Illustrative report on the motion to raise the ratio between the variable to fixed component of remuneration to 2:1

This document has been translated from that issued in Italy, from the Italian into the English language, solely for the convenience of international readers. The Italian version remains the definitive version.

ILLUSTRATIVE REPORT

OF THE BOARD OF DIRECTORS OF BANCA GENERALI S.P.A.

CONCERNING ITEM 6 ON THE AGENDA OF THE ORDINARY

SHAREHOLDERS' MEETING

"Motion to raise the ratio of the variable to fixed component of remuneration to

2:1: relevant and ensuing resolutions"

(Prepared pursuant to Article 125-ter of Legislative Decree No. 58 of 24 February 1998, as subsequently amended and extended, and pursuant to Article 84-ter of the Regulation adopted with Consob Resolution No. 11971 of 14 May 1999, as subsequently amended and extended)

Shareholders,

The Bank of Italy, through the Supervisory provisions on remuneration and incentive practices within banks and banking groups, contained in the Circular No. 285/2013 "Supervisory Provisions for Banks", transposed into the Italian legal framework the CRD Directive on remuneration and incentive policies and practices taking into account application procedures and market developments, in accordance with the European Banking Authority's Guidelines on Sound Remuneration Policies. The CRD Directive sets forth specific principles and requirements that banks must comply with so as to ensure that: remuneration systems are properly designed and implemented; potential conflicts of interest are effectively managed; the remuneration system takes due account of current and prospective risks, the degree of capitalisation, as well as liquidity levels of each intermediary; transparency towards the market is maximised; and oversight by regulatory authorities is reinforced.

The objective of the regulation is to promote - in the interest of all stakeholders - the implementation of remuneration systems that are in line with long-term corporate values, objectives and strategies, linked to corporate performance but appropriately adjusted to reflect all risks, commensurate with the capital and liquidity levels required to cover ongoing business operations, and in any event, designed to avoid distorted incentives that could lead to regulatory violations and excessive risk-taking by the bank and within the financial system as a whole.

As far as this motion is concerned, relevant provisions on remuneration and incentive policies and practices are as follows:

• a maximum limit of 1:1 for the ratio of the variable to fixed component of remuneration, to be exclusively applied to Key Personnel;
• vesting the General Shareholders' Meeting with powers to raise the aforesaid ratio, provided certain conditions are met and, in any case, up to a maximum ratio of 2:1.

The aforementioned provisions also require the Board of Directors to forward the related motion to the Bank of Italy at least 60 days before the date scheduled for Shareholders' approval of the resolution, and to subsequently file the resulting resolution, with indication of the approved ratio/s for each personnel category, with the Bank of Italy within no more than 30 days following its passage.

Accordingly, the Board of Directors submits for your approval the motion to raise the ratio of the variable to fixed component of remuneration, for a limited number of persons as specified below, in light of the reasons and considerations set forth in the following paragraphs.

1. Corporate functions discharged by the persons concerned

The motion seeks Shareholders' approval to determine - solely for the corporate persons specified below - the ratio of the variable to fixed component of remuneration by up to a maximum of 200% (ratio 2:1) in accordance with Bank of Italy's Circular No. 285/2013, Part 1, Title IV, Chapter 2.

The motion has been raised with regard to the following corporate persons:

1. Members of the Top Management (Chief Executive Officer/General Manager, Deputy General Wealth Manager Markets and Products, Deputy General Manager Commercial Networks, Alternative and Support Channels (3 key personnel);
2. Heads of the Asset Management Area, Alternative and Support Channels Area, Wealth Management Area, COO & Innovation Area, Marketing and External Relations Department, Equity Private Investments Service (6 managers);
3. Main Network Managers (one Sales Manager, nine Area Managers, one Head of Business Development Top Wealth Advisor/Top Private Banker, one Recruiting Trainer Italy, and one Head of Recruiting, one Head of Advisory).

2. Reasons underlying the motion

The reasons underlying the motion submitted for Shareholders' approval in respect of various categories of persons, may be summarised as follows:

Employed personnel (Top Managers, Heads of Asset Management Area, Alternative and Support Channels Area, Wealth Management Area, COO & Innovation Area, Marketing and External Relations Department, Equity Private Investments Service)

Banca Generali's remuneration policy is aimed at ensuring the best possible alignment of the interests of the Banking Group's Shareholders and those of the management, especially in a long-term perspective, through careful risk management and the consistent pursuit of long-term strategies. In fact, a well-balanced system of remuneration and incentives for the bank's directors and management is key to boost competitiveness and ensure high-levels of corporate governance over time. It must also be borne in mind that the overall remuneration system - in particular for persons belonging to key corporate functions - is a tool to attract and retain in the company highly qualified professionals with the skill necessary to meet company's requirements.

The motion to apply to the Managers listed above a ratio of the variable to fixed component of remuneration higher than 1:1, and in particular, to raise the said ratio up to 2:1 - the highest ratio contemplated - is based on the following grounds:

• the vast majority of Banca Generali's operations - which are carried out through networks of Financial Advisors and Relationship Managers - are concentrated in specific sectors such as private banking and asset management. As a result of its strategic positioning, Banca Generali has to face not only traditional competitors (mainly network banks) but also major international competitors (primarily foreign private banks) that, thanks to a well-consolidated presence in Italy, have earned significant shares of the Italian market, as well as major Italian banks with international ambitions. In this competitive context and in light of the brilliant results obtained in the private banking sector, which is expected to continue to grow at the same rapid pace observed in the past, it is clearly in Banca
  Generali's interest to offer remuneration packages that enable the bank to retain key resources who are primarily responsible for the significant growth achieved so far by the bank, and also to attract new managerial talent in a niche labour market featuring a shortage of the specialist skills required to effectively meet current and future challenges;
• the current remuneration package (for Top Managers, as well as for all other bank personnel) focuses on sustainability, with the priorities of pursuing sustainable growth over time and enhancing the potential of the Group's personnel by rewarding individual contributions to the organisation's success, also through appropriate remuneration, whilst discouraging conduct leading to excessive risk-taking. Therefore, the remuneration policies are aimed at adequately rewarding sustainable performance and are also based on the following principles:
• 1. internal fairness, as remuneration must be commensurate with the role covered, the level of responsibilities assigned, and the competence and skills demonstrated, also ensuring gender- neutral conditions;
  2. competitiveness, as the remuneration level must be in line with those of the reference markets; to this end, trends in remuneration levels prevailing in the industry of reference are constantly monitored through general and industry-specific surveys of remuneration practices;
• moreover, approval of the motion would have the following effects:
• 1. for members of the Top Management: it would not impact the applicable remuneration packages, which, in relation inter alia to the granting of Long Term Incentive Plans, entry plans/agreements, and/or stability pacts, may lead to amounts that exceed the threshold of 1:1 of the variable to fixed components of remuneration, reaching values that in some cases may be closer to the 2:1 threshold. However, it must be pointed out that a very significant portion of overall variable remuneration is primarily linked to company's medium-to-long term targets under the Long Term Incentive Plan, whereas the variable component of the short-term remuneration is linked to the economic and financial performance as indicated in the budget for the year of reference, through the application of the Balanced Scorecard mechanism, and is paid in cash and in shares;

• 1. for the other Managers: it would both ensure the respect of the contractual agreements entered into upon recruitment and would not impact the remuneration package which may envisage, inter alia, the granting of Long Term Incentive Plans, entry plans/agreements and/or stability pacts. It should be noted that, in case Long Term Incentive Plans is granted, a significant portion of variable remuneration received by those managers would be linked to medium-to-long term targets and paid out in shares, whereas the variable component of the short-term remuneration would remain linked to economic and financial performance as indicated in the budget for the year of reference, through the application of the Balanced Scorecard mechanism, and would be paid in cash and in shares;
• the remuneration package is made up of both variable and fixed components of remuneration. The weight of the fixed component has been determined so as to impact overall remuneration and attract and retain talent, as well as provide adequate remuneration for job responsibilities even in case bonuses or other incentives are not paid out in light of substandard performance, discouraging risk-taking that is not proportionate to the company's risk appetite, with a view to attaining short and medium-to-long- term results;
• the competitiveness of the remuneration package of Key Managers is constantly monitored, taking due account of trends recorded on reference markets, applying the methods most commonly used on the reference market. Even on the basis of these external comparisons, the fixed component of remuneration has been found to be reasonably competitive in light of the remuneration packages offered by the company's main competitors on the reference market. This consideration leads to the following crucial conclusions:
• 1. a direct cut to the percentage of variable remuneration aimed solely at ensuring compliance with the recommended ratio of 1:1 of the variable to fixed component of remuneration without any form of offsetting whatsoever would, at present, lead to a drastic drop in the competitiveness and therefore the attractiveness of the remuneration packages offered to the company's Top Managers, giving rise to a serious risk of loosing persons who have ensured the bank's indisputable success in recent years;
  2. in order to maintain an adequate level of retention of key managers, whilst also complying with the recommended ratio of 1:1 of the variable to fixed component of remuneration, it would be necessary to "re-balance" the remuneration package on the overall, with a steep increase in the fixed component of remuneration. Such a course would obviously entail the risk of losing flexibility and incurring higher costs linked to the managers' remuneration packages, whilst at the time undermining the coherent link between short, and especially, long-term corporate performance and management remuneration, in a business climate featuring steady economic and revenue growth;
  3. keeping the remuneration packages does not have any bearing whatsoever on compliance with prudential rules, with specific reference to own funds, as highlighted below.

Main network managers (Sales Managers, Area Managers, Head of Business Development Top Wealth Advisor/Top Private Banker, Recruiting Trainer Italy and Head of Recruiting, Head of Advisory)

The remuneration of network managers listed above is entirely variable, insofar as they serve the company as self-employed outside collaborators (agency contracts). Despite its variable nature, however, the remuneration of these managers is broken down into a recurrent component representing the stable and ordinary portion of remuneration, and a non-recurrent component designed to serve as an incentive, and equivalent, for the most part, to the variable component of remuneration.

It must also be pointed out that even in the case of these managers, the distinction between the two components of remuneration is established in advance, taking due account of the Bank's situation in terms of assets, revenues and liquidity, together with the terms and conditions (so-called "gates") regulating entitlement to incentives and bonuses and barring access to some or all of the same, if left unmet. The non- recurrent component does not have any guaranteed minimum amount, is subject to multi year deferral and to corrective mechanisms (malus or claw-back systems). Moreover, incentive mechanisms are structured so as not to conflicts with the best interests of customers, to ensure that customers are treated with the utmost

correctness and propriety, and, consequently avoid any and all related legal and reputational risks for the Bank. These mechanisms are therefore structured both to protect the bank's assets against capital stability risks, and to promote correctness of operations so as to better serve the customer's interests. Furthermore, in case managers remarkably achieve all objectives, the aforesaid system of incentives and bonuses may determine for them a ratio in excess of 1:1 of the variable to fixed component of remuneration. The whole remuneration structure directly comes from the steady growth underway in the financial advice and private banking sectors, with Banca Generali as one of the main players, with top levels of per-capita productivity in terms of net inflows, both total inflows and inflows from managed and insurance products.

It must be pointed out that these performance levels have been achieved as a result of not only specific strategic and sales policies implemented by the Bank, but also through the careful selection and training of network managers which, over time, have borne fruit in the form of a technically competent, highly skilled managers. The latter have contributed heavily to the achievement of particularly satisfying results, in terms of both the coordinated networks' sales productivity and the recruitment of experienced professionals coming from other companies, whilst constantly enforcing compliance with applicable ethical standards by all network managers, also with a view to ensuring that all advice provided and all the products and services placed by each of them are always in the best interests of customers. It should also be noted that the network managers in question are now so closely knit and familiar with the company that they currently constitute the best guarantee for the long-term sustainability of the results attained in recent years. Against this backdrop, cutting the non-recurrent component of remuneration with a view to ensuring the recommended ratio of no more than 1:1 of the variable to fixed component of remuneration would inevitably give rise to a high degree of instability, as at least some network managers would leave the company to join competitors ready and willing to offer very high percentages of recurrent remuneration, in a bid to cut staff selection and training costs by attracting fully trained stafff with significant managerial and professional experience. This would deprive the Bank of precious resources discharging crucial management, coordination and control functions in respect of the sales networks, and, consequently jeopardise the attainment of corporate objectives, considering the low number of talented network managers in this sector. Lastly, account must also be taken of the fact that, given their undisputed leadership in coordinating the resources entrusted to them, network managers who leave the company may also take along with them other persons, thereby bringing to naught the results of the bank's considerable investments made in the past to reinforce its sales networks (recruiting, training, office space, IT equipment, etc.). Faced with these obvious risks, the Bank could find itself compelled to raise the recurrent component of remuneration to the detriment of the variable component, thus increasing overhead costs and reducing the effectiveness of sales efforts, with obvious impacts on the profit and loss statement and the ability to continue to invest in products, technology and training.

3. Implications on the Bank's ability to continue to comply with prudential rules

With regard to the repercussions on the Bank's ability to continue to comply with all prudential rules with special reference to own funds, the historical trends of the main reference ratios, followed by an indication of closing result for 2019, a preliminary closing result for 2020, and a forecast for 2021 referred to budget data, are illustrated in the table below.

HISTORICAL TRENDS OF Tier1 ratio/T1R and Total Capital ratio/TCR

(€ thousand)		31.12.2020	31.12.2019	31.12.2018	01.01.2018	31.12.2017	31.12.2016
					FTA
				Phase-in	Phase-in	Phase-in	Phase-in
Common Equity Tier 1 capital 1 (CET	626,103	520,939	494,915		475,232	419,073
1)					494,564
Additional Tier 1 (AT1) capital	50,000	50,000	0	0	0	0
Tier 2 capital (Tier 2)	0	0	43,000	43,000	43,370	43,854
Total own funds		676,103	570,939	537,915	537,564	518,602	462,927