HSBC 2007 Annual Report Download - page 380

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
Note 10
378
10 Share-based payments
During 2007, US$870 million was charged to the income statement in respect of share-based payment transactions
settled in equity (2006: US$854 million; 2005: US$540 million). This expense, which was computed from the fair
values of the share-based payment transactions when contracted, arose under employee share awards made in
accordance with HSBC’s reward structures.
Calculation of fair values
Fair values of share options/awards, measured at the date of grant of the option/award, are calculated using a
binomial lattice model methodology that is based on the underlying assumptions of the Black-Scholes model. When
modelling options/awards with vesting dependent on HSBC’s Total Shareholder Return (‘TSR’) over a period, the
TSR performance targets are incorporated into the model using Monte Carlo simulation. The expected life of options
depends on the behaviour of option holders, which is incorporated into the option model on the basis of historic
observable data. The fair values calculated are inherently subjective and uncertain due to the assumptions made and
the limitations of the model used.
The significant weighted average assumptions used to estimate the fair value of the options granted were as follows:
HSBC
Holdings
Group
Share Option
Plan
1-year
Savings-
Related
Share Option
Plan
3-year
Savings-
Related
Share Option
Plans
5-year
Savings-
Related
Share Option
Plans
The HSBC
Share Plan
2007
Risk-free interest rate1 (%) ......... – 5.6 5.5 5.4 –
Expected life2 (years) .................. – 1 3 5 –
Expected volatility3 (%) .............. – 17 17 17 –
Share price at grant date (£) ........ – 9.24 9.24 9.24 –
2006
Risk-free interest rate1 (%) ......... – 4.7 4.8 4.7 –
Expected life2 (years) .................. – 1 3 5 –
Expected volatility3 (%) .............. – 17 17 17 –
Share price at grant date (£) ........ – 9.54 9.54 9.54 –
2005
Risk-free interest rate1 (%) ......... 4.6 – 4.3 4.3 4.3
Expected life2 (years) .................. 7.8 – 3 5 5
Expected volatility3 (%) .............. 20 – 20 20 20
Share price at grant date (£) ........ 8.30 – 8.68 8.68 8.37
1 The risk-free rate was determined from the UK gilts yield curve for the HSBC Holdings Group Share Option Plan awards and 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.
Expected dividends are incorporated into the valuation model for options and shares, where applicable. The expected
US dollar denominated dividend growth was determined to be 10 per cent for the first 3 years (2006: 9 per cent for
first year) and 8 per cent thereafter (2006: 8 per cent), in line with consensus analyst forecasts.
The HSBC Share Plan
The HSBC Share Plan was adopted by HSBC Holdings in 2005. 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
Performance shares are awarded to executive Directors and other senior executives after taking into account
individual performance in the previous year. 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