HSBC 2010 Annual Report Download - page 288

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
9 – Share-based payments
286
9 Share-based payments
During 2010, US$813m was charged to the income statement in respect of share-based payment transactions settled
in equity (2009: US$683m; 2008: US$819m). 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 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 historical observable data. The fair values calculated are inherently subjective and uncertain due to the
assumptions made and the limitations of the model used.
Significant weighted average assumptions used to estimate the fair value of options granted
Savings-related share option plans
1-year plan 3-year plans 5-year plans
2010
Risk-free interest rate1 (%) ......................................................................................... 0.7 1.9 2.9
Expected life2 (years) .................................................................................................. 1 3 5
Expected volatility3 (%) .............................................................................................. 30 30 30
Share price at grant date (£) ........................................................................................ 6.82 6.82 6.82
2009
Risk-free interest rate1 (%) ......................................................................................... 0.7 2.1 2.4
Expected life2 (years) .................................................................................................. 1 3 5
Expected volatility3 (%) .............................................................................................. 50 35 30
Share price at grant date (£) ........................................................................................ 4.65 4.65 4.65
2008
Risk-free interest rate1 (%) ......................................................................................... 4.5 4.5 4.5
Expected life2 (years) .................................................................................................. 1 3 5
Expected volatility3 (%) .............................................................................................. 25 25 25
Share price at grant date (£) ........................................................................................ 8.80 8.80 8.80
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 annum in line with consensus
analyst forecasts (2009: 4.5%). 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% for the first year and 8% 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 (‘EPS’) target. For each element of the award, shares are released to the employee on a sliding scale from 30%