HSBC 2005 Annual Report Download - page 224

HSBC HOLDINGS PLC
Directors’ Remuneration Report (continued)
222
to the peer group and re-testing provisions were
eliminated such that awards will lapse if the
performance condition is not satisfied after the initial
three-year performance period.
A benchmark for HSBC Holdings’ TSR,
weighted by market capitalisation, was established
which takes account of the TSR performance of:
1. a peer group of nine banks weighted by market
capitalisation which were considered most
relevant to HSBC in terms of size and
international scope. For performance periods up
to and including the one beginning in 2003, this
group comprised ABN AMRO Holding N.V.,
The Bank of East Asia, Limited, Citigroup Inc.,
Deutsche Bank AG, JPMorgan Chase & Co.,
Lloyds TSB Group plc, Mitsubishi Tokyo
Financial Group Inc., Oversea-Chinese Banking
Corporation Limited and Standard Chartered
PLC. To be more relevant to HSBC in terms of
size and international scope, this peer group was
amended for conditional awards made in 2004
by the replacement of Lloyds TSB Group plc,
Oversea-Chinese Banking Corporation Ltd.,
Mitsubishi Tokyo Financial Group Inc. and The
Bank of East Asia, Limited with Bank of
America Corporation, The Royal Bank of
Scotland Group plc, Banco Santander Central
Hispano S.A. and UBS AG;
2. the five largest banks from each of the US, the
UK, continental Europe and the Far East, other
than any within paragraph 1 above, weighted by
market capitalisation; and
3. the banking sector of the Morgan Stanley
Capital International World Index, excluding
any within paragraph 1 or paragraph 2 above,
weighted by market capitalisation.
By combining the weighted average TSR for
each of the above three groups and weighting that
average so that 50 per cent is applied to paragraph 1,
25 per cent is applied to paragraph 2 and 25 per cent
is applied to paragraph 3, a single TSR benchmark
for market comparison was determined.
The extent to which each award will vest will be
determined by reference to HSBC Holdings’ TSR
measured against the TSR benchmark. For each
award the opening calculation of the share price
component within HSBC Holdings’ TSR was the
average market price over the 20 trading days
commencing on the day when the annual results
were announced. TSR for the benchmark
constituents was based on their published share
prices on the 20th trading day after the annual results
were announced. If HSBC Holdings’ TSR over the
performance period exceeds the benchmark TSR,
awards with a value, at the date of grant, of up to
100 per cent of the individual’s earnings (base salary
and bonus in respect of the previous performance
year), will vest. For higher value awards, the greater
of 50 per cent of the award or the number of shares
equating at the date of grant to 100 per cent of the
individual’s earnings, will vest at this level of
performance. If HSBC Holdings’ TSR over the
performance period places it within the upper
quartile of the ranked list of the banks comprising
the benchmark, these higher value awards will vest
in full. For performance between the median and the
upper quartile, vesting will be on a straight-line
basis.
The Performance Shares awarded in 2000
passed their three-year TSR performance condition
in March 2003 and vested on the fifth anniversary of
the award, 10 March 2005. The Performance Shares
awarded in 2001 and 2002 have passed their three-
year TSR performance conditions and will vest on
the fifth anniversaries of the awards, 13 March 2006
and 8 March 2007 respectively.
For awards made in 2003 the initial performance
period is three years. If the upper quartile
performance target is achieved at the third
anniversary of the date of award then an additional
award equal to 20 per cent of the initial Performance
Share award will be made and will vest at the same
time as the original award to which it relates.
However, regardless of whether the upper quartile is
achieved, full vesting and transfer of the shares will
not generally occur until the fifth anniversary of the
date of grant. For awards made in 2004 the
conditions are the same but, if the performance test
is not passed at the third anniversary, the shares will
be forfeited.
In addition to these performance conditions,
none of the outstanding awards will vest unless the
Remuneration Committee is satisfied that, during the
performance period, HSBC has achieved sustained
growth. The Remuneration Committee retains
discretion to recommend early release of shares
awarded in certain circumstances, for example,
retirement, redundancy or ill health.
Where events occur which cause the
Remuneration Committee to consider that the
performance conditions have become unfair or
impractical the right is reserved for the Committee to
amend or substitute the performance conditions.
The Committee believes that the continued use of a
single TSR measure in the awards made in 2003 and
2004 may give rise to unfairness given that EPS for
2002 (which was calculated on a UK GAAP basis,