key investment projects for energy security, in particular with respect to electricity generation and distribution, including the investment projects related to BAT in 2020-2021;
7. sales of the new products (sales of products that include electricity and products that are synergic with electricity and gas);
8. improving the quality indicators related to customer service or other operational indicators;
9. increase in TAURON Capital Group’s innovations through the implementation of research and development works, pilot projects as well as deployments, taking into account the effective use of the funds allocated for this purpose.

The Members of the Management Board of the Company are neither covered by the bonus program based on the capital (equity) of the Company (stock awards), nor do they receive any compensation or bonuses due to the performance of their functions in the governing bodies (authorities) of TAURON Capital Group’s subsidiaries.

COMPENSATION SYSTEM FOR THE MEMBERS OF THE MANAGEMENT BOARD OF TAURON CAPITAL GROUP’S SUBSIDIARIES

At all of TAURON Capital Group’s subsidiaries for which TAURON is a parent company within the meaning of art. 4, clause 3 of the Act of February 16, 2017, on the protection of competition and consumers (Journal of Laws of 2020, item 1076, as subsequently amended), the principles of compensation for the members of the management authorities (bodies) are applied in accordance with the Act of June 9, 2016, on the principles of determining compensation of the management personnel of certain companies (Journal of Laws of 2020, item 1907). The above was defined in the Policy for determining the compensation for the members of the authorities of the Subsidiaries adopted by the Management Board of TAURON, and in the Principles of the compensation for the members of the corporate authorities of the Subsidiaries.

The principles of compensation for the members of the management bodies (authorities) of the subsidiaries are, similar as at TAURON, based on a two-component system for determining compensation, where the total compensation is composed of a fixed part and a variable part dependent on fulfilling specific, results-based criteria, i.e. achieving the management objectives. Linking of the compensation’s variable part to achieving the management objectives set to be accomplished is of major importance in TAURON Capital Group’s management process and is aimed at prioritizing the directions of the expansion of the individual subsidiaries.

The management objectives that the variable compensation is linked to may, in particular, include:

1. increase of the net profit or EBITDA or a positive change of the growth rate of one of those results;
2. achieving or changing the production or sales volume;
3. amount of the revenue, in particular revenue from sales, from the operating activities, from the other operating or financing activities;
4. cutting down losses, reducing the overhead costs or the costs of the business operations conducted (operating expenses);
5. implementation of the strategy or the restructuring plan;
6. achieving or changing certain indicators, in particular profitability, financial liquidity, management efficiency or solvency;
7. implementing investment projects, taking into account in particular the scale, rate of return, innovations, on-time implementation (delivery);
8. change of the company’s market position, calculated as market share or according to other criteria or relationships with the counterparties (business partners, contractors) designated as the key counterparties (business partners, contractors) according to the defined criteria;
9. implementation of the personnel policy conducted and an increase of the workforce commitment.

COMPENSATION SYSTEM FOR THE KEY MANAGERS

The principles related to the compensation and bonus system for the key managers and other employees are defined in the Regulations of the Compensation for the Employees of TAURON Polska Energia S.A., adopted for application by the Management Board of the Company.

In 2020, Principles of Compensation at TAURON Group were in force at TAURON Capital Group, constituting the guidelines for TAURON Capital Group’s subsidiaries with respect to the personnel compensation systems, particularly taking into account the bonus system for the key managers based on the management by objectives system, consistent throughout TAURON Capital Group, representing a combination of the planning process, efficiency (performance) measurement process and assessment process.

The compensation and bonus system for the key managers in force envisages that the level of compensation should be tied to the financial condition of TAURON Capital Group and the Company over a year’s time frame, in connection with the achievement (implementation) of the strategic goals. The overarching assumption of the compensation system in force is to ensure the optimal and motivating compensation level, based on the value and type of work in the given position as well as the quality of work and effects achieved by the employees.

The structure of the compensation is composed of the following elements:

1. fixed part – constituting the base compensation (salary) determined in accordance with the table of level (tier) categories applicable at the Company and the monthly rates of the personal level (tier). The allocated level of the basic compensation (salary) reflects the value and type of work as well as the quality of the employee’s work, defined based on the assessment of the employee’s competence level,
2. variable part – which is dependent on the work performance results, defined based on the level of accomplishing the targets and tasks within the MBO (management by objectives) bonus system,
3. benefits – which are defined in the internal regulations of the Company.

The MBO bonus system based on the market principles of awarding bonuses ensures focusing of the activities of the key managers on attaining the objectives aimed at implementing the Strategy, as well as the strategic objectives and expansion directions of TAURON Capital Group’s individual subsidiaries. Such a system allows for cascading of the objectives defined by the Company’s Management Board at TAURON Capital Group level and at the Company level, down to the concrete, parameterized tasks vested with the employees positioned at the lower levels of the organization.

At the same time, this tool enables precise correlating of the KPI‘s defined for the Members of the Company’s Management Board with the objectives set for the given year for the key managers of the Company. An initial assessment of the accomplishment of the objectives takes place after the elapse of the first 6 months of the year, while the Members of the Company’s Management Board make the final assessment of the accomplishment of the objectives by the key managers after the year has ended.

In addition, there is a bonus system for the trading area (and the units directly cooperating therewith), the purpose of which is to motivate to achieve higher revenues for TAURON Capital Group. The trading bonus covers the key managers from the trading area, where the bonus mechanism awards them an additional bonus only after exceeding their designated annual trading plans.

COMPENSATION OF THE MEMBERS OF THE MANAGEMENT BOARD OF TAURON POLSKA ENERGIA S.A.

The compensation of the Members of the Company’s Management Board is determined by the Company’s Supervisory Board. The total amount of compensation understood as the value of the salaries, bonuses and benefits received in cash, in kind or in any other form, due or paid by the Company to the Members of the Company’s Management Board in 2020 reached the gross amount of PLN 2,834,000.

*bez narzutów

At the same time, it is indicated that, because of the Company’s obligations towards the former Members of TAURON’s Management Board, the total amount of PLN 1,320,000 was paid out in 2020 due to the payment of the compensation for refraining from performing competing activities (the non-compete clauses), variable compensation and the other benefits. In addition, the amount of the severance payments came in at PLN 383,000 in 2020.

The Members of TAURON’s Management Board did not receive compensation or bonuses for performing the functions in the corporate bodies (authorities) of TAURON Capital Group’s subsidiaries in 2020.

All Members of the Company’s Management Board received compensation in 2020, in accordance with the applicable contract for the provision of the management services in accordance with the Act of June 9, 2016, on the principles of determining compensation of the management personnel of certain companies (Journal of Laws of 2020, item 1907) and the Compensation Policy.

The Company does not have any obligations towards the former Members of the Company’s Management Board due to pensions or benefits of similar nature

COMPENSATION OF THE MEMBERS OF THE MANAGEMENT BOARDS OF TAURON CAPITAL GROUP’S SUBSIDIARIES

The compensation of the Members of the Management Boards of TAURON Capital Group’s subsidiaries is determined taking into account the scale of the given subsidiary’s operations, in particular:

1. average annual headcount,
2. annual net revenue (turnover) from the sales of goods, products and services as well as the financial operations,
3. total assets on the balance sheet at the end of the year.

Based on the above criteria, the categories of subsidiaries are defined, which determine the amount of the fixed compensation of the members of the subsidiaries’ management authorities (bodies).

NON-FINANCIAL COMPONENTS OF THE COMPENSATION DUE TO THE MEMBERS OF THE MANAGEMENT BOARD OF TAURON POLSKA ENERGIA S.A. AND THE KEY MANAGERS

Members of the Company’s Management Board, in accordance with the agreements on the provision of the management services, are entitled to the reimbursement by the Company of the cost of training up to the net amount of PLN 15,000 in a calendar year.

Starting from February 1, 2020, the Members of the Company’s Management Board have been covered by the Employee Pension Program in accordance with the rules applicable to all the Employees of TAURON.

In addition, in the event of the permanent residence at a considerable distance from the registered office of the Company, a Member of the Management Board of the Company is entitled to a housing allowance in the gross amount of PLN 2,500.00 per month, that constitutes an additional benefit.

The personnel employed at the key positions by the Company are entitled to take advantage of the following benefits and non-financial components of the compensation offered by the Company:

1. Employee Pension Program operated by the employer (under the condition of being employed by the Company or one of TAURON Capital Group’s subsidiaries over a period of at least 1 year),
2. medical package financed with the Company’s funds,
3. company car allocated for their exclusive use,
4. housing allowance in the gross amount of PLN 2,500.00 per month in case the availability of the employee is required due to the nature of his / her work and scope of responsibilities.

ASSESSMENT OF THE FUNCTIONING OF THE COMPENSATION POLICY IN TERMS OF THE FULFILMENT OF ITS OBJECTIVES, IN PARTICULAR THE LONG-TERM GROWTH IN SHAREHOLDER VALUE AND STABILITY OF THE COMPANY’S PERFORMANCE

The applied compensation system for the members of the Management Board is in accordance with the Act of June 9, 2016 on the principles for determining compensation of the management personnel of certain companies. The motivational and consistent system is provided, linked with the monitoring of the annual financial plans and the adopted Strategy and the expansion directions.

The Policy of compensation for members of the supervisory and management authorities, including the description of the principles for determining such policy at TAURON Polska Energia S.A. in force at the Company is in line with the Best Practice 2016 principles and defines, in particular, the form, structure and the manner of determining the compensation of the Members of the Company’s Management Board.

The form, structure and level of the compensations correspond to the market conditions and are oriented towards enabling the recruitment and retaining individuals fulfilling the criteria required to manage the Company in a manner that would take into account the shareholders’ interests (building the Company’s value for the shareholders), as well as prevent arising of conflicts of interest among the Members of the Company’s Management Board and the shareholders. At the same time, they are structured in a manner that is transparent for the investors so as to build their confidence in the Company and provide the motivational function for the Company’s Management Board.

The disbursement of the variable components of the compensation is linked to the pre-defined, measurable results-based criteria that support the long-term stability of the Company and TAURON Capital Group and they also include the non-financial criteria, related to the generation of long-term value of the Company and TAURON Capital Group.

The criteria the fulfilment of which determines obtaining of the variable components of the compensation and the level thereof are defined in accordance with the SMART methodology, i.e. they display such features as: precision, measurability, achievability, materiality and timing references.

The compensation and bonus system for both the Members of the Management Board of the Company as well as the key managers in force at TAURON supports the accomplishment (implementation) of the strategic goals and takes into account the determination of the compensation depending on the financial condition of the Company and TAURON Capital Group over one year period.

COMPENSATION SYSTEM FOR THE MEMBERS OF THE SUPERVISORY BOARD

In 2020, the system of compensation for the Members of the Supervisory Board of the Company defined in the Resolution of the Extraordinary GM of TAURON of December 15, 2016, on determining compensation for the Members of the Supervisory Board, as subsequently amended, was in force, adopted as the implementation of the provisions of the Act of June 9, 2016, on the principles for determining compensation of the management personnel of certain companies, as subsequently amended, was in force.

Until July 14, 2020, the Policy of compensation for the members of the supervisory and management authorities, including the description of the principles for determining such policy at TAURON Polska Energia S.A., adopted by the Company’s Supervisory Board on October 23, 2017, had been in force at TAURON. With a view to complying with the provisions of the Act of October 16, 2019, on amending the Act on the public offering and the conditions for introducing financial instruments to an organized trading system and on public companies and certain other acts, the General Meeting of the Company adopted a resolution on July 15, 2020, on the adoption of the “Policy of Compensation for Members of the Management Board and Supervisory Board of TAURON Polska Energia S.A.” (Compensation Policy).

In accordance with the above-mentioned Resolution of the Extraordinary GM the monthly compensation of members of the Supervisory Board is determined as a product of multiplying the assessment base mentioned in art. 1, clause 3, item 11 of the Act of 9 June 2016 on the principles for determining compensation of the management personnel of certain companies, and the multiplier:

1. for the chairperson of the Supervisory Board – 1.7
2. for the other members of the Supervisory Board – 1.5

Members of the Supervisory Board are entitled to receive the compensation irrespective of the frequency of the meetings convened.

The compensation is not due for a month in which a member of the Supervisory Board was not present at any of the formally convened meetings, and the absence was not excused. The decision on excusing or a failure to excuse the absence of a Member of the Company’s Supervisory Board at its meeting is taken by the Company’s Supervisory Board by way of a resolution.

The Company covers the costs incurred in connection with the performance of the functions entrusted with the Members of the Supervisory Board, in particular: the costs of the round trip between the place of residence and the venue of the Supervisory Board’s meeting or a meeting of the Supervisory Board’s Committee, the costs of the individual supervision and the costs of accommodation and board.

COMPENSATION OF THE MEMBERS OF THE SUPERVISORY BOARD OF TAURON POLSKA ENERGIA S.A.

The total amount of compensation understood as the value of the compensations due or paid by the Company to the Members of the Company’s Supervisory Board in 2020 reached the gross amount of PLN 565,000.

The Members of the Company’s Supervisory Board do not perform functions (hold positions) in the authorities of the subordinated units.

The Company does not have any obligations towards the former Members of the Company’s Supervisory Board due to pensions or benefits of similar nature.

SEE ALSO:

Policy of Compensation for Members of the Management Board and Supervisory Board of TAURON Polska Energia S.A.

56.3 Compensation of the executives