On 14 March 2008, the Ordinary General Meeting of BRE Bank adopted a resolution approving an incentive program for Management Board Members of the Bank. Under the program, the Management Board Members can acquire bonds with the pre-emptive right to acquire shares of the Bank and, as originally planned, shares of the ultimate parent of the Group, Commerzbank AG. In 2010, the program was amended in the part comprising Commerzbank shares so that the Management Board Members can acquire the right to receive a cash equivalent of the value of the respective number of Commerzbank shares.

As a result of the program in the part comprising BRE Bank shares, the share capital of the Bank will be increased conditionally by PLN 2 200 000 through an issue of 550 000 ordinary shares. As a result of settlement of the program, the Bank will issue 550 000 bonds with the pre-emptive right to acquire shares of the Bank in 10 series (C1 to C10), 55 000 bonds in each series, with an issue price of PLN 0.01. Bonds can be acquired by entitled persons in 2010 – 2018 provided that their employment continues, however in special cases C1 series bonds could have been acquired in 2009. The bonds’ pre-emptive right to acquire shares from the conditional capital increase can be exercised by entitled persons in the period from the acquisition of bonds until 31 December 2018. The issue price of each share acquired under the program will be equal to the nominal price at PLN 4. 

The right to acquire bonds and the number of bonds will depend on the degree of fulfillment of the following conditions: individual assessment of the entitled person by the Supervisory Board, net return on equity (ROE) net in the financial year for which shares are granted, performance of the financial year’s consolidated profit before tax of the BRE Bank Group or consolidated profit before tax of a BRE Bank Group business line.

In addition, under the incentive program it was originally planned that the Management Board Members of the Bank could acquire shares of Commerzbank AG. Shares were to be transferred to the Management Board Members by BRE Bank. The right to acquire shares and the value of shares transferred would also depend on the degree of fulfillment of the above mentioned conditions. The number of granted Commerzbank shares would depend on the market price of the shares within 30 days before their allocation date in 2010 – 2018. In 2010, the program was amended and based on the agreements signed between the Bank and the Management Board Members included in the program, it was agreed that the right to receive Commerzbank shares will be replaced by the right to receive cash equivalent of the value of Commerzbank shares calculated on the basis of the average stock exchange price of Commerzbank shares from the day, when the right to the equivalent existed.

Starting from 2009, the cost of implementation of the program has been calculated by the Bank on the basis of the expected value of the program for the period for which the Management Board is appointed. The cost of the program is charged into the income statements of the respective reporting periods in line with the estimated scheme of acquiring rights in the particular years in correspondence with other reserve capital (the part of the program comprising BRE Bank shares) or other liabilities (the part of the program comprising Commerzbank shares). The cost is estimated starting from the date of taking up the office by a Management Board Member on the basis of the expected fulfillment of the conditions which enable an entitled person to gain rights to acquire BRE Bank shares and cash equivalent of the value of Commerzbank shares. The estimation of the cost is updated at the end of each year on the basis of actual fulfillment of the conditions and potential changes in assessed fulfillment of these conditions in the coming years.

The choice of the valuation technique has been significantly influenced by the conditions of the program.

The table below presents the number and weighted average exercise prices of shares options related to the 2008 incentive program for the Management Board Members of the Bank.

* In 2011, the weighted average share price at the date of option exercise amounted to PLN 332.95 (2010: PLN 266.92).

Options outstanding as at the end of 2010 and at the end of 2011 expire on 31 December 2018.

The 2008 incentive program for the Management Board Members of the Bank does not include Mr. Cezary Stypułkowski, President of the Management Board of the Bank, appointed to the Management Board with effect from 1 October 2010.

These officers are responsible for decisions which materially impact the implementation of the strategy defined by the Management Board of the Bank, the results of the Group, the viability and safety of business, and the development and creation of added value of the organisation.

The maximum size of the program is 700 000 shares. The lifetime of the programme is 10 years (2009-2019). 

In 2010, the Management Board of the Bank took the decision to launch the program and approved the list of participants for Tranche III. Not granted options from Tranche I and II may be granted in the future years of the program execution. There were 12,650 options granted from Tranche III. Additionally, in 2011 there were 20 000 options granted from Tranche IV and 19 990 options granted from Tranche V. The options granted will allow participants to purchase the Bank shares with an issue price of PLN 4 per share. Realisation of rights stemming from Tranches III, IV and V is conditional and the options will be exercisable between 1 May 2012 and 31 December 2019 (Tranche III), 1 May 2013 and 31 December 2019 (Tranche IV) and 1 May 2014 and 31 December 2019 (Tranche V), respectively. The right to acquire shares is conditional upon the achievement of the following conditions: being employed over the period of the tranche, achievement of the economic factor set by Management Board for BRE Bank Group and achievement of the individual yearly assessment grade in each year of the tranche.

The fair values of options granted were determined as at 23 August 2010 (Tranche III) and as at 1 February 2011 (Tranches IV and V) using the Monte-Carlo simulation and amounted to PLN 245.9 (Tranche III), PLN 306.4 (Tranche IV) and PLN 306.6 (Tranche V), respectively. The valuation model was selected mainly due to the terms of the program, particularly its length and flexibility given to the participants in setting the exercise dates for vested options. The volatility of BRE Bank shares was calculated based on historical data for the period adequate to the length of the program (data from 12 April 2001 up to 23 August 2010 for Tranche III and from 5 March 2002 up to 1 February 2011 for Tranches IV and V). Calculations were based on a standard deviation of daily share price changes in the given period as well as the yield curve based on zero-coupon rates as at the valuation date.

The table below presents the number and weighted average exercise prices of share options related to the 2008 incentive program for key managers of BRE Bank Group.

Options outstanding at the end of 2010 expire on 31 December 2019.

The table below presents changes in other reserve capital generated by the above mentioned incentive programs.