HSBC 2009 Annual Report Download - page 12

HSBC HOLDINGS PLC
Group Chairman’s Statement (continued)
Group Chairman’s Statement
10
customer needs.
The market for capital has also suffered from
clear distortions in recent years. There has been too
great an emphasis on short-term gains, often
accompanied by shareholder pressure to increase
leverage in order to boost returns, and a dangerous
underpricing of risk. This resulted in unsustainable
returns, which in some cases proved to be illusory.
Banks must be appropriately capitalised, sufficiently
liquid and not overstretched, and getting this right
will be crucial in delivering the sustainable financial
system we need for the future.
Partly because of these problems in other areas
of the marketplace, the third area requiring urgent
reform is the market for talent. There is
understandable public anger in some countries as a
result of the practices at certain banks and, in
particular, because of the egregious reward of
management failure. We have witnessed
unacceptable distortions – from rewards linked to
unsustainable or illusory day-one revenues which
encouraged excessive risk-taking; to multi-year
guaranteed bonuses with no performance criteria.
Over the last three years I have spoken publicly
about my concerns regarding remuneration and I will
set out our principles at HSBC.
Rewarding sustainable performance
First, for any bank to be sustainable it must strike the
right balance in serving the long-term interests of its
stakeholders. It must deliver sustainable returns to
shareholders on their investment; it must maintain
the capital strength needed to support the customers
and economies it serves; and it must reward its
employees appropriately. My own experience is that
colleagues want to know that their job makes a
difference and contributes to social and economic
development; reward is simply not the only
motivating factor. Nonetheless it is important, and
companies have a clear responsibility to treat their
employees appropriately.
It therefore follows that remuneration must be
firmly tied to sustainable performance and must not
reward failure. It should be properly aligned with
risk which remains on the balance sheet, and subject
to deferral and to clawback in case performance later
proves to be unsatisfactory.
Second, in order to maintain long-term
competitive advantage, remuneration must be
market-based. Underpaying ultimately results in a
company losing some of its best people. HSBC is
domiciled in the UK but we have around 300,000
employees in 88 countries and territories. We have to
think internationally, and remuneration policy is no
exception. Similarly, if pre-eminent financial centres
like London are to remain home to firms like HSBC,
those of us who care for its future must reflect the
reality of the global marketplace in our thinking and
approach.
Third, an independent Remuneration Committee
should conduct rigorous international benchmarking
on compensation and consult appropriately on its
conclusions. These are the principles we have
followed in determining HSBC’s rewards this year.
Our executive Directors have a combined
178 years of service – a track record almost without
parallel in the industry. I believe there is no better
management team in banking and it is no
coincidence that HSBC has remained profitable
throughout the financial crisis and paid dividends
when few other banks did. Indeed, for 2009, our total
dividends to shareholders once again comfortably
exceed total bonus awards. We have not needed
taxpayers’ money; on the contrary, HSBC has
contributed nearly £5 billion in tax to the UK
economy over the past five years.
At HSBC, we firmly believe that bonuses are a
legitimate and proper element of reward providing,
of course, awards fully satisfy the principles set out
above. The G20 has set out clear guidance which
HSBC wholly supports, and we comply with the
Financial Services Authority’s remuneration code of
practice. Indeed, our decision to defer 100 per cent
of executive Director bonuses in respect of 2009
over three years exceeds these guidelines.
Proper pay for proper performance includes
ensuring market-based pay for employees over time.
The Board expects fixed pay in banking to increase
as a proportion of total compensation, especially for
important risk and supervisory functions. This is a
process we intend to see through at HSBC, and our
management team is no exception.
The Board fully appreciates that, in these
extraordinary times, remuneration is enormously
sensitive – and particularly so when the absolute
numbers involved are large by any standards, even if
they are not in comparison with some other
companies of HSBC’s standing. Our practice is clear
and transparent and this year’s executive awards are
set out in the Directors’ Remuneration Report
published today. We absolutely believe that the
decisions we have taken on this year’s remuneration
awards are right – for all of our stakeholders.
Building a sustainable financial system for
the future
As policymakers and industry participants take the