HSBC 2005 Annual Report Download - page 272

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
270
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 in 2005 were as
follows:
HSBC
Holdings
Group Share
Option Plan
3-year
Savings-
Related
Share Option
Plans
5-year
Savings-
Related Share
Option
Plans
The
HSBC
Share Plan
Risk-free interest rate1 (%) .......................................... 4.6 4.3 4.3 4.3
Expected life2 (years) .................................................. 7.8355
Expected volatility3 (%) .............................................. 20 20 20 20
1The 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.
2Expected life is not a single input parameter but a function of various behavioural assumptions.
3Expected 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 dividend yield was determined, denominated in US dollars, to be 12 per cent for the first year and
8 per cent thereafter, consistent with consensus analyst forecasts.
The HSBC Share Plan
The HSBC Share Plan was adopted by HSBC 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 to 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 Share awards are made to Senior Executives taking into account individual performance in the prior
year. Performance Share awards are divided into two equal parts for testing attainment against pre-determined
benchmarking. One half is subject to a Total Shareholder Return measure, based on HSBC’s ranking against a
comparator group of 28 major banks. The other half of the award is subject to an Earnings Per Share target. For each
element of the award, shares would be released to the employee according to a sliding scale from 30 to 100 per cent
of the award, dependent upon the scale of achievement against the benchmarks and provided that a threshold has
been passed. If the threshold is not passed, 0 per cent will vest for that part of the award. Shares will be released after
three years to the extent that the performance conditions are satisfied. These awards are forfeited in total if HSBC
performance fails to meet the minimum criteria.
2005
Number
(000’s)
Additions during the year1................................................................................................................................................ 5,077
Forfeited in the year ......................................................................................................................................................... –
Outstanding at 31 December ........................................................................................................................................... 5,077
1Additions during the year include 3,453,884 shares awarded to employees of HSBC Holdings.
The weighted average fair value of shares awarded by HSBC for Performance Share awards in 2005 was US$9.02.