Annual Financial Report - 42 of 54

RNS Number : 0541I

HSBC Holdings PLC

20 March 2015

Directors' Remuneration
Report	Page	App¹

Annual Statement from the Group Remuneration Committee Chairman	300
Our remuneration strategy and key decisions for 2014	300
Major decisions on Directors' remuneration	302
Future regulatory change	302

Directors' remuneration policy	303

Downward override policy	304
Differences in policy applied to employees generally	304
Material factors taken into account when setting pay policy	305
Adjustments, malus and clawback	306
Remuneration policy - non-executive Directors	306
Service contracts	306
Other directorships	307

Annual report on remuneration	307
Remuneration Committee	307
Group variable pay pool	309
Single figure of remuneration	311
Remuneration scenarios and outcomes	313
Awards under the GPSP	314
Determining executive Directors' annual performance	315
Total pension entitlements	318
Payments to past Directors	318
Exit payments made in year	318
Scheme interests awarded during 2014	318
Summary of performance	319
CEO remuneration	319
Directors' interests in shares	320
Shareholder context	322
Implementation of remuneration policy in 2015	322
Annual bonus scorecards	323

Additional disclosures		324
Employee compensation and benefits		324
Emoluments of senior management		324
Emoluments of five highest paid employees		325
Remuneration of eight highest paid senior executives		325
Pillar 3 remuneration disclosures		326

1 Appendix to Directors' Remuneration Report.

Annual Statement from the Group Remuneration Committee Chairman

Dear Shareholder,

I am very pleased to present the Remuneration Report for 2014. In this report we provide details of the HSBC remuneration policy, what we paid our Directors in 2014 and why.

This is the first year in which our remuneration policy, which was approved at last year's Annual General Meeting, has been implemented. I hope this report will give you an understanding of how the Group Remuneration Committee (the 'Committee') implemented the policy in 2014 and, more importantly, the link between the performance and pay of our executives and the long-term interests of our shareholders.

The report is divided into three sections: my letter to you as Chairman of the Committee, a summary of our remuneration policy, and an annual report on what we paid our Directors for the year ended 31 December 2014. Additional remuneration-related disclosures are provided in the appendix to this report.

Our remuneration strategy and key decisions for 2014

Our remuneration strategy is designed to reward competitively the achievement of long-term sustainable performance and attract and motivate the very best people who are committed to a long-term career with the Group in the long-term interests of our shareholders.

The Committee believes that it is important that what we pay our people is aligned to our business strategy. Performance should be judged not only on what is achieved over the short and long-term but also, importantly, on how it is achieved, as we believe the latter contributes to the long-term sustainability of the business.

In 2014, new regulatory requirements were introduced under the EU's Capital Requirements Directive ('CRD') IV. The consequential changes to the remuneration rules of the Prudential Regulation Authority ('PRA') have influenced how we pay our senior executives and those of our employees identified by the PRA as having a material impact on the institution's risk profile, being what are termed Material Risk Takers ('MRTs').

From 2014, CRD IV introduced a cap on variable pay requiring banks in the EU, including HSBC, to restrict variable pay awards of MRTs, if approved by shareholders, to 200% of fixed pay. This authority was sought and given by shareholders at last year's Annual General Meeting.

The CRD IV requirements present challenges for HSBC in ensuring that the total compensation package for our employees in all of the markets in which we operate

around the world remains competitive, in particular, relative to other banks not subject to these requirements.

As a consequence, we introduced fixed pay allowances for our executive Directors and other MRTs to rebalance the fixed and variable components of their total compensation. The Committee believes that the introduction of fixed pay allowances as a component of remuneration was essential to ensure the total compensation package for our employees remains competitive. HSBC must continue to retain and attract talent in key non-EU markets where our international peers and their domestic competitors do not have to comply with the CRD IV pay cap. As required by CRD IV, fixed pay allowances are not linked to the achievement of any performance conditions and we comply with the current guidelines which have been issued by the regulators. Our executive Directors and senior executives receive this allowance in shares which are subject to a retention period in order to maintain a close alignment with the long-term interests of our shareholders.

In July 2014, the PRA introduced a new requirement for firms to ensure that clawback (i.e. a firm's ability to recoup paid and/or vested awards) can be applied to variable pay awards granted on or after 1 January 2015 for a period of at least seven years from the date of award. This requirement is in addition to a firm's ability
to apply malus (i.e. reduction or cancellation of unvested awards prior to the vesting of such awards) in certain circumstances.

To comply with the new PRA requirement, the Committee has established a clawback policy which will apply to all awards we grant to MRTs on or after 1 January 2015. More details of the circumstances in which 'malus' and 'clawback' can be applied is provided later in this report.

The Committee has also adopted a policy enabling it to exercise its discretion to reduce variable pay awards for executive Directors and other senior executives when it believes there has been insufficient yearly progress in developing an effective anti-money laundering and sanctions compliance programme.

In 2014, there were a number of legal and regulatory costs for legacy events, including penalties arising from the investigation of certain behaviour within the foreign exchange markets. These were fully reflected in the level of profits used by the Committee to determine the incentive pool, and resulted in a US$600m adjustment to the pool. Additionally, there were a number of actions taken, including discretion applied to reduce variable pay proposed for 2014 for Group employees by US$22m, including members of senior management. More details are provided later in this report.

Overall performance summary/business context

HSBC Holdings plc

· In 2014, the Group maintained a strong balance sheet and robust capital position. Excluding the effect of currency translation, loans and advances grew by US$28bn and customer accounts increased by US$47bn, with a ratio of customer advances to customer accounts of 72%.

· Profit before tax fell on a reported basis compared with 2013, primarily reflecting lower gains from disposals and reclassifications in 2014 and the effect of other significant items, which included provisions for fines, settlements and UK customer redress of US$3.7bn. On an adjusted basis, excluding the effect of significant items and currency translation, profit before tax was broadly unchanged from 2013.

· Adjusted profit before tax was up in three out of five regions.

· CMB reported a record profit in 2014.

· Revenue on an adjusted basis was broadly unchanged from 2013. This reflected growth in CMB offset by a fall in revenue in GB&M, together with lower revenue in RBWM and GPB reflecting the remodelling of these businesses.

· Net interest margin for the Group stabilised during 2014.

· Loan impairment charges were lower, reflecting the changes to our portfolio since 2011.

· The reported cost efficiency ratio increased from 59.6% in 2013 to 67.3% in 2014, and on an adjusted basis it increased to 61.1% in 2014 from 57.7%, principally reflecting higher operating expenses due to an increase in Regulatory Programmes and Compliance costs, inflationary pressures, continued investment in strategic initiatives, and a rise in the bank levy. These factors were partly offset by sustainable cost savings in the year of US$1.3bn.

· The return on average ordinary shareholders' equity was 7.3%, down from 9.2% in 2013, primarily reflecting lower gains from disposals and reclassifications, together with higher operating expenses, including provisions for fines, settlements and UK customer redress.

· Dividends in respect of 2014 increased from US$0.49 per ordinary share in 2013 to US$0.50 per ordinary share.

· Our capital position strengthened in 2014 with our CRD IV transitional CET1 ratio increasing to 10.9% from 10.8% in 2013.

RBWM

· Lower reported profit before tax was principally driven by lower revenue from the continued run-off of our US CML portfolio and higher operating expenses in our Principal RBWM business.

CMB

· CMB reported an increase in profit before tax reflecting higher revenue performance in our home markets of Hong Kong and the UK, together with lower LICs, mainly in Europe and Latin America.

GB&M

· GB&M reported lower profit before tax, mainly reflecting an increase in significant items, notably settlements and provisions in connection with foreign exchange investigations, together with lower revenue in part reflecting an adjustment following the introduction of the FFVA and lower Foreign Exchange revenue.

GPB

· Lower profit before tax on an adjusted basis, mainly reflected a managed reduction in client assets as we continued to reposition the business. Despite a reduction in client assets, we attracted positive net new money of US$14bn in areas that we have targeted for growth.

Major decisions on Directors' remuneration

The Group Chief Risk Officer, Marc Moses, was appointed an executive Director with effect from 1 January 2014, reflecting the criticality of the Risk function to HSBC, his leadership of that function and his personal contribution to the Group. His remuneration has therefore been brought into line with the executive Directors' remuneration policy.

Following consultation with shareholders, the Group Chairman, Douglas Flint, became eligible under the policy to receive a one-time award under the Group Performance Share Plan ('GPSP'). The Committee has subsequently decided that it will not grant a GPSP award to the Group Chairman for 2014. Instead, it has decided to review the base salary of the Group Chairman as part of any future policy change that is proposed to shareholders.

The Committee has concluded that there will be no increase to the base salary of executive Directors in 2015. In light of the feedback received from some of our shareholders, the Committee will review the level of cash pension allowances for executive Directors as part of any future policy change.

The Committee has exercised its discretion to reduce the executive Directors' overall variable pay from that which would be justified simply from application of the scorecard weightings. This adjustment is justified in the context of the overall financial results and the legal, compliance and regulatory issues impacting the Group, particularly those related to historical events, including but not limited to foreign exchange. Further details are set out in this report.

Future regulatory change

Looking ahead to 2015/2016, further significant regulatory changes to executive remuneration are expected from the recent PRA and Financial Conduct Authority consultation on 'Strengthening the alignment of risk and reward: new remuneration rules'. In addition, the European Banking Authority is expected to issue for consultation remuneration guidelines which include criteria under which allowances can be treated as fixed remuneration.

The number and volume of regulatory changes that have been and are being proposed in connection with remuneration are, in the Committee's view, excessive and are hindering our ability to communicate with any certainty to our current employees and potential employees the remuneration policies and structures that would apply to them. Regulatory uncertainty and complexity is contributing to a general misunderstanding about how our remuneration policies work and the impact of those policies on employee performance.

The Committee will consider the effect of these various changes as well as shareholder feedback on our policy. In light of these factors, it is possible that we will need to make changes to our remuneration policy in 2016.

Sir Simon Robertson

Chairman of the Group Remuneration Committee

23 February 2015

Directors' remuneration policy

The following section sets out a summary of HSBC's remuneration policy for our executive and non-executive Directors approved at the Annual General Meeting on 23 May 2014. The full policy is available in last year's Directors' Remuneration Report in the Annual Report and Accounts 2013, a copy of which can be obtained by visiting the following website: http://www.hsbc.com/ investor-relations/financial-and-regulatory-reports.

The quality and long-term commitment of all of our employees is fundamental to our success. We therefore aim to attract, retain and motivate the very best people who are committed to maintaining a long-term career with the Group, and who will perform their role in the long-term interests of shareholders.

The key elements of our remuneration policy, fixed pay, benefits and variable pay consisting of the annual incentive and GPSP are shown below. These elements support the achievement of our strategic objectives through balancing reward for both short-term and long-term sustainable performance. Our strategy is designed to reward only success, and to align employees' remuneration with our risk framework and risk outcomes. For our most senior employees, the greater part of their reward is deferred and thereby subject to malus, that is, unvested awards can be reduced or cancelled if warranted by events. In addition, as outlined in the Chairman's statement, the variable pay awards made from 1 January 2015 will be subject to clawback.

Remuneration policy - executive Directors

Base salary

Fixed pay allowance

Pension

Benefits

FIXED PAY

· Paid in cash on a monthly basis.

· Benchmarked on an annual basis against relevant comparator group.

· Base salary increases for each executive Director will not exceed more than 15% of base salary levels in our 2013 Directors' Remuneration Report during the term of this policy.

· Granted in immediately vested shares.

· Shares issued are subject to a retention period (20% released in the March immediately following the end of the financial year, 80% released after a period of 5 years from the date of the first release).

· Reflects the role, skills, and experience of the Directors and the maintenance of a competitive total remuneration package for the retention of key talent.

· Not subject to malus or clawback.

· Cash allowance in lieu of pension of up to 50% of base salary.

· To attract and retain key talent by being market competitive.

BENEFITS

· To take account of local market practice and include the provision of medical insurance, income protection insurance, health assessment, life assurance, club membership, tax assistance, use of company car (including any tax due on the benefit) and travel assistance.

· Stuart Gulliver is also provided with an accommodation and car benefit in Hong Kong. Any tax due on this benefit is borne by HSBC.

· Additional benefits may also be provided where an executive is relocated or spends a substantial proportion of their time in more
than one jurisdiction based on business needs.

Purpose and link to srategy

Annual incentive

GPSP

VARIABLE PAY

· To drive and reward performance consistent with strategy and align to shareholder interests.

· Adherence to HSBC Values is a prerequisite to be considered for any variable pay.

· Deferral provides an incentive for a longer-term commitment and the ability to apply malus.

· Performance targets are set taking into account the economic environment, the Group's strategic priorities and risk appetite.

· Maximum is 200% of fixed
pay.

· Delivered in the form of cash and shares. A minimum of 50% of awards will be made in shares.

· Measured against an annual scorecard, based on targets set for financial and non-financial measures. The scorecards vary by individual.

· A minimum of 60% of the total award will be deferred and vest over a period of three years or such other period as determined by the Committee.

· Maximum is 67% of fixed pay (1/3 of maximum variable pay opportunity of 200% of fixed pay).

· The Committee can exercise its discretion to vary the award if it considers that it does not reflect the overall position and performance of the Company.

· Delivered in shares.

· Award levels are determined by considering performance up to the end of the financial year against enduring performance measures set out in the long-term performance scorecard.

· The award vests after a five-year period. On vesting, the shares must be retained for the duration of the participant's employment.

· For leavers not deemed to be good leavers, the unvested awards will be cancelled, and the vested shares will be released in three equal instalments on or around each anniversary of the date of cessation of employment.

· Maximum is 133% of fixed pay (2/3 of the maximum total variable pay opportunity of 200% of fixed pay).

· The Committee can exercise its discretion to vary the award if it considers that it does not reflect the overall position and performance of the Company.

The following chart providesan overview of the release profile of target performance total compensation for the Group Chief Executive Officer based on the above policy.

Release profile for target total compensation

1 Shares arising from GPSP awards must be retained and cannot be sold for the duration of the participant's employment. For leavers deemed to be good leavers, the retention period applicable to their vested shares will end upon cessation of employment. For leavers not deemed to be good leavers, their vested shares will be released in three equal instalments on or around each anniversary of the date of cessation of employment.

The Committee will apply the above policy for executive Directors in 2015. In the event that regulatory requirements require changes to be made to the terms of any fixed or variable remuneration outside this policy, the Committee will make the changes necessary to ensure regulatory compliance.

Downward override policy

Based on the recommendations received from the independent monitor, the Committee introduced a downward override policy in 2014, to set the circumstances in which it will make a downward adjustment to any variable pay determination for the executive Directors and other senior executives.

Under this policy, the criteria used to determine the downward adjustment will include:

· insufficient yearly progress in developing an effective AML and sanctions compliance programme; or

· non-compliance with the US DPA and other relevant orders.

The Committee will factor in the Financial System Vulnerabilities Committee's recommendations in deciding the application and degree of any such downward override to reduce variable pay awards.

Differences in policy applied to employees generally

The mix of fixed and variable pay granted to an employee is commensurate with the individual's role and experience and local market factors.

Fixed pay allowances are granted to MRTs or individuals identified as having a material impact on the institution's risk profile based on the qualitative and quantitative criteria set out in the EU Regulatory Technical Standard 604/2014. The fixed pay allowance can also be granted to such other individuals where it is considered a rebalancing of the fixed and variable pay components of their remuneration would be appropriate.

The criteria used for determining fixed pay allowances include the role undertaken, skills, experience, technical expertise, market compensation for the role and other remuneration that the employee may receive in the year.

Group Managing Directors and Group General Managers will receive the fixed pay allowance in shares with the same release profile as the executive Directors. All other employees will receive the fixed pay allowance in cash when it is below a specified threshold. Where the fixed pay allowance is above the specified threshold, all of it will be received in shares that vest immediately. Any shares delivered (net of shares sold to cover any income

tax and social security) as part of the fixed pay allowance would be subject to a retention period. 40% of the shares are released in March following the end of the relevant financial year in which the shares were granted. The remaining 60% are released in three equal annual tranches on or around each anniversary of the initial release.

Group Managing Directors participate in both the annual incentive and the GPSP. Group General Managers participate in the annual incentive and may receive other long-term awards. Other employees across the Group are eligible to participate in annual incentive arrangements.

Elements of remuneration

	Executive Directors	Group Managing Directors	Group General Managers	Other MRTs	Other Employees

Base salary	P	P	P	P	P
Fixed pay allowance	P	P	P	P	P
Annual incentive	P	P	P	P	P
GPSP/long-term awards	P	P	P	-	-
Benefits and pension	P	P	P	P	P

Material factors taken into account when setting pay policy

The Committee takes into account a variety of factors when determining the remuneration policy for Directors.

INTERNAL FACTORS	Funding	· Annual incentive and GPSP awards are funded from a single annual variable pay pool. · Funding of the Group's annual variable pay pool is determined in the context of Group profitability, capital strength, shareholder returns, the distribution of profits between capital, dividends and variable pay, risk appetite statement, market competitiveness, and overall affordability. · Details of the calculation of this year's variable pay pool can be found on page 309.
INTERNAL FACTORS	Pay and employment conditions within the Group	· HSBC considers pay across the Group when determining remuneration levels for its executive Directors. In considering individual awards, a comparison of the pay and employment conditions of our employees and senior executives is considered by the Committee. · The Committee invites the Head of Group Performance and Reward to present proposals for remuneration for the wider employee population and to consult on the extent to which the different elements of remuneration are provided to other employees. · Feedback from employee engagement surveys and HSBC Exchange meetings are taken into account in determining the Group's remuneration policy.

EXTERNAL FACTORS	Regulation	· There is still a wide divergence in local regulations governing remuneration structures globally. This presents significant challenges to HSBC, which operates worldwide. · In order to deliver long-term sustainable performance, it is important to have market-competitive remuneration which is broadly equivalent across geographical boundaries in order to attract, motivate and retain talented and committed employees around the world. · We aim to ensure that our remuneration policy is aligned with regulatory practices and the interests of shareholders. · HSBC is fully compliant with the FSB, FCA, PRA and HKMA guidance and rules on remuneration which apply at the date of this report.
	Comparator group	· The Committee considers market data for executive Directors' remuneration packages from a defined remuneration comparator group. · This group consists of ten global financial services companies, namely Australia and New Zealand Banking Group Limited ('ANZ'), 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. ANZ is an additional firm added to the group as part of the Committee's 2014 review. · The Committee can also review other companies where relevant in determining the remuneration policy.
	Shareholder views	· The Chairman of the Committee, the Head of Group Performance and Reward and the Group Company Secretary meet with key institutional shareholders and other representative bodies. We consider these types of meetings important to gather views on our current and developing remuneration practices to ensure that our reward strategy continues to be aligned with the long-term interests of our shareholders.

Adjustment, malus and clawback

In order to reward genuine performance, individual awards are made on the basis of a risk-adjusted view of both financial and non-financial performance. The Committee has exclusive discretion to apply the malus and clawback policies that it has adopted, enabling it to take the following actions, taking into consideration an individual's proximity to, and responsibility for, the event in question. Where practicable, an adjustment will be made to current year variable pay, before the application of malus, then clawback.

This policy is in line with the PRA regulatory requirements.

Type of action	Type of variable pay award affected	Circumstance where it may apply (including, but not limited to):
Adjustment	Current year variable pay	· Detrimental conduct or conduct which brings the business into disrepute, such as in 2014 relating to the investigation of certain behaviour within the Foreign Exchange markets. · Involvement in Group-wide events resulting in significant operational losses, including events which have caused or have the potential to cause significant harm to HSBC. · Non-compliance with HSBC Values and other mandatory requirements. · For specified individuals, insufficient yearly progress in developing an effective AML and sanctions compliance programme or non-compliance with the DPA and other relevant orders.
Malus	Unvested deferred awards granted in prior years	· Detrimental conduct or conduct which brings the business into disrepute. · Past performance being materially worse than originally reported. · Restatement, correction or amendment of any financial statements. · Improper or inadequate risk management.
Clawback¹	Vested or paid awards	· Participation in or responsibility for conduct which results in significant losses. · Failing to meet appropriate standards of fitness and propriety. · Reasonable evidence of misconduct or material error that would justify, or would have justified, summary termination of a contract of employment. · HSBC or a business unit suffers a material failure of risk management within the context of Group risk management standards, policies and procedures.

1 Clawback is only applicable to variable pay awards granted to MRTs on or after 1 January 2015. These include, but are not limited to, the awards made in relation to the 2014 performance year.

Remuneration policy - non-executive Directors

Non-executive Directors are not employees and receive a fee for their services as Directors. In addition, it is common practice for non-executive Directors to be reimbursed expenses incurred in performing their role and any related tax. They are not eligible to receive a base salary, fixed pay allowance, benefits, pension or any variable pay.

The fee levels payable reflect the time commitment and responsibilities required of a non-executive Director of HSBC Holdings. Fees are determined by reference to other UK companies and banks in the FTSE 30, and to the fees paid by other non-UK international banks.

The Board reviews each component of the fees periodically to assess whether, individually and in aggregate, they remain competitive and appropriate in light of changes in roles, responsibilities, and/or the time commitment required for the non-executive Directors and to ensure that individuals of the appropriate calibre are retained or can be appointed. The Board (excluding the non-executive Directors) may approve changes to the fees within the ranges prescribed in the remuneration policy. The Board may also introduce any new component
of fee for non-executive Directors subject to the principles, parameters and other requirements set out in the remuneration policy.

The Philanthropic and Community Investment Oversight Committee, a new non-executive Board committee, was established on 5 December 2014. In line with its authority under the remuneration policy, the Board approved the following fee levels for this committee: chairman - £25,000 per annum; member - £15,000 per annum.

No other change has been made or is proposed to the fees of non-executive Directors during the term of this policy. The fees payable to non-executive Directors are set out in last year's Directors' Remuneration Report in the Annual Report and Accounts 2013.

Servicecontracts

Executive Directors

Our policy is to employ executive Directors on service agreements with 12 months' notice period. Consistent with the best interests of the Group, the Committee will seek to minimise termination payments. Directors may be eligible for a payment in relation to statutory rights.

Service contracts

	Contract date (r (rolling)	Notice period (Director & HSBC)
Director
Douglas Flint	14 February 2011	12 months
Stuart Gulliver	10 February 2011	12 months
Iain Mackay	4 February 2011	12 months
Marc Moses	27 November 2014	12 months

Other than as set out under 'Directors' remuneration policy' and 'Policy on payments for loss of office' in the Directors' Remuneration Report in the Annual Report and Accounts 2013, there are no further obligations which could give rise to remuneration payments or payments for loss of office.

Non-executive Directors

Non-executive Directors are appointed for fixed terms not exceeding three years, which may be renewed subject to their re-election by shareholders at annual general meetings. Non-executive Directors do not have a service contract, but are bound by letters of appointment issued for and on behalf of HSBC Holdings plc. Other than as set out in 'Remuneration policy - non-executive Directors' in the Directors' Remuneration Report in the Annual Report and Accounts 2013, there are no obligations in the non-executive Directors' letters of appointment which could give rise to remuneration payments or payments for loss of office. Non-executive Directors' current terms of appointment will expire as follows:

· in 2015, Joachim Faber, Rona Fairhead, John Lipsky, Rachel Lomax and Sir Simon Robertson;

· in 2017, Kathleen Casey, Safra Catz, Laura Cha, Lord Evans of Weardale, Sam Laidlaw and Jonathan Symonds; and

· in 2018, Heidi Miller and Phillip Ameen¹.

1 Appointed with effect from 1 January 2015.

Other directorships

Executive Directors may accept appointments as non-executive directors of companies which are not part of HSBC if so authorised by either the Board or the Nomination Committee.

When considering a request to accept a non-executive appointment, the Board or the Nomination Committee will take into account, amongst other things, the expected time commitment associated with the proposed appointment. The time commitment for Directors' external appointments is also routinely reviewed to ensure that these external appointments will not compromise the Directors' commitment to HSBC.

In accordance with the requirements of CRD IV, Directors who are approved by the PRA to take up certain roles on the Board are subject to the following limits on the number of directorships which they may hold:

· one executive directorship with two non-executive directorships; or

· four non-executive directorships.

With the consent of the PRA one additional non-executive directorship may be held.

Any remuneration receivable in respect of an external appointment of an executive Director is normally paid to the Group, unless otherwise approved by the Nomination Committee or the Board.

Annual report on remuneration

Remuneration Committee

Role

Within the authority delegated by the Board, the Committee is responsible for approving the Group's remuneration policy. The Committee also determines the remuneration of executive Directors, senior employees, employees in positions of significant influence and employees whose activities have or could have a material impact on our risk profile and, in doing so, takes into account the pay and conditions across the Group. No executive Directors are involved in deciding their own remuneration.

Membership

The members of the Group Remuneration Committee during 2014 were Sir Simon Robertson (Chairman), Sam Laidlaw, John Lipsky (appointed 23 May 2014), Jonathan Symonds (appointed 14 April 2014 but stepped down from this Committee on 1 September 2014 to become Chairman of the Group Audit Committee), Renato Fassbind (resigned as a Director on 1 September 2014), and John Coombe (retired as a Director on 23 May 2014).

Activities

The Committee met 11 times during 2014. The following is a summary of the Committee's key activities during 2014.

Details of the Committee's key activities

Month	Activities	Month	Activites
January	· 2013 performance year pay review matters · Design of new remuneration policy · New shareholding guidelines · Governance matters	July	· Feedback from the 2014 Annual General Meeting · 2014 performance year pay review matters · Update on notable events · Matters regarding Group-wide incentives · Employee share plan matters · Governance matters
February	· 2013 performance year pay review matters · 2014 GPSP and Annual Scorecards for executive Directors · Design of new remuneration policy · Matters regarding Group-wide incentives framework · Employee share plan matters · New shareholding guidelines · Regulatory submissions and disclosures · Governance matters	September	· 2014 performance year pay review matters · Review of PRA/FCA consultation on alignment between risk and reward
February		October	· Shareholder feedback on remuneration matters · Update on PRA/FCA consultation on alignment between risk and reward
March	· Provision of response to the monitor's report · 2013 performance year pay review matters · Review of PRA consultation on clawback rules · Update on notable events · Matters regarding retirement benefit arrangements and incentive plans · Regulatory submissions and disclosures	November	· Update on EBA's report and opinion on fixed pay allowances · 2014 Risk Appetite Statement review and Remuneration Code risk assessment · 2014 proposed Group variable pay spend and methodology · Approval of clawback policy · Update on notable events · Regulatory submissions and disclosures · Independent review of HSBC Reward Strategy against the HKMA remuneration guidelines
April	· New remuneration policy matters · Preparation for the 2014 Annual General Meeting · Matters regarding retirement benefit arrangements and incentive plans · Regulatory submissions and disclosures	December	· Risk appetite framework and Financial Crime Compliance updates · Inputs from the Group Risk Committee, Financial System Vulnerabilities Committee, and Conduct & Values Committee · 2014 performance year pay review matters · 2015 GPSP and Annual Scorecards for executive Directors · Update on notable events · Regulatory submissions and disclosures · Employee share plan matters · Governance matters
May	· Matters regarding implementation of new remuneration policy · Preparation for the 2014 Annual General Meeting · 2014 performance year pay review matters · Employee share plan matters · Governance matters	December

Advisers

In 2014, the Committee did not engage any external adviser, and will only seek specific legal and/or remuneration advice independently as and when it considers this to be necessary.

During the year, the Group Chief Executive provided regular briefings to the Committee. In addition, the Committee received advice from the Group Head of Human Resources and Corporate Sustainability, Ann Almeida, the Head of Group Performance and Reward, Alexander Lowen, the Group Chief Risk Officer, Marc Moses, and the Global Head of Financial Crime Compliance and Group Money Laundering Reporting
Officer, Robert Werner, as part of their executive role as employees of HSBC. The Committee also received advice and feedback from the Group Risk Committee, Financial System Vulnerabilities Committee and Conduct & Values Committee on risk and compliance-related matters relevant to remuneration, and the implementation of the downward override policy.

Group variable pay pool

(Unaudited)

Variable pay pool determination

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

Variable pay pool determination

Performance and risk appetite statement	· 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 and any Group-wide notable events. · The risk appetite statement describes and measures the amount and types of risk that HSBC is prepared to take in executing its strategy. It shapes the integrated approach to business, risk and capital management and supports achievement of the Group's 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.
Counter-cyclical funding methodology	· We use a counter-cyclical funding methodology which is categorised by both a floor and a ceiling and the payout ratio reduces as performance increases to avoid pro-cyclicality risk. · The floor recognises that competitive protection is typically required irrespective of performance levels. · The ceiling recognises that at higher levels of performance it is possible to limit reward as it is not necessary to continue to increase the variable pay pool, thereby limiting the risk of inappropriate behaviour to drive financial performance.
Distribution of profits	· 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 (see next page for the 2014, 2013 and target split).
Commerciality and affordability	· Finally, the commercial requirement to remain competitive in the market and overall affordability are considered. Both the annual incentive and GPSP are funded from a single annual variable pay pool from which individual awards are considered. Funding of the Group's annual variable pay pool is determined in the context of Group profitability, capital strength, and shareholder returns. This approach ensures that performance-related awards for individual global businesses, global functions, geographical regions and levels of staff are considered in a holistic fashion. · Market competiveness is one of the inputs in the determination of the variable pay pool. This allows us to address any gaps to market identified when comparing total reward with our global peers. This recognises the challenges which arise from being headquartered in the UK and hereby having to apply more stringent reward practices than those applied in markets outside the EU. Factors which influence our competitive market position in Asia, Latin America and the US in attracting and retaining talent are the discounts applied on their pay by employees arising from regulations covering a variable pay cap, higher and longer deferrals, malus and now clawback. · This year's variable pay pool was established by reference to the Group's reported profit before tax, which is adjusted to exclude movements in the fair value of own debt attributable to credit spread, the gains and losses from disposals, and debit valuation adjustment. Reported profit before tax includes the costs of fines, penalties and other items of redress. · Taking into account all of the above, the Committee decided that in light of performance, the competitive market environment , risk inputs, and other factors, the adjusted pre-tax pre-variable pay profit payout ratio for 2014 would be 16% (15% in 2013). The higher payout ratio reflects stronger performance in Asia and the Middle East, and an increased emphasis on risk and control functions.

Variable pay pool outcome (US$m)

(Unaudited)

	Group		Global Banking and Markets
	2014	2013	2014	2013
Variable compensation incentive pool as a % of pre-tax profit (pre-variable pay)¹	16%	15%	15%	13%
% of variable pay pool deferred²	14%	18%	25%	30%

1 The 2014 Group pre-tax pre-variable pay profit calculation as described on the previous page.

2 The percentage of variable pay deferred for 2014 MRT population is 50%.

Pro forma post-tax profits allocation

(Unaudited)

On a pro-forma basis, attributable post-tax profits (excluding the movements in the fair value of own debt and before pay distributions) were allocated in the proportions shown in the chart below. The Group's target policy is for the vast majority of post-tax profit to be allocated to capital and to shareholders.
Relative importance of spend on pay

(Unaudited)

The chart below provides a breakdown of total staff pay relative to the amount paid out in dividends.

1 Dividends per ordinary share in respect of that year. For 2014, this includes the first, second and third interim dividends paid in 2014 of US$5.8bn (gross of scrip) and a fourth interim dividend of US$3.8bn.

2 Employee compensation and benefits in 2014 includes fixed pay, benefits and variable pay as outlined on page 303. Employee compensation and benefits in 2013 totalled US$19,196m which included an accounting gain arising from a change in the basis of delivering ill-health benefits in the UK of US$430m. Excluding this accounting gain, 2013 employee compensation and benefits totalled US$19,626m.

1 Inclusive of dividends to holders of other equity instruments and net of scrip issuance based on an assumption of scrip take up for the fourth quarter of 2014 of 20%. Dividends per ordinary share declared in respect of 2014 were US$0.50, an increase of 2% compared with 2013.

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

Single figure of remuneration

Executive Directors

(Audited)

		Douglas Flint			Stuart Gulliver			Iain Mackay			Marc Moses
	2014		2013	2014		2013	2014		2013	2014		2013
	£000		£000	£000		£000	£000		£000	£000		£000

Fixed pay
Base salary	1,500		1,500	1,250		1,250	700		700	700		-
Fixed pay allowance	-		-	1,700		-	950		-	950		-
Pension	750		750	625		625	350		350	350		-

	2,250		2,250	3,575		1,875	2,000		1,050	2,000		-
Variable pay
Annual incentive	-		-	1,290		1,833	867		1,074	1,033		-
GPSP	-		-	2,112		3,667	1,131		2,148	1,131		-

				3,402		5,500	1,998		3,222	2,164		-

Total fixed and variable pay	2,250		2,250	6,977		7,375	3,998		4,272	4,164		-

Benefits	136		48	589		591	43		33	6		-
Non-taxable benefits	105		102	53		67	28		53	33		-
Notional return on deferred cash	41		27	-		-	11		7	36		-
												-
Total single figure of remuneration	2,532		2,427	7,619		8,033	4,080		4,365	4,239		-

Notes to the single figure of remuneration

(Audited)

Marc Moses was appointed an executive Director with effect from 1 January 2014, so his 2013 figures have not been disclosed.

Base salary

· Salary paid in year for executive Directors. No fees were paid to executive Directors.

Fixed pay allowance

· Fixed pay allowance granted in immediately vested shares in the year for executive Directors.

· The shares are subject to a retention period. 20% released in the March immediately following the end of the financial year. 80% released after a period of five years from the date of the first release.

· Dividends will be paid on the vested shares held during the retention period.

Pension

· The amounts consist of an allowance of 50% of annual base salary in lieu of personal pension arrangements.

· No other benefits were received by the executive Directors from the Group pension plans.

Benefits

· All taxable benefits (gross value before payment of tax). Benefits include provision of medical insurance, accommodation and car, club membership, tax gross-up for accommodation and car benefit, and car allowance.

· Non-taxable benefits include the provision of life assurance and other insurance cover.

· The values of the significant benefits in the above table were as follows:

		Douglas Flint			Stuart Gulliver			Iain Mackay			Marc Moses
	2014		2013	2014		2013	2014		2013	2014		2013
	£000		£000	£000		£000	£000		£000	£000		£000

Car benefit (UK and Hong Kong)	70¹		-²	88¹		79	-²		-²	-²		-
Hong Kong bank-owned accommodation³	-		-	246		229	-		-	-		-
Tax expense on car benefit and Hong Kong bank-owned accommodation	58¹		-²	239¹		266	-²		-²	-²		-
Insurance benefit (non-taxable)	80		78	-²		54	-²		-²	-²		-

1 The UK car benefit provided for Douglas Flint and Stuart Gulliver in 2014 has not changed from 2013. The valuation of the car benefit has increased as they are no longer deemed pool cars for UK tax purposes, and include driver wages, fuel and all associated costs.

2 The car benefit and tax on car benefit for Douglas Flint in 2013, Marc Moses in 2014 and Iain Mackay is not included in the above table as it was not significant. The insurance benefit for Stuart Gulliver and Marc Moses in 2014 and Iain Mackay is not included in the above table as it was not significant.

3 Based on the current market rental value of the bank-owned property, as estimated by an external lease service provider, plus utility costs, rates, the taxable value of furniture and taking into account the business use of the property, the taxable value of the accommodation is considered to be 70% of the total of these amounts.

Annual incentive

· Annual incentive awarded (including deferred amounts) as a result of achievement of performance measures for the relevant financial year. 60% of the award is deferred. 50% of both the deferred and non-deferred component of the award is payable in cash and the remaining 50% in shares, subject to a six month retention period on vesting.

· The deferred element of the 2014 award pays out over a period of three years, subject to service and malus conditions: 33% vests on or around the first and second anniversary of grant and 34% on or around the third anniversary of grant. For the 2014 award the performance measures and the outcomes of the performance conditions can be found on pages 315-317. Outcomes for the 2013 award can be found in the Directors' Remuneration Report in the Annual Report and Accounts 2013.

· The deferred share awards also include a right to receive dividend equivalents. Dividend equivalents on deferred share awards are delivered in the form of additional shares, in the same time and in the same manner and in such proportion as the original deferred award that vests. The expected value of these dividend equivalents is included in the value of deferred share awards.

Illustration of annual incentives

(Unaudited)

GPSP

· GPSP awarded as a result of achievement of sustainable long-term performance. Figures shown reflect the face value of awards granted in 2014 and 2013 respectively.

· Award levels are determined by considering performance against enduring performance measures set out in the long-term performance scorecard. There are no post-grant performance conditions.

· The award is subject to a five-year cliff vesting period during which the Committee has the authority to cancel all or part of the award. On vesting, the shares (net of tax) must be retained for the duration of the participant's employment.

· For the 2014 award the outcomes of the performance conditions can be found in the section titled 'Awards under the GPSP' on page 314. Outcomes for the 2013 award can be found in the Directors' Remuneration Report in the Annual Report and Accounts 2013.

· The GPSP awards also include a right to receive dividend equivalents for the period between the grant and the vesting date. Dividend equivalents on the GPSP awards will be delivered when the GPSP awards vest. There was no vesting of historical GPSP awards in 2014. The expected value of these dividend equivalents are included in the value of GPSP awards.

Illustration of GPSP

(Unaudited)

Notional return on deferred cash

· The deferred cash award portion of the annual incentive also include a right to receive notional returns for the period between grant date and vesting date and determined by reference to the dividend yield on HSBC shares, determined annually.

· A payment of notional return is made annually in the same proportion as the vesting of the deferred awards on each vesting date. The amount is disclosed on a paid basis in the year in which the payment is made.

Remuneration scenarios and outcomes

The charts below show the value and composition of remuneration under three performance scenarios for each of the executive Directors based on the current policy in comparison to the actual 2014 variable pay outcomes.

Stuart Gulliver

(Amounts in £'000)

Iain Mackay

(Amounts in £'000)

Marc Moses

(Amounts in £'000)

1 Fixed pay includes base salary, fixed pay allowance and pension allowance for the year, and excludes benefits.

2 Maximum award level as stated in our remuneration policy Includes deferred portion of award. Target has been defined as 50% of the maximum award. Minimum assumes no annual incentive award.

3 Maximum award level as stated in our remuneration policy. Target has been defined as 50% of the maximum award. The GPSP scorecard has not been designed with a numeric targeted or expected value of performance. Minimum assumes no GPSP award.

Variable pay outcomes

(Audited)

	Stuart Gulliver	Iain Mackay	Marc Moses
Fixed pay
Value (£000)	3,575	2,000	2,000

Annual incentive
Maximum multiple of fixed pay	0.67	0.67	0.67
Performance outcome	54.1%	65.0%	77.5%
Multiple awarded	0.36	0.43	0.52

Value (£000)	1,290	867	1,033

GPSP
Maximum multiple of fixed pay	1.33	1.33	1.33
Performance outcome	54.8%	54.8%	54.8%
Multiple awarded	0.73	0.73	0.73

Pre-discretion value (£000)	2,612	1,461	1,461
Committee discretion (£000)	(500)	(330)	(330)

Post-discretion value (£000)	2,112	1,131	1,131

Total variable pay
Maximum multiple of fixed pay	2.00	2.00	2.00
Multiple awarded	0.95	1.00	1.08

Value (£000)	3,402	1,998	2,164

Awards under the GPSP

(Audited)

Awards in respect of 2014 were assessed against the 2014 long-term scorecard published in the Annual Report and Accounts 2013 and reproduced below.

The performance assessment under the 2014 long-term scorecard took into account achievements under both financial and non-financial objectives, both of which
were set within the context of the risk appetite and strategic direction agreed by the Board.

Notwithstanding the detail or extent of performance delivery against the objectives, an individual's eligibility for a GPSP award requires confirmation of adherence to HSBC Values which acts in effect as a gateway to GPSP participation, which was assessed to have been met for all executive Directors. A summary of the assessment and rationale for the conclusions is set out below.

Annual assessment - GPSP

	Weighting	Long-term target range	Actual 2014 performance	Assessment	Outcome
Measure
Capital strength (%)¹	15%	>10	11.1	100%	15.0%
Progressive dividend payout (%)²	15%	40-60	72.5	100%	15.0%
Return on equity (%)³	15%	12-15	7.2	0%	-
Cost efficiency ratio
- Jaws⁴	7.5%	Positive jaws¹	(14.7)	0%	-
- Cost efficiency ratio (%)³	7.5%	Mid-50s	67.8	0%	-

Financial	60%				30.0%

Strategy execution	20%	Judgement	n/a	67%	13.3%
Risk and compliance	15%	Judgement	n/a	50%	7.5%
People	5%	Judgement	n/a	80%	4.0%

Non-financial	40%				24.8%

Total performance outcome	100%				54.8%

1 Capital strength is defined as common equity tier 1 capital (CRD IV end point basis).

2 Payout ratio reflects dividends in respect of the year.

3 Return on equity and cost efficiency ratio excludes from the return the impact of fair value movements on own debt designated at fair value resulting from changes in credit spreads.

4 Revenue growth (excluding the impact of fair value movements on own debt designated at fair value resulting from changes in credit spreads) less operating expense growth.

Financial (60% weighting - achieved 30%)

Capital strength (assessment: 100%): The Committee took particular note in 2014 of the Group's position against prospective capital and liquidity standards given the publication of important fresh regulatory proposals on total loss-absorbing capacity ('TLAC'), net stable funding and leverage. The Group's ability and capacity to meet these standards will have important ramifications for its business model, the prospective returns available and, therefore, the Group's dividend paying capacity.

The Committee also took note of the outcome of stress tests conducted by the EBA and the PRA, which provided independent evidence of the Group's resilience to economic downturn and sectoral weaknesses in framing its judgements on capital strength and dividend policy. The Committee noted positively the outcome of these stress tests which placed the Group favourably amongst its peers in terms of its capacity to absorb and recover from adverse circumstances.

The strength of the capital position was therefore considered favourably, with additional note taken of the improvement in the year-end common equity tier 1 ratio and the increase in the estimated end point position under CRD IV.

Progressive dividend payout (assessment: 100%): The projected capacity to maintain a progressive dividend policy was also noted favourably, which was underpinned by the Group's strong capital position, its distributable reserves, its cash position, and its planning
assumptions around future performances. The progressive development of the Group's dividend was achieved notwithstanding economic weakness in parts of the external environment, demonstrating the benefits of the Group's diversified business model.

Return on equity (assessment: 0%): The Group did not achieve previously set aspiration of 12-15%. While having made good progress towards reducing legacy positions and having de-risked the business where necessary, Group performance remains below its stated target. Business model changes consequent upon new regulatory requirements and enhanced risk controls to reduce the possibility of future customer redress and conduct issues were considered to be essential elements to take the Group to where it needed to be for sustainable financial performance. In the interim, the Committee noted the necessary structural changes which are likely to constrain the overall return of equity and mask the benefits coming from new business and from market share improvement in some areas. Additionally, the Group's performance continues to be exposed in the near term to uncertainties from an evolving regulatory reform agenda (including the Group's target capital ratios), contingent legal risks from notable legacy matters and continued significant customer redress costs. While acknowledging the commendable efforts being made to meet an ROE target of 12-15% against increased capital requirements both at a global and at a local level, it was decided not to make any award under this opportunity.

Cost efficiency ratio (assessment: 0%): Based on the 2014 development of the Group's operating expenses, it was judged that no reward should be made under the cost efficiency ratio element of the scorecard. It was noted that the strengthening of Regulatory and Financial Crime Compliance resources and capabilities was a material element in the level of higher costs. It was also recognised that this situation is not likely to diminish in the medium term.

Non-financial (40% weighting - achieved 24.8%)

Strategy execution (assessment: 67%): The Board reviewed progress achieved by management in 2014 to deliver the strategic priorities including organic growth, implementation of Global Standards and driving further efficiency gains through streamlining processes and procedures.

Against a backdrop of weaker than expected economic growth in a number of important markets, and with financial market activity and liquidity further constrained by the industry reshaping in response to regulatory changes, the Group was nevertheless able to demonstrate underlying growth in a number of its global businesses and maintain market position in key products. The Committee recognised that the Board had emphasised a cautious approach to risk appetite during 2014 in light of uncertain economic conditions.

Management demonstrated further progress towards the implementation of Global Standards, acknowledging that material further work is required to achieve full roll‑out.

With regard to streamlining, the Group delivered over US$1bn of sustainable savings but these were outweighed by incremental costs in support of growth initiatives and to implement regulatory change, enhance risk controls and implement Global Standards. In light of this, management launched new initiatives to improve efficiency across global businesses and functions which will continue into 2015.

Risk and compliance (assessment: 50%): The Committee received input from the Group Risk Committee, the Conduct & Values Committee and the Financial System Vulnerability Committee on evidence of progress being made to minimise the long-term impact of regulatory and compliance issues on the Group's reputation. The Committee was satisfied that based on feedback received it was clear that this remains a top priority within the organisation and progress was made in 2014. The Committee took particular notice of work on restructuring the Group Compliance function, investment in greater compliance capabilities, the establishment of enterprise-wide risk assessment programmes, the roll-out of enhanced training and continued strengthening of governance oversight. The Committee also noted the disappointing incidence of further fines and penalties received in 2014, albeit in relation to matters occurring in prior periods, and the consequential extension of work to prevent recurrence.

People (assessment: 80%): The Committee reviewed progress made in talent development, succession planning, diversity and attrition in some areas. The Committee recognised continued progress, including the successful initiation of a mentoring programme between non-executive directors and senior executives below Board level.

This performance assessment resulted in an overall score of 54.8%.

Notwithstanding this, the Committee subsequently used their discretion to reduce the executive Directors' GPSP awards by the following amounts:

GPSP adjustment

	GPSP adjustment	Adjustment as a percentage of variable pay
	£000	%
Director
Stuart Gulliver	500	13%
Iain Mackay	330	14%
Marc Moses	330	13%

For Stuart Gulliver and Marc Moses, the adjustments were considered appropriate based on the weight of legal, compliance and regulatory issues affecting the Group, even those related to historical events, including but not limited to foreign exchange. For Iain Mackay, the adjustment is considered appropriate by the Committee in the context of overall year-on-year Group-wide profitability, incentive pool funding and market remuneration benchmarks.

In 2013, the Committee also used their discretion to reduce Stuart Gulliver's overall variable pay by 18.5%.

Determining executive Directors' annual performance

(Audited)

The annual incentive award made to executive Directors in respect of 2014 reflected the Committee's assessment of the extent to which they had achieved personal and corporate objectives set within their performance scorecard as agreed by the Board at the beginning of the year. This measurement took into account performance against both the financial and non-financial measures which had been set to reflect the risk appetite and strategic priorities determined by the Board to be appropriate for 2014. In addition, in accordance with the downward override policy, the Committee also consulted the Financial System Vulnerabilities Committee and took into consideration the feedback received from this committee in relation to progress on enhancing AML and sanctions compliance as well as progress in meeting the Group obligations under the DPA and other relevant orders.

In order for any award of annual incentive to be made under the above performance scorecard, the Committee had to satisfy itself the executive Directors had personally met and shown leadership in promoting HSBC Values. This overriding test assessed behaviour around HSBC Values of being 'open, connected and dependable' and acting with 'courageous integrity', which was assessed to have been met for all executive Directors.

Notwithstanding regulatory difficulties, overall the executive Directors performed well in the context of a challenging market environment.

A summary of each executive Director's assessment against specific performance measures is provided in the following tables.

Stuart Gulliver

Annual assessment

	Weighting	Target⁶	Performance	Assessment	Outcome
Measure
Pre-tax profit (US$bn)¹	17.5%	21.6	18.6	86%	15.1%
Return on equity (%)²	10%	9.8	7.2	0%	-
Cost efficiency ratio (%)
- Jaws³	8.75%	5.6	(14.7)	0%	-
- Cost efficiency ratio (%)²	8.75%	58.5	67.8	0%	-
Dividends (%)⁴	10%	57.1	72.5	100%	10.0%
Capital strength (%)⁵	5%	10.9	11.1	100%	5.0%

Financial	60%				30.1%

Strategy execution	20%	Judgement	n/a	70%	14.0%
Risk and compliance	20%	Judgement	n/a	50%	10.0%

Non-financial	40%				24.0%

Promoting HSBC Values	Over-riding test				Met

Total	100%				54.1%

1 Group's reported profit before tax adjusted to exclude movements in the fair value of own debt attributable to credit spread, the gains and losses from disposals, and debit valuation adjustment (2013 does not include debit valuation adjustment).

2 Return on equity and cost efficiency ratio excludes from the return the impact of fair value movements on own debt designated at fair value resulting from changes in credit spreads.

3 Revenue growth (excluding the impact of fair value movements on own debt designated at fair value resulting from changes in credit spreads) less operating expense growth.

4 Payout ratio reflects dividends in respect of the year.

5 Capital strength is defined as common equity tier 1 capital (CRD IV end point basis).

6 Based on prior year 2013.

Strategy execution (assessment: 70%): The Board reviewed progress achieved in 2014 to deliver the strategic priorities including organic growth, implementation of Global Standards, and driving further efficiency gains through streamlining processes and procedures.

The Committee noted favourably that underlying revenue reflected progress in execution against priority initiatives, including growing market share in selected trade corridors and maintaining market position in key products.

The Committee noted progress in the Global Standards programme throughout 2014 in moving from design to execution phase, the continuation of disposals and closures of non-core businesses and shareholdings (75 transactions since 2011). In addition, the global businesses are implementing operating procedures to assure the delivery of global AML and sanctions policies approved earlier in the year. The Committee noted continuing investment to strengthen financial crime compliance expertise and build strategic infrastructure for customer due diligence, transaction monitoring and sanctions screening. As a consequence, the Committee was advised the Group had been able to deliver on its 2014 milestones.

The Committee noted favourably that the Group had achieved sustainable savings in excess of US$1bn in the year through business simplification and re-engineering. The Committee noted that costs during 2014 had increased by being affected by significant items and a rise in regulatory and financial crime compliance costs, inflationary pressures, continued investment in strategic initiatives, and a rise in the bank levy. The Committee was advised the Group had launched new initiatives to further improve efficiency across global businesses and key functions which will continue into 2015.

Risk and compliance (assessment: 50%): This measure increased in weighting to 20% from 15% in 2013 to underscore the Group's commitment to these areas. The Committee reviewed the Group's progress in increasing and enhancing Group Compliance headcount, the roll out of the 'Driving a values-led high performance culture' programme, the implementation of measures to address conduct risk (e.g., product range reviews and associated product exits, changes to retail banking incentive arrangements) and the continued strengthening of governance oversight. The outcome has been affected by the incidence, scale and reputational damage incurred from continuing customer redress and regulatory fines and penalties incurred in 2014.

This performance assessment resulted in an overall score of 54.1%.

Iain Mackay

Annual assessment

	Weighting	Target	Performance	Assessment	Outcome
Measure
Grow both business and dividends	15%	Judgement	n/a	85%	13.0%
Risk and compliance including Global Standards	50%	Judgement	n/a	75%	37.5%
Streamline processes and procedures	25%	Judgement	n/a	45%	11.0%

Strategic priorities	90%				61.5%

People	10%	Judgement	n/a	35%	3.5%

Promoting HSBC Values	Over-riding test				Met

Total	100%				65.0%

Grow both business and dividends (assessment: 85%): The Committee recognised the contribution of the Finance function in supporting the development, implementation and monitoring of business cases in support of organic growth and the substantial improvement in clarity in analysts and investors presentations which had attracted favourable comment from analysts and shareholders.

Risk and compliance including Global Standards (assessment: 75%): The Committee noted substantial progress in a number of areas. Risk and compliance metrics, and implementation of new cost and resource monitoring processes for Global Standards programmes were both fully met during the year.

Streamline processes and procedures (assessment: 45%): The Committee recognised the substantial commitment to, and achievement of, the exacting stress testing programmes across the Group. It was further noted that costs were higher than target, while the target for sustainable saves had not been met fully. Similarly, while progress was being made in re-engineering the global Finance function, a number of initiatives were still in progress.

People (assessment: 35%): The progress made in performance management and reward differentiation for the global Finance function and further work to be done in increasing employee diversity and cost restructuring were noted.

This performance assessment resulted in an overall score of 65%.

Marc Moses

Annual assessment

	Weighting	Target	Performance	Assessment	Outcome
Measure
Grow both business and dividends	20%	Judgement	n/a	90%	18.0%
Risk and compliance including Global Standards	50%	Judgement	n/a	75%	37.5%
Streamline processes and procedures	20%	Judgement	n/a	70%	14.0%

Strategic priorities	90%				69.5%

People	10%	Judgement	n/a	80%	8.0%

Promoting HSBC Values	Over-riding test				Met

Total	100%				77.5%

Grow both business and dividends (assessment: 90%): The Committee recognised the use of risk appetite statements to enable a sustainable business, and the provision of resources to support business growth (e.g., risk analytics and enhancements to risk processes to enable improvements in quality of credit portfolio).

Risk and compliance including Global Standards (assessment: 75%): The Committee noted the progress towards implementing Global Standards, compliance with regulatory requirements, and de-risking the organisation. This was evidenced by the roll-out of the AML and sanctions compliance plan, the development of the operational risk transformation roadmap and the successful execution of the PRA and EBA stress tests.

Streamline processes and procedures (assessment: 70%): The Committee recognised these objectives have been largely met, supported by the management of business performance, delivery of key streamlining initiatives, and re-engineering of Financial Crime Compliance systems. Work towards the Global Risk data strategy programme to support PRA data requirements, which included enhancements to the Risk data infrastructure, was further noted.

People (assessment: 80%): The execution of the pay and performance plans, as well as the learning and development plans which were part of a comprehensive people strategy for the Global Risk function were noted.

This performance assessment resulted in an overall score of 77.5%.

Non-executive Directors

Fees and benefits

(Audited)

	Fees		Benefits⁷		Total
	2014	2013	2014	2013	2014	2013
	£000	£000	£000	£000	£000	£000

Kathleen Casey¹	129	-	12	-	141	-
Safra Catz	95	95	4	14	99	109
Laura Cha²	197	195	22	47	219	242
Lord Evans of Weardale	167	50	14	-	181	50
Joachim Faber	145	137	10	21	155	158
Rona Fairhead³	494	202	19	6	513	208
Sam Laidlaw	140	125	-	-	140	125
John Lipsky	168	150	27	25	195	175
Rachel Lomax	205	155	21	8	226	163
Heidi Miller⁴	52	-	-	-	52	-
Sir Simon Robertson	260	240	6	1	266	241
Jonathan Symonds⁵	365	-	3	-	368	-

Total⁶	2,417	1,349	138	122	2,555	1,471

Total (US$000)	3,979	2,221	229	201	4,208	2,422

1 Appointed on 1 March 2014.

2 Includes fees of £57,000 in 2014 (£75,000 for 2013) as Director, Deputy Chairman and member of the nomination committee of The Hongkong and Shanghai Banking Corporation Limited.

3 Includes a fee of £334,000 in 2014 as non-executive Chairman of HSBC North America Holdings Inc (appointed on 1 January 2014).

4 Appointed on 1 September 2014.

5 Appointed on 14 April 2014 as non-executive Director of HSBC Holdings plc and non-executive chairman of HSBC Bank plc, for which he received a fee of £247,000.

6 Excludes fees and benefits for Marvin Cheung, John Coombe, Renato Fassbind and James Hughes-Hallett who were not Directors at 31 December 2014. Marvin Cheung resigned on 1 August 2014. His fees for 2014 were £113,000 (£197,000 for 2013) (including fees of £40,000 as Director, Chairman of the risk committee and member of the audit committee of Hang Seng Bank Limited). His benefits for 2014 were £18,000 (£45,000 for 2013). John Coombe retired on 23 May 2014. His fees and benefits for 2014 were £85,000 and £5,000 respectively (£205,000 and £14,000 respectively in 2013). Renato Fassbind resigned on 1 September 2014. His fees and benefits for 2014 were £109,000 and £10,000 respectively (£145,000 and £23,000 respectively in 2013). James Hughes-Hallett retired on 23 May 2014. His fees and benefits for 2014 were £50,000 and £1,000 respectively (£145,000 and £1,000 respectively in 2013).

7 Benefits include travel-related expenses relating to the attendance at Board and other meetings at HSBC Holdings registered office. Amounts disclosed are estimated and have been grossed up using a tax rate of 45%, where relevant.

Total pension entitlements

(Audited)

No employees who served as executive Directors during the year have a right to amounts under any HSBC final salary pension schemes or are entitled to additional benefits in the event of early retirement. There is no retirement age set for Directors, but the normal retirement age for employees is 65.

Payments to past Directors

(Audited)

This report does not include details of payments made to past Directors below the de minimis limit set by the company of £50,000.

Exit payments made in year

(Audited)

No payments for loss of office were made in 2014 to any person serving as a Director in the year or any previous years.

Scheme interests awarded during 2014

(Unaudited)

The table below sets out the scheme interests awarded to Directors in 2014 (for performance in 2013) as disclosed in the 2013 Directors' Remuneration Report. No non-executive Directors received scheme interests during the financial year.

Scheme awards in 2014

(Unaudited)

	Type of interest awarded	Basis on which award made	Dates of award	Face value awarded¹ £000	Percentage receivable for minimum performance²	Number of shares awarded	Share price on date of grant¹	End of performance period

Stuart Gulliver	Deferred cash	Annual incentive 2013	10 Mar 2014	550	0%	n/a	n/a	31 Dec 2013
Stuart Gulliver	Restricted shares	Annual incentive 2013	10 Mar 2014	550	0%	88,766	£6.196	31 Dec 2013
Stuart Gulliver	Restricted shares	GPSP 2013	10 Mar 2014	3,667	0%	591,779	£6.196	31 Dec 2013

Iain Mackay	Deferred cash	Annual incentive 2013	10 Mar 2014	322	0%	n/a	n/a	31 Dec 2013
Iain Mackay	Restricted shares	Annual incentive 2013	10 Mar 2014	322	0%	51,997	£6.196	31 Dec 2013
Iain Mackay	Restricted shares	GPSP 2013	10 Mar 2014	2,147	0%	346,647	£6.196	31 Dec 2013

Marc Moses	Deferred cash	Annual incentive 2013	10 Mar 2014	322	0%	n/a	n/a	31 Dec 2013
Marc Moses	Restricted shares	Annual incentive 2013	10 Mar 2014	322	0%	51,992	£6.196	31 Dec 2013
Marc Moses	Restricted shares	GPSP 2013	10 Mar 2014	2,147	0%	346,613	£6.196	31 Dec 2013

GPSP awards made based on performance up to the financial year-end preceding the grant date with no further performance conditions after grant. Vesting occurs five years after grant date and is normally subject to the Director remaining an employee on the vesting date. Any shares (net of tax) which the director becomes entitled to on the vesting date are subject to a retention requirement.

The above table does not include details of shares issued as part of the Fixed Pay Allowances, as those shares vest immediately and are not subject to any service or performance conditions.

1 Share price used is the closing mid-market price on the last working day preceding the date of grant.

2 Awards determined based on performance achieved during the period to 31 December 2013. The overall award level could have been 0% of the maximum opportunity if minimum performance was achieved for the period to 31 December 2013. After grant, awards are subject to service condition and malus provisions.

Summary of performance

(Unaudited)

HSBC TSR and FTSE100 Index

The graph shows the TSR performance against the FTSE 100 Index for the six-year period ended 31 December 2014. The FTSE 100 Index has been chosen as this is a recognised broad equity market index of which HSBC Holdings is a member.

Source: Datastream

CEO remuneration

(Unaudited)

Historical CEO remuneration

The table below summarises the CEO's single figure remuneration over the past six years together with the outcomes of the respective annual incentive and long-term incentive awards.

		Single figure of remuneration	Annual incentive maximum²	Annual incentive paid²	Long-term incentive maximum⁴	Long-term incentive paid⁴
		(£000)	(% of fixed pay)³	(% of maximum)	(% of fixed pay)³	(% of maximum)

2014	Stuart Gulliver	7,619	67%	54.1%	133%	44.3%
2013	Stuart Gulliver	8,033	300%	49.0%	600%	49.0%
2012	Stuart Gulliver	7,532	300%	52.0%	600%	40.0%
2011	Stuart Gulliver	8,047	300%	57.5%	600%	50.0%
2010¹	Michael Geoghegan	7,932	400%	81.6%	700%	19.1%
2009¹	Michael Geoghegan	7,580	400%	93.5%	700%	25.4%

1 The GPSP was introduced in 2011. Prior to this, values shown relate to awards of Performance Shares under the HSBC Share Plan. Under this plan Performance Share awards vest three years after grant subject to performance conditions of total shareholder return, economic profit and earnings per share, and an over-riding 'sustained improvement' judgement by the committee.

2 The 2012 annual incentive figure for Stuart Gulliver used for this table includes 60% of the annual incentive disclosed in the 2012 Directors' Remuneration Report which was deferred for five years. The vesting of these awards is subject to service condition and satisfactory completion of the DPA. The DPA condition ends on or around the fifth anniversary of the award date unless the DPA is extended or otherwise continues beyond that date, in which case the awards will vest on or around the date on which the DPA expires and otherwise ceases to operate.

3 For 2014, fixed pay includes base salary, fixed pay allowance and pension allowance for the year, and excludes benefits. For 2013 and earlier, fixed pay includes base salary only.

4 Long-term incentive awards are shown in the year where the performance period is deemed to be substantially completed. For performance share awards this is at the end of the third financial year following the date of grant (Performance Share awards shown in 2010 therefore relate to awards granted in 2008). For GPSP awards this is at the end of the financial year preceding the date of grant (GPSP awards shown in 2011 to 2014 therefore relate to awards granted in 2012 to 2015).

Comparison of Group CEO and all-employee pay

The following table compares the changes in Group CEO pay to changes in employee pay between 2013 and 2014:

Percentage change in remuneration

	Base salary	Benefits³	Annual incentive⁴

Group CEO¹	0.0%	(0.3%)	(29.6%)
Employee group²	4.4%	5.7%	(5.3%)

1 Group CEO received an FPA of £1.7 million with effect from 1 January 2014 based on the new remuneration policy approved by shareholders. Further details on the FPA are provided in the remuneration policy section for executive Directors.

2 Employee group consists of all employees globally, based on costs included in wages and salaries disclosed in financial reports (excluding FPA) and staff numbers (full-time equivalents averaged over the financial year).

3 Employee group consists of UK employees only (full-time equivalents averaged over the financial year) as it was deemed the most appropriate comparison for the Group CEO given varying local requirements.

4 Employee group consists of all employees globally, based on annual incentive pool less GPSP as disclosed in financial reports and staff numbers (full-time equivalents at the financial year-end).

Directors' interests in shares

(Audited)

Guidelines

To ensure appropriate alignment with our shareholders, we have shareholding guidelines expressed as a number of shares for executive Directors, non-executive Directors, and Group Managing Directors. The Committee considers that share ownership by senior executives and non-executive Directors helps align their interests with those of shareholders. The numbers of shares they are required to hold are set out in the table below.

Individuals are given five years from 2014 or (if later) their appointment as executive Director, non-executive Director, or Group Managing Director to build up the recommended levels of shareholding.

HSBC operates an anti-hedging policy for all employees. As part of this all employees are required to certify each year that they have not entered into any personal hedging strategies in relation to their holdings of HSBC shares.

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.

The shareholdings of all persons who were Directors in 2014 (including the shareholdings of their connected persons) at 31 December 2014 or at the time of their retirement are set out below.

Share options

(Audited)

			Exercisable		At 1 Jan	Exercised	At 31 Dec
	Date of award	Exercise price	From¹	until	2014	in year	2014

Douglas Flint	24 Apr 2012	4.4621	1 Aug 2015	1 Feb 2016	2,016	-	2,016
Douglas Flint	23 Sep 2014	5.1887	1 Nov 2019	1 May 2020	-	-	2,919
Iain Mackay	23 Sep 2014	5.1887	1 Nov 2017	1 May 2018	-	-	3,469

1 May be advanced to an earlier date in certain circumstances, e.g. retirement.

The HSBC Holdings savings-related share option plans are all-employee share plans under which eligible employees may be granted options to acquire HSBC Holdings ordinary shares. Employees may make contributions of up to £500 (or equivalent) each month over a period of three or five years which may be used on or around the third or fifth anniversary of the commencement of the relevant savings contract, at the employee's election, to exercise the options. The plans help align the interests of employees with the creation of shareholder value. The options were awarded for nil consideration and are exercisable at a 20% discount to the average market value of the ordinary shares on the five business days immediately preceding the invitation date. There are no performance criteria conditional upon which the outstanding options are exercisable and there have been no variations to the terms and conditions since the awards were made. The market value per ordinary share at 31 December 2014 was £6.09. The highest and lowest market values per ordinary share during the year were £6.81 and £5.89. Market value is the mid-market price derived from the London Stock Exchange Daily Official List on the relevant date. Under the Securities and Futures Ordinance of Hong Kong, the options are categorised as unlisted physically settled equity derivatives.

(Audited)

		At 31 December 2014 or date of retirement
			Scheme interests
				Shares awarded subject to deferral
	Shareholding requirement (number of shares)¹	Total share interests (number of shares)	Share options²	without performance conditions³	with performance conditions
Executive Directors
Douglas Flint	400,000	400,748	4,935	-	-
Stuart Gulliver	750,000	2,611,188	-	2,476,808	87,007
Iain Mackay	450,000	79,933	3,469	942,732	60,150
Marc Moses	450,000	480,423	-	1,216,599	58,439
Group Managing Directors⁴	250,000	n/a	n/a	n/a	n/a

Non-executive Directors⁵
Safra Catz	15,000	20,045	n/a	n/a	n/a
John Coombe⁶	15,000	23,845	n/a	n/a	n/a
Lord Evans of Weardale	15,000	5,519	n/a	n/a	n/a
Joachim Faber	15,000	24,105	n/a	n/a	n/a
Rona Fairhead	15,000	76,524	n/a	n/a	n/a
Sam Laidlaw	15,000	36,768	n/a	n/a	n/a
John Lipsky	15,000	15,820	n/a	n/a	n/a
Rachel Lomax	15,000	15,500	n/a	n/a	n/a
Heidi Miller⁷	15,000	3,575	n/a	n/a	n/a
Sir Simon Robertson	15,000	22,981	n/a	n/a	n/a
Jonathan Symonds⁸	15,000	20,553	n/a	n/a	n/a

1 The current shareholding requirement does not count unvested share based incentives.

2 All share options are unexercised.

3 Includes GPSP awards which are made following an assessment of performance over the relevant period ending on 31 December immediately before the grant date but are subject to a five-year vesting period.

4 All of the Group Managing Directors are expected to meet their minimum shareholding requirement by 2019 or within five years of the date of their appointment, whichever is later.

5 Those who were non-executive Directors in 2014 but are not in the list above did not hold any shares as at 31 December 2014, or at the date of their retirement, directly or through any connected persons.

6 John Coombe retired as a Director on 23 May 2014.

7 Appointed on 1 September 2014.

8 Appointed on 14 April 2014.

Shareholder context

(Unaudited)

The table below shows the outcome of the remuneration-related votes at the Annual General Meeting of HSBC Holdings plc held on 23 May 2014.

	Number of votes cast	For	Against	Withheld

Advisory vote on 2013 Remuneration Report	9,744,121,154	8,180,579,271 (83.95%)	1,563,541,883 (16.05%)	205,528,859
Binding vote on the Remuneration Policy	9,781,954,191	7,762,051,505 (79.35%)	2,019,902,686 (20.65%)	167,509,544

Implementation of remuneration policy in 2015

(Unaudited)

The table below summarises how each element of pay will be implemented in 2015.

Purpose and link to strategy		Operation and Planned changes to policy
Fixed pay
Base salary		Base salary levels will remain unchanged from their 2014 levels as follows: Douglas Flint: £1,500,000 Stuart Gulliver: £1,250,000 Iain Mackay: £700,000 Marc Moses: £700,000
Fixed pay allowance¹		Fixed pay allowances will remain unchanged from their 2014 levels as follows: Douglas Flint: Nil Stuart Gulliver: £1,700,000 Iain Mackay: £950,000 Marc Moses: £950,000
Pension		Pension Allowance to apply in 2015 as a percentage of base salary will remain unchanged as follows: Douglas Flint: 50% Stuart Gulliver: 50% Iain Mackay: 50% Marc Moses: 50%
Benefits
Benefits		No changes are proposed to the benefits package for 2015.
Variable pay¹
Annual incentive		No changes are proposed to the annual incentive.
GPSP		No changes are proposed to the GPSP.

1 This approach applies to all executive Directors with the exception of the Group Chairman, Douglas Flint, who is not eligible for a fixed pay allowance or variable pay awards.

Annual bonus scorecards

The measures and weightings of the performance measures to apply to the 2015 annual incentive for Stuart Gulliver, Iain Mackay and Marc Moses are given below. Douglas Flint is not included as he is not eligible for an annual incentive award.
The Committee is of the opinion that the performance targets for the annual incentive are commercially sensitive and that it would be detrimental to the interests of the company to disclose them before the start of the financial year. Subject to commercial sensitivity, the targets will be disclosed after the end of the relevant financial year in that year's remuneration report.

2015 annual incentive scorecards

Stuart Gulliver		Iain Mackay		Marc Moses
Measures	Weighting	Functional measures linked to	Weighting	Functional measures linked to	Weighting

Profit before tax¹	15%	Grow both business and dividends	15%	Grow both business and dividends	20%
Return on equity	15%	Global Standards including risk and compliance	50%	Global Standards including risk and compliance	50%
Jaws²	15%	Streamline processes and procedures	25%	Streamline processes and procedures	20%
Grow dividends³	15%

Financial	60%	Strategic priorities	90%	Strategic priorities	90%

Strategy execution	15%	People	10%	People	10%
Global Standards including risk and compliance	25%

Non-financial	40%	People	10%	People	10%

Promoting HSBC Values	Over-riding test	Promoting HSBC Values	Over-riding test	Promoting HSBC Values	Over-riding test

Total	100%	Total	100%	Total	100%

2015 Group GPSP scorecard

Measure	Long-term target range		Weighting

Return on equity	>10%		20%
Jaws²	Positive adjusted jaws		20%
Grow dividends³	Progressive		20%

Financial			60%

Strategy execution	Judgement		15%
Global standards including risk and compliance	Judgement		25%

Non-financial		40%

Total		100%

1 Profit before tax, as defined for the Group variable pay pool.

2 Revenue growth less operating expense, on an adjusted basis.

3 Dividend per ordinary share (USD) in respect of the year, measured year on year; consistent with the growth of the overall profitability of the Group, predicated on the continued ability to meet with regulatory capital requirements.

This information is provided by RNS

The company news service from the London Stock Exchange

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