HSBC 2009 Annual Report Download - page 404

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
Note 10
402
1 The risk-free rate was determined from the UK gilts yield curve for the UK Savings-Related Share Option Plans. A similar yield curve
was used for the International Savings-Related Share Option Plans.
2 Expected life is not a single input parameter but a function of various behavioural assumptions.
3 Expected volatility is estimated by considering both historic average share price volatility and implied volatility derived from traded
options over HSBC shares of similar maturity to those of the employee options.
The expected US dollar denominated dividend yield was determined to be 4.5 per cent per annum in line with
consensus analyst forecasts. Prior to 2009, HSBC adopted a dividend growth model and incorporated expected
dividends into the valuation model for share options and awards. In 2008, the expected dividend growth was
determined to be 7 per cent for the first year and 8 per cent thereafter.
The HSBC Share Plan
The HSBC Share Plan was approved at the 2005 Annual General Meeting and amendments were approved at the
2008 Annual General Meeting. Under this plan, Performance Share awards, Restricted Share awards and share option
awards may be made. The aim of the HSBC Share Plan is to align the interests of executives with the creation of
shareholder value and recognise individual performance and potential. Awards are also made under this plan for
recruitment and retention purposes.
Performance Share awards
Awards of Performance Shares are made to executive Directors and other senior executives after taking into account
individual performance in the previous year. For awards made prior to 2008, each award is divided into two equal
parts for testing attainment against pre-determined benchmarks. One half of the award is subject to a TSR measure,
based on HSBC’s ranking against a comparator group of 28 major banks; the other half is subject to an earnings per
share target. For each element of the award, shares are released to the employee on a sliding scale from 30 to 100 per
cent of the award, depending on the scale of achievement against the benchmarks, providing that the minimum
criteria for each performance measure have been met.
For awards made during 2008 and prospectively, each award is divided into three parts for testing attainment against
pre-determined benchmarks. 40 per cent of the award is subject to a TSR measure, based on a free-float market
capitalisation ranking method; 40 per cent is subject to an economic profit measure, calculated as the average annual
difference between return on invested capital and HSBC’s benchmark cost of capital; and 20 per cent is subject to an
earnings per share target. For the TSR and EPS elements of the awards, shares are released to the employee on a
sliding scale from 20 to 100 per cent of the award, depending on the scale of achievement against the benchmarks.
For the economic profit element of the awards, shares are released to the employee on a sliding scale from zero to
100 per cent, depending on the scale of achievement against the benchmark. In all cases, shares are only released
when the minimum criteria for each performance measure has been met. The performance conditions are measured
over a three year performance period and awards forfeited to the extent they have not been met.
In addition to the performance conditions mentioned above, before an award can vest, the Remuneration Committee needs
to be satisfied that the Group has shown a sustained improvement in the period since the award was made. In determining
whether HSBC Holdings has achieved such sustained improvement the Remuneration Committee will take account of all
relevant factors, in particular, comparisons against the TSR comparator group in areas such as revenue growth and mix, cost
efficiency, credit performance as measured by risk-adjusted revenues, cash return on cash invested, dividend performance
and TSR.
2009 2008
Number Number
(000s) (000s)
Outstanding at 1 January ......................................................................................................................... 11,619 12,318
Additions during the year1........................................................................................................................ 333 5,664
Adjustment for rights issue ...................................................................................................................... 1,712 –
Released in the year ................................................................................................................................. (1,076) (2,246)
Forfeited in the year ................................................................................................................................. (5,228) (4,117)
Outstanding at 31 December ................................................................................................................... 7,360 11,619
1 Additions in 2009 comprised reinvested dividend equivalents
No Performance Shares were awarded by HSBC in 2009. The weighted average fair value of Performance Shares
awarded in 2008 was US$13.61.