HSBC 2010 Annual Report Download - page 229

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Overview Operating & Financial Review Governance Financial Statements Shareholder Information
to the extent that they have not been met. The
performance measures and the targets described
below apply to the last awards made in 2008.
Total shareholder return award
TSR is measured against a comparator group
comprising the largest global banks in the world as
well as other banks against which we compete for
business at a regional and/or local level. These
companies are:
TSR comparator group
AGEAS ICBC
Banco Bradesco Itau Unibanco
Banco Santander JPMorgan 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
During 2008, HBOS and Wachovia merged with
other banks in the comparator group and in 2009 the
remainder of the banking activities of Fortis were
acquired by BNP Paribas, an existing member of the
comparator group. For awards made in 2008,
performance from the point of acquisition will track
that of the acquirer. This approach retains the free
float market capitalisation (‘FFMC’) weighting of
the combined entities. The Committee determined
that the comparator group remains 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 FFMC weighted method is used to calculate
TSR performance. Under this approach, our out-
performance of the comparator group will be
calculated by dividing the total FFMC of all of the
companies that we have 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 vests is determined as follows:
If HSBC’s TSR outperforms
companies comprising
Proportion of TSR
award vesting1
75% of the total FFMC 100%
50% of the total FFMC 20%
< 50% of the total FFMC nil
1 Vesting will occur in a straight line between 20% and 100%
where our performance falls between these incremental
steps.
Economic profit award
Economic profit (‘EP’) is calculated as the average
annual difference between return on invested capital
and our 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
our benchmark cost of capital.
For the awards made in 2008 the benchmark
cost of capital was 10%. Return on invested capital
is based on the profit attributable to shareholders.
The extent to which the EP award vests is
determined as follows:
Average annual EP over
three years
Proportion of EP
award vesting1
8% or above 100%
< 3% nil
1 Vesting will occur in a straight line between 0% and 100%
where our performance falls between these incremental
steps.
Earnings per share award
Growth in EPS is measured on a point to point basis,
by comparing EPS in the third financial year of the
performance period with EPS in the financial year
preceding that in which the award is made.
EPS growth in Year 3 over
the base EPS
Proportion of EPS
award vesting1
28% or above 100%
16% 20%
< 16% nil
1 Vesting will occur in a straight line between 20% and 100%
where our performance falls between these incremental
steps.
If events occur which cause the Committee to
consider that a performance condition has become
unfair or impractical in either direction, the right is
reserved to the Committee, if it considers it
appropriate, to amend, relax or waive the condition.
Awards will vest in full and immediately in
cases of death. In the event of redundancy,
retirement on grounds of injury or ill health and
where a participant ceases to be employed by HSBC
due to a company ceasing to be part of HSBC,
awards will normally vest at the end of the vesting
period on a time-apportioned basis to the extent that
the performance conditions have been satisfied. In
the event of a change of control, awards will
normally vest immediately and on a time-
apportioned basis to the extent that the performance