HSBC 2008 Annual Report Download - page 321

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Awards will not vest unless the Remuneration
Committee is satisfied that HSBC Holdings’
financial performance has shown a sustained
improvement in the period since the award date. 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, cash
return on cash invested, dividend performance and
TSR.
The performance conditions are measured over
a three year performance period and awards forfeited
to the extent that they have not been met.
The performance measures and the targets
described below apply for awards made in 2008.
The Remuneration Committee will review annually
whether the performance targets remain appropriate
and challenging, or should be recalibrated, for
awards made thereafter, taking into account factors
such as economic expectations, the industry’s
outlook and shareholders’ interests. The Committee
will consult in accordance with institutional
shareholder guidelines on any further changes
proposed to the nature of the performance measures
and their percentage split referred to above.
TSR award
TSR is measured against a comparator group
comprising the largest global banks in the world as
well as other banks against which HSBC competes
for business on a regional and/or local level. These
companies are:
Banco Bradesco HBOS
Banco Itau ICBC
Banco Santander JP Morgan Chase
Bank of America Lloyds Banking Group
Bank of China National Australia Bank
Barclays Royal Bank of Canada
BBVA Royal Bank of Scotland
BNP Paribas Société Générale
Citigroup Standard Chartered
Credit Suisse Group UBS
DBS Group UniCredito Italiano
Deutsche Bank Wells Fargo
Fortis Wachovia
During 2008, HBOS and Wachovia merged with
other banks in the comparator group. The Committee
determined that the comparator group will remain
large enough to be statistically valid and as such it
was not necessary to introduce any replacement
banks.
To reflect the fact that the range of market
capitalisations within the comparator group is very
wide, a free float market capitalisation (‘FFMC’)
weighted method is used to calculate TSR
performance. Under this approach, HSBC’s out-
performance of the comparator group will be
calculated by dividing the total FFMC of all of the
companies that HSBC has outperformed in terms of
TSR by the total FFMC of all of the companies in
the comparator group.
The extent to which the TSR award will vest
will be determined as follows:
If HSBC’s TSR outperforms
companies comprising
Proportion of TSR Award
vesting1
75 per cent of the total FFMC 100%
50 per cent of the total FFMC 20%
< 50 per cent of the total FFMC nil
1 Vesting will occur in a straight line between 20 per cent and
100 per cent where HSBC’s performance falls between these
incremental steps.
In line with the commitment made to
shareholders in 2008, the Remuneration Committee
reviewed the methodology and concluded that it
continues to be appropriate. The Committee then
wrote to HSBC Holdings’ sixty largest shareholders
advising them of this conclusion and offering them
the opportunity to comment.
Economic profit award
Economic Profit (‘EP’) is calculated as the average
annual difference between return on invested capital
and the Group’s benchmark cost of capital and is
expressed as a percentage. EP is a key measure of
shareholder value creation as it rewards management
progressively to the extent that the return on the
capital invested in HSBC by its shareholders is in
excess of a threshold return, which itself exceeds the
Group’s benchmark cost of capital.
For the awards made in 2008 the benchmark
cost of capital is 10 per cent. Return on invested
capital is based on the profit attributable to
shareholders as defined on page 18.
The extent to which the EP award will vest will
be determined as follows:
Average annual EP over
three years
Proportion of EP Award
vesting1
8 per cent or above 100%
< 3 per cent nil
1 Vesting will occur in a straight line between 0 per cent and
100 per cent where HSBC’s performance falls between these
incremental steps.