Remuneration of members of the Board of Directors and the Management Board

The contractual salaries of the members of the Management Board of the Company consist of a fixed amount payable on a monthly basis, as well as quarterly and yearly performance bonuses.

The Directors receive compensation for service as directors in accordance with the Regulation on the Board of Directors approved by the general shareholders meeting on June 26, 2011. According to this regulation, the Directors receive quarterly and annual compensation. Quarterly compensation for each Director is equal to RUB 1.5 million and can be decreased by 10% (in case of non-participation in up to 25% of meetings), 30% (in case of nonparticipation in more than 25% but fewer than 50% of meetings) and 100% (in case of non-participation in more than 50% of meetings). Annual compensation of all Directors is approved by the general shareholders meeting as a percentage of the Company’s OIBDA determined on the basis of RAS accounts for the next reporting financial year, and in any case shall not exceed 0.13%. Annual compensation can be decreased by 50% if the Director participated in less than 50% of meetings. Also according to the Regulation, we shall reimburse the Directors’ expenses incurred in connection with their functions as directors.

The Company’s service contracts with members of the Management Board do not provide special benefits upon termination of employment, other than common compensation prescribed by the Russian Labour Code which varies from two to three monthly salaries. The Company does not currently have service contracts with the Directors.

Management Incentives

The Group is committed to recruiting and retaining highly skilled personnel. To this end, the Company offers members of the Management Board and other selected employees performance linked and other incentives. These incentives are designed to motivate and award the Company’s key personnel for achieving long-term corporate financial and operational performance goals and maximizing shareholder value. Long-term incentives also serve to encourage retention of the Company’s key personnel.

Bonus

In July 2009, we adopted an internal regulation on cash bonus award which replaced the similar regulation that came into effect in December 2008. The current cash bonus award program is designed for all our employees and provides for quarterly and annual individual performance-based compensations depending on the relevant performance targets.

Share Options

On May 28, 2010, the Board of Directors approved a long-term employee incentive share option program governed by Russian law (the “Incentive Program”). The Incentive Program regulates the general procedures and sets forth the key incentive principles for the employees of the Company to facilitate the realization of the Company’s strategy to create an integrated telecom operator rendering a full range of services to individuals, corporate clients, government agencies and network carriers in Russia and further to accomplish business objectives on a regular basis in the long run. The effective date of the Incentive Program is May 28, 2010.

The Incentive Program is aimed at attracting and retaining the key employees, encouraging sustained development of the Group and also targets certain long-term objectives.

The Incentive Program seeks to accomplish the following tasks:

  • to ensure competitive conditions to retain key employees;
  • to increase the loyalty of and provide incentives for the key employees for long-term and efficient work during both the Reorganisation period and the Company’s operations thereafter;
  • to combine the interests of the Company’s shareholders and our key employees;
  • to draw the attention of our key employees to increasing the value of the Shares; and
  • to encourage our key employees to increase the performance of the Company and the value of the Shares.

The following of the key employees of the Company are participants of the Incentive Program: our President, members of the Management Board, deputy presidents, heads of the Company’s branches and other key managers of the Company (specialists who have shown remarkable results and who are invited into the Phase II Program at the discretion of the President).

The operator of the Incentive Program is CJSC Gazprombank Asset Management. When participants enter the Incentive Program, CJSC Gazprombank Asset Management and the participants of the Incentive Program enter into sale and purchase agreements with respect to the ordinary shares which, among others, provide for the payment for the ordinary shares by the participants on a deferred basis at the price of RUB 96.80 per ordinary share. Each participant must make an advance payment of RUB 30,000 to the operator of the Incentive Program.

The term of the Incentive Program is 2.5 years and the share options shall be exercised as follows:

  • 60% shall be exercised by the participant in 1.5 years from the effective date of the Incentive Program; and
  • 40% shall be exercised by the participant in 2.5 years from the effective date of the Incentive Program.

As of December 31, 2011, 80,904,349 ordinary shares have been allocated to the Incentive Program, which constitute 2.7% of all ordinary shares and 2.5% of all Shares.

On June 9, 2011, the Board of Directors approved an amendment to the Incentive Program, which adds the Phase II RUB 3.5 billion employee share option program (the “Phase II Program”) to the Incentive Program. For purposes of the Phase II Program, the Company will allocate 39,554,794 preferred shares, which constitute 16.3% of all preferred shares and 1.2% of all shares. The effective date of the Phase II Program is June 9, 2011.

The participants of the Phase II Program are members of the Board of Directors and key managers (specialists who have shown remarkable results and who are invited into the Phase II Program at the discretion of the President).

The operator of the Phase II Program is CJSC Gazprombank Asset Management. When participants enter the Phase II Program, CJSC Gazprombank Asset Management and the participants of the Phase II Program enter into sale and purchase agreements with respect to the Preferred Shares which, among others, provide for the payment for the Preferred Shares by the participants on a deferred basis at the price of RUB 87.6 per Preferred Share. Each participant must make an advance payment of RUB 30,000 to the operator of the Phase II Program.

The term of the Phase II Program is 2 years and the share options shall be exercised as follows:

  • 50% shall be exercised by the participant in 1 year from the effective date of the Phase II Program; and
  • 50% shall be exercised by the participant in 2 years from the effective date of the Phase II Program.

Other benefits

Members of the Management Board have the benefit of the medical insurance the cost of which is reimbursed by the Company. In addition, the Directors and members of our Management Board have the benefit of the D&O insurance provided by LLC Insurance Company Soglasie.

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