Annual Financial Report - 31 of 44

RNS Number : 1501A

HSBC Holdings PLC

27 March 2012

 



Report of the Group Remuneration Committee

Members and advisers ...........................................	256
HSBC's reward strategy ........................................	256
Regulation ............................................................	259
Executive Directors' remuneration ......................	259
Non-executive Directors ......................................	268
Employee compensation and benefits ..................	269
Pensions ..............................................................	271
Share Plans ..........................................................	272

Group Remuneration Committee

Within the authority delegated by the Board, the Group Remuneration Committee ('the Committee') is responsible for approving the Group's remuneration policy. The Committee also determines the remuneration of Directors, other senior Group employees, employees in positions of significant influence and employees whose activities have or could have an impact on our risk profile and in doing so takes into account the pay and conditions across our Group.

No Directors are involved in deciding their own remuneration.

Members and advisers

The members of the Committee during 2011 were J D Coombe, W S H Laidlaw, G Morgan and J L Thornton.

There were nine meetings of the Committee during 2011. The table on page 238 gives details of Directors' attendance at these meetings.

The Committee has decided to not use advisers except in exceptional circumstances. No external advisers were used by the Committee during 2011. During the year, the Group Chief Executive provided regular briefings to the Committee and the Committee received advice from the Group Managing Director, Group Head of Human Resources and Corporate Sustainability, A Almeida, the Group Head of Performance and Reward, T Roberts and the Group Chief Risk Officer, M M Moses.

The Committee also received advice and feedback from the Group Risk Committee on risk-related matters relevant to remuneration and the alignment of remuneration with risk appetite.

HSBC's reward strategy

The quality and commitment of our human capital is deemed fundamental to our success and accordingly the Board aims to attract, retain and motivate the very best people. As trust and relationships are vital in our business our broad policy is to recruit those who are committed to making a long-term career with the organisation.

HSBC's reward strategy supports this objective through focusing on both short-term and sustainable performance over the long-term. It aims to reward success, not failure, and be properly aligned with risk.

In order to ensure alignment between remuneration and our strategy, individual remuneration is determined through assessment of performance delivered against both annual and long‑term objectives summarised in performance scorecards and adherence to the HSBC Values of being 'open, connected and dependable' and acting with 'courageous integrity'. Altogether, performance is judged, not only on what is achieved over the short and medium term, but also on how it is achieved, as the latter contributes to the sustainability of the organisation.

The financial and non-financial measures that comprise the annual and long-term scorecards are carefully considered to ensure alignment with the long-term strategy of the Group.

Overview of remuneration

In order to ensure clarity over remuneration, there are just four elements of remuneration, two of which are performance related. These are:

·     fixed pay;

·     the annual bonus;

·     the Group Performance Share Plan (the new long-term incentive plan of the HSBC Share Plan 2011); and

·     benefits.

The Group Performance Share Plan ('GPSP') was developed over 2010 and 2011 to incentivise senior executives to deliver sustainable long-term business performance. A key feature of the GPSP is that participants are required to hold the awards, once they have vested, until retirement, thereby enhancing the alignment of interest between the senior executives of the Group and shareholders.

As part of the HSBC Share Plan 2011, the GPSP was approved by shareholders at the Annual General Meeting in May 2011 and the first awards were made in June 2011. It replaces the previous long-term incentive plan. Further details are given on page 261.

Executive Directors, Group Managing Directors and Group General Managers participate in both performance-related plans, namely the annual bonus and the GPSP. Other employees across the Group are eligible to participate in annual bonus arrangements. Both the annual bonus and long-term incentive awards are funded from a single annual variable pay pool from which individual awards are considered.

Further details are provided in the section below and on page 258 in the Individual awards section.

Group variable pay pool determination

The Committee considers many factors in determining the Group's variable pay pool funding.

The variable pay pool takes into account the performance of the Group which is considered within the context of our risk appetite statement. This helps to ensure that the variable pay pool is shaped by risk considerations. The risk appetite statement describes and measures the amount and types of risk that HSBC is prepared to take in executing our strategy. It shapes our integrated approach to business, risk and capital management and supports achievement of our objectives. The Group Chief Risk Officer regularly updates the Committee on the Group's performance against the risk appetite statement.

The Committee uses these updates when considering remuneration to ensure that return, risk and remuneration are aligned. The risk appetite statement for 2011 was approved by the Board and was cascaded across global businesses and regions.

In addition, our funding methodology considers the relationship between capital, dividends and variable pay to ensure that the distribution of post‑tax profits between these three elements is considered appropriate. On a pro forma basis, attributable profits (excluding movements in the fair value of own debt and before variable pay distributions) are allocated in the following proportions:

2011 pro forma post-tax profits allocation

1  Inclusive of dividends to holders of other equity instruments and net of scrip issuance.

2  Total variable pay pool for 2011 net of tax and portion to be delivered by the award of HSBC shares.

Finally the commercial requirements to remain competitive in the market and overall affordability are considered.

2011 performance summary

Key achievements

During 2011 we made significant progress on executing our strategic objective to reshape the Group and become the world's leading international bank. We commenced a wide portfolio review to improve the capital deployment and announced 16 disposals or closures of non-strategic businesses during the year, and a further three in 2012. In addition, progress was made towards our target of delivering US$2.5bn to US$3.5bn of sustainable cost savings by the end of 2013, by achieving US$0.9bn of sustainable savings.

The following summarises the Group's 2011 financial performance.

·     reported profit before tax grew compared with 2010, although it fell on an underlying basis;

·     return on average ordinary shareholders' equity of 10.9% improved but remained below the target range;

·     we successfully grew revenue in our target markets of Latin America, Hong Kong, Rest of Asia-Pacific and Middle East and North Africa, which supported record revenues in CMB. However, revenue was adversely affected by the eurozone sovereign debt crisis, adverse movements on non-qualifying hedges, lower Balance Sheet Management revenues (as expected), and the continued reduction in the HSBC Finance portfolio in North America;

·     loan impairment charges and other credit risk provisions reduced significantly, notably in North America; credit conditions remained stable elsewhere;

·     notwithstanding the savings noted above, the cost efficiency ratio ('CER') increased from 55.2% in 2010 to 57.5% in 2011. This largely reflected an increase in significant items including restructuring costs, customer redress programmes and the bank levy introduced by the UK government. The increase also reflected a rise in staff costs due to wage inflation, most notably in faster-growing markets, and higher average staff numbers. The Group remains focused on achieving the CER target range of 48-52%;

·     we maintained a strong balance sheet, with a ratio of customer advances to customer accounts of 75%. On an underlying basis, we grew loans to customers and customer deposits across our target markets of Latin America, Hong Kong, Rest of Asia-Pacific and Middle East and North Africa;

·     we increased dividends in respect of 2011 to our shareholders from US$0.36 per ordinary share in 2010 to US$0.41 per ordinary share in respect of 2011; and

·     our core tier 1 ratio remained strong in the face of a difficult operating and ever-changing regulatory environment.

The 2011 Group variable pay pool that was approved by the Committee is detailed below. It is stated in US dollars in line with the main currency of presentation of our results and on a constant currency basis.

Group variable pay pool

	Group				Global Banking and Markets
	2011		2010		2011		2010
	US$m		US$m		US$m		US$m
Total 2011 variable pay pool .......................................................	4,223		4,297		1,210		1,640
	%		%		%		%
Variable compensation bonus pool as a percentage of pre-tax profit (pre-variable pay)1 ...................................................................	18		18		14		15
Proportion of bonus that is deferred .............................................	16		18		27		31

1  The 2011 Group pre-tax profit pre-variable pay includes the add-back of restructuring costs incurred during the year, and the adjustment for movements in the fair value of own debt attributable to credit spread.

Individual awards

Individual awards are based on the achievement of both financial and non-financial objectives. These objectives, which are aligned with the Group's strategy, are detailed in participants' annual performance scorecards and the collective long-term performance scorecard of participants in the GPSP. Performance is then measured and reviewed against the objectives on a regular basis.

HSBC Values are described on page 13. They are key to the running of a sound, sustainable bank. Overall performance under both scorecards is judged on performance outcomes and, importantly, adherence to the HSBC Values. Our most senior employees had a separate values rating for 2011 which directly influenced their overall performance rating and, accordingly, their variable pay.

In addition, the global Risk and Compliance functions carry out annual reviews for senior executives and risk-takers (defined as HSBC Code Staff). These reviews determine whether there are any instances of non-compliance with Risk and Compliance procedures and expected behaviour. Instances of non-compliance are escalated to senior management for consideration in variable pay decisions, clawback and ongoing employment.

Group-wide thematic reviews of risk are also carried out to determine if there are any transgressions for sizing variable pay or any instances where clawback is required. Risk and Compliance input is a critical part of the assessment process in determining the performance of HSBC Code Staff (which includes the executive Directors) and in ensuring that their individual remuneration has been appropriately assessed with regard to risk.

We require a proportion of variable pay awards above certain thresholds to be deferred into awards of HSBC shares. This is to ensure that the Group's interests and those of our employees are aligned with those of our shareholders, that our approach to risk management supports the interests of all stakeholders and that remuneration is consistent with effective risk management. In addition, employees are encouraged to participate in our savings-related share options plans and local share ownership arrangements.

Finally, in considering individual awards, a comparison of the pay and employment conditions of our employees, Directors and senior executives is considered by the Committee.

Clawback

In order to reward genuine performance and not failure, individual awards are made on the basis of a risk-adjusted view of both financial and non-financial performance. However, if the assessment of performance subsequently proves to be inaccurate or incorrect, then previously unvested deferred awards made since 2010 can be clawed back by the Committee. Clawback has been exercised by the Committee in 2012 in relation to the inappropriate advice given by advisors of NHFA Limited and in relation to the settlement of claims around the possible mis-selling of Payment Protection Insurance ('PPI') in the UK.

Management of risk

The integration of risk in our remuneration approach is described in detail in the overview of remuneration section on page 256.

Regulation

2011 has seen further significant change to the regulatory environment as it relates to remuneration. There is still a wide divergence in how regulations operate globally and this presents significant challenges to HSBC, which operates in 85 countries and territories worldwide. In order to deliver long-term sustainable performance, it is important we have market-competitive remuneration in order to attract, motivate and retain talented and committed employees around the world.

We ensure our remuneration policies are aligned with both new regulatory practices and the interests of shareholders and confirm that HSBC is fully compliant with the Financial Stability Board and the FSA guidance and rules on remuneration.

Executive Directors' remuneration

Composition of executive Directors' reward

Executive Directors' reward is delivered through three main elements (excluding benefits):

Description	Strategic purpose
Fixed pay	·  Takes account of experience and personal contribution to the individual's role.
Annual bonus	·  Maximum bonus is three times fixed pay (a reduction from the previous maximum of four times). ·  The award is non-pensionable. ·  Drives and rewards performance against annual financial and non-financial measures and adherence to HSBC Values which are consistent with the medium to long-term strategy. ·  The 2011 bonus will be fully delivered in HSBC shares, 60% of the bonus is deferred over a period of three years, 33% vests on the first and second anniversary of grant and 34% on the third anniversary of grant. During the vesting period the Committee has the authority to claw back part of or all the award. ·  50% of the deferred and non-deferred awards are subject to a six-month retention period after vesting in line with FSA regulations.
GPSP	·  Maximum award is six times fixed pay (a reduction from the maximum of seven times under the previous long-term incentive plan). ·  The award is non-pensionable. ·  Incentivises sustainable long-term performance and alignment with shareholder interests. ·  Award levels are determined by considering performance prior to the date of grant against enduring performance measures set out in the long-term performance scorecard. ·  The award is subject to a five-year vesting period during which the Committee has the authority to claw back part or all of the award. ·  On vesting the net of tax shares must be retained until the participant retires.

This approach applies to all executive Directors with the exception of the Group Chairman, D J Flint, who, from 2011, is not eligible for annual bonus and is not expected to be granted awards under the GPSP other than in exceptional circumstances.

Total remuneration benchmarking methodology

When considering the competitiveness of executive Directors' remuneration packages the Committee considers market data from a defined remuneration comparator group. This group consists of nine global financial services companies, namely Banco Santander, Bank of America, Barclays, BNP Paribas,

Citigroup, Deutsche Bank, JPMorgan Chase & Co, Standard Chartered and UBS. These companies were selected on the basis of their broadly similar business coverage, size and international scope, and are subject to annual review for continuing relevance.

Fixed pay

No fixed pay increases are proposed for executive Directors in 2012.

Annual bonus

Determining executive Directors' performance

S T Gulliver

The annual bonus award made to S T Gulliver in respect of 2011 was based upon the Committee's assessment of the achievement of personal and corporate objectives as laid out in his performance scorecard agreed by the Board at the beginning of the year. This approach took into account performance against both financial and non-financial objectives and was set within the context of the risk appetite and strategic priorities agreed by the Board as appropriate for 2011.

In order for any award of annual bonus to be made under the above performance scorecard approach the Committee had to firstly satisfy itself that S T Gulliver had demonstrated personal adherence to and leadership in promoting HSBC Values. This over-riding test assesses behaviour around the HSBC Values principles of being 'open, connected and dependable' and acting with 'courageous integrity'. The Committee determined that S T Gulliver had exhibited strong leadership and behaviour in this area and so met the required standard.

Equal weighting was given within the performance scorecard agreed for S T Gulliver for 2011 between financial and non-financial measures. In aggregate, in assessing the quantum of the 2011 annual bonus against the theoretical maximum opportunity of three times base salary, an overall score of 57.5% of that maximum opportunity was judged to have been achieved. The achievement of the financial measures was scored more highly than the non-financial measures. A summary of the assessment and rationale for the conclusions is set out below.

Financial (50% weighting - achieved 30%)

The Committee considered that in the key areas of Capital Strength (10%) and Dividend Progression (10%) HSBC had fully met the objectives agreed and so this element of financial performance had been achieved. In assessing the extent to which Profit (10%) and Cost Performance improvement (10%) had been delivered, these were judged to have been met to the extent of 50%. The Committee assessed positively the profit performance across CMB globally, in RBWM outside the US and in GB&M outside Europe and the US. The unexpected increase in loan impairment charges in the third quarter in the consumer finance business in the US and the impact of the eurozone crisis on GB&M performance in Europe were the key drivers of underperformance. In terms of cost performance, this was assessed positively and broadly in line with the profit performance. With regard to Return on Equity (5%) and Return on Risk-Weighted Assets (5%), largely driven by the underperforming areas noted above, performance was below the targets set and thus those elements of the scorecard attracted no award.

Non-financial (50% weighting - achieved 27.5%)

Half the opportunity in this area related to Strategy Execution and out of a maximum possible 25% opportunity, 80% was judged to have been achieved. This strong performance reflected execution of planned divestments of underperforming and sub-scale businesses and, importantly, the sale of the upstate New York branches of the US commercial bank and the US credit and storecard businesses. The Committee noted that the portion of the annual bonus attributable to these latter two divestments would be clawed back in the event the agreed sales do not complete. Elsewhere in relation to Strategy Execution, the Committee noted good progress regarding organic expansion in mainland China, early stage development of the Wealth Management strategy and strong personal commitment to and success in supporting key client relationships.

The remainder of the opportunity within the non-financial portion of the performance scorecard related to People and Values (10%) and Compliance and Reputation (15%). The Committee awarded 75% of the available opportunity in respect of People and Values noting the strong cohesion of the new senior management leadership team which was updated during 2011. With regard to Compliance and Reputation, in spite of the considerable progress made under S T Gulliver's leadership in rolling out HSBC Values awareness Group-wide to avoid repetition of legacy compliance failings, the incidence of the PPI redress settlement, the mis-selling instances uncovered at NHFA Limited and continuing legacy legal and compliance issues in the US, the Committee determined that there could be no award under this element of the scorecard.

The same deliberations and assessments with regard to performance and adherence to HSBC Values were undertaken by the Committee with regard to the performance of AA Flockhart and I J Mackay. These are summarised below.

A A Flockhart

The performance scorecard for A A Flockhart was weighted 45% financial, 55% non-financial. In aggregate, in assessing the quantum of the 2011 annual bonus against the theoretical maximum opportunity of three times base salary, an overall score of 66% of that maximum opportunity was judged to have been achieved. The Committee considered that performance against the financial measures of Profit before Tax, Cost Efficiency and Return on Risk-Weighted Assets had been met or exceeded in CMB, Latin America and the Middle East and North Africa. The performance in Europe against these targets was below plan. Capital Generation targets were met in Europe and Latin America but were below target in the Middle East and North Africa. The Committee considered that good progress had been made against the non-financial targets of Strategy Execution and People, whilst the Project Merlin lending intentions had been exceeded both in terms of total and SME facilities. Notwithstanding strong management of the UK business during the riots in the summer of 2011 and the Middle East business during the political unrest across the region, due to the incidence of the PPI redress settlement and the mis-selling instances uncovered at NHFA Limited, the Committee determined that there could be no award under this element of the scorecard.

I J Mackay

The performance scorecard for I J Mackay was weighted 40% financial, 60% non-financial, reflecting the nature of his responsibilities. In aggregate, in assessing the quantum of the 2011 annual bonus against the theoretical maximum opportunity of three times base salary, an overall score of 52% of that maximum opportunity was judged to have been achieved. The Committee considered that performance against the financial targets of Cost disciplines, Functional Operating Costs and Capital and Liquidity Management had been met or were in progress. The Committee considered that performance against the non-financial targets including People, Reporting and Planning was in progress. With regard to Compliance and Reputation, the incidence of the PPI redress settlement, the mis‑selling instances uncovered at NHFA Limited and continuing legacy legal and compliance issues in the US, the Committee determined that there could be no award under this element of the scorecard.

Annual bonus awards

	2011 performance1								2010 performance
	Non-deferred2				Deferred2				Non-deferred				Deferred
	Cash		Restricted Shares		Cash		Restricted Shares		Cash		Restricted Shares		Cash		Restricted Shares
	£000		£000		£000		£000		£000		£000		£000		£000
V H C Cheng3 .............	-		-		-		-		142		142		213		213
D J Flint .....................	-		-		-		-		560		560		840		840
A A Flockhart ............	-		770		-		1,156		362		362		542		542
S T Gulliver4 ...............	-		862		-		1,294		-		-		-		5,200
I J Mackay ..................	-		434		-		652		12		12		18		18

1  The awards made in respect of 2011 performance will be delivered as described on page 259.

2  50% of the deferred and non deferred shares award are subject to a 6 month retention period.

3  Retired as a Director on 27 May 2011.

4  S T Gulliver requested that 100% of the award made to him in respect of 2010 performance be fully deferred in Restricted Shares subject to the standard vesting and retention period.

Group Performance Share Plan

2010 awards

In determining the level of GPSP award granted on 23 June 2011, the Committee used the 2010 long‑term performance scorecard detailed below.

The financial targets were commensurate with the published targets for 2010. The assessment of performance against the financial measures was based upon the published outcome and the non-financial performance represented the considered view of the Committee.

In considering the overall performance against the scorecard a simple approach was adopted. Each measure in the financial targets section was given a weighting of 15% of the total and each measure in the non-financial section was given a weighting of 10%. Where individual targets consisted of a range, a straight-line approach was applied, with 50% weighting on entry to the range rising on a straight line basis to 100% weighting at the maximum performance target. 

The only financial measure that exceeded the range for 2010 was capital strength with a core tier 1 capital ratio of 10.5%. The dividend payout fell within the range and the ranges for the Return on Equity and Cost Efficiency Ratio financial measures were not met. Within the non-financial measures the Committee's considered view was that Strategy, Brand Equity and People had been partially met and a partial weighting was applied. The target for the Compliance and Reputation measure was not met for 2010.

Using this approach, the initial guideline for the performance outcome for 2010 was calculated as 38.2% of the maximum face value of awards as detailed below.

2010 long-term scorecard and initial performance outcome

Measure	Long-term                   target range                    (pre 2011)		Weighting		Actual 2010                 Performance		Outcome
Return on equity.....................................................	15% - 19%		15%		9.5%1		-
Cost efficiency ratio ..............................................	48% - 52%		15%		55.2%1		-
Capital strength .....................................................	7.5% - 10%		15%		10.5%1		15.0%
Dividends (payout ratio) ........................................	40% - 70%		15%		46.6%1		9.2%
Strategy .................................................................	Judgement		10%		Judgement		4.0%
Brand equity ..........................................................	Top 3 rating and    improve US$bn value		10%		Top 3 rating but                 drop in value2		5.0%
Compliance and reputation ....................................	Judgement		10%		Not met		-
People ...................................................................	Judgement		10%		Judgement		5.0%
Mechanical performance outcome .........................			100%				38.2%
Committee discretion ............................................							31.3%

1  As reported in Annual Report and Accounts 2010.

2  Based on results from The Brand Finance^® Banking 500 2011 survey.

Notwithstanding this, during the shareholder consultation process in respect of the GPSP, the Committee had committed to shareholders that it would be conservative when determining the first awards to be made. Accordingly the Committee determined that the initial performance outcome should be reduced further to give a final performance outcome for 2010 of 31.3%.

This performance outcome was then applied to maximum face values (expressed as a percentage of salary) for each participant. The awards made in respect of 2010 are detailed below:

	Maximum face          value of award		Performance         outcome		Awards               made
S T Gulliver ..................................................................................................	600%		31.3%		187.8%
A A Flockhart ..............................................................................................	350%		31.3%		109.6%
I J Mackay ...................................................................................................	300%		31.3%		93.9%

2011 awards

Awards to be granted in 2012 in respect of 2011 were assessed against the 2011 long-term scorecard detailed overleaf.

The performance outcome under the 2011 long‑term scorecard was again based upon the Committee's assessment of the achievement of the objectives as detailed below. This approach took into account performance under both financial and non-financial objectives and was set within the context of the risk appetite and strategic direction agreed by the Board.

Irrespective of the performance outcome, eligibility for a GPSP award requires confirmation of adherence to HSBC Values and all participants passed that test in 2011.

The weighting between financial and non-financial measures was set at 60% and 40% respectively. In aggregate an overall performance outcome of 50% of the scorecard was judged to have been achieved. A summary of the assessment and rationale for the conclusions is set out below.

2011 long-term scorecard and performance outcome

Measure	Long-term                target range		Weighting		Actual 2011               performance		Outcome
Return on equity.....................................................	12% - 15%		15%		10.9%1		-
Cost efficiency ratio ..............................................	48% - 52%		15%		57.5%1		-
Capital strength .....................................................	>10%		15%		10.1%1		15.0%
Dividends (payout ratio) ........................................	40% - 60%		15%		42.4%1		15.0%
Strategy .................................................................	Judgement		10%		Judgement		7.5%
Brand equity ..........................................................	Top 3 rating and improve US$bn value		10%		Top 3 rating but              drop in value2		5.0%
Compliance and reputation ....................................	Judgement		10%		Not met		-
People and values ..................................................	Judgement		10%		Judgement		7.5%
Performance outcome ...........................................			100%				50.0%

1  As reported in the Annual Report and Accounts 2011.

2  Based on results from The Brand Finance^® Banking 500 2012 survey.

Financial (60% weighting - achieved 30%)

The Committee considered that in the key areas of Capital Strength and Dividend Progression, HSBC was meeting its short-term targets and preparing carefully for the incoming higher standards embedded within the new regulatory regime. Accordingly these elements of longer-term financial performance were fully met.

The Group did not however meet its targets for Return On Equity or the Cost Efficiency Ratio in 2011. The Committee considered the extent to which steps had been taken to improve both metrics over the longer term. In its deliberations, the Committee noted positively the progress under the five filters approach to divesting or closing underperforming and sub‑scale businesses, the business model and organisational efficiency programmes underway to deliver targeted cost savings, the focus in terms of capital deployment on sustainable opportunities within the larger economies in which the Group has meaningful positions and in the faster-growing markets which will drive incremental trade and investment flows, and lastly the concentration on businesses that take advantage of the connectivity of the Group's geographical reach and global business product platforms.

The Committee scored progress towards the Return on Equity and Cost Efficiency Ratio targets but concluded at this early stage in the application of the GPSP it would not make any partial award for such achievement. This will be looked at again in future years.

Non-financial (40% weighting - achieved 20%)

With regard to Strategy, looking at progress made on addressing the longer term issues, the Committee looked favourably on the framework developed and being actioned to address underperforming and sub-scale businesses. Greater clarity has also been brought to the Board on the options to deliver more value from the Group's leading position in mainland China, to develop a larger Wealth Management business and to reshape the long term business of HSBC in the US. Given the clarity delivered, the Committee awarded 75% achievement for this element.

On People and Values, the Committee awarded 75% of the available opportunity of 10% to reflect how well and quickly the new management team has been constructed, positive actions regarding team building and succession planning, the roll out of the HSBC Values and the well thought out reshaping of the organisational structure under the new leadership team.

In considering Brand Equity the Committee noted positively the recognition in February 2012 in the Brand Finance^® Banking 500 2012 report that HSBC was judged to be the most valuable banking brand in the world, rising from third place one year prior. Despite the no. 1 rating in the Brand Finance survey the value of the brand (as measured using Brand Finance's methodology) decreased during 2011 and accordingly only 50% achievement was awarded to this element.

Finally with regard to Compliance and Reputation, the Committee concluded that as a

consequence of the incidence of the PPI redress settlement, the mis-selling instances uncovered at NHFA Limited and continuing legacy legal and compliance issues in the US, there could be no award under this element of the scorecard.

The performance outcome of 50% was then applied to maximum face values (expressed as a percentage of salary) for each participant. The awards to be made in respect of 2011 are detailed below:

	Maximum face          value of award		Performance         outcome		Awards               made
S T Gulliver ..................................................................................................	600%		50%		300%
I J Mackay ...................................................................................................	200%		50%		100%

2012 long-term scorecard

The long-term scorecard against which performance will be assessed in 2012 is detailed below. The 2012 scorecard remains consistent with 2011, with the exception that the weighting for strategy has been increased from 10% to 20% to emphasise the importance of this element. This increase in weighting has been accommodated by a reduction from 10% to 5% for both Brand Equity and People and Values. Overall performance is to be judged on performance outcomes and adherence to HSBC Values.

2012 scorecard

	Long-term                target range		Weighting
Measure
Return on equity .........................................................................................................	12% - 15%		15%
Cost efficiency ratio ...................................................................................................	48% - 52%		15%
Capital strength ..........................................................................................................	>10%		15%
Progressive dividend payout within 40% - 60% range ................................................	40% - 60%		15%
Strategy ......................................................................................................................	Judgement		20%
Brand equity ...............................................................................................................	Top 3 rating and improve US$bn value		5%
Compliance and reputation .........................................................................................	Judgement		10%
People and values .......................................................................................................	Judgement		5%
			100%

2011 Executive Directors' variable pay summary

The Committee is conscious of the different requirements for disclosing the various elements of variable pay. The table below simply details in one place the actual salary and variable pay awarded to the executive Directors in respect of the 2011 performance year.

			A A Flockhart						S T Gulliver						I J Mackay
(Unaudited)	Maximum Multiple		2011 Multiple awarded		2011       £000		2010       £000		2011 Multiple awarded		2011       £000		2010       £000		2011 Multiple awarded		2011       £000		2010       £000
Salary1 ......	1.00		1.00		975		820		1.00		1,250		800		1.00		700		57
Annual bonus2.....	3.00		1.98		1,926		1,808		1.72		2,156		5,200		1.55		1,086		61
GPSP awards3....	6.00		-		-		1,069		3.00		3,750		2,350		1.00		700		55
Total ........					2,901		3,697				7,156		8,350				2,486		173

1  As disclosed in the Directors emoluments table on page 265.

2  As disclosed in the Directors remuneration table on page 265. The 2011 bonus will be fully delivered in HSBC shares, 60% of the bonus is deferred over a period of three years, 33% vests on the first and second anniversary of grant and 34% on the third anniversary of grant. During the vesting period the Committee has the authority to claw back part or all of the award.

3  As disclosed in the 2011 long-term scorecard and performance outcome on page 263. The award is subject to a five-year vesting period during which the Committee has the authority to claw back part or all of the award. On vesting the net of tax shares must be retained until the participant retires.

2011 executive Directors' emoluments and remuneration

The following table shows the 2011 emoluments of the Group Chairman and executive Directors of

HSBC Holdings, with annual bonus disclosed on an actual paid basis, pursuant to section 421 of the UK Companies Act 2006 and the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008:

Directors' emoluments

	V H C Cheng1				D J Flint				A A Flockhart				S T Gulliver				I J Mackay1
(Audited)	2011		2010		2011		2010		2011		2010		2011		2010		2011		2010
£000
Salary .......................	382		775		1,500		845		975		820		1,250		800		700		57
Allowances2 ..............	142		193		750		434		366		-		527		154		364		36
Benefits in kind3 .......	133		311		98		8		237		629		266		17		363		27
Bonus4  .....................	124		284		1,054		1,805		1,627		1,385		4,559		2,934		446		24
Total emoluments ....	781		1,563		3,402		3,092		3,205		2,834		6,602		3,905		1,873		144
US$000 Total emoluments ....	1,252		2,414		5,452		4,775		5,136		4,377		10,581		6,031		3,002		222

The following table shows the 2011 total remuneration of the Group Chairman and executive Directors of HSBC Holdings with annual bonus disclosed on a 2011 performance year basis, pursuant to the UK Listing Rules. Explanations of the constituent parts of the bonus calculated pursuant to the UK Companies Act 2006 and the UK Listing Rules are given in footnotes 4 and 5, respectively.

Directors' remuneration

	V H C Cheng1				D J Flint				A A Flockhart				S T Gulliver				I J Mackay1
(Unaudited)	2011		2010		2011		2010		2011		2010		2011		2010		2011		2010
£000
Salary, allowances and benefits in kind ......	657		1,279		2,348		1,287		1,578		1,449		2,043		971		1,427		120
Bonus5 ......................	-		711		-		2,800		1,926		1,808		2,156		5,200		1,086		61
Total remuneration ..	657		1,990		2,348		4,087		3,504		3,257		4,199		6,171		2,513		181
US$000 Total remuneration ..	1,053		3,073		3,763		6,312		5,616		5,030		6,729		9,530		4,027		280

1  V H C Cheng retired as a Director on 27 May 2011 and I J Mackay was appointed as a Director on 3 December 2010.

2  Allowances include an executive allowance paid to fund personal pension arrangements.

3  Benefits in kind include provision of medical insurance, other insurance cover, accountancy advice and travel assistance. S T Gulliver is also provided with HSBC owned accommodation whilst in Hong Kong. In accordance with the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, the taxable rental value of the property is shown for the whole period from 4 August 2011 to 31 December 2011 notwithstanding that it is only occupied when S T Gulliver is in Hong Kong. I J Mackay relocated to London and he received temporary accommodation for him and his family together with other normal relocation benefits. Prior to relocating to the UK from Hong Kong, and whilst being subject to tax in Hong Kong, A A Flockhart also incurred a tax liability in the UK as a result of a number of business trips to the UK at the request of the Group. This liability was covered by HSBC.

4  Where applicable, bonus comprises: (i) the estimated monetary value of 33% of the award of HSBC Holdings Restricted Shares that will vest on 15 March 2012 arising from the 2010 bonus awarded in March 2011 that was partly deferred into awards of HSBC Holdings Restricted Shares, as follows: V H C Cheng, £53,000, D J Flint, £219,000, A A Flockhart, £141,000, S T Gulliver, £1,353,000 and I J Mackay, £5,000; (ii) the estimated monetary value of 33% of the award of HSBC Holdings Restricted Shares that will vest on 5 March 2012 arising from the 2009 bonus awarded in March 2010 that was fully deferred into awards of HSBC Restricted Shares as follows: D J Flint, £547,000, A A Flockhart, £529,000 and S T Gulliver, £2,343,000 and (iii) 40% of the annual bonus in respect of the 2011 performance year that is non-deferred. The non-deferred bonus is payable in HSBC Holdings Restricted Shares, 50% of which are subject to a six month retention period. Full details are set out above and on page 259.

5  The bonus for 2011 comprises the deferred and non-deferred bonus, details of which are set out above and on pages 259.

Performance Shares under the HSBC Share Plan (This plan is no longer in use)

As previously noted this plan has been replaced by the HSBC Share Plan 2011 which includes the GPSP. The last award made under this plan was in 2008 and vested in 2011. Accordingly the plan is detailed below. No further awards will be made under this plan.

The average actual vesting of Performance Share awards made in 2004 to 2008 (which were tested in 2007 to 2011) has been 25.77% of their face value. The awards granted in 2008 did not satisfy the earnings per share ('EPS') or economic profit conditions but did satisfy the total shareholder return ('TSR') condition and accordingly 21.3% of the overall award vested.

Delivery	HSBC Performance Shares
Policy	·  Face value up to a maximum of seven times fixed pay. ·  Vesting of awards based on three independent performance measures; TSR (40%), economic profit (40%), growth in EPS (20%). ·  Performance conditions measured over a three year period.
Timing	·  Last award made in 2008 and shares under the plan were released in March 2011. Performance Shares plan replaced by the GPSP.

Description of performance conditions

The performance measures for the long-term incentive awards of Performance Shares under the HSBC Share Plan were as follows.

The vesting of awards was based on three independent performance measures and an overriding 'sustained improvement' judgement by the Committee. The three Group measures were relative TSR (40% of the award); economic profit ('EP') (40%); and growth in EPS (20%).

These measures provided a basis on which to measure our relative and absolute performance over the long term. They take into account an external measure of value creation, a measure of the extent to which the return on capital invested in HSBC is in excess of a benchmark return and a direct measure of the profits generated for shareholders.

Awards did not vest unless the Committee was satisfied that our financial performance had shown a sustained improvement in the period since the award date. In determining whether we had achieved such sustained improvement the Committee took 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, dividends and TSR.

The performance measures and the targets described below applied to the last awards made in 2008 which vested and were released in April 2011.

Total shareholder return award

TSR was 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 were:

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

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 was used to calculate TSR performance. Under this approach, our out-performance of the comparator group was calculated by dividing the total FFMC of all of the companies that we had 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 vested was 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 occurred in a straight line between 20% and 100% where our performance fell between these incremental steps.

Economic profit award

EP was calculated as the average annual difference between return on invested capital and our benchmark cost of capital and was expressed as a percentage.

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 vested was determined as follows:

Average annual EP over three years		Proportion of EP award vesting1
8% or above		100%
< 3%		nil

1  Vesting occurred in a straight line between 0% and 100% where our performance fell between these incremental steps.

Earnings per share award

Growth in EPS was 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 was 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 occurred in a straight line between 20% and 100% where our performance fell between these incremental steps.

Funding

The dilution limits set out in the HSBC share plans comply with the Association of British Insurers' guidelines. To date, all awards of Performance Shares and Restricted Shares vesting under the HSBC Share Plan have been satisfied by the transfer of existing shares. To create additional core tier 1 capital and retain funds within HSBC, the Board has agreed that new shares may be issued to satisfy the vesting of Restricted Shares awards and GPSP awards that cannot be satisfied from shares already held by employee benefit trusts.

Total shareholder return

Pursuant to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, the graph below shows the TSR performance against the FTSE 100 Index for the five-year period ended 31 December 2011. The FTSE 100 Index has been chosen as this is a recognised broad equity market index of which HSBC Holdings is a member.

HSBC TSR and FTSE 100 Index

Source: International Data Corporation

Pensions

The normal retirement age for executive Directors is 65. The pension entitlements of the executive Directors for 2011 are set out on page 271.

Senior management changes

V H C Cheng, Chairman of HSBC Bank (China) Company Limited, retired from the Group on 27 May 2011.

M F Geoghegan stepped down from the Board and his Group Chief Executive position on 31 December 2010. Upon retirement on 31 March 2011, M F Geoghegan received in lieu of the remaining nine months' notice period required to terminate the service agreement, £1,027,500 and a pension contribution equal to £401,250. M F Geoghegan provided consultancy to HSBC for a period of three months from 1 April 2011 and was paid a consultancy fee of £200,000, which he stated he intended to donate to charity. No annual variable pay award has been recommended for 2011.

Share ownership guidelines

To ensure appropriate alignment with our shareholders, we operate a formal share ownership policy, expressed as a number of shares, for executive Directors and the Group Managing Directors. The Committee considers that material share ownership by executives creates a community of interest between senior management and shareholders.

Under the existing guidelines, the shareholding is expected to be achieved within five years of the executive's appointment. The executive Directors and Group Managing Directors are required to build and retain the following shareholdings:

			At 31 December
			2011				2010
	Shares to       be held1		Shares          held1		Estimated         value		Shares            held1		Estimated          value
	(Number)		(Number)		£000		(Number)		£000
D J Flint .................................................................................	400,000		626,342		3,076		494,933		3,223
A A Flockhart ........................................................................	200,000		1,420,535		6,976		1,066,450		6,944
S T Gulliver ............................................................................	600,000		4,892,014		24,025		4,279,244		27,862
I J Mackay ..............................................................................	200,000		424,735		2,086		287,719		1,873
Group Managing Directors ......................................................	125,000		-2		-		-2		-

1  For the purposes of the guidelines, unvested awards of Restricted Shares and GPSP awards are included.

2  All of the Group Managing Directors exceed the expected holdings.

The Committee monitors compliance with the share ownership guidelines annually. The Committee has full discretion in determining any penalties in cases of non-compliance, which could include a reduction of future awards of GPSP and/or an increase in the proportion of the annual variable pay that is deferred into shares.

Service contracts

Our policy is to employ executive Directors on one-year rolling contracts although longer initial terms may be approved by the Committee if considered appropriate. The Committee will, consistent with the best interests of the Group, seek to minimise termination payments.

Name		Contract date                (rolling)		Notice period    (Director & HSBC)		Compensation on termination by the company without notice or cause
V H C Cheng		15 March 2011		12 months		Payment in lieu of notice equal to fixed pay, pension entitlements and other benefits.
.............................
D J Flint		14 February 2011		12 months		Payment in lieu of notice equal to fixed pay, pension entitlements and other benefits.
.............................
A A Flockhart		14 February 2011		12 months		Payment in lieu of notice equal to fixed pay, pension entitlements and other benefits. Eligible to be considered for a variable pay award upon termination of employment other than where the executive has resigned or the Company has terminated the executive's employment with the contractual right to do so.
S T Gulliver1		10 February 2011		12 months		Payment in lieu of notice equal to fixed pay, pension entitlements and other benefits. Eligible to be considered for a variable pay award upon termination of employment other than where the executive has resigned or the Company has terminated the executive's employment with the contractual right to do so.
I J Mackay		4 February 2011		12 months		Payment in lieu of notice equal to fixed pay, pension entitlements and other benefits. Eligible to be considered for a variable pay award upon termination of employment other than where the executive has resigned or the Company has terminated the executive's employment with the contractual right to do so.

1  The other benefits as part of the payment in lieu of notice do not include the accommodation and car provided in Hong Kong.

Other directorships

Executive Directors, if so authorised by either the Nomination Committee or the Board, may accept appointments as non-executive Directors of suitable companies which are not part of HSBC. Approval will not be given for executive Directors to accept a non-executive directorship of more than one FTSE 100 company nor the chairmanship of such a company. When considering a non-executive appointment, the Nomination Committee or Board will take into account the expected time commitment of such appointment. The time commitment for executive Directors' external appointments will be reviewed as part of the annual Board review. Any remuneration receivable in respect of an external appointment is normally paid to HSBC, unless otherwise approved by the Committee. D J Flint was a non-executive Director of BP p.l.c. until 14 April 2011 and, during his directorship, elected to donate his fees to charity.

Non-executive Directors

Non-executive Directors are appointed for fixed terms not exceeding three years, subject to their re‑election by shareholders at Annual General Meetings. Non-executive directors have no service contract and are not eligible to participate in our share plans. Current non-executive Directors' terms of appointment will expire as follows:

·     in 2012, M K T Cheung, J R Lomax, Sir Simon Robertson, J L Thornton and Sir Brian Williamson;

·     in 2013, R A Fairhead and G Morgan; and

·     in 2014, S A Catz, L M L Cha, J D Coombe, J W J Hughes-Hallett, W S H Laidlaw and N R N Murthy.

Dr J Faber and J P Lipsky were appointed as non-executive Directors with effect from 1 March 2012. Subject to their re-election by shareholders at the Annual General Meeting in 2012, their terms will expire in 2015. Sir Brian Williamson and G Morgan will retire at the Annual General Meeting in 2012 and will not offer themselves for re-election.

Fees

Non-executive Directors' fees are regularly reviewed and compared with other large international companies of comparable complexity. The current fee, which was approved by shareholders in 2011, is £95,000 per annum.

A fee of £45,000 per annum is payable to the senior independent non-executive Director. In addition, non-executive Directors received the following fees for service on Board Committees:

Board Committee annual fees

	Chairman		Member		Number of        meetings    held during
	£000		£000		2011
Group Audit Committee ...............................................................................	50		30		7
Group Risk Committee .................................................................................	50		30		6
Group Remuneration Committee ..................................................................	50		30		9
Nomination Committee ...............................................................................	40		25		4
Corporate Sustainability Committee .............................................................	40		25		4

The total of fees paid to each of the non-executive Directors of HSBC Holdings for 2011, being emoluments for the purposes of the UK Companies Act 2006, is as follows:

Fees paid to non-executive Directors

(Audited)

	2011		2010
	£000		£000
S A Catz ..................................................................................................................................	95		65
L M L Cha1 .............................................................................................................................	465		-
M K T Cheung2 .......................................................................................................................	165		112
J D Coombe ............................................................................................................................	205		130
R A Fairhead ...........................................................................................................................	200		152
J W J Hughes-Hallett ...............................................................................................................	150		105
W S H Laidlaw ........................................................................................................................	125		85
J R Lomax ..............................................................................................................................	155		102
G Morgan ................................................................................................................................	125		85
N R N Murthy .........................................................................................................................	135		91
Sir Simon Robertson ................................................................................................................	166		115
J L Thornton3..........................................................................................................................	1,081		1,068
Sir Brian Williamson ...............................................................................................................	120		87
Total4 .....................................................................................................................................	3,187		2,329
Total (US$000)4 .....................................................................................................................	5,108		3,597

1  Includes fees as non-executive Director and Deputy Chairman of The Hongkong and Shanghai Banking Corporation Limited during the year and a member of its Nomination Committee from 1 October 2011.

2  Includes fees as non-executive Director and member of the Audit Committee of Hang Seng Bank Limited.

3  Includes fees as non-executive Chairman of HSBC North America Holdings Inc.

4  Total fees for 2010 include the fees of non-executive Directors who retired in that year.

Employee compensation and benefits

Set out below are details of remuneration paid to Senior Management (being executive Directors and Group Managing Directors of HSBC Holdings) for the year ended 31 December 2011 or for the period of appointment as a Director or Group Managing Director.

Emoluments of Senior Management

	Senior management £000
Basic salaries, allowances and benefits in kind ...................................................	17,191
Pension contributions ...........................	860
Bonuses paid or receivable .....................	37,321
Inducements to join paid or receivable ..	-
Compensation for loss of office ............	-
Total ....................................................	55,372
Total (US$000) ....................................	88,740

The aggregate emoluments of Senior Management for the year ended 31 December 2011 was US$88,740,342. The emoluments of Senior Management were within the following bands:

	Number senior management
£0 - £1,000,000 ...................................	2
£1,000,001 - £2,000,000 .....................	1
£2,000,001 - £3,000,000 .....................	3
£3,000,001 - £4,000,000 .....................	8
£4,000,001 - £5,000,000 .....................	1
£7,000,001 - £8,000,000 .....................	1
£8,000,001 - £9,000,000 .....................	1

The aggregate amount set aside or accrued to provide pension, retirement or similar for executive Directors and Senior Management for the year ended 31 December 2011 was US$1,377,618.

Set out below are details of remuneration paid to the five individuals whose emoluments were the highest in HSBC (including one executive Director and three Group Managing Directors of HSBC Holdings), for the year ended 31 December 2011.

Emoluments of the 5 highest paid employees

	5 highest paid employees £000
Basic salaries, allowances and benefits in kind ...............................................	5,244
Pension contributions ...........................	391
Bonuses paid or receivable .....................	20,193
Inducements to join paid or receivable ..	1,892
Compensation for loss of office ............	-
Total ....................................................	27,720
Total (US$000) ....................................	44,425

The emoluments of the five highest paid employees were within the following bands:

	Number of        5 highest paid      employees
£3,900,001 - £4,000,000 .....................	1
£4,200,001 - £4,300,000 .....................	1
£4,300,001 - £4,400,000 .....................	1
£7,100,001 - £7,200,000 .....................	1
£8,000,001 - £8,100,000 .....................	1

Remuneration of 8 highest paid senior executives (members of the GMB, but not Directors of HSBC Holdings plc)

	Employee
	1		2		3		4		5		6		7		8
	£000		£000		£000		£000		£000		£000		£000		£000
Fixed
Cash based ..................	650		623		650		650		654		650		481		624
Total fixed .................	650		623		650		650		654		650		481		624
Annual bonus1
Cash ...........................	-		375		-		-		493		-		271		374
Non-deferred shares2....	1,812		375		451		717		493		570		271		374
Deferred cash ..............	-		563		-		-		740		-		407		562
Deferred shares3 ..........	2,718		563		677		1,076		740		854		407		562
Total annual bonus .....	4,530		1,876		1,128		1,793		2,466		1,424		1,356		1,872
Long-term incentive plan (GPSP)
Deferred shares ...........	1,950		1,250		1,950		975		-		975		724		-
Total variable pay ......	6,480		3,127		3,078		2,768		2,466		2,399		2,081		1,872
Total remuneration ....	7,130		3,749		3,728		3,418		3,120		3,049		2,562		2,496
US$000
Total remuneration.....	11,427		6,009		5,975		5,477		5,000		4,886		4,106		4,000

1  Annual bonus in respect of performance year 2011.

2  Awards vested, subject to a 6 month retention period. For UK based employees 50% of the awards vested are subject to a 6 month retention period.

3  For UK based employees 50% of the deferred shares under the annual bonus are subject to a 6 month retention period post vesting.

 

END

 

 

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