CASE STUDY

Case Study: Shareholders in HSBC



Case Study: Shareholders in HSBC

Why the executive remuneration plans are necessary?

HSBC, who are said to be consulting investors about increasing the basic salaries of its chief executive and finance director. The significant salary increases reflect increased responsibilities but also a shift in emphasis from performance-related pay to fixed income. This might seem to be a natural response to the public and political furore over the bonus culture but HSBC does seem to be risking a heated battle with shareholders and others. (Schor, 2007, pp. 107-131)

HSBC argues that it has an excellent record of transparency over its remuneration policy and it should be commended for this. A remuneration reporting that both communicated how pay, strategy, risk and performance could be linked as well as complying with the necessary regulations. The messages in this report are still valid today - clear and transparent reporting is essential if a company is to avoid rumour and misinterpretation and there will be a significant test of resolve in this area in the coming reporting season. (Betts, 2006, pp. 151-160)

How these plans are typically structured?

Executive Pay Plans

In my opinion, the first principle is to structure pay so it rewards long-term performance and mitigates risk. Often the financial incentive for many executives seemed to simply work on the achievement of the top line, without questioning whether these sales might not produce sustained long-term profits to the firm. Another risky practice is putting the bulk of pay in the form of an annual bonus. (McClure, 2009, pp. 595-608)

Highly leveraged bonuses encourage executives to favour business decisions that may appear profitable in the short-term but whose risk is only revealed down the road, after the bonuses have been paid. Compensation packages that tie pay to business performance and pay out over multiple ...