There were no disagreements on accounting and financial disclosure matters between HUSI and its independent accountants during 2006.
HUSI maintains a system of internal and disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended, (the Exchange Act), is recorded, processed, summarized and reported on a timely basis. HUSI’s Board of Directors, operating through its Audit Committee, which is composed entirely of independent outside directors, provides oversight to the financial reporting process.
An evaluation was conducted, with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of HUSI’s disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that HUSI’s disclosure controls and procedures were effective as of the end of the period covered by this report, so as to alert them in a timely fashion to material information required to be disclosed in reports filed under the Exchange Act.
There have been no significant changes in HUSI’s internal controls or in other factors that could significantly affect internal and disclosure controls subsequent to the date that the evaluation was carried out.
HUSI continues the process to complete a thorough review of its internal controls as part of its preparation for compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (Section 404). Section 404 requires management to report on, and external auditors to attest to, the effectiveness of HUSI’s internal controls structure and procedures for financial reporting. As a non-accelerated filer under Rule 12b-2 of the Exchange Act, HUSI’s first report under Section 404 will be contained in its Form 10-K for the period ended December 31, 2007.
None.
P A R T III
Item 10. Directors, Executive Officers and Corporate Governance
Directors
Set forth below is certain biographical information relating to the members of HUSI’s Board of Directors as of February 21, 2007. Each director is elected annually. There are no family relationships among the directors.
Salvatore H. Alfiero, age 69, joined the HUSI Board in 2000, the HBUS Board in 1996 and the HNAH Board in 2005. Mr. Alfiero has been the Chairman and Chief Executive Officer of Protective Industries, LLC since 2001. He is also a director of Phoenix Companies, Inc., Southwire Company and Fresh Del Monte Produce Company.
Mr. Alfiero is Chair of the Audit Committee and a member of the Nominating & Governance Committee.
Donald K. Boswell, age 55, joined the HUSI and HBUS Boards in 2002. Mr. Boswell has been the President and Chief Executive Officer of Western New York Public Broadcasting Association since 1998, and has been in public broadcasting since 1977.
Mr. Boswell is a member of the Fiduciary Committee and the Human Resources & Compensation Committee.
James H. Cleave, age 64, joined the HUSI and HBUS Boards in 1991. Mr. Cleave was the President and Chief Executive Officer of HUSI and HBUS from 1993 through 1997. Prior to that, he was President and Chief Executive Officer of HSBC Bank Canada and is currently a director and Vice Chairman of HSBC Bank Canada.
Mr. Cleave is a member of the Audit Committee and the Executive Committee.
Dr. Frances D. Fergusson, age 62, joined the HBUS Board in 1990 and the HUSI Board in 2000. She is President Emeritus of Vassar College and served as President from 1986 to 2006. Prior to that, Dr. Fergusson was Provost and Vice President for Academic Affairs, Bucknell University. Dr. Fergusson is also a director of Wyeth Pharmaceuticals and Mattel, Inc., and a member of the Board of Overseers of Harvard University.
Dr. Fergusson is the Chair of the Human Resources & Compensation Committee and a member of the Nominating & Governance Committee and the Executive Committee.
Michael F. Geoghegan, age 53, joined the HUSI and HBUS Boards as Chairman in September 2006. He joined HSBC in 1973 and has been an executive director of HSBC since 2004 and the HSBC Group Chief Executive since May 2006. Mr. Geoghegan served as Chief Executive of HSBC Bank plc from January 2004 to March 2006. He is a director and Deputy Chairman of HSBC Bank plc and a director of The Hongkong and Shanghai Banking Corporation Limited and HSBC France. Mr. Geoghegan is also a non-executive director and Chairman of Young Enterprise UK.
Stuart T. Gulliver, age 47, joined the HUSI and HBUS Boards in September 2006. He has been the Chief Executive, CIBM and Group Investment businesses for HSBC since May 2006. Mr. Gulliver was appointed as a Group Managing Director and to the Group Management Board in 2004. He served as a Group General Manager from 2000 to 2004. Mr. Gulliver joined HSBC in 1980 and has held a number of key roles in various treasury and capital markets businesses, most recently as Co-Head of Corporate, Investment Banking and Markets from 2003 to 2006 and Head of Global Markets from 2002 to 2003. He is also a director of HSBC Bank plc and The Hongkong and Shanghai Banking Corporation Limited.
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Richard A. Jalkut, age 62, joined the HUSI Board in 2000 and the HBUS Board in 1992. Mr. Jalkut is the President and Chief Executive Officer of Telepacific Communications. He was a director of Birch Telecom, Inc. until June 2006. Formerly, he was the President and Chief Executive of Pathnet and, prior to that, President and Group Executive, NYNEX Telecommunications. Mr. Jalkut is also a director of IKON Office Solutions and Covad Communications.
Mr. Jalkut has been Lead Director of HUSI and HBUS since January 2005. He is the chair of the Executive Committee, the Chair of the Nominating & Governance Committee and a member of the Audit Committee.
Peter Kimmelman, age 62, joined the HUSI and HBUS Boards in 2000. Mr. Kimmelman is a private investor and managing member of Peter Kimmelman Asset Management, LLC, an investment advisory firm registered with the Securities and Exchange Commission. He was formerly a director of Republic New York Corporation and Republic National Bank of New York from 1976 until 1999.
Mr. Kimmelman is a member of the Audit Committee.
Paul J. Lawrence, age 45, joined the HUSI and HBUS Boards and was appointed President and Chief Executive Officer of HUSI and HBUS as of February 21, 2007. Mr. Lawrence joined HSBC in 1982 and has held numerous positions in Asia and the United Kingdom. He was appointed Head of CIBM, North America for HUSI and HBUS as of October 1, 2006. Mr. Lawrence held the position of Chief Executive Officer, The Hongkong and Shanghai Banking Corporation Limited, Singapore from 2002 through September 2006 and, prior to that, served as Chief Executive Officer of The Hongkong and Shanghai Banking Corporation Limited, Philippines. Mr. Lawrence has been an HSBC Group General Manager since 2005.
Mr. Lawrence is a member of the Executive Committee.
Charles G. Meyer, Jr., age 69, joined the HUSI and HBUS Boards in 2000. Mr. Meyer is an architect and former President of Cord Meyer Development Company. Mr. Meyer was formerly a director of Republic National Bank of New York from 1987 until 1999.
Mr. Meyer is the Chair of the Fiduciary Committee and a member of the Nominating & Governance Committee.
James L. Morice, age 69, joined the HUSI and HBUS Boards in 2000. Mr. Morice has been the President and Chief Executive Officer of Morice Consulting, LLC, successor to the JLM Group, LLC, a management consulting firm, since 2006. He was previously Executive Vice President and Director of NationsBuilders Insurance Services, Inc. Mr. Morice was a director of Republic New York Corporation and Republic National Bank of New York from 1987 until 1999 and a member of the Human Resources Committee of the University of New Haven from 2003 through 2005.
Mr. Morice is a member of the Fiduciary Committee and the Human Resources & Compensation Committee.
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Executive Officers
Information regarding the executive officers of HUSI as of February 21, 2007 is presented in the following table.
Name
| |
Age
| | Year
Appointed | |
Present Position with HUSI
|
Paul J. Lawrence | | 45 | | 2006 | | President and Chief Executive Officer |
Kevin Newman | | 49 | | 2007 | | Group General Manager, Personal Financial Services |
Janet L. Burak | | 51 | | 2004 | | Senior Executive Vice President, General Counsel and Secretary |
Robert M. Butcher | | 63 | | 1988 | | Senior Executive Vice President & Chief Risk Officer |
Christopher Davies | | 45 | | 2007 | | Senior Executive Vice President, Commercial Banking |
David Dew | | 51 | | 2006 | | Senior Executive Vice President & Chief Administrative Officer |
Mark A. Hershey | | 54 | | 2007 | | Senior Executive Vice President, Co-Head Chief Credit Officer |
David C. Kotheimer | | 49 | | 2007 | | Senior Executive Vice President, Business Performance |
John J. McKenna | | 47 | | 2005 | | Senior Executive Vice President & Chief Financial Officer |
George T. Wendler | | 62 | | 2000 | | Senior Executive Vice President, Co-Head Chief Credit Officer |
Jeanne G. Ebersole | | 45 | | 2004 | | Executive Vice President, Human Resources |
Teresa A. Pesce | | 47 | | 2005 | | Executive Vice President & Anti-Money Laundering (AML) Director |
Carolyn M. Wind | | 53 | | 2005 | | Executive Vice President, Compliance |
Marlon Young | | 51 | | 2006 | | Managing Director, Chief Executive Officer Private Bank Americas |
Clive R. Bucknall | | 43 | | 2006 | | Executive Vice President & Controller |
Kevin Newman, Group General Manager, Personal Financial Services since October 2006. Mr. Newman served as Senior Executive Vice President, Personal Financial Services from September 2005 to October 2006 and as Executive Vice President, Personal Financial Services from December 2003 to September 2005. Prior to that, he served as Head of HSBC.com.
Janet L. Burak, Senior Executive Vice President, General Counsel and Secretary for HUSI and HBUS since April 2004. Ms. Burak served as an attorney with HSBC Finance Corporation for twelve years, most recently as Group General Counsel. Prior to joining HSBC Finance Corporation, she was an associate with Shearman & Sterling and an attorney with Citigroup.
Robert M. Butcher, Senior Executive Vice President & Chief Risk Officer for HUSI and HBUS since May 2003. Mr. Butcher was Chief Financial Officer of HUSI and HBUS from 1990 to 2003. Prior to joining HBUS’s predecessor, Marine Midland Bank, in 1988, Mr. Butcher was with Citicorp for 15 years where he held various senior officer positions in the corporate finance department.
Christopher Davies, Senior Executive Vice President, Commercial Banking since February 2007. Prior to this appointment, Mr. Davies was Head of Corporate and Institutional Banking with HSBC Securities (USA) Inc. from 2004 to February 2007. From 2003 to 2004, he was Head of Client Service and Marketing, Global CIB with HSBC Bank plc, and from 2000 to 2003 he was Credit & Banking Services Director with First Direct, Leeds. Mr. Davies has held various senior officer positions in credit, treasury and retail and commercial banking since joining Midland Bank plc, now known as HSBC Bank plc, in 1985.
David Dew, Senior Executive Vice President & Chief Administrative Officer since February 2007. He served as Senior Executive Vice President, Audit for HUSI and HSBC North America Inc. (HNAI) from January 2006 to February 2007. Prior to this appointment, Mr. Dew served as Chief Auditor, Group Audit, HSBC Finance Corporation from November 2004 to December 2005. He was Executive Director & Chief Operating Officer, The Saudi British Bank, Riyadh, Saudi Arabia from March 2001 to November 2004; Deputy Chief Executive Officer, The Hongkong and Shanghai Banking Corporation Limited, Singapore from September 1997 to March 2001; and Chief Executive Officer, HSBC Bank plc, Milan, Italy from November 1994 to September 1997. Mr. Dew has been an HSBC employee since 1977.
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Mark A. Hershey, Senior Executive Vice President, Co-Head Chief Credit Officer since February 2007. Prior to this appointment Mr. Hershey was Senior Executive Vice President, Commercial Banking since 2005 and Executive Vice President, Commercial Banking from 2000 to 2005. Mr. Hershey was a senior officer of Republic National Bank of New York when it was acquired by HSBC in December 1999.
David C. Kotheimer, Senior Executive Vice President, Business Performance since December 2006. Mr. Kotheimer served as Senior Executive Vice President, Tri-State, of HBUS from May 2006 to December 2006 and as an Executive Vice President, Metro New York, of HBUS from November 2000 to May 2006. Since joining HSBC in 1987, Mr. Kotheimer has held a variety of senior officer positions in commercial banking, human resources and personal financial services.
John J. McKenna, Senior Executive Vice President and Chief Financial Officer of HUSI since October 2005. Prior to this appointment, Mr. McKenna served as Chief Financial Officer, HSBC Mexico, S.A. from November 2002 through September 2005. From July 2000 to October 2002, he held the position of Senior Vice President and Director of Financial Management for HUSI. Since joining HSBC in 1986, Mr. McKenna has held a variety of financial management positions focusing on strategic planning, business controllership and management information.
George T. Wendler, Senior Executive Vice President, Co-Head Chief Credit Officer of HUSI since February 2007. Prior to this appointment, Mr. Wendler was Chief Credit Officer of HUSI from January 2000 to February 2007, and he was Chief Credit Officer and a member of the Senior Management Committee of Republic New York Corporation when it was acquired by HSBC in December 1999. Mr. Wendler was also a director and Vice Chairman of Republic New York Corporation from 1997 to 1999.
Jeanne G. Ebersole, Executive Vice President, Human Resources since May 2004. Prior to this appointment, Ms. Ebersole had overall human resources responsibility for HSBC Finance Corporation’s retail services, insurance services and refund lending businesses since August 2002. She held a variety of human resources positions after joining HSBC Finance Corporation in 1980.
Teresa A. Pesce, Executive Vice President and Anti-Money Laundering (AML) Director since September 2003. In 2004 she was appointed the AML Director for all HSBC businesses in North America. Ms. Pesce joined HUSI from the United States Attorney’s Office, Southern District of New York where she was Senior Trial Counsel, White Plains Division and previously Chief of the Major Crimes Unit and Deputy Chief of the Criminal Division. From 1992 to 1999 she served as a Line Assistant in the Major Crimes, Narcotics, and General Crimes Units.
Carolyn M. Wind, Executive Vice President, Compliance, was the Chief Compliance Officer for Republic New York Corporation when it was acquired by HSBC in December 1999. Prior to joining Republic New York Corporation, she was a senior national bank examiner with the Office of the Comptroller of the Currency (OCC).
Marlon Young, Managing Director, CEO Private Bank Americas since October 2006. Mr. Young joined HSBC as Managing Director and Head of Domestic Private Banking for HBUS in March 2006. He served as Managing Director and Head of Private Client Lending for Smith Barney from 2004 through 2006. Prior to that, Mr. Young held various positions with Citigroup from 1979, most recently as Managing Director and Head of Citigroup Private Bank (Northeast Region) from 2000 through 2004.
Clive R. Bucknall, Executive Vice President & Controller and Chief Accounting Officer since March 7, 2006. Prior to this appointment Mr. Bucknall served as Senior Financial Officer, HSBC Singapore from March 2002 through December 2005. He was Senior Financial Officer, HSBC Thailand from September 1998 to March 2002 and Senior Area Accounting Manager, HSBC Hong Kong from September 1994 to September 1998. In 1991, Mr. Bucknall joined Midland Bank in London, which was acquired by HSBC in 1992, as Financial Accounting Manager.
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Corporate Governance
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act, as amended, requires our directors, executive officers and any persons who own more than 10 percent of a registered class of our equity securities to report their initial ownership and any subsequent change to the SEC and the New York Stock Exchange (“NYSE”). With respect to the issues of HUSI preferred stock outstanding, we reviewed copies of all reports furnished to us and obtained written representations from our directors and executive officers that no other reports were required. Based solely on a review of copies of such forms furnished to us and written representations from the directors and executive officers, all Section 16(a) filing requirements were complied with for the 2006 fiscal year.
Board of Directors – Committees and Charters
The Board of Directors of HSBC USA Inc. has five standing committees: the Audit Committee, the Executive Committee, the Fiduciary Committee, the Human Resources & Compensation Committee and the Nominating & Governance Committee. The charter of each of these committees, as well as the HSBC USA Inc. Corporate Governance Standards, are available upon written request to HSBC USA Inc., 452 Fifth Avenue, New York, New York 10018, Attention: Corporate Secretary.
Audit Committee
The primary purpose of the Audit Committee is to assist the Board of Directors in fulfilling its oversight responsibilities relating to HUSI’s system of internal controls over financial reporting and its accounting, auditing and financial reporting practices. The Audit Committee is currently comprised of the following independent directors (as defined by HSBC USA Inc.’s Corporate Governance Standards, which are based upon the rules of the New York Stock Exchange): Salvatore H. Alfiero (Chair), James H. Cleave, Richard A. Jalkut and Peter Kimmelman. The Board of Directors has determined that each of these individuals is financially literate. The Board of Directors has also determined that Messrs. Alfiero and Cleave qualify as audit committee financial experts.
Executive Committee
The Executive Committee may exercise the powers and authority of the Board of Directors in the management of HUSI’s business and affairs during the intervals between meetings of the Board of Directors. The executive committee is currently comprised of the following directors: Richard A. Jalkut (Chair and Lead Director), James H. Cleave, Dr. Frances D. Fergusson and Paul J. Lawrence.
Fiduciary Committee
The primary purpose of the Fiduciary Committee is to supervise the fiduciary activities of HBUS to ensure the proper exercise of its fiduciary powers in accordance with 12 U.S.C. §92a – Trust Powers of National Banks and related regulations promulgated by the Office of the Comptroller of the Currency. The Fiduciary Committee is currently comprised of the following directors: Charles G. Meyer, Jr. (Chair), Donald K. Boswell and James L. Morice. All members of the Fiduciary Committee are independent directors under HSBC USA Inc.’s Corporate Governance Standards.
Human Resources & Compensation Committee
The primary purpose of the Human Resources & Compensation Committee is to assist the Board of Directors in discharging its responsibilities related to the compensation of the Chief Executive Officer, other officers of HUSI holding a title of executive vice president and above and such other officers as may be designated by the Board of Directors. The Human Resources & Compensation Committee is currently comprised of the following directors: Dr. Frances D. Fergusson (Chair), Donald K. Boswell and James L. Morice. All members of the Human Resources & Compensation Committee are independent directors under HSBC USA Inc.’s Corporate Governance Standards.
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The Charter of the Human Resources & Compensation Committee lists the primary responsibilities, powers and authorities of the committee. The listed items include (i) review and approval of corporate goals and performance objectives relevant to the compensation of the Chief Executive Officer and certain other executive officers, evaluate the performance of the Chief Executive Officer and other executive officers in light of those goals and objectives, and review its findings with the Board of Directors in executive session, (ii) submit recommendations concerning base salary, performance-based cash and long-term equity-based incentive awards for the Chief Executive Officer and other executive officers to the Remuneration Committee of HSBC (“REMCO”) for approval, (iii) recommend to REMCO equity incentives under HSBC plans to all employees, except those awards that the Chief Executive Officer may determine based upon a delegation of authority by REMCO, (iv) review and approve benefits and perquisites of the Chief Executive Officer and other executive officers to the extent such benefits are not available to all employees, (v) review and recommend to REMCO any employment and severance arrangements for the Chief Executive Officer and other executive officers, as well as any severance payouts to such officers, (vi) review and consider “best practices” of peer companies with respect to compensation philosophies, policies and practices, (vii) review management’s Compensation Discussion and Analysis (“CD&A”) to be included in HUSI’s Annual Report on Form 10-K, discuss the CD&A’s content with management, and prepare the Compensation Committee Report concerning the CD&A and recommend to the Board of Directors that the CD&A be included in the Annual Report on Form 10-K, and (viii) engage in an annual self assessment with the goal for continuing improvement, and to review and assess the adequacy of this charter at least annually and recommend any proposed changes to the Board of Directors for approval.
The Human Resources & Compensation Committee may at its discretion retain and discharge consultants to assist the committee in evaluating Chief Executive Officer or other executive officer compensation and to determine the appropriate terms of engagement and the fees to be paid to such consultants. The Chief Executive Officer is given full authority, which may be delegated, to establish the compensation and salary ranges for all other employees of HUSI and its subsidiaries whose salaries are not subject to review by the Human Resources & Compensation Committee and approval by REMCO. For more information about HUSI’s compensation policies and programs, please see Item 11. Executive Compensation - Compensation Discussion and Analysis.
Nominating & Governance Committee |
The primary purpose of the Nominating & Governance Committee is to assist the Board of Directors of HUSI in discharging its responsibilities related to identifying and nominating members of the Board of Directors to the Board, recommending to the Board the composition of each committee of the Board and the Chair of each committee, establishing and reviewing HUSI’s corporate governance and making recommendations to the Board regarding compensation for service of the non-executive Board members. The Nominating & Governance Committee ensures that HUSI maintains “best practices” with respect to corporate governance in order to ensure effective representation of its stakeholders.
The Nominating & Governance Committee is currently comprised of the following directors: Richard A. Jalkut (Chair), Salvatore H. Alfiero, Dr. Frances D. Fergusson and Charles G. Meyer, Jr. All members of the Nominating & Governance Committee are independent directors under HSBC USA Inc.’s Corporate Governance Standards.
Code of Ethics
HUSI has adopted a code of ethics that is applicable to its chief executive officer, chief financial officer, chief accounting officer and controller, which is incorporated by reference to Exhibit 14 of this Form 10-K. HUSI also has a general code of ethics applicable to all employees that is referred to as its Statement of Business Principles and Code of Ethics. Both documents are available upon written request made to HSBC USA Inc., 452 Fifth Avenue, New York, New York 10018, Attention: Corporate Secretary.
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Item 11. Executive Compensation
Compensation Discussion and Analysis
The following compensation discussion and analysis (the “2006 CD&A”) summarizes the principles, objectives and factors considered by HUSI in evaluating and determining the compensation of executive officers in 2006. Specific compensation information relating to Sandra L. Derickson, President and Chief Executive Officer – Designate (and President and Chief Executive Officer from January 1 until February 20, 2007); Martin J.G. Glynn, President and Chief Executive Officer; John J. McKenna, Senior Executive Vice President and Chief Financial Officer; Joseph A. Belfatto, Senior Executive Vice President & Head of Global Markets Americas; Marlon Young, Managing Director, CEO, Private Bank Americas; and Janet L. Burak, Senior Executive Vice President, General Counsel and Secretary, is contained in this portion of the Form 10-K. The 2006 CD&A also includes compensation information relating to Brendan McDonagh, Chief Operating Officer; and Joseph M. Petri, Senior Executive Vice President, Treasurer and Co-Head, CIBM Americas, both of whom served as an executive officer of HUSI during part of 2006, but ceased providing services to HUSI prior to December 31, 2006.
Oversight of Compensation Decisions
HUSI is a wholly owned subsidiary of HSBC Holdings plc (“HSBC”). The Board of Directors of HSBC has the authority to delegate any of its powers, authorities and judgments to any committee consisting of one or more directors, and has established a Remuneration Committee (“REMCO”) for the purpose of setting the remuneration policy for HSBC and its subsidiaries and the compensation of senior executives. REMCO’s responsibilities include reviewing and approving performance-based remuneration by reference to corporate goals and objectives established by the Board of Directors of HSBC from time to time and approving overall market positioning of the compensation package, individual base salaries and increases and annual and long-term incentive/bonus arrangements for certain executives. In November 2006, REMCO delegated its authority for approval of salaries and annual cash incentive awards relating to certain classes of executives to Michael F. Geoghegan, the HSBC Group Chief Executive (the “HSBC CEO”). However, REMCO retained exclusive authority over compensation of the more senior executives within HSBC and its subsidiaries. As a result, REMCO had authority over the compensation of Ms. Derickson and Messrs. Glynn, McDonagh and Petri in 2006. Pursuant to a further delegation of authority from the HSBC CEO, Siddharth N. Mehta, Chief Executive Officer of HNAH until February 15, 2007, had approval authority over certain executives within HUSI, including Mr. McKenna and Ms. Burak; Stuart T. Gulliver, HSBC Managing Director and Head of CIBM, has approval authority over certain executives within the CIBM businesses; and Chris M. Meares, Chief Executive Officer, Group Private Banking, has approval authority over certain executives within the Private Banking businesses. REMCO has exclusive authority with respect to all long-term incentive plan awards involving interests in HSBC ordinary shares.
The members of REMCO in 2006 were Sir Mark Moody-Stuart (Chairman), W.K.L. Fung, S. Hintze, Sir John Kemp-Welch (until retirement on May 26, 2006) and J.D. Coombe (effective as of June 1, 2006), all of whom were or are non-executive directors of HSBC. REMCO has retained the services of Towers Perrin, a human resource consulting firm, to provide independent advice on executive compensation issues. REMCO is provided with comparator information from Towers Perrin, which obtains compensation data for executive positions with companies of similar size and complexity that are subsidiaries of peer financial services companies. In addition, market data has been obtained from American Express Company, Bank of America Corporation, Bank One Corporation, BB&T Corporation, Capital One Corporation, Citigroup, Inc., Countrywide Financial Corporation, FifthThird Bancorp, KeyCorp, LaSalle Bank Corporation, Merrill Lynch & Co., Inc., National City Corporation, The PNC Financial Services Group Inc., Royal Bank of Canada, State Street Corporation, Sun Trust Banks, Inc., Wachovia Corporation, Washington Mutual Inc. and Wells Fargo & Company. Comparator and market data is used by REMCO to evaluate the competitiveness of proposed executive compensation.
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The Human Resources and Compensation Committee of the Board of Directors of HUSI (the “Compensation Committee”) seeks to ensure that HUSI’s compensation policies and practices support the objectives of HUSI’s compensation program, which is based upon the compensation objectives established by REMCO. The Compensation Committee makes advisory recommendations to REMCO for all compensation to be paid to the HUSI Chief Executive Officer, the HSBC CEO or the Chief Executive Officer of HNAH, as appropriate, for all executives holding a title of executive vice president or above, other than executive officers in the CIBM and Private Banking businesses. Mr. Gulliver makes advisory recommendations to REMCO for all compensation to be paid to General Managers and certain other senior executives within CIBM. Mr. Meares makes advisory recommendations to REMCO for all compensation to be paid to Group General Managers and certain other senior executives within Private Banking.
HUSI Human Resources executives work with HNAH Human Resources executives to prepare a comprehensive annual compensation package for the Chief Executive Officer. This package is reviewed by the Chief Executive Officer of HNAH, who approves or requests revisions to the compensation package before it is submitted to the Compensation Committee for review.
HUSI Human Resources executives consult with the Chief Executive Officer of HUSI in preparing annual compensation packages for executives holding a title of executive vice president and above (other than the Chief Executive Officer). These compensation packages are also reviewed by the Chief Executive Officer of HNAH. Any revisions to a compensation package recommended by the Chief Executive Officer of HNAH are reviewed and considered by the Chief Executive Officer of HUSI prior to the package being submitted to the Compensation Committee for review.
The Compensation Committee reviews the compensation packages submitted to it, and approves or requests revisions to one or more of the components of annual compensation. The compensation packages, as approved or modified by the Compensation Committee, are forwarded to HSBC Human Resources management for submission to REMCO and the HSBC CEO, as appropriate, or to the Chief Executive Officer of HNAH in late December or early January, and include advisory recommendations for salaries for the ensuing calendar year, preliminary performance-based cash awards and equity-based long-term incentive awards. As the performance-based cash awards are dependent upon satisfaction of objectives that cannot be evaluated until the end of the performance measurement year, the final determination of this component of compensation is not made until the Compensation Committee receives reports from management concerning satisfaction of corporate, business unit and individual objectives in January. REMCO or the HSBC CEO, as appropriate, will approve or revise the advisory recommendations provided by the Compensation Committee.
Within the CIBM and Private Banking businesses, senior executives prepare annual compensation package recommendations for executive officers within their business units. Accordingly, the discretion and judgment of senior management play a much more significant role in establishing appropriate compensation packages to be included in advisory recommendations to REMCO or the Head of CIBM or Chief Executive Officer, Group Private Banking, as appropriate. As is the case for HUSI generally, performance-based cash awards are dependent upon performance of the individual, the local business unit and the business globally and, accordingly, cannot be determined until the end of the performance measurement year.
Within CIBM, compensation recommendations for the Global Markets business are prepared by Mike J. Powell, Group Head of Global Markets, recommendations for the Global Banking business are prepared by Paul Hand, Co-Head of Global Banking, and recommendations for the Group Investment Businesses are prepared by Alain Dromer, Global Chief Executive Officer, Group Investment Businesses. These recommendations are submitted to and reviewed by the Head of CIBM. Any revisions to a compensation package recommended by the Head of CIBM are included in the package before it is submitted to REMCO for review. REMCO will approve or revise to the advisory recommendations provided by the Head of CIBM.
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For Private Banking, compensation recommendations are prepared by Chris M. Meares, Chief Executive Officer, Group Private Banking, and submitted to and reviewed by the Director of Human Resources, CIBM/INV/GPB/Amanah and the HSBC CEO. Any revisions to a compensation package recommended by the Director of Human Resources or the HSBC CEO are included in the package before it is submitted to REMCO for review. REMCO will approve or revise the advisory recommendations provided by the Chief Executive Officer, Group Private Banking.
Objectives of HUSI’s Compensation Program
HUSI’s compensation program is designed to support the successful recruitment, development and retention of high performing executive talent and to incent those executives to achieve HUSI’s short-term business objectives and to optimize its long-term financial returns. We design our compensation program to be competitive with a comparator group of benchmark financial institutions. HUSI’s comparator group is comprised of U.S.-based organizations that compete with us for business, customers and executive talent. HUSI’s comparator group includes Bank of America Corporation, The Bank of New York Company, Inc., JP Morgan Chase & Co., SunTrust Banks, Inc., Wachovia Corporation and Wells Fargo & Company (collectively, the “Comparator Group”). While these organizations are publicly-held companies, HUSI’s operations are of comparable scale and complexity. Accordingly, HUSI’s compensation program is designed to provide the flexibility to offer compensation that is competitive with the Comparator Group so that we may attract and retain the highest performing executives.
The philosophy underlying HUSI’s executive compensation program, which is designed to promote the compensation objectives of our parent, HSBC, is discussed below. Across businesses, individual compensation recommendations reflect HSBC’s strong stance with respect to diversity and equal opportunity for all employees within the context of meritocracy and performance.
Link to Company Performance
We seek to offer competitive base salaries with a significant portion of variable compensation components determined by measuring performance of the executive, his or her respective business unit, HUSI and HSBC. The performance-based cash compensation plans, which are more fully described under Elements of Compensation – Annual Performance-Based Awards, emphasize revenue and expense growth, net income, receivable growth, profits and other key performance measures. Other considerations taken into account in setting compensation policies and making compensation decisions include demonstrated leadership, future potential, adherence to HSBC’s ethical standards and the ability to leverage capabilities across businesses. Corporate, business unit and/or individual goals are established at the beginning of each year.
Compensation plans motivate our executives to improve the overall performance and profitability of HSBC as well as the specific region, unit or function to which they are assigned. Each executive’s individual performance and contribution is considered in making salary adjustments and determining the amount of annual performance bonus paid and the value of HSBC equity-based awards granted each year.
HUSI has historically used grants of stock options and restricted shares to reward and provide longer term incentives for our executives. In 2005, however, HSBC adopted a new philosophy to provide only restricted shares, called “Achievement Shares,” which vest on a specified date if the executive remains employed through that date, and “Performance Shares,” which require continued employment and satisfaction of corporate performance conditions designed to reinforce a long-term focus on HSBC’s Managing for Growth strategy and delivering value to its shareholders. Performance Shares are granted to the most senior executives whose business units have the ability to have a direct impact on HSBC’s consolidated results. Achievement Shares awards are granted to other high performing executives. Within CIBM and Private Banking, restricted shares are also used as a bonus deferral mechanism for executives within those businesses who receive large bonus awards, as described below.
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Competitive Compensation Levels and Marketplace Research
HUSI endeavors to maintain compensation programs that are competitive with our Comparator Group. We operate in a highly competitive business environment, in which our Comparator Group and other financial services companies continuously look to gain market share and competitive advantage by hiring top executive talent. On an annual basis, and as needed when recruiting, we compare the compensation for our executive officers to that of executives with similar responsibilities for companies of similar industry, size and complexity. In 2006, the Compensation Committee considered comparative data from general industry surveys of non-financial services companies and of financial services companies, which included members of our Comparator Group, to help establish compensation levels for our executives. The Compensation Committee also reviews the Towers Perrin data provided to REMCO.
We research the types of compensation programs provided by other companies, compensation levels for executives, details of certain compensation programs, historical marketplace compensation trends, marketplace practices regarding compensation mix, stock vesting terms, equity ownership levels, the amount of compensation that is derived from equity incentives and the benefits provided to executives. We also research different aspects of performance, including the relationship between performance and compensation, a comparison of HUSI’s historical performance to our Comparator Group and types of performance measures that are used by other companies for their annual and long-term incentive programs. Research data is gathered from several different sources, including general surveys of the marketplace.
HUSI’s compensation program generally provides executives with the opportunity to earn a base salary that is near the 50th percentile average of our Comparator Group. We believe this represents a competitive base salary for meeting general business objectives. However, total compensation, which includes incentive awards, is targeted to be in the 75th percentile if HUSI, HSBC and the executive meet established performance goals. This provides greater incentive to achieve higher performance standards and the specific goals established by the Compensation Committee each year. The level of compensation paid to an executive from year to year will differ based on performance. This year-to-year difference stems mainly from HUSI’s and/or an individual business unit’s performance results and, for individuals eligible for performance-based equity awards, awards may vary based upon HSBC’s performance results. Compensation levels will also increase or decrease based on the executive’s individual performance and level of responsibility.
CIBM and Private Banking
The philosophies underlying the compensation programs employed in the CIBM and Private Banking businesses are consistent with the philosophy described above for HUSI generally, but there are some specific variations in the compensation methodologies that are employed
The overall approach for these businesses involves a carefully managed approach to tracking of compensation expense throughout the year in relation to business performance and planned overall expenditure on staff costs. This is combined with a year-end pay review process that takes careful account of market pay methods, levels and trends, as well as the actual levels of business and individual performance that are achieved. The year-end pay review process is itself subject to review and approval by HSBC senior management and by REMCO.
The approach to regular bonus accrual is agreed with REMCO and updated at intervals to reflect changes in the competitive market. This agreement covers factors such as the proportion of pre-tax profit that may be allocated to the bonus pool for each business, taking into account aspects such as the maturity and complexity of each business and also considering any appropriate geographical variations. Annual operating plans for each business cover monthly accrual of the planned bonus amounts. Development of these accruals against the agreed parameters is reviewed at intervals during each year with the Group Finance Director.
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At year end, the compensation levels within each business reflect individual contribution, business unit performance and the competitive pay market. In addition, compensation within CIBM and Private Banking also reflects the overall (i.e., global) results of the respective business. Base salary and incentive compensation (bonus) are sized within the context of a total compensation package that is intended to be appropriately market competitive, but these businesses apply a much less formulaic approach to the use of comparative market data than is typical in some other parts of HUSI and HSBC. Compensation proposals are based upon careful benchmarking of individual executives in the correct competitive context, making use of independently compiled studies of market pay levels, methods and trends. These studies are conducted by external advisors with in-depth knowledge of the business areas concerned and they allow careful verification against market of the compensation levels and methodologies for executives in these businesses. With this information to hand, senior management carefully considers and interprets the performance of each business, and of CIBM or Private Banking globally, relative to the performance of key competitors. Individual performance is assessed relative to performance in a market context to ensure that each executive is correctly positioned against market. Both CIBM and Private Banking target appropriate groups of competitors for each business so that the total compensation for each executive can be correctly positioned within the overall market range, ensuring a high degree of differentiation towards the very best performers. Senior management also uses market data in a similar way when designing appropriate recruitment and retention initiatives.
The compensation programs within CIBM and Private Banking are designed to support the successful recruitment, development and retention of high performing executive talent and to incent those executives to maximize the performance of their respective businesses. Within the context of the total compensation package, performance-related adjustments emphasize variable pay (i.e., discretionary bonus awards) over fixed pay (i.e., base salary). As described above, bonus awards are differentiated significantly towards the very best performers and careful attention is also paid to those executives whose retention is regarded as critical to the business. For those executives receiving large bonus awards, a significant portion of the award is paid in the form of restricted shares that vest over three years provided the individual remains employed with HSBC, thus encouraging retention of the best performers. The proportion of bonus that is deferred varies to some extent between specific businesses but the typical approach is to apply a ‘tax table’ so that increasing proportions of a bonus will be deferred above clearly defined hurdles. The maximum proportion of bonus to be deferred within CIBM and Private Banking is normally 50 percent. The proportion of bonus to be deferred and the related vesting periods are positioned against competitive market practice using information provided by the external advisors referenced above.
Elements of Compensation
HUSI strives for a compensation mix that reflects our pay for performance philosophy and results-oriented culture. We attract and retain executives that are highly motivated to achieve results, and our compensation program supports that environment.
HUSI’s philosophy is to place a significant amount of compensation at risk to ensure that company performance objectives are met. In line with this pay for performance philosophy, on average, approximately 20 percent of executive compensation is base salary and 80 percent of compensation for top executives relates to short-term and long-term incentives where the amount paid is based upon defined performance goals. Of the 80 percent incentive compensation, on average, approximately 45 percent of such compensation relates to long-term incentives, while approximately 35 percent relates to short-term incentives. The allocation between short-term and long-term incentives is based on HUSI’s need to recognize past performance (short-term incentives) in conjunction with the need to motivate and retain our talent (long-term incentives). We believe these allocations are competitive within the market and reinforce HUSI’s pay-for-performance philosophy, which requires that a greater part of compensation is at risk and aligns executives’ interests with those of HSBC’s shareholders.
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The primary elements of executive compensation are base salary, annual non-equity performance-based awards, and long-term equity-based incentives. In limited circumstances, discretionary bonuses may also be awarded. In addition, executives are eligible to receive company funded retirement benefits that are offered to all employees. Perquisites are not a significant component of compensation. In establishing executive compensation packages, the Compensation Committee provides advisory recommendations and, ultimately, REMCO and/or the HSBC CEO establishes remuneration under each element based on what they believe is an appropriate balance between performance-based compensation and other forms of compensation, the level of responsibility and individual contribution of the executive and competitive practice in the marketplace for executives from companies of similar industry, size, and complexity as HUSI.
Within the CIBM and Private Banking businesses, the allocation of compensation between base salary and incentive compensation, as well as between long-term and short-term incentives, is recommended by senior management and reviewed and approved by REMCO and/or the HSBC CEO. As further described below, short-term incentive awards include cash awards under each business’s discretionary bonus program. Long-term incentives include the deferral of a portion of discretionary bonus awards through HSBC equity-based awards. In establishing executive compensation packages, remuneration under each element is based on what is believed to be an appropriate balance between performance-based compensation and other forms of compensation, the level of responsibility and individual contribution of the executive, business unit performance and overall CIBM or Private Banking results.
Base Salary
Base salary is reviewed annually and increases, if any, are based on corporate and individual performance. When establishing base salaries for executives, consideration is given to compensation paid for similar positions at companies included in compensation surveys of HUSI’s Comparator Group, targeting the 50th percentile, which the Compensation Committee believes, when combined with significant performance-based compensation opportunities, enables HUSI to attract and retain high performing executives. In addition, other factors such as individual and corporate performance, potential for future advancement, specific job responsibilities, length of time in current position, individual pay history, and comparison to comparable internal positions (internal equity) influences the final base salary recommendations for individual executives.
Within the CIBM and Private Banking businesses, annual salary increases must be accommodated within the annual operating plan for the business globally. Accordingly, salary increases proposed by senior management are prioritized towards high performing employees and those who have demonstrated rapid development. Proposals for salary increases are justified against performance and with reference to local market rates, where available. While individual performance is assessed relative to performance in a market context to ensure that the executive is correctly positioned within the market range, the CIBM and Private Banking business generally do not apply formulaic rates in determining compensation, but rely more on the discretion and judgment of senior management in the context of performance relative to key competitors of that business.
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Annual Performance-Based Awards
Annual non-equity performance-based awards are paid in cash upon satisfaction of individual, business unit, corporate financial and operational goals. Superior performance is encouraged by placing a significant part of the executive’s total compensation at risk. In the event certain quantitative or qualitative performance goals are not met, annual performance awards may be less than the maximum permitted.
Performance goals are set based on prior year’s performance, expectations for the upcoming year, HUSI’s annual business plan, the HSBC Managing for Growth business strategy, and objectives related to building value for HSBC shareholders. The general concept is if both HUSI and the executive perform well for the year, the performance award earned should be at a high level. If either HUSI or the executive does not perform well, the award earned should be at a low level. The Management Incentive Program described below implements this approach by defining “target” and “maximum” percentages for annual non-equity performance-based awards. Target award percentages range form 20 percent to 100 percent of base salary and maximum award percentages range from 40 percent to 300 percent. The award percentage range assigned to an executive officer will be determined on the basis of his or her position and level of responsibility within HUSI. The actual amount of the award within the applicable range will be determined on the basis of the performance goals established for HUSI and the individual each year.
In support of our pay-for-performance philosophy, HUSI maintains the Management Incentive Program, which is an annual cash incentive plan that uses quantitative and qualitative goals to motivate HUSI employees who have a significant role in the corporation and do not participate in another incentive compensation plan. The quantitative objectives may include meeting designated financial performance targets for the company and/or the executive’s respective business unit. Qualitative objectives may include key strategic business initiatives or projects for the executive’s respective business unit. Award opportunity and payouts are determined as a percentage of base salary and are based on comparison to other internal comparable positions (internal equity) and external market practices. Cash incentive awards under the Management Incentive Program are paid in February of the year following the measurement year.
Ms. Derickson, Messrs. Glynn, McKenna and McDonagh and Ms. Burak participated in the Management Incentive Program in 2006. A discussion of the quantitative and qualitative objectives for each of these executives and the performance against those goals can be found below under the heading Compensation of Officers Reported in the Summary Compensation Table.
Within the CIBM and Private Banking businesses, all regular employees are eligible for consideration for a discretionary bonus award. Final bonus recommendations are determined after full year results are available and are evaluated within the context of the performance of each business unit, including, where relevant, economic profit at the regional and global levels and compensation proposals for all business units within CIBM or Private Banking, as applicable. In conjunction with an assessment of the executive’s individual performance, senior management may consult market surveys to assist in identifying both market pay levels and factors influencing pay (i.e., product, market, length of service, etc.). However, as is the case with other components of compensation, we rely more on the discretion and judgment of senior management in the context of performance relative to our key competitors than a mechanical application of market rates.
Long-term Incentives
Long-term incentive compensation is awarded through grants of HSBC equity instruments. The purpose of equity-based incentives is to help HUSI attract and retain outstanding employees and to promote the growth and success of our business over a period of time by aligning the financial interests of these employees with those of HSBC’s shareholders. Historically, equity incentives were awarded through stock options and restricted share grants.
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Prior to 2005, options on HSBC ordinary shares were granted to certain executives and restricted shares to others. Awarded options have an exercise price equal to the greater of the average market value of HSBC ordinary shares on the five business days prior to the grant of the option and the market value of HSBC ordinary shares on the grant date. The options typically vest in three, four or five equal installments, subject to continued employment, and expire ten years from the grant date. However, certain options awarded to key executives had a “total shareholder return” performance vesting condition and only vest if and when the condition is satisfied. No stock options were granted to executive officers in 2005 or 2006 in conjunction with HSBC’s philosophical shift on the form of equity based compensation.
Awards of restricted shares is another form of long-term incentive compensation utilized to compensate and incent our employees. When restricted shares are granted to an executive officer, the underlying shares are held in a trust for the benefit of the employee and are released only after the defined vesting conditions are met at the end of the holding period. While in such trust, dividend equivalents are paid on all underlying shares of restricted stock at the same rate paid to ordinary shareholders. The dividend equivalents are paid in the form of additional shares for awards made after 2004 and in cash paid to the executive for all prior awards.
There are three types of restricted shares used by HSBC: those with a time vesting condition awarded to recognize significant contribution to HUSI (“Achievement Shares”), those with time and performance-based vesting conditions (“Performance Shares”) and those with a time vesting condition for retention purposes (“Retention Awards”). Achievement Shares are awarded to key executives as part of the annual pay review process in recognition of past performance and to further motivate and retain executives. The amount granted is based on general guidelines established by REMCO, which include a percentage of base pay, position within HUSI and potential for growth. Performance Shares are awarded to key executives whose performance can have a direct impact on HSBC’s consolidated results and, in 2006, within HUSI, only Mr. Glynn and Mr. McDonagh received such awards. Retention Awards have typically not been granted on an annual basis but rather have been granted on an as needed basis. No Retention Awards were granted to executive officers in 2006.
As described above, Performance Shares are awarded to an executive and vesting of those shares is based on achievement of defined levels of future performance of HSBC. Performance Shares are divided into two equal parts subject to distinct performance conditions measured over a three year period. A total shareholder return award, which accounts for 50 percent of each Performance Share award, will vest in whole or in part (based on a sliding scale of 0 percent to 100 percent) depending upon how the growth in HSBC’s share value, plus declared dividends, compares to the average shareholder return of a defined competitor group which for 2006 grants was comprised of 28 major banking institutions including: ABN AMRO Holding N.V., Banco Bilbao Vizcaya Argentaria, S.A., Banco Santander Central Hispano S.A., Bank of America Corporation, The Bank of New York Company, Inc., Barclays PLC, BNP Paribas S.A., Citigroup, Inc., Credit Agricole SA, Credit Suisse Group, Deutsche Bank AG, HBOS plc, JP Morgan Chase, Lloyds TSB Group plc, Mitsubishi Tokyo Financial Group Inc., Mizuho Financial Group Inc., Morgan Stanley, National Australia Bank Limited, Royal Bank of Canada, The Royal Bank of Scotland Group plc, Société Générale, Standard Chartered PLC, UBS AG, Unicredito Italiano, US Bancorp, Wachovia Corporation, Wells Fargo & Company and Westpac Banking Corporation.
The earnings per share award accounts for 50 percent of each Performance Share award and is measured using a defined formula based on HSBC’s earnings per share growth over the three-year period as compared to the base-year earnings per share, which is earnings per share for the year prior to the year the Performance Shares are granted. None of the earnings per share Performance Shares will vest unless a minimum earnings per share is reached at the end of three years.
REMCO maintains discretion to determine that a Performance Share award will not vest unless REMCO is satisfied that HSBC’s financial performance has shown sustained improvement since the date of the award. REMCO may also waive, amend or relax performance conditions if it believes the performance conditions have become unfair or impractical and believes it appropriate to do so. Due to the probability of one or both of the performance conditions not being met in part or in full, grants of Performance Shares are for a greater number of shares than Achievement Share grants. The expected value of Performance Shares is equal to 44 percent of the face value. Additional information concerning the conditions to vesting of Performance Share awards is contained in Footnote 2 to the Grants of Plan Based Awards table on page 184.
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Within the CIBM and Private Banking businesses, a portion of each discretionary bonus award is paid in restricted shares. The minimum deferral threshold, or the portion of each bonus award paid in restricted shares, and vesting schedules may vary by business unit within the parameters set by CIBM and Private Banking, as applicable, for their businesses.
Repricing of Stock Options and Timing of Option Grants
For HSBC discretionary option plans, the exercise price of awards made in 2003 and 2004 was the higher of the average market value for HSBC ordinary shares on the five business days preceding the grant date or the market value on the date of the grant.
HSBC also offers all employees a plan in which options to acquire HSBC ordinary shares are awarded when an employee commits to contribute up to 250 GBP (or the equivalent) each month for one, three or five years. At the end of the term, the accumulated amount, plus interest, may be used to purchase shares under the option, if the employee chooses to do so. The exercise price for such options is the average market value of HSBC ordinary shares on the five business days preceding the date of the invitation to participate, less a 15 to 20 percent discount (depending on the term).
HUSI does not, and our parent, HSBC, does not, reprice stock option grants. In addition, neither HUSI nor HSBC has ever engaged in the practice known as “back-dating” of stock option grants, nor have we attempted to time the granting of historical stock options in order to gain a lower exercise price.
Dilution from Equity-Based Compensation
While dilution is not a primary factor in determining award amounts, there are limits to the number of shares that can be issued under HSBC equity-based compensation programs. These limits were established by vote of HSBC’s shareholders in 2005.
Perquisites
HUSI’s philosophy is to provide perquisites that are intended to help executives be more productive and efficient or to protect HUSI and its executives from certain business risks and potential threats. Our review of competitive market data indicates that the perquisites provided to executives are reasonable and within market practice. See the “Summary Compensation Table” below for further information on perquisites awarded to HUSI executives.
Retirement Benefits
HNAH offers a pension retirement plan in which HUSI executives may participate that provides a benefit equal to that provided to all employees of HUSI. However, both qualified and non-qualified defined benefit plans are maintained so that this level of pension benefit can be continued without regard to certain Internal Revenue Service limits. Executives and other highly compensated employees can elect to participate in a nonqualified deferred compensation plan, where such employees can elect to defer the receipt of earned compensation to a future date. We also maintain a qualified 401(k) plan with company matching contributions. Ms. Derickson and Ms Burak, as former executives of HSBC Finance Corporation, also participate in a nonqualified deferred compensation plan that provides executives and other highly compensated employees with a company matching contribution based on the level of the deferral of the employee’s earned compensation to the qualified 401(k) plan to the extent that such company contributions cannot be allocated to the 401(k) plan because of certain Internal Revenue Service limits. HUSI does not pay any above-market or preferential interest in connection with deferred amounts.
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Employment Contracts and Severance Protection
Ms. Derickson entered into an employment agreement with HSBC Finance Corporation, an affiliate of HUSI, on November 14, 2002, which was amended and restated on May 17, 2005. As of December 31, 2006, Ms. Derickson’s employment remained subject to the terms of that agreement, the main purpose of which was to protect HSBC Finance Corporation and its affiliates (including HUSI) from certain business risks (threats from competitors, loss of confidentiality or trade secrets, solicitation of customers and employees) and to define HSBC Finance Corporation’s right to terminate the employment relationship. The employment agreement also protected Ms. Derickson from certain risks, such as a change in control, death or disability. The terms of Ms. Derickson’s employment agreement are summarized in the description of her compensation under the heading Compensation of Officers Reported in the Summary Compensation Table.
In connection with his employment March 2006, HBUS extended an offer letter to Mr. Young dated February 17, 2006. The primary purpose of the offer letter was to define Mr. Young’s terms of employment, compensation and the rights of the parties in the event of Mr. Young’s resignation or termination. The terms of Mr. Young’s offer letter are summarized in the description of his compensation under the heading Compensation of Officers Reported in the Summary Compensation Table.
In connection with his retirement on December 31, 2006, Mr. Glynn entered into an agreement with HNAH dated June 30, 2006. The primary purpose of the agreement was to define the rights of the parties prior to and upon Mr. Glynn’s retirement. The terms of Mr. Glynn’s agreement are summarized in the description of his compensation under the heading Compensation of Officers Reported in the Summary Compensation Table.
Prior to his retirement on August 5, 2006, Mr. Petri entered into a separation agreement with HBUS dated August 1, 2006. The primary purpose of the agreement was to define the rights of the parties prior to and upon Mr. Petri’s retirement. The terms of Mr. Petri’s agreement are summarized in the descriptions of his compensation under the heading Compensation of Officers Reported in the Summary Compensation Table.
Accounting Considerations
We adopted the fair value method of accounting under Statement of Financial Accounting Standards No. 123 (revised 2004), “Share Based Payment” (SFAS 123(R)) effective January 1, 2006. SFAS 123(R) applies to all equity instruments granted to employees beginning January 1, 2006 and does not apply to awards granted in prior periods before the effective date, except to the extent that prior periods’ awards are modified, repurchased or cancelled after the required effective date. Prior to 2006, we adopted the fair value method of accounting prospectively in 2002 for all new equity instruments granted to employees as provided under Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure (an amendment of FASB Statement No. 123).” The Board of Directors believes that this treatment reflects greater accuracy and transparency of the cost of these incentives and promotes better corporate governance.
Tax Considerations
Limitations on the deductibility of compensation paid to executive officers under Section 162(m) of the Internal Revenue Code is not applicable to HUSI, as it is not a public corporation as defined by Section 162(m). As such, all compensation to our executive officers is deductible for federal income tax purposes, unless there are excess golden parachute payments under Section 4999 of the Internal Revenue Code following a change in control.
Compensation of Officers Reported in the Summary Compensation Table
Below is a summary of the factors that affected the compensation earned in 2006 by the executive officers listed in the Summary Compensation Table. In recommending compensation for each of our executives, management and the Compensation Committee evaluated competitive levels of compensation for executives managing operations or functions of similar size and complexity and the importance of retaining executives with the strategic, leadership and financial skills to ensure HUSI’s continued growth and success and their potential for assumption of additional responsibilities.
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Chief Executive Officer Compensation – Ms. Derickson
Sandra L. Derickson was appointed President and Chief Executive Officer – Designate of HUSI as of September 1, 2006 and succeeded Mr. Glynn as President and Chief Executive Officer as of January 1, 2007. She resigned as President and Chief Executive Officer on February 20, 2007. Until that time, Ms. Derickson participated in the same programs and generally received compensation based on the same factors as HUSI’s other executive officers. However, Ms. Derickson’s overall compensation level reflected her greater degree of policy and decision-making authority, her higher level of responsibility with respect to the strategic direction of HUSI, and her ultimate responsibility for HUSI’s financial and operational results.
In connection with her appointment as of September 1, 2006, the Compensation Committee set Ms. Derickson’s base salary at an annualized level of $700,000 for 2006. In establishing Ms. Derickson’s initial base salary, the Compensation Committee sought to align Ms. Derickson’s compensation level with that of her predecessor, Mr. Glynn, which placed Ms. Derickson’s compensation level at the 50th percentile among similarly-placed executives within the Comparator Group. As Ms. Derickson’s initial base salary with HUSI did not represent an increase over her base salary for HSBC Finance Corporation, no further approvals were sought or obtained.
Because she served as President & Chief Executive Officer – Designate for only a portion of the year, Ms. Derickson did not receive an equity-based award with respect to her service to HUSI in 2006. In January 2006, REMCO met and considered the proposed equity-based awards for all HSBC executives and awarded Ms. Derickson Performance Shares with a grant date value of $2,500,003 with respect to Ms. Derickson’s services as an executive officer of HSBC Finance Corporation. In making the award, REMCO considered internal equity of compensation paid to management peers within HSBC and its subsidiaries and external benchmarking, as described above.
Under the Management Incentive Program, Ms. Derickson’s 2006 target annual incentive bonus opportunity was 100 percent of her base salary at December 31, 2006 and her maximum opportunity was 300 percent. In addition, pursuant to her employment agreement, described below, Ms. Derickson was entitled to a bonus guaranteed to be not less than $1,275,000. However, due to the disappointing results in the HSBC Finance Corporation Mortgage Services business, Ms. Derickson voluntarily waived her right to a guaranteed bonus under her employment agreement.
Other compensation paid to Ms. Derickson in 2006, including perquisites, such as life insurance premiums and social club membership fees, was consistent with perquisites paid to similarly-placed executive officers within and outside of HSBC.
Ms. Derickson had an employment agreement with HSBC Finance Corporation, which was to expire on March 28, 2008. Pursuant to her agreement, Ms. Derickson served as President and Chief Executive Officer of HUSI. The terms of that agreement are summarized below. As stated above, Ms. Derickson resigned as of February 20, 2007. The terms of the severance arrangements agreed with Ms. Derickson will be described in HUSI’s Annual Report on Form 10-K for the year ending December 31, 2007.
During the term of the employment agreement, Ms. Derickson was entitled to receive an annual base salary (which as of January 1, 2006 was increased to $700,000), and an annual bonus of at least $1,275,000 (75 percent of the annual average of her bonus earned in 2003, 2004 and 2005). During the term of the agreement, Ms. Derickson was eligible to participate in any equity-based incentive compensation plan or program of HSBC as in effect from time to time for similarly situated senior executives of HSBC Finance Corporation, as approved by REMCO. In addition, during the term of the agreement, Ms. Derickson was eligible to participate in the various retirement, medical, disability and life insurance plans, programs and arrangements in accordance with the terms of HSBC Finance Corporation’s benefit plans.
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Under the terms of the employment agreement, if Ms. Derickson’s employment was terminated during the term of the agreement other than for “cause” or disability, or she resigned for “good reason,” subject to her execution of a general release in favor of HSBC Finance Corporation and its affiliates, Ms. Derickson was to continue to receive her base salary and annual bonus described above as if she had remained employed until March 28, 2008. In addition, to the extent permitted under the terms of the applicable plans, Ms. Derickson’s welfare benefits, umbrella liability insurance and automobile and financial counseling allowances would continue until March 28, 2008, unless she became eligible to participate in similar plans of another employer prior to that date.
In 2003 and 2005, Ms. Derickson was awarded Retention Awards of HSBC restricted shares with values of $3.75 and $6 million, respectively, in each case based on the closing price of HSBC ordinary shares as of the date of the grant. The 2003 award was to vest in five equal installments on March 28 of each year through 2008. The 2005 award was to vest in five equal installments on March 26 of each year through 2010. Each award was to vest in full upon termination of Ms. Derickson’s employment other than for cause or, with respect to the 2003 award, by Ms. Derickson due to a material breach by HUSI of Ms. Derickson’s employment agreement, or with respect to the 2005 award, by Ms. Derickson for good reason.
Chief Executive Officer Compensation – Mr. Glynn
Martin J.G. Glynn retired as President and Chief Executive Officer as of December 31, 2006. Prior to his retirement, Mr. Glynn participated in the same programs and generally received compensation based on the same factors as the other executive officers. However, Mr. Glynn’s overall compensation level reflected his greater degree of policy and decision-making authority, his higher level of responsibility with respect to the strategic direction of HUSI, and his ultimate responsibility for HUSI’s financial and operational results. For 2006, Mr. Glynn’s compensation was comprised of base salary, non-equity incentive compensation (bonus), an additional cash payment in lieu of stock awards, an additional cash payment triggered by his retirement and perquisites.
In 2006, Mr. Glynn’s base salary remained at $700,000, the same as for 2005. For 2006, the Compensation Committee reviewed competitive compensation levels and found Mr. Glynn’s then current cash compensation level was in line with the 50th percentile among similarly-placed executives in our Comparator Group. In keeping with the goal of maintaining executive base salaries in the 50th percentile, it did not make an advisory recommendation to increase his salary.
In January 2006, REMCO approved the Compensation Committee’s advisory recommendation that Mr. Glynn receive a Performance Share award with a grant date value of $1,400,000. The award is subject to three-year performance vesting conditions. The vesting criteria of the Performance Shares are set out in Footnote 2 to the Grants of Plan-Based Awards Table on page 184. The grant reflected the view of the Compensation Committee and REMCO of the value of Mr. Glynn’s contribution to and leadership of HUSI and HSBC’s desire to incent outstanding performance.
Mr. Glynn’s cash incentive under the Management Incentive Program is determined based upon satisfaction of quantitative and qualitative objectives that provide for a target cash award equal to 100 percent of his base salary, up to a maximum of 300 percent of base salary. Mr. Glynn’s cash incentive compensation required satisfaction of objectives that included business goals related to HUSI’s profit before tax and initiates promoting diversity in employment, managing reputational risk and improving HUSI’s compliance environment. Management assessed Mr. Glynn’s and HUSI’s performance against the objectives and found that there was complete or substantial satisfaction of each objective. Mr. Glynn was awarded cash incentive compensation of $1,600,000, or approximately 230 percent of his base salary, which was paid to him in February 2007. This amount was consistent with the guaranteed cash incentive award provided for in Mr. Glynn’s agreement, as described below.
Other compensation paid to Mr. Glynn including perquisites, such as rent allowance, car allowance and related tax gross-ups, is consistent with perquisites paid to similarly-placed executive officers within and outside of HSBC.
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In connection with his retirement, Mr. Glynn entered into an agreement with HNAH on June 30, 2006. Pursuant to the terms of this agreement, Mr. Glynn received his regular base salary and benefits through his retirement on December 31, 2006. Mr. Glynn also received a full incentive bonus of $1,600,000 for 2006, which was paid in February 2007. He is also entitled to an additional cash payment of $616,000 in lieu of any equity-based award for 2006 and continued vesting of his outstanding equity-based awards as reflected in the Outstanding Equity Awards at Fiscal Year-End Table. Finally, Mr. Glynn received a lump sum payment of $6,600,000 for general employment benefits that would otherwise have accrued had he retired two years after December 31, 2006.
Chief Financial Officer Compensation
The Senior Executive Vice President & Chief Financial Officer of HUSI, John J. McKenna, participates in general benefits available to executives of HUSI and the Management Incentive Program. His cash compensation for 2006 was determined by Mr. Mehta, the HNAH Chief Executive Officer, upon recommendation of the Compensation Committee in consultation with HUSI Human Resources executives and the Chief Financial Officer of HNAH. As with all HUSI executives, REMCO has authority over Mr. McKenna’s Achievement Share awards. For 2006, Mr. McKenna’s compensation was comprised of base salary, non-equity incentive compensation (bonus), stock awards and perquisites.
Mr. McKenna’s base salary increased by $25,050 in February 2006, bringing his base salary to $325,050. In recommending Mr. McKenna’s base salary, the Compensation Committee and HUSI senior executives reviewed competitive compensation levels and found Mr. McKenna’s current compensation level was only slightly below the 50th percentile among similarly-placed executives at HUSI’s Comparator Group. The recommendation also reflected the company’s view of Mr. McKenna’s performance in 2005. The HNAH Chief Executive Officer agreed with the recommendation and approved the increase in Mr. McKenna’s base salary.
In March 2006, Mr. McKenna was granted Achievement Shares with a grant date value of $400,000, which vest in three years and have no performance conditions. This reflected management’s recognition of the value of Mr. McKenna’s contribution to and leadership of HUSI and HSBC’s desire to retain Mr. McKenna and to incent outstanding performance.
Mr. McKenna’s cash incentive under the Management Incentive Program is determined based upon satisfaction of quantitative and qualitative objectives that provide for a target cash award equal to 75 percent of his base salary, up to a maximum of 150 percent of base salary. Mr. McKenna’s cash incentive compensation required satisfaction of the quantitative and qualitative objectives described above for Mr. Glynn. Management assessed Mr. McKenna’s and HUSI’s performance against the objectives and found that there was complete or substantial satisfaction of each objective. Mr. McKenna was awarded cash incentive compensation of $381,934, or approximately 119 percent of his base salary, which was paid to him in February 2007.
Other compensation paid to Mr. McKenna, including perquisites such as life insurance premiums, is consistent with perquisites paid to similarly-placed executive officers within and outside of HSBC.
Joseph A. Belfatto Compensation
The Senior Executive Vice President and Head of Global Markets Americas, Joseph A. Belfatto, participates in general benefits available to executives of HUSI and the CIBM business. For 2006, Mr. Belfatto’s compensation was comprised primarily of base salary, non-equity incentive compensation (discretionary bonus award) and stock awards.
Mr. Belfatto’s total compensation increased by $20,000 in 2006, bringing his total compensation to $3,750,000. In recommending Mr. Belfatto’s compensation package to the Group Head of CIBM, CIBM senior management considered the performance of the CIBM business locally and globally and its judgment of competitive compensation levels within the relevant markets. The recommendation also reflected CIBM senior management’s view of Mr. Belfatto’s contribution to the business’s performance in 2005 and the desire to retain Mr. Belfatto within the CIBM business. The Head of CIBM agreed with senior management’s recommendation and approved the increase in Mr. Belfatto’s total compensation package.
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As described above, the allocation of compensation between base salary and incentive compensation within CIBM, as well as between long-term and short-term incentives, is recommended by senior management in its discretion and reviewed and approved by REMCO and/or the HSBC CEO. For 2006, Mr. Belfatto’s compensation package consisted of $250,000, or approximately seven percent of his total compensation, in base salary and $3,500,000, or approximately 93 percent, as a discretionary bonus award. Of the discretionary bonus award, Mr. Belfatto received $1,960,000 in cash and the balance will be deferred through a grant of restricted shares in March 2007 with a grant date value of $1,540,000. One-third of the shares vest on each of the first three anniversaries of the grant and have no performance conditions.
Other compensation paid to Mr. Belfatto, including perquisites, is consistent with perquisites paid to similarly-placed executive officers within and outside of HSBC.
Marlon Young Compensation
The Managing Director, Chief Executive Officer, Private Bank Americas, Marlon Young, participates in general benefits available to executives of HUSI and the Private Banking business. For 2006, Mr. Young’s compensation was comprised primarily of base salary, non-equity incentive compensation (discretionary bonus award) and stock awards.
Mr. Young was appointed Managing Director, Chief Executive Officer, Private Bank Americas, in March 2006. His total compensation for 2006 was $1,875,000, which included a $75,000 increase to his base salary in September 2006. In recommending Mr. Young’s compensation package, Group Private Banking senior management considered the performance of the Private Banking business locally and globally and the competitive compensation levels within the relevant markets. The recommendation also reflected management’s view of Mr. Young’s potential contribution to the business’s performance and HSBC’s desire to retain Mr. Young within Private Banking. The Chief Executive Officer, Group Private Banking agreed with senior management’s assessment and approved Mr. Young’s compensation package.
As described above, the allocation of compensation between base salary and incentive compensation within Private Banking, as well as between long-term and short-term incentives, is recommended by senior management in its discretion and reviewed and approved by REMCO. For 2006, Mr. Young’s compensation package consisted of $375,000, or 20 percent of his total compensation, in base salary and $1,500,000, or 80 percent, as a discretionary bonus award. Of the discretionary bonus award, Mr. Young received $750,000 in cash and the balance will be deferred through a grant of restricted shares in March 2007 with a grant date value of $750,000. One-third of the shares vest on each of the first three anniversaries of the grant and have no performance conditions. These amounts were consistent with the guaranteed cash incentive award provided for in Mr. Young’s offer letter, as described below.
Other compensation paid to Mr. Young, including perquisites, is consistent with perquisites paid to similarly-placed executive officers within and outside of HSBC.
In connection with his employment by HUSI in March 2006, HBUS extended an offer letter to Mr. Young defining the terms of his employment. Pursuant to the offer letter, Mr. Young is entitled to an annual salary of $300,000 and a guaranteed bonus of $1,000,000 for each of the 2006 and 2007 performance years, 50 percent of which is to be deferred through a grant of restricted shares. The offer letter also provided for additional annual bonuses to be awarded in the sole discretion of the company, subject to deferral pursuant to the Private Banking discretionary bonus program. The offer letter also defined the rights of the parties upon Mr. Young’s resignation or termination, which are described under below under Potential Payments upon Termination or Change-in-Control.
Janet L. Burak Compensation
The Senior Executive Vice President, General Counsel and Secretary of HUSI, Janet L. Burak, participates in general benefits available to executives of HUSI and the Management Incentive Program. Her cash compensation for 2006 was determined by Mr. Mehta, the HNAH Chief Executive Officer, upon recommendation of the Compensation Committee in consultation with HUSI Human Resources executives. As with all HUSI executives, REMCO has authority over Ms. Burak’s Achievement Share awards. For 2006, Ms. Burak’s compensation was comprised of base salary, non-equity incentive compensation (bonus), stock awards and perquisites.
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Ms. Burak’s base salary increased by $32,708 in February 2006, bringing her base salary to $400,208. In recommending Ms. Burak’s base salary, the Compensation Committee and HUSI senior executives reviewed competitive compensation levels and found Ms. Burak’s current compensation level was in line with the 50th percentile among similarly-placed executives at HUSI’s Comparator Group. The recommendation also reflected the company’s view of Ms. Burak’s performance in 2005. The HNAH Chief Executive Officer agreed with the recommendation and approved the increase in Ms. Burak’s base salary.
In March 2006, Ms. Burak was granted Achievement Shares with a grant date value of $500,000, which vest in three years and have no performance conditions. This reflected management’s recognition of the value of Ms. Burak’s expected long-term contribution to and leadership of HUSI and HNAH, and HSBC’s desire to retain Ms. Burak and to incent outstanding performance.
Ms. Burak’s cash incentive under the Management Incentive Program is determined based upon satisfaction of quantitative and qualitative objectives that provide for a target cash award equal to 100 percent of her base salary, up to a maximum of 200 percent of base salary. Ms. Burak’s cash incentive compensation required satisfaction of the quantitative and qualitative objectives described above for Mr. Glynn. Management assessed Ms. Burak’s and HUSI’s performance against the objectives and found that there was complete or substantial satisfaction of each objective. Ms. Burak was awarded cash incentive compensation of $735,383, or approximately 186 percent of her base salary, which was paid to her in February 2007.
Other compensation paid to Ms. Burak including perquisites, such as life insurance premiums, is consistent with perquisites paid to similarly-placed executive officers within and outside of HSBC.
Brendan McDonagh Compensation
Mr. McDonagh served as Chief Operating Officer of HUSI until December 1, 2006. For that portion of 2006, Mr. McDonagh participated in general benefits available to executives of HUSI and the Management Incentive Program and certain additional benefits available to HSBC’s international staff executives. As an HSBC Group General Manager, Mr. McDonagh’s cash compensation for 2006 was determined by REMCO upon advisory recommendation of the Compensation Committee in consultation with HSBC Human Resources executives. As with all HUSI executives, REMCO has authority over Mr. McDonagh’s equity-based awards. For 2006, Mr. McDonagh’s compensation was comprised of base salary, non-equity incentive compensation (bonus), stock awards and perquisites.
Mr. McDonagh’s base salary for 2006 was $676,553. In recommending Mr. McDonagh’s base salary to the Compensation Committee, HUSI and HNAH senior executives reviewed competitive compensation levels and found Mr. McDonagh’s current compensation level was below the 50th percentile among similarly-placed executives at HUSI’s Comparator Group. The recommendation also reflected the company’s view of Mr. McDonagh’s performance in 2005. The Compensation Committee agreed with management’s recommendation and made an advisory recommendation to REMCO. REMCO concurred with the Compensation Committee’s assessment and, as a result, Mr. McDonagh’s base salary was increased.
In January 2006, REMCO approved the Compensation Committee’s advisory recommendation that Mr. McDonagh receive a Performance Share award with a grant date value of $635,000. The award is subject to three-year performance vesting conditions. The vesting criteria of the Performance Shares are set out in Footnote 2 to the Grants of Plan-Based Awards Table on page 184. The grant reflects REMCO’s view of the value of Mr. McDonagh’s long-term contribution to and leadership of HSBC, including HUSI and HNAH, and HSBC’s desire to retain Mr. McDonagh and to incent exceptional performance.
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Under the Management Incentive Program, Mr. McDonagh’s 2006 target annual incentive bonus opportunity was 100 percent of his base salary at December 31, 2006 and his maximum opportunity was 200 percent. Mr. McDonagh’s cash incentive compensation was determined upon satisfaction of the quantitative and qualitative objectives described above for Mr. Glynn. Management assessed Mr. McDonagh’s and HUSI’s performance against the objectives and recommended a cash incentive compensation award equal to $720,000, or approximately 106 percent of his base salary, which was paid in February 2007. The Compensation Committee agreed with management’s assessment and made an advisory recommendation to REMCO that Mr. McDonagh receive this amount. REMCO concurred with the assessment and advisory recommendation of the Compensation Committee and approved the cash incentive compensation.
Mr. McDonagh received other compensation in 2006, including perquisites relating to housing, education, travel and tax equalization, that was significant when compared to other compensation received by other executive officers within HUSI. These amounts are consistent, however, with perquisites paid to similarly-placed HSBC international staff executives, who are subject to appointment to HSBC locations globally as deemed appropriate by HSBC senior management. The additional perquisites and benefits available to HSBC international staff executives, as described below in the Summary Compensation Table, are intended to compensate executives for the significant cost and expense incurred in connection with global postings.
Joseph M. Petri Compensation
Mr. Petri served as Senior Executive Vice President, Treasurer and Co-Head, CIBM Americas until August 5, 2006. For that portion of 2006, Mr. Petri participated in general benefits available to executives of HUSI and the CIBM business. For 2006, Mr. Petri’s compensation was comprised primarily of base salary, non-equity incentive compensation (discretionary bonus award) and a cash payment triggered by his retirement.
In 2006, Mr. Petri’s total compensation remained at $7,825,000, the same as for 2005. In recommending Mr. Petri’s compensation package to the Group Head of CIBM, CIBM senior management considered the performance of the CIBM business locally and globally and its judgment of competitive compensation levels within the relevant markets. The recommendation also reflected CIBM senior management’s view of Mr. Petri’s contribution to the business’s performance in 2005 and the desire to retain Mr. Petri within the CIBM business. The Head of CIBM agreed with senior management’s recommendation and made an advisory recommendation to REMCO to approve his compensation. REMCO concurred with the assessment and recommendation of CIBM management and approved Mr. Petri’s total compensation package.
Mr. Petri entered into a separation agreement with HBUS on August 1, 2006. Pursuant to the terms of his separation agreement, Mr. Petri received his regular base salary and benefits through his retirement on August 4, 2006. Mr. Petri received a lump sum payment of $146,339 as payment of the base salary that would have accrued for continued employment through December 31, 2006. He also received a lump sum payment of $3,960,000 in February 2007 in payment of the portion Mr. Petri’s minimum guaranteed bonus for 2006 not subject to deferral, and is entitled to receive the balance of his guaranteed bonus amount for 2006 through a grant of restricted shares with a grant date value of $3,540,000. In connection with Mr. Petri’s retirement, REMCO also approved the continued vesting of all outstanding restricted shares that have not yet vested, subject to any existing performance conditions.
Other compensation paid to Mr. Petri, including perquisites, is consistent with perquisites paid to similarly-placed executive officers within and outside of HSBC.
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Compensation Committee Interlocks and Insider Participation
The primary purpose of the Compensation Committee is to assist the Board of Directors in discharging its responsibilities related to the compensation of the Chief Executive Officer, other officers of HUSI holding a title of executive vice president and above and such other officers as may be designated by the Board of Directors. The Compensation Committee is comprised of the following directors: Dr. Frances D. Fergusson (Chair), Donald K. Boswell and James L. Morice. During 2006, with the exception of Mr. Glynn, the Compensation Committee was comprised of independent directors, as defined under HUSI’s Corporate Governance Standards. HUSI’s present intention is to maintain a Compensation Committee that consists entirely of independent directors.
Additional information with regard to the Compensation Committee, including a description of the committee’s responsibilities under its charter, is contained in the section of this Form 10-K entitled Item 10. Directors, Executive Officers and Corporate Governance – Board of Directors – Committees and Charters.
Compensation Committee Report
We, the Human Resources & Compensation Committee of the Board of Directors of HSBC USA Inc., have reviewed and discussed the Compensation Discussion and Analysis (“2006 CD&A”) set forth above with management and, based on such review and discussion, have recommended to the Board of Directors that the 2006 CD&A be included in this Annual Report on Form 10-K.
Human Resources & Compensation Committee
Dr. Frances D. Fergusson (Chair)
Donald K. Boswell
James L. Morice
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Item 11. Executive Compensation
The following tables and narrative text discuss the compensation awarded to, earned by or paid to (i) Ms. Derickson, who served as our Chief Executive Officer – Designate from September 1, 2006 to December 31, 2006, (ii) Mr. Glynn, who served as our Chief Executive Officer during 2006, (iii) Mr. McKenna, who served as our Chief Financial Officer during 2006, (iii) our three most highly compensated executive officers (other than the chief executive officer and chief financial officer) who were serving as executive officers as of December 31, 2006 and (iv) two additional individuals who served as executive officers during 2006, but were not serving as executive officers as of December 31, 2006.
Summary Compensation Table
Name and principal position | Year | | Salary | | Bonus (4) | Stock
Awards (5) | Option Awards
(6) | Non-Equity Incentive Plan Compensation (7) | Change in Pension Value and Nonqualified Deferred Compensation Earnings (8) | All Other Compensation
(9) | | Total |
Sandra L. Derickson (1) President &
Chief Executive Officer – Designate | 2006 | $ | 233,333 | $ | — | $ | — | $ - | $ | — | $ | 63,386 | $ | 192,632 | $ | 489,351 |
| | | | | | | | | | | | | | | | |
Martin J.G. Glynn (1)
President &
Chief Executive Officer | 2006 | | 700,000 | | — | | 1,976,008 | — | | 1,600,000 | | 1,899,593 | | 7,651,080 | (10) | 13,826,681 |
| | | | | | | | | | | | | | | | |
John J. McKenna
Senior Executive Vice President & Chief Financial Officer | 2006 | | 321,196 | | — | | 222,114 | — | | 381,934 | | 92,238 | | 16,685 | | 1,034,167 |
| | | | | | | | | | | | | | | | |
Joseph A. Belfatto
Senior Executive Vice President & Head, Global Markets Americas | 2006 | | 250,000 | | 1,960,000 | | 952,379 | — | | — | | 4,576 | | 20,763 | | 3,187,718 |
| | | | | | | | | | | | | | | | |
Marlon Young
Managing Director, CEO Private Bank Americas | 2006 | | 245,769 | | 750,000 | | 535,770 | — | | — | | — | | 1,463 | | 1,533,002 |
| | | | | | | | | | | | | | | | |
Janet L. Burak
Senior Executive Vice President, General Counsel & Secretary | 2006 | | 395,176 | | — | | 415,346 | — | | 736,383 | | 368,753 | | 92,597 | | 2,008,255 |
| | | | | | | | | | | | | | | | |
Brendan McDonagh (2)
Chief Operating Officer | 2006 | | 676,553 | | — | | 272,515 | — | | 720,000 | | 488,925 | | 635,401 | | 2,793,394 |
| | | | | | | | | | | | | | | | |
Joseph M. Petri (3)
Senior Executive Vice President, Treasurer and Co-Head, CIBM Americas | 2006 | | 206,250 | | 3,960,000 | | 5,420,744 | — | | — | | 4,576 | | 171,802 | (11) | 9,763,372 |
| (1) | Sandra L. Derickson was appointed President and Chief Executive Officer – Designate of HUSI as of September 1, 2006 and succeeded Mr. Glynn as President and Chief Executive Officer when he retired as of January 1, 2007. She resigned as President and Chief Executive Officer on February 20, 2007. The amount shown for Ms. Derickson is the pro rata portion of her annual base salary of $700,000. |
| (2) | Mr. McDonagh resigned his position as Chief Operating Officer of HUSI as of December 1, 2006, and was appointed Group Executive of HSBC Finance Corporation as of that date. |
| (3) | Mr. Petri retired as Senior Executive Vice President, Treasurer and Co-Head, CIBM Americas as of August 5, 2006. |
| (4) | The amounts disclosed for Messrs. Belfatto, Young and Petri represent the discretionary cash bonus relating to 2006 performance but paid in February 2007. |
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(5) | Reflects the amounts of compensation expense amortized in 2006 for accounting purposes under FAS 123R for outstanding restricted stock grants made in the years 2003 through 2006. HUSI did not record a compensation expense with respect to restricted stock grants made to Ms. Derickson by HSBC Finance Corporation during this period and prior to her appointment as President & Chief Executive Officer of HUSI. HSBC Finance Corporation recorded an expense with respect to those grants in 2006 in the amount of $2,720,809. |
A portion of the expense reflected for Messrs. Glynn and McDonagh relates to Performance Shares granted in 2005 and 2006 that will vest in whole or in part three years from the date of grant if all or some of the performance conditions are met, as follows: 50 percent of the award is subject to a total shareholder return measure (“TSR”) and will vest in whole or in part (based on a sliding scale of 0 to 100 percent) depending upon on how the growth in HSBC’s share value, plus declared dividends, compares to the average shareholder return of a defined competitor group, which for 2006 grants was comprised of 28 major banking institutions, including ABN AMRO Holding N.V., Banco Bilbao Vizcaya Argentaria, S.A., Banco Santander Central Hispano S.A., Bank of America Corporation, The Bank of New York Company, Inc., Barclays PLC, BNP Paribas S.A., Citigroup, Inc., Credit Agricole SA, Credit Suisse Group, Deutsche Bank AG, HBOS plc, JP Morgan Chase, Lloyds TSB Group plc, Mitsubishi Tokyo Financial Group Inc., Mizuho Financial Group Inc., Morgan Stanley, National Australia Bank Limited, Royal Bank of Canada, The Royal Bank of Scotland Group plc, Société Générale, Standard Chartered PLC, UBS AG, Unicredito Italiano, US Bancorp, Wachovia Corporation, Wells
Fargo & Company and Westpac Banking Corporation. The remaining 50 percent of the award is subject to satisfaction of an earnings per share measure (“EPS”) and may vest based on an incremental EPS percentage in accordance with a defined formula. If the aggregate incremental EPS is less than 24 percent, the EPS portion will be forfeited. If it is 52 percent or more, the EPS component will vest in full. We have reduced the amount of expense related to the Performance Shares that would have been recorded by 50 percent due to the probability of a 0 percent vest on the TSR portion and a 100 percent vest on the EPS portion for both years 2005 and 2006. HUSI records expense over the three-year period based on the fair value, which is 100 percent of the face value on the date of the award. The remaining grants are non-performance-based awards and are subject to various time vesting conditions as disclosed in the footnotes to the Outstanding Equity Awards at Fiscal Year End Table and will be released as long as the named executive officer is still in the employ of HUSI at the time of vesting. HUSI records expense based on the fair value over the vesting period, which is 100 percent of the face value on the date of the award. Dividend equivalents, in the form of cash or additional shares, are paid on all underlying shares of restricted stock at the same rate as paid to ordinary share shareholders.
(6) | The current philosophy of HSBC and HUSI, including within the CIBM and Private Banking businesses, is to reward executive officers with awards of restricted shares rather than stock options. Ms. Derickson received stock option awards from HSBC Finance Corporation in 2002 and from HSBC in 2003 and 2004, all of which were awarded prior to her appointment as President & Chief Executive Officer of HUSI. HUSI did not record a compensation expense with respect to those stock options in 2006. The amount of compensation expense amortized in 2006 by HSBC Finance Corporation for accounting purposes under FAS 123R with respect to these stock options was $787,646, which amount did not include any compensation expense amortization with respect to the outstanding stock options awarded in 2004. The methodology of the valuation of the outstanding Stock options awarded in 2002 and 2003 was based on a Black-Scholes model for each of the respective years. The stock options awarded to Ms. Derickson in 2004 are performance based with 100 percent of the condition tested against TSR in 2007. The amount of compensation expense amortized in 2006 with respect to the stock options awarded in 2004 has been excluded from the amounts shown because of the probability of the performance condition not being satisfied. The performance condition will be subject to a re-test in 2008, and again in 2009, and must be satisfied in order for the shares to vest. |
(7) | The amounts disclosed for Messrs. Glynn, McKenna and McDonagh and Ms. Burak represent the incentive bonus earned in 2006 but paid in February 2007 under the Management Incentive Program. |
(8) | The HSBC-North America (U.S.) Retirement Income Plan (“RIP”), the Household Supplemental Retirement Income Plan (“SRIP”), the HSBC Bank Supplemental Plans (“Excess Plans”), the HSBC Bank Canada Qualified and Non-Qualified Retirement Plans and the HSBC International Staff Retirement Benefit Scheme (Jersey) (“ISRBS”) are described under Savings and Pension Plans on page 190. |
Increase in values by plan for each participant are: Ms. Derickson – $5,453 (RIP), $57,933 (SRIP); Mr. Glynn – $150,274 (Canada Qualified), $1,749,319 (Canada Non-Qualified); Mr. McKenna – $54,991 (RIP), $37,247 (Excess); Mr. Belfatto – $4,576 (RIP); Ms. Burak – $40,402 (RIP), $328,351 (SRIP); Mr. McDonagh – $488,925 (ISRBS, net of mandatory 2006 contribution); and Mr. Petri – $4,576 (RIP).
(9) | Components of All Other Compensation are disclosed in the aggregate. All Other Compensation includes perquisites and other personal benefits received by each named executive officer, such as financial planning services, physical exams, club initiation fees, expatriate benefits and car allowances, to the extent such perquisites and other personal benefits exceeded $10,000 in 2006. The following itemizes perquisites and other benefits for each named executive officer who received perquisites and other benefits in excess of $10,000: Car allowances for Mr. Glynn were $13,800 and for Mr. McDonagh were $11,375 in 2006. The tax gross up on the car allowances were $12,138 and $9,406 respectively. Club Dues and Membership fees for Messrs. Glynn and McDonagh were $4,100 and $22,211, respectively, and for Ms. Derickson were $11,000. Executive Tax Services for Messrs. Glynn and McDonagh were each $500 excluding tax gross-ups of $458 and $84, respectively. Mr. Glynn was reimbursed for approximately $52,500 in Legal Fees and Expenses in 2006. Financial Counseling expenses for Ms. Derickson were $4,000 in 2006. Ms. Derickson received Executive Umbrella Liability Coverage in the amount of $1,850 for 2006. In 2006, Mr. Glynn had $177,600 in Rent Allowance, excluding a tax gross up of $150,522. In 2006, Mr. McDonagh had $90,233 in Children’s Education Allowance and a corresponding tax gross-up of $75,332, $17,663 in a Relocation Allowance, $75,000 for Rent Allowance and a corresponding tax gross-up of $62,615, $122,383 in Housing and Furniture Allowance and a corresponding tax gross-up of $25,575, $72,454 in Executive Travel Allowance, a $16,879 Loan Subsidy and $33,690 of Additional Income. |
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The total in the All Other Compensation column includes life insurance premiums paid by HUSI in 2006 for the benefit of executives, as follows: Ms. Derickson, $7,782; Mr. Glynn, $12,462; Mr. McKenna, $1,992; Mr. Belfatto, $7,782; Mr. Young, $1,463; Mr. Petri, $5,088 and Ms. Burak, $6,973. All Other Compensation also includes HUSI’s contribution for the named executive officer’s participation in the HSBC-North America (U.S.) Tax Reduction Investment Plan (“TRIP”) in 2006, as follows: Mr. Glynn, Mr. Petri, Ms. Derickson and Ms. Burak each had an $11,000 contribution; Mr. McKenna had a $12,308 contribution and Mr. Belfatto had a $12,980 contribution. In addition, Ms. Derickson and Ms. Burak each had a company contribution in the Supplemental Tax Reduction Investment Plan (“STRIP”) of $157,000 and $68,466 respectively, in 2006. TRIP and STRIP are described under Savings and Pension Plans – Deferred Compensation Plans on page 194.
| (10) | Pursuant to an agreement with HNAH entered into in connection with his retirement, Mr. Glynn received $7,216,000 in additional cash compensation. This included $6,600,000 for general employment benefits that would otherwise have accrued had he retired two years after December 31, 2006, and $616,000 as compensation for any equity-based award that would have been awarded in 2007. See Chief Executive Officer Compensation – Mr. Glynn in the 2006 CD&A for a description of Mr. Glynn’s agreement. |
| (11) | In 2006, Mr. Petri received $155,714 in additional compensation, which included payment for general employment benefits that would otherwise have accrued had his employment continued through 2006. Mr. Petri is also entitled to receive restricted shares with a grant date value of $3,540,000 as part of his 2006 bonus compensation. The shares vest 33 1/3 percent over the first three anniversaries from the date of grant and forfeit only if Mr. Petri violates the terms of his separation agreement. See Joseph M. Petri Compensation in the 2006 CD&A for a description of Mr. Petri’s separation agreement. |
Grants Of Plan-Based Awards Table
Name
|
Grant Date
|
Estimated Future Payouts Under
Non-Equity Incentive Plan Awards (1)
|
Estimated Future Payouts Under
Equity Incentive Plan Awards (2)
| All Other Stock Awards: Number of Shares of Stock or Units (#) | All Other Option Awards: Number of Securities Underlying Options
(#) |
Exercise or Base Price of Option Awards
($/Sh)
|
Grant Date Fair Value of Stock and Option Awards
($) (2) (3)
|
Threshold ($) | Target ($) | | Threshold
(#) (4) | Target (#) | Maximum (#) |
Sandra L. Derickson | N/A | N/A | $700,000 | $2,100,000 | N/A | N/A | N/A | N/A | N/A | N/A | N/A |
President &
Chief Executive Officer – Designate | | | | | | | | | | | |
Martin J.G. Glynn | 3/6/2006 | N/A | 700,000 | 2,100,000 | 23,329 | N/A | 77,766 | N/A | N/A | N/A | $1,400,000 |
President &
Chief Executive Officer | | | | | | | | | | | |
John J. McKenna | 3/31/2006 | N/A | 243,788 | 487,575 | N/A | N/A | N/A | 23,612 | (5) | N/A | N/A | 414,785 |
Senior Executive Vice President & Chief Financial Officer | | | | | | | | | | | |
Joseph A. Belfatto | 3/6/2006 | N/A | N/A | N/A | N/A | N/A | N/A | 83,178 | (5) | N/A | N/A | 1,440,000 |
Senior Executive Vice President and Head, Global Markets Americas | | | | | | | | | | | |
Marlon Young | 4/28/2006 | N/A | N/A | N/A | N/A | N/A | N/A | 86,304 | (5) | N/A | N/A | 1,489,905 |
Managing Director, CEO Private Bank Americas | | | | | | | | | | | |
Janet L. Burak | 3/31/2006 | N/A | 400,208 | 800,416 | N/A | N/A | N/A | 29,513 | (5) | N/A | N/A | 518,447 |
Senior Executive Vice President, General Counsel & Secretary | | | | | | | | | | | |
Brendan McDonagh | 3/6/2006 | N/A | 676,453 | 1,353,106 | 10,596 | N/A | 35,319 | N/A | N/A | N/A | 635,839 |
Chief Operating Officer | | | | | | | | | | | |
Joseph M. Petri | 3/6/2006 | N/A | N/A | N/A | N/A | N/A | N/A | 204,479 | (5) | N/A | N/A | 3,539,993 |
Senior Executive Vice President, Treasurer and Co-Head, CIBM Americas | | | | | | | | | | | |
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(1) | Pursuant to her employment agreement, Ms. Derickson was entitled to a bonus guaranteed to be not less than $1,275,000. As discussed in the 2006 CD&A, Ms. Derickson’s actual award was $0. |
Messrs. Glynn, McKenna and McDonagh and Ms. Burak participate in the Management Incentive Program. As discussed in the 2006 CD&A, the Management Incentive Program is an annual cash incentive plan that is comprised of both quantitative and qualitative individual, business unit or company objectives that are determined at the beginning of the year with each objective being assigned a target and maximum payout based upon a percentage of base salary. The percentage of target and maximum payout is determined by market data for the position the executive officer holds and will not change unless the executive officer changes into a position that has a different target and maximum payout. Typically, the maximum payout is a 1x, 2x or 3x multiplier of target. Actual awards for the 2006 performance year for Messrs. Glynn, McKenna and Mr. McDonagh and Ms. Burak were $1,600,000, $381,934, $720,000 and $736,383, respectively, and were paid in February 2007. These amounts are included in the Summary Compensation Table above under “Non-Equity Incentive Plan Compensation”.
(2) | Does not reflect the award of Performance Shares granted to Ms. Derickson on March 6, 2006 while an executive with HSBC Finance Corporation and prior to her appointment as President and Chief Executive Officer of HUSI, the estimated future payouts under which are 41,660 (Threshold) and 138,868 (Maximum). The total grant date fair value for these Performance Shares is $2,500,003, which amount is based on 100 percent of the fair market value of the underlying HSBC ordinary shares on March 6, 2006 (the date of grant) of GBP9.909706 and converted into U.S. dollars using the GBP exchange rate at the time of funding of the grant (1.816677). |
Reflects the award of Performance Shares granted to Messrs. Glynn and McDonagh. As discussed in the 2006 CD&A and in Footnote 5 to the Summary Compensation Table, Performance Shares are subject to two performance conditions, each of which triggers a potential payout of 50 percent of the aggregate award. The first objective is based upon total shareholder return (“TSR”) and the second objective is based upon earnings per share (“EPS”), both measured over a three-year performance period. TSR means the growth in share value and declared dividend income on HSBC ordinary shares, measured in Sterling, during the three-year performance period and is based on HSBC’s ranking against a comparator group of 28 major banks, as listed on page 171. The calculation of the share price component within HSBC’s TSR will be the average market price over the 20 dealing days commencing on the day when HSBC’s annual results are announced with the end point being the average market price over the 20 dealing days commencing on the day on which the annual results of HSBC are announced three years later. The TSR portion of the award will vest on a sliding scale based on HSBC’s relative ranking against the comparator group at the end of the three year period. If HSBC is ranked 1st through 7th, the vesting percentage will be 100 percent. If HSBC is ranked 8th through 14th, the vesting percentage will fall by 10 percent per rank. If HSBC is ranked 15th through 28th, the vesting percentage will be zero. The percentage of the TSR portion of the award that will vest is defined in the following formula:
{(X-Z) x (A-B)} + B
------
(Y-Z)
where:
X = the TSR performance of HSBC
Z = the TSR performance of the bank immediately below X
Y = the TSR performance of the bank immediately above X
A = the vesting percentage linked to the ranking of Y as detailed above
B = the vesting percentage linked to the ranking of Z as detailed above
The second performance condition is based upon EPS, which for purposes of awarding Performance Shares is the profit attributable to shareholders, divided by the weighted average number of shares in issue and held outside of HSBC during the performance year. The base measure will be the EPS for the financial year preceding that in which the award is made. EPS will then be compared over the three consecutive financial years commencing with the year in which the award is made. Incremental EPS will be calculated by expressing, as a percentage of the EPS of the base year, the difference each year of the measurement period between the EPS of that year and the EPS of the base year. These percentages will be aggregated to arrive at the total incremental EPS for the measurement period. The percentage of the EPS objective that will vest will be determined in accordance with the following formula: 30+2.5(X-24) where: 30 percent is the minimum proportion of the objective that may vest and X is the aggregate incremental EPS from the base year to the end of the measurement period between and including 24 percent and 52 percent. If the aggregate incremental EPS in accordance with the formula is less than 24 percent then the EPS objective will be forfeited. If it is more than 52 percent, then the EPS objective will vest in full.
For all plans, additional shares are awarded in amounts equivalent to the same dividend rate on ordinary shares.
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(3) | The total grant date fair value reflected for Messrs. Glynn and McDonagh is based on 100 percent of the fair market value of the underlying HSBC ordinary shares on March 6, 2006 (the date of grant) of GBP9.909706 and converted into U.S. dollars using the GBP exchange rate as of the time of funding the grant (1.816677). The total grant date fair value reflected for Mr. McKenna and Ms. Burak is based on 100 percent of the fair market value of the underlying HSBC ordinary shares on March 31, 2006 (the date of grant) of GBP9.6697 and converted into U.S. dollars using the GBP exchange rate as of the time of funding the grant (1.816677). The total grant date fair value reflected for Messrs. Belfatto and Petri is based on 100 percent of the fair market value of the underlying HSBC ordinary shares on March 6, 2006 (the date of grant) of GBP 9.909706 and converted into U.S. dollars using the GPB exchange rate at the time of purchase (1.747). The total grant date fair value reflected for Mr. Young is based on 100 percent of the fair market value of the underlying HSBC ordinary shares on April 28, 2006 (the date of grant) of GBP 9.475 and converted into U.S. dollars using the GPB exchange rate at the time of purchase (1.822). |
(4) | As described in Footnote 2 above, the executives could receive no awards under the equity incentive plan. However, the numbers presented under “Threshold” represent the minimum awards the executives could receive if the minimum (i.e., 30%) of either of the performance conditions is met. |
(5) | Reflects awards of Achievement Shares granted to Mr. McKenna and Ms. Burak, which awards consist of shares of restricted stock that vest in full at the end of a three-year period from the date of grant. The award amount of Achievement Shares is based on the executive officer’s position within the organization, base salary, performance rating and scope for growth. At the executive level, officers eligible to receive Achievement Shares are eligible for awards ranging from 50 percent up to 300 percent of base salary. |
Reflects awards of restricted shares to Messrs. Belfatto and Petri on March 6, 2006 and to Mr. Young on April 28, 2006, which awards consist of shares of restricted stock that vest one-third on each of the first three anniversaries of the date of grant. As described in the 2006 CD&A, a portion of the executive’s annual discretionary bonus award is deferred through the award of restricted shares. The minimum deferral threshold, or the portion of each bonus award paid in restricted shares, and vesting schedules may vary by business unit within the parameters set by CIBM and Private Banking, as applicable, for their businesses and approved by REMCO.
Reflects awards of restricted shares to Mr. Young in connection with his employment by HUSI, which were granted to compensate Mr. Young for previous equity awards forfeited when he joined HUSI. These awards consist of shares of restricted stock that vest one-third on each of the first three anniversaries of the date of grant.
For all plans, additional shares are awarded in amounts equivalent to the same dividend rate on ordinary shares.
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Outstanding Equity Awards At Fiscal Year-End Table
| Option Awards | Stock Awards |
Name | Number of Securities Underlying Unexercised Options (#) Exercisable | | Number of Securities Underlying Unexercised Options (#) Unexercisable | Equity Incentive Plan Awards:
Number of Securities Underlying Unexercised Unearned Options (#) | Option Exercise Price | Option Expiration Date | Number of Shares or Units of Stock That Have Not Vested (#) (1) | | Market Value of Shares or Units of Stock that Have Not Vested
($) (2) | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) (1) | | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) (2) |
| | | | | | | | | | | | |
Sandra L. Derickson (3) | 107,000
133,750 | (4)
(4) | | | $18.40
$21.37 | 11/13/2010
11/12/2011 | 141,421
302,481 | (7)
(8) | $2,578,105
$5,514,229 | 158,399
138,868 | (9)
(10) | $2,887,614
$2,531,564 |
President &
Chief Executive
Officer – Designate | 267,500
153,000 | (4)
(5) |
51,000 (5)
|
102,000 (6)
| $10.66
GBP9.1350
GBP8.2830 | 11/20/2012
11/03/2013
04/30/2014 | | | | | | |
| | | | | | | | | | | | |
Martin J.G. Glynn
President & | | | | | | | | | | 25,434
34,339 | (11)
(12) | $463,662
$626,000 |
Chief Executive Officer | | | | | | | | | | 46,659
21,602 | (9)
(10) | $850,594
$393,804 |
| | | | | | | | | | | | |
John J. McKenna
Senior Executive Vice President & Chief Financial Officer | | | | | | | 9,456
23,612 | (13)
(14) | $172,383
$430,429 | 8,280
8,697 | (15)
(16) | $150,944
$158,546 |
| | | | | | | | | | | | |
Joseph A. Belfatto
Senior Executive | | | | | | | 37,562
22,567 | (17)
(18) | $684,755
$411,396 | | | |
Vice President and Head, Global Markets Americas | | | | | | | 2,594
83,178 | (19)
(20) | $47,289
$1,516,335 | | | |
| | | | | | | | | | | | |
Marlon Young
Managing Director, | | | | | | | 31,778
24,898 | (21)
(22) | $579,313
$453,891 | | | |
CEO Private Bank Americas | | | | | | | 29,628 | (23) | $540,118 | | | |
| | | | | | | | | | | | |
Janet L. Burak
Senior Executive | 26,750
26,750 | (4)
(4) | | | $13.71
$16.96 | 11/9/2008
11/8/2009 | 5,351
13,334 | (24)
(25) | $97,548
$243,079 | 20,004 | (26) | $364,673 |
Vice President, General Counsel & Secretary | 26,750 | (4) | | | $18.40 | 11/13/2010 | 31,678
29,513 | (13)
(14) | $577,490
$538,022 | | | |
| | | | | | | | | | | | |
Brendan McDonagh | 18,900
9,000 | (4)
(4) | | | GBP6.3754
GBP6.2767 | 3/29/2009
3/16/2008 | 11,392 | (27) | $207,676 | 14,612
15,259 | (15)
(16) | $266,377
$278,172 |
Chief Operating Officer | | | | | | | | | | 23,734
35,319 | (9)
(10) | $432,671
$643,865 |
| | | | | | | | | | | | |
Joseph M. Petri
Senior Executive | | | | | | | 77,818
111,487 | (19)
(17) | $1,418,622
$2,032,408 | 9,176
8,526 | (15)
(16) | $167,278
$155,429 |
Vice President, Treasurer and Co-Head, CIBM Americas | | | | | | | 204,479 | (20) | $3,727,652 | | | |
(1) | Share amounts do not include additional awards accumulated over the vesting periods. |
(2) | The market value of the shares on December 29, 2006 was GBP9.31 and the exchange rate from GBP to U.S. dollars was 1.958, which equates to a U.S. dollar share price of $18.23 per share. |
(3) | All amounts shown for Ms. Derickson reflect equity awards received while an executive of HSBC Finance Corporation and prior to her appointment as President & Chief Executive Officer of HUSI. |
(4) | Reflects fully vested options. Options shown for Ms. Burak reflect equity awards received while employed by HSBC Finance Corporation and prior to her appointment as Senior Executive Vice President, General Counsel and Secretary of HUSI. Options shown for Mr. McDonagh reflect equity awards received from HSBC prior to his appointment to HUSI. |
186
(5) | Seventy-five percent of this award vested on November 3, 2006. The remaining 25 percent will vest on November 3, 2007. |
(6) | This award will vest in full, subject to satisfaction of performance conditions, on the third anniversary of the date of grant, which was April 30, 2004. If the performance conditions are not satisfied on the third anniversary, the performance conditions will be re-tested on the fourth and fifth anniversaries of the date of grant. If the performance conditions are not met on the fifth anniversary of the date of grant, the options will be forfeited. |
(7) | Twenty percent this award vested on each of March 31, 2004, March 31, 2005 and March 31, 2006. Twenty percent of the award will vest on each of March 30, 2007 and May 31, 2008. |
(8) | Twenty percent of this award vested on May 26, 2006. Twenty percent of this award will vest on each of May 25, 2007, May 26, 2008, May 26, 2009 and May 26, 2010. |
(9) | These awards will vest in part or in full on March 31, 2008 if performance conditions are met. For Mr. Glynn, the amount of the award was pro-rated based on the number of months between date of grant and date of retirement divided by 36, pursuant to the terms of the agreement entered into in connection with his retirement. |
(10) | These awards will vest in part or in full on March 31, 2009 if performance conditions are met. For Mr. Glynn, the amount of the award was pro-rated based on the number of months between date of grant and date of retirement divided by 36, pursuant to the terms of the agreement entered into in connection with his retirement. |
(11) | These awards vest in full on March 31, 2007 if performance conditions are met. If the performance conditions are not met, the performance conditions will be re-tested on March 31, 2008 and, if met, the shares will vest in full. If the performance conditions are not met, the shares will be forfeited. |
(12) | This award vests in full on March 31, 2007 if performance conditions are met. If the performance conditions are not met, the shares will be forfeited. |
(13) | These awards vest in full on March 31, 2008. |
(14) | These awards vest in full on March 31, 2009. |
(15) | These awards vest in full five years from date of grant (April 2, 2003) if performance conditions are met as of the third, fourth or fifth anniversary of the date of grant. If performance conditions are not met on the fifth anniversary of the date of grant, the shares will be forfeited. |
(16) | These awards vest in full on the fifth anniversary of the date of grant (April 1, 2004) if performance conditions are met as of the third anniversary of the date of grant. If performance conditions are not met, the shares will be forfeited with no re-test provision. |
(17) | Thirty-three percent of these awards vested on March 6, 2006. Thirty-three percent will vest on announcement of 2006 annual results in 2007 and the remaining 34 percent will vest on announcement of 2007 annual results in 2008. |
(18) | Fifty percent of this award vested on February 28, 2005 and the remaining 50 percent will vest on announcement of 2006 annual results in 2007. |
(19) | Thirty-three percent of this award vested on February 28, 2005 and 33 percent vested on March 6, 2006. The remaining 34 percent will vest on announcement of 2006 annual results in 2007. |
(20) | Thirty-three percent of these awards will vest on March 5, 2007, 33 percent will vest on February 28, 2008 and 34 percent will vest on February 28, 2009. |
(21) | Forty-three percent of this award will vest on January 31, 2007, 22 percent will vest on each of January 31, 2008 and 2009 and 13 percent will vest on January 31, 2010. |
(22) | This award will vest in full on January 31, 2009. |
(23) | This award will vest in full on April 30, 2009. |
(24) | Thirty-three percent this award vested on November 21, 2005 and 33 percent vested on November 20, 2006. The remaining 34 percent of this award will vest on November 20, 2007. |
(25) | Thirty-three percent of this award vested on October 31, 2006. Thirty-three percent of the award will vest on each of October 31, 2007 and 2008. |
(26) | Thirty-three percent of this award will vest on each of the third, fourth and fifth anniversaries of the date of grant (April 30, 2004) if performance conditions are satisfied as of the third anniversary of the date of grant. If the performance conditions are not met as of the third anniversary, the performance conditions will be re-tested on the fourth and fifth anniversaries of the date of grant. If the performance conditions are not met as of the fifth anniversary of the date of grant, the shares will be forfeited. |
(27) | This award vests in full on April 16, 2007. |
187
Option Exercises and Stock Vested Table
| Option Awards | | Stock Awards |
Name
| Number of Shares Acquired on Exercise(#) | | Value Realized
on Exercise
($) (1) | | Number of Shares Acquired on Vesting
(#) (2) | | Value Realized on Vesting
($) (1) |
Sandra L. Derickson | | | | | 161,201 | (3) | $2,769,142 |
President &
Chief Executive Officer – Designate | | | | | | | |
| | | | | | | |
Martin J.G. Glynn | | | | | 34,936 | (4) | 580,052 |
President &
Chief Executive Officer | | | | | | | |
| | | | | | | |
John J. McKenna | 26,600 | (5) | $129,162 | | | | |
Senior Executive Vice President & Chief Financial Officer | | | | | | | |
| | | | | | | |
Joseph A. Belfatto | | | | | 47,497 | (6) | 819,080 |
Senior Executive Vice President and Head, Global Markets Americas | | | | | | | |
| | | | | | | |
Marlon Young | | | | | | | |
Managing Director, CEO Private Bank Americas | | | | | | | |
| | | | | | | |
Janet L. Burak | | | | | 12,017 | (7) | 226,653 |
Senior Executive Vice President, General Counsel & Secretary | | | | | | | |
| | | | | | | |
Brendan McDonagh | 6,000 | (8) | 51,335 | | 11,843 | (9) | 211,649 |
Chief Operating Officer | | | | | | | |
| | | | | | | |
Joseph M. Petri | | | | | 254,908 | (10) | 4,408,267 |
Senior Executive Vice President, Treasurer and Co-Head, CIBM Americas | | | | | | | |
(1) | Value realized on exercise or vesting uses the GBP fair market value on the date of exercise/release and the exchange rate from GBP to U.S. dollars on the date of settlement. |
(2) | Includes the release of additional awards accumulated over vesting period. |
(3) | The amount shown for Ms. Derickson reflects equity awards received while an executive of HSBC Finance Corporation and prior to her appointment as President and Chief Executive Officer of HUSI and includes the release of 70,710 shares granted on April 15, 2003 and 75,620 shares granted on May 26, 2005. The remaining shares reflect the release of additional awards accumulated over the vesting period. |
(4) | Includes the release of 9,829 shares granted on April 30, 2001 and 18,123 shares granted on March 8, 2002. Remaining shares are release of additional awards accumulated over the vesting period. |
(5) | Includes the exercise of stock options granted on March 24, 1997 (3,000), March 16, 1998 (4,500), March 29, 1999 (9,600), April 3, 2000 (3,000) and April 23, 2001 (6,500). |
(6) | Includes the release of 18,781 shares granted on February 28, 2005, 2,594 shares granted on March 8, 2004 and 21,949 shares granted on March 13, 2003. Remaining shares are release of additional awards accumulated over the vesting period. |
(7) | Includes the release of 5,350 shares granted on November 20, 2002 and 6,667 shares granted on November 3, 2003. |
(8) | Includes the exercise of stock options granted on March 24, 1997 from HSBC prior to his appointment to HUSI. |
188
(9) | Includes the release of 7,645 shares granted on April 30, 2001 and 2,061 shares granted on May 12, 2003. Remaining shares are release of additional awards accumulated over the vesting period. |
(10) | Includes release of 5,461 shares granted on April 30, 2001, 7,595 shares granted on April 15, 2002, 83,173 shares granted on March 13, 2003, 77,817 shares granted on March 8, 2004 and 55,743 shares granted on February 28, 2005. Remaining shares are release of additional awards accumulated over the vesting period. |
Pension Benefits
Name | Plan Name (1) | Number of Years Credited Service (#) | Present Value
of Accumulated
Benefit ($) | Payments
During Last
Fiscal Year ($) |
| | | | |
Sandra L. Derickson | RIP-Account Based | 6.3 | $30,539 | $0 |
President &
Chief Executive Officer – Designate | SRIP-Account Based | 6.3 | $195,884 | $0 |
| | | | |
Martin J.G. Glynn (2) | Canada Qualified | 24.1 | $528,375 | $0 |
President &
Chief Executive Officer | Canada Non-Qualified | 24.1 | $4,785,734 | $0 |
| | | | |
John J. McKenna (3) | RIP-HSBC Old | 20.2 | $261,473 | $0 |
Senior Executive Vice President & Chief Financial Officer | Excess-HSBC Old | 20.2 | $37,247 | $0 |
| | | | |
Joseph A. Belfatto | RIP-Account Based | 4.6 | $8,776 | $0 |
Senior Executive Vice President and Head, Global Markets Americas | | | | |
| | | | |
Marlon Young (4) | RIP-Account Based | 0.8 | $0 | $0 |
Managing Director, CEO Private Bank Americas | SRIP-Account Based | 0.8 | $0 | |
| | | | |
Janet L. Burak | RIP-Household New | 14.8 | $280,648 | $0 |
Senior Executive Vice President, General Counsel & Secretary | SRIP-Household New | 14.8 | $927,033 | $0 |
| | | | |
Brendan McDonagh (5) | ISRBS | 26.0 | $2,634,208 | $0 |
Chief Operating Officer | | | | |
| | | | |
Joseph M. Petri | RIP-Account Based | 6.7 | $8,776 | $0 |
Senior Executive Vice President, Treasurer and Co-Head, CIBM Americas | | | | |
(1) | Plan described under Savings and Pension Plans below. |
(2) | Value reflects January 1, 2007 retirement and actual benefit election. |
(3) | Value of age 65 benefit. At age 60, participant would be eligible for unreduced early retirement, and accrued benefit has a present value of $389,571 (RIP) and $55,432 (SRIP). |
(4) | Not yet a participant; will participate upon completion of one year of service. |
(5) | Value of age 53 benefit. Participant is also eligible for an immediate early retirement benefit with value of $3,130,166. |
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Savings and Pension Plans
Retirement Income Plan (RIP)
The HSBC-North America (U.S.) Retirement Income Plan (“RIP”) is a non-contributory, defined benefit pension plan for employees of HSBC North America and its U.S. subsidiaries who are at least 21 years of age with one year of service and not part of a collective bargaining unit. Benefits are determined under a number of different formulas that vary based on year of hire and employer.
Supplemental Retirement Income Plan (SRIP)
HSBC Bank (HBUS) Supplemental Plans (Excess Plans)
Supplemental Retirement Income Plan (“SRIP”) is a non-qualified retirement plan that is designed to provide benefits that are precluded from being paid to legacy Household employees by the RIP due to legal constraints applicable to all qualified plans. The HBUS Supplemental Benefit Plan and the Benefit Equalization Plan (the “Excess Plans”) are designed to provide benefits that are precluded from being paid to legacy HBUS employees by the defined benefit formula under the Retirement Income Plan (RIP) due to legal constraints applicable to all qualified plans. For example, the maximum amount of compensation during 2006 that can be used to determine a qualified plan benefit is $220,000 and the maximum annual benefit commencing at age 65 in 2006 is $175,000. SRIP and Excess Plan benefits are calculated without regard to these limits. The resulting benefit is then reduced by the value of qualified benefits payable by RIP so that there is no duplication of payments. Benefits are paid in a lump sum for retired executives covered by a Household Old, Household New, or Account Based Formula, and in the same manner as elected for the qualified plan for executives covered by a HBUS Old or New Plan Formula.
Formulas for Calculating Benefits
HBUS Old Plan Formula: Applies to executives who were participants in the HBUS pension plan before January 1, 1989. The normal retirement benefit is the sum of A and B below:
| A. | A benefit determined under the HBUS New Plan Formula, provided service for this purpose is limited to 30 years reduced by years of service used in B. |
| B. | A benefit determined by multiplying (a) by (b) as described below: |
| (a) | The gross benefit prior to offset by an integration amount is equal to two percent of average salary multiplied by the first 30 years of service. This gross benefit is then reduced by an integration amount equal to 2/3 of one percent of Social Security multiplied by the first 30 years of service. However, the integration amount cannot reduce the gross benefit by more than 50 percent. Average salary, service, and Social Security for the gross benefit and integration amount are determined as of December 31, 1988. |
| (b) | The benefit in (a) is multiplied by a fraction (but not less than one), the numerator of which is average salary at date of retirement and the denominator is average salary on December 31, 1988. |
For this purpose, salary includes base wages but excludes bonuses. The formula uses an average of salaries for the 60 highest consecutive months selected from the 120 consecutive months preceding date of retirement. Executives who are at least age 60 with 30 or more years of service are eligible to retire with unreduced benefits. Executives who are at least age 55 with 10 or more years of service may retire before age 65 in which case the benefit is reduced 3/12 of one percent for the first 60 months and 5/12 of one percent for the next 60 months that payment precedes age 65.
190
HBUS New Plan Formula: Applies to executives who were hired prior to January 1, 1997 by HBUS and became participants in the pension plan after December 31, 1988. The normal retirement benefit at age 65 is the sum of (i) 1.55 percent of average salary and (ii) 0.4 percent of average salary in excess of the integration amount. The total of (i) and (ii) is then multiplied by the first 30 years of service. For this purpose, the integration amount is an average of the Social Security taxable wage bases for the 35 year period ending with the year in which full benefits are available; any such wage bases that have to be estimated are based on the current wage base for the year of retirement. Salary includes base wages but excludes bonuses. The formula uses an average of salaries for the 60 highest consecutive months selected from the 120 consecutive months preceding date of retirement. Executives who are at least age 60 with 30 or more years of service are eligible to retire with unreduced benefits. Executives who are at least age 55 with 10 or more years of service may retire before age 65 in which case the benefit is reduced 3/12 of one percent for the first 60 months and 5/12 of one percent for the next 60 months that payment precedes age 65.
Household Old Formula: Applies to executives who were hired prior to January 1, 1990 by Household International. The benefit at age 65 is determined under whichever formula, A or B below, provides the higher amount.
| A. | The normal retirement benefit at age 65 is the sum of (i) 51 percent of average salary that does not exceed the integration amount and (ii) 57 percent of average salary in excess of the integration amount. For this purpose, the integration amount is an average of the Social Security taxable wage bases for the 35 year period ending with the year of retirement. The benefit is reduced pro rata for executives who retire with less than 15 years of service. If an executive has more than 30 years of service, the benefit percentages in the formula, (the 51 percent and 57 percent) are increased 1/24 of 1 percentage point for each month of service in excess of 30 years, but not more than 5 percentage points. The benefit percentages are reduced for retirement prior to age 65. |
| B. | The normal retirement benefit at age 65 is determined under (a) below, limited to a maximum amount determined in (b): |
| (a) | 55 percent of average salary, reduced pro rata for less than 15 years of service, and increased 1/24 of 1 percentage point for each month in excess of 30 years, but not more than 5 percentage points; the benefit percentage of 55 percent is reduced for retirement prior to age 65. |
| (b) | The amount determined in (a) is reduced as needed so that when added to 50 percent of the primary Social Security benefit, the total does not exceed 65 percent of the average salary. This maximum is applied for payments following the age at which full Social Security benefits are available. |
Both formulas use an average of salaries for the 48 highest consecutive months selected from the 120 consecutive months preceding date of retirement; for this purpose, salary includes total base wages and bonuses.
For executives who were participants on January 1, 1978, had attained age 35 and had at least 10 years of employment, the minimum normal retirement benefit is 55 percent of final average salary. For this purpose, salary does not include bonuses and the average is based on 60 consecutive months, rather than 48.
Executives who are at least age 50 with 15 years of service or at least age 55 with 10 years of service may retire before age 65, in which case the benefits are reduced.
191
Household New Formula: Applies to executives who were hired after December 31, 1989, but prior to January 1, 2000, by Household International. The normal retirement benefit at age 65 is the sum of (i) 51 percent of average salary that does not exceed the integration amount and (ii) 57 percent of average salary in excess of the integration amount. For this purpose, salaries include total base wages and bonuses and are averaged over the 48 highest consecutive months selected from the 120 consecutive months preceding date of retirement. The integration amount is an average of the Social Security taxable wage bases for the 35 year period ending with the year of retirement. The benefit is reduced pro rata for executives who retire with less than 30 years of service. If an executive has more than 30 years of service, the percentages in the formula, (the 51 percent and 57 percent) are increased 1/24 of 1 percentage point for each month of service in excess of 30 years, but not more than 5 percentage points. Executives who are at least age 55 with 10 or more years of service may retire before age 65 in which case the benefit percentages (51 percent and 57 percent) are reduced.
Account Based Formula: Applies to executives who were hired by Household International after December 31, 1999. It also applies to executives who were hired by HBUS after December 31, 1996 and became participants in the Retirement Income Plan on January 1, 2005, or were hired by HSBC after March 28, 2003. The formula provides for a notional account that accumulates two percent of annual salary for each calendar year of employment. For this purpose, salary includes total base wages and bonuses. At the end of each calendar year, interest is credited on the notional account using the value of the account at the beginning of the year. The interest rate is based on the lesser of average yields for 10-year and 30-year Treasury bonds during September of the preceding calendar year. The notional account is payable at termination of employment for any reason after three years of service although payment may be deferred to age 65.
Provisions Applicable to All U.S. Formulas: The amount of salary used to determine benefits is subject to an annual maximum that varies by calendar year. The limit for 2006 is $220,000. The limit for years after 2006 will increase from time-to-time as specified by IRS regulations. Benefits are payable as a life annuity, or for married participants, a reduced life annuity with 50 percent continued to a surviving spouse. Participants (with spousal consent, if married) may choose from a variety of other optional forms of payment, which are all designed to be equivalent in value if paid over an average lifetime. Retired executives covered by a Household Old, Household New or Account Based Formula may elect a lump sum form of payment (spousal consent is needed for married executives).
Canadian Plans applicable to Martin Glynn
HSBC Bank Canada’s qualified pension plan is a defined benefit plan under which benefits are determined primarily by final average earnings, years of service and a plan formula. Benefits payable under this plan are limited to the maximum allowed by Canada Revenue Agency (CRA). For example, in year 2005 the limit was $2,000 and in year 2006, the limit is $2,111.11 per year of pensionable service. The following table, which is presented in Canadian currency, indicates the maximum pension benefits allowed by law for plan participants in the specified compensation and years of service classifications for year 2006. The table assumes payments in the form of a life annuity, guaranteed for ten years.
Compensation | | 15 | | 20 | | 25 | | 30 |
$ | 500,000 | $ | 31,666 | $ | 42,222 | $ | 52,777 | $ | 63,333 |
| 600,000 | | 31,666 | | 42,222 | | 52,777 | | 63,333 |
| 700,000 | | 31,666 | | 42,222 | | 52,777 | | 63,333 |
| 800,000 | | 31,666 | | 42,222 | | 52,777 | | 63,333 |
| 900,000 | | 31,666 | | 42,222 | | 52,777 | | 63,333 |
| 1,000,000 | | 31,666 | | 42,222 | | 52,777 | | 63,333 |
The pension benefit for plan participants in the compensation levels presented above is capped for all participants having the number of years of credited service indicated. The compensation covered by the plan is limited to straight salary. At the plan’s normal retirement date of age 60, Mr. Glynn will have 28.75 years of credited service.
192
In addition to the pension benefit available from the HSBC Bank Canada qualified plan, Mr. Glynn is entitled to receive an annual pension benefit during his lifetime pursuant to a non-qualified supplemental retirement agreement with HSBC Bank Canada. Under the terms of this agreement, the supplemental allowance is forfeited if Mr. Glynn ceases employment with HSBC before age 55 and goes to work for a competitor within two years. The supplemental allowance is calculated based on Mr. Glynn’s highest three years average base salary, excluding all bonuses. The supplemental pension agreement formula is 2.5 percent of final average earnings, times years of pensionable service. Mr. Glynn’s earnings under this formula are converted into Canadian currency by multiplying his current earnings in U.S. currency by 1.3333.
Based on an annual salary of $933,310 in Canadian currency, the estimated annual total pension benefit at the normal retirement age of 60 for Mr. Glynn is $670,815. Of this amount, $60,694 is payable from the HSBC Bank Canada qualified plan and $610,121 from the non-qualified supplemental retirement agreement. In U.S. currency, these pension benefits amount to $45,522 from the qualified plan and $457,602 from the non-qualified plan. Mr. Glynn attained age 55 on September 30, 2006 and retired effective as of January 1, 2007. Therefore, his pension which began as of January 1 was reduced by ¼ of one percent for each month between the commencement date and his 60th birthday.
HSBC International Staff Retirement Benefits Scheme
The HSBC International Staff Retirement Benefits Scheme (Jersey) (“ISRBS”) is a defined benefit plan maintained for certain international managers. Each member during his service must contribute five percent of his salary to the plan but each member who has completed 20 years of service or who enters the senior management or general management sections during his service shall contribute 6 2/3 percent of his salary. In addition, a member may make voluntary contributions, but the total of voluntary and mandatory contributions cannot exceed 15 percent of his total compensation. Upon leaving service, the value of the member’s voluntary contribution fund, if any, shall be commuted for a retirement benefit.
The annual pension payable at normal retirement is 1/480 of the member’s final salary for each completed month in the executive section, 1.25/480 of his final salary for each completed month in the senior management section, and 1.50/480 of his final salary for each completed month in the general management section. A member’s normal retirement date is the first day of the month coincident with or next following his 53rd birthday. Payments may be deferred or suspended but not beyond age 75.
If a member leaves before normal retirement with at least 15 years of service, he will receive a pension which is reduced by .25 percent for each complete month by which termination precedes normal retirement. If he terminates with at least 5 years of service, he will receive an immediate lump sum equivalent of his reduced pension.
Present Value of Accumulated Benefits
For the Account Based formula: The value of the notional account balances currently available on December 31, 2006.
For other formulas: The present value of benefit payable at assumed retirement using interest and mortality assumptions consistent with those used for financial reporting purposes under SFAS 87 with respect to the company’s audited financial statements for the period ending December 31, 2006. However, no discount has been assumed for separation prior to retirement due to death, disability or termination of employment. Further, the amount of the benefit so valued is the portion of the benefit at assumed retirement that has accrued in proportion to service earned on December 31, 2006.
193
Deferred Compensation Plans
Tax Reduction Investment Plan HNAH maintains the HSBC-North America (U.S.) Tax Reduction Investment Plan (“TRIP”), which is a deferred profit-sharing and savings plan for its eligible employees. With certain exceptions, a U.S. employee who has been employed for 30 days and who is not part of a collective bargaining unit may contribute into TRIP, on a pre-tax and after-tax basis, up to 40 percent (15 percent if highly compensated) of the participant’s cash compensation (subject to a maximum annual pre-tax contribution by a participant of $15,000, as adjusted for cost of living increases, and certain other limitations imposed by the Internal Revenue Code) and invest such contributions in separate equity or income funds.
If the employee has been employed for at least one year, HUSI contributes three percent of compensation on behalf of each participant who contributes one percent and matches any additional participant contributions up to four percent of compensation. However, matching contributions will not exceed six percent of a participant’s compensation if the participant contributes four percent or more of compensation. The plan provides for immediate vesting of all contributions. With certain exceptions, a participant’s after-tax contributions which have not been matched by us can be withdrawn at any time. Both our matching contributions made prior to 1999 and the participant’s after-tax contributions which have been matched may be withdrawn after five years of participation in the plan. A participant’s pre-tax contributions and our matching contributions after 1998 may not be withdrawn except for an immediate financial hardship, upon termination of employment, or after attaining age 59 1/2. Participants may borrow from their TRIP accounts under certain circumstances.
Supplemental Tax Reduction Investment Plan HNAH also maintains the Supplemental Tax Reduction Investment Plan (“STRIP”), which is an unfunded plan for eligible employees of HUSI and its participating subsidiaries who are legacy Household employees and whose participation in TRIP is limited by the Internal Revenue Code. Only matching contributions required to be made by us pursuant to the basic TRIP formula are invested in STRIP through a credit to a bookkeeping account maintained by us which deems such contributions to be invested in equity or income funds selected by the participant.
Non-Qualified Deferred Compensation Plan HNAH maintains a Non-Qualified Deferred Compensation Plan for the highly compensated employees in the organization, including executives of HUSI. The named executive officers are eligible to contribute up to 80 percent of their salary and/or cash bonus compensation in any plan year. Participants are required to make an irrevocable election with regard to an amount or percentage of compensation to be deferred and the timing and manner of future payout. Two types of distributions are permitted under the plan, either a scheduled in-service withdrawal which must be scheduled at least 2 years after the end of the plan year in which the deferral is made, or payment upon termination of employment. For either the scheduled in-service withdrawal or payment upon termination, the participant may elect either a lump sum payment or if the participant has made at least $25,000 of contributions and has over 10 years of service, he may request installment payments over 10 years. Due to the unfunded nature of the plan, participant elections are deemed investments whose gains or losses are calculated by reference to actual earnings of the investment choices. The deemed investment choices are reviewed on a periodic basis by the Investment Committee for the Plan which consists of members chosen by the Board or Directors or Chief Executive Officer of HSBC North America Holdings Inc. and are chosen based on a conservative mix of funds and currently include Van Kampen Real Estate Securities – A Shares, Oppenheimer Global – A Shares, AIM Small Cap Growth – Class A, HSBC Investor Small Cap Equity – Class Y, Fidelity Advisor Mid Cap Stock – Class A, Dreyfus S&P 500 Index, HSBC Investor Growth & Income – Class Y, HSBC Investor Fixed Income – Class Y and HSBC Investor Money Market – Class Y. In order to provide the participants with the maximum amount of protection under an unfunded plan, a Rabbi Trust has been established where the participant contributions are segregated from the general assets of HUSI. The Investment Committee for the plan endeavors to invest the contributions in a manner consistent with the participant’s deemed elections reducing the likelihood of an underfunded plan.
194
Nonqualified Defined Contribution and Other Nonqualified Deferred Compensation Plans
Name
| NonQualified
Deferred
Compensation
Plan (1)
Executive
Contributions in
2006 | Supplemental
Tax Reduction
Investment
Plan (2)
HUSI
Contributions in 2006 |
Aggregate Earnings in 2006
|
Aggregate Withdrawals/
Distributions
|
Aggregate Balance at 12/31/2006
|
Sandra L. Derickson | $ | 0 | $ | 157,000 | $ | 161,379 | $ | 0 | $ | 2,286,511 | |
President & Chief Executive
Officer – Designate | | | | | |
| | | | | |
Martin J.G. Glynn | 100,000 | N/A | 5,608 | 0 | 105,608 |
President &
Chief Executive Officer | | | | | |
| | | | | |
John J. McKenna | N/A | N/A | N/A | N/A | N/A |
Senior Executive Vice President & Chief Financial Officer | | | | | |
| | | | | |
Joseph A. Belfatto | N/A | N/A | N/A | N/A | N/A |
Senior Executive Vice President and Head, Global Markets Americas | | | | | |
| | | | | |
Marlon Young | N/A | N/A | N/A | N/A | N/A |
Managing Director, CEO Private Bank Americas | | | | | |
| | | | | |
Janet L. Burak | 19,822 | 68,466 | 54,776 | 0 | 638,286 |
Senior Executive Vice President, General Counsel & Secretary | | | | | |
| | | | | |
Brendan McDonagh | N/A | N/A | N/A | N/A | N/A |
Chief Operating Officer | | | | | |
| | | | | |
Joseph M. Petri | N/A | N/A | N/A | 73,423 | (3) | N/A |
Senior Executive Vice President, Treasurer and Co-Head, CIBM Americas | | | | | |
| | | | | | | | | | | | | | | |
(1) | The Nonqualified Deferred Compensation Plan is described under Savings and Pension Plans on page 194. Ms. Derickson has made prior contributions to the plan, but elected not to make contributions in 2006. |
(2) | The Supplemental Tax Reduction Investment Plan (STRIP) is described under Savings and Pension Plans on page 194. Company contributions are invested in STRIP through a credit to a bookkeeping account, which deems such contributions to be invested in equity or income mutual funds selected by the participant. For this purpose, compensation includes amounts that would be compensation but for the fact they were deferred under the terms of the HSBC North America Non-Qualified Deferred Compensation Plan. Distributions are made in a lump sum upon termination of employment. These figures are also included in the “Other Compensation” column of the Summary Compensation Table on page 181. |
(3) | The figure above represents a distribution from Mr. Petri’s participation in the HSBC Investment Banking and Markets 2001Notional Co-Investment Plan. This plan allowed the participant to waive some or all of a discretionary cash bonus and have the notional amount contributed as a deemed investment in European private equity and technology transactions through the HSBC Private Equity Partnership Scheme and the HPE Technology Fund. |
195
Potential Payments Upon Termination Or Change-In-Control
The following tables describe the payments that HUSI would be required to make as of December 31, 2006 to Ms. Derickson, Mr. McKenna, Mr. Belfatto, Mr. Young and Ms. Burak as a result of their termination, retirement, disability or death or a change in control of the company as of that date. The specific circumstances that would trigger such payments are identified in the tables. The amounts and terms of such payments are defined by HSBC’s employment and severance policies, the particular terms of any equity-based awards and, in the case of Ms. Derickson and Mr. Young, Ms. Derickson’s employment agreement and Mr. Young’s offer letter.
Mr. Glynn retired as President and Chief Executive Officer as of December 31, 2006. The amounts paid to Mr. Glynn by HUSI were agreed to in an agreement between Mr. Glynn and HNAH entered into in connection with his retirement. Similarly, the amounts paid to Mr. Petri in connection with his retirement in 2006 were agreed to in a separation agreement between Mr. Petri and HBUS. These agreements are summarized in the 2006 CD&A under Compensation of Officers Reported in the Summary Compensation Table. Mr. McDonagh resigned his position with HUSI and was appointed Group Executive of HSBC Finance Corporation, an affiliate of HUSI, in 2006. His resignation and appointment did not trigger a payment obligation on the part of HUSI. In addition, the termination of Mr. McDonagh’s employment with HSBC Finance Corporation for any reason would not trigger a payment obligation on the part of HUSI. As a result, no additional information for Messrs. Glynn, Petri or McDonagh is required or provided below.
Sandra L. Derickson
Executive Benefits and Payments Upon Termination
|
Voluntary Termination
|
Disability
|
Normal Retirement
|
Involuntary Not for Cause Termination
| |
For Cause Termination
| Voluntary for Good Reason Termination | |
Death
|
Change in Control Termination
|
|
Cash Compensation | | | | | | | | | | | | |
Base Salary | — | — | — | $ | 875,000 | (1) | — | $ | 875,000 | (1) | — | | — | |
Short Term Incentive | — | — | — | 1,593,750 | (1) | — | 1,593,750 | (1) | — | | — | |
Long Term Incentive | | | | | | | | | | | | |
Performance Shares (6) | — | $2,317,332 | (2) | $2,317,332 | (2) | 2,317,332 | (2) | — | 2,317,332 | (2) | $5,419,177 | (3) | $2,317,332 | (2) |
Stock Options:
Unvested and Accelerated | — | — | — | 222,583 | (4) | — | 222,583 | (4) | 222,583 | (4) | — | |
Restricted Stock (6):
Unvested and Accelerated | — | | — | 8,092,333 | (5) | — | 8,092,333 | (5) | $8,092,333 | (5) | — | |
Benefits and Perks | | | | | | | | | | | | |
Healthcare | — | — | — | 28,366 | | | 28,366 | | — | | — | |
Life Insurance | — | — | — | 1,800 | | | 1,800 | | — | | — | |
Financial Planning | — | — | — | 20,000 | | | 20,000 | | — | | — | |
Umbrella Liability | — | — | — | 3,700 | | | 3,700 | | — | | — | |
| | | | | | | | | | | | | | | | |
(1) | As of December 31, 2006, Ms. Derickson has an employment agreement, which stipulates that she will receive her current salary and 75 percent of the average of her bonus in the years 2003, 2004 and 2005 from the date of termination through March 28, 2008. The figures above assume a termination date of December 31, 2006. |
(2) | The figures above represent the pro-rata portion of the Performance Shares, assuming “good leaver” status is granted by REMCO, that would vest three years from the date of grant assuming a termination date of December 31, 2006, and are calculated using the closing price of HSBC ordinary shares and exchange rate on December 29, 2006. For an explanation of the performance conditions, please refer to Footnote 2 of the Grants of Plan-Based Awards Table. |
(3) | The figure above represents a full vest of the Performance Shares that would vest three years from the date of grant assuming a termination date of December 31, 2006, and is calculated using the closing price of HSBC ordinary shares and exchange rate on December 29, 2006. |
(4) | In the event of death, the figure represents accelerated vesting of 100 percent of the outstanding, unvested stock options assuming the difference between the strike price and the fair market value of HSBC ordinary shares on December 29, 2006. The amounts represent outstanding unvested stock options that would continue to vest according to schedule, if REMCO approves such continued vesting, if a termination was involuntary not for cause, or voluntary for good reason, and assumes the satisfaction of all applicable performance conditions. |
(5) | The figures above represent a full vest of the outstanding restricted shares assuming a termination date of December 31, 2006 and are calculated using the closing price of HSBC ordinary shares and exchange rate on December 29, 2006. |
(6) | Does not include additional awards accumulated through December 31, 2006, the assumed date of termination. |
196
John J. McKenna
Executive Benefits and Payments Upon Termination |
Voluntary Termination
|
Disability
| |
Normal
Retirement
| Involuntary Not for Cause Termination | |
For Cause Termination
| Voluntary for Good Reason Termination | |
Death
| | Change in Control Termination | |
Cash Compensation | | | | | | | | | | | | | |
Base Salary | — | — | | — | $250,038 | (1) | — | — | | — | | — | |
Short Term Incentive | — | — | | — | 381,934 | (1) | — | — | | — | | — | |
Long Term Incentive | | | | | | | | | | | | | |
Performance Shares (6) | — | $309,491 | (2) | — | 309,491 | (3) | — | — | | $309,491 | (5) | $309,491 | (3) |
Restricted Stock (6):
Unvested and Accelerated | — | 208,164 | (4) | — | 208,164 | (4) | — | $208,164 | (4) | 602,811 | (5) | 208,164 | (4) |
| (1) | Under the terms of the HSBC Severance Policy, Mr. McKenna would receive 40 weeks of his current salary upon separation from the company and a pro-rata amount of his earned bonus. The figures above represent the bonus payment earned in 2006 assuming a termination date of December 31, 2006. |
(2) | The figures above represent accelerated vesting of 100 percent of the outstanding Performance Shares assuming “good leaver” status is granted by REMCO, a termination date of December 31, 2006 and that the performance test has been passed using the month end prior to exit date as the performance period. The amount has been calculated using the closing price of HSBC ordinary shares and exchange rate on December 29, 2006. If the performance test is not passed, 100 percent of the award remains outstanding and the performance condition is re-tested on the third, fourth and fifth anniversary of the award date. If the performance condition is not passed by the fifth anniversary, the shares are forfeited. |
(3) | The figures above represent accelerated vesting of 100 percent of the outstanding Performance Shares assuming “good leaver” status is granted by REMCO, a termination date of December 31, 2006 and that the performance test has been passed using the month end prior to exit date as the performance period. The amount has been calculated using the closing price of HSBC ordinary shares and exchange rate on December 29, 2006. If the performance test is not passed, the shares are forfeited. |
(4) | The figure represent a pro-rata portion of the March 31, 2005 and March 31, 2006 outstanding restricted share awards based on the number of months elapsed between the date of grant and date of termination assuming a termination date of December 31, 2006 and are calculated using the closing price of HSBC ordinary shares and exchange rate on December 29, 2006. |
(5) | The figures above represent a full vest of the outstanding shares assuming a termination date of December 31, 2006, and are calculated using the closing price of HSBC ordinary shares and exchange rate on December 29, 2006. |
(6) | Does not include additional awards accumulated through December 31, 2006, the assumed termination date. |
Joseph A. Belfatto
Executive Benefits and Payments Upon Termination
|
Voluntary Termination
|
Disability
| |
Normal Retirement
| Involuntary Not for Cause Termination |
For Cause Termination
|
Voluntary for Good Reason Termination
|
Death
| |
Change in Control Termination
| |
Cash Compensation | | | | | | | | | | | | |
Base Salary | — | — | | — | $57,692 | (1) | — | — | — | | — | |
Short Term Incentive | — | — | | — | — | | — | — | — | | — | |
Long Term Incentive | | | | | | | | | | | | |
Restricted Stock (4):
Unvested and Accelerated | — | $2,659,775 | (2) | — | $2,659,775 | (2) | — | — | $2,659,775 | (2) | $2,659,775 | (3) |
(1) | Under the terms of the HSBC Severance Policy, Mr. Belfatto will receive 12 weeks of his current salary upon separation from the company and a pro-rata amount of his earned bonus. The figures above represent the bonus payment earned in 2006 assuming a termination date of December 31, 2006. |
(2) | The figures above represent continued vesting of the outstanding restricted shares assuming a termination date of December 31, 2006 and assuming “good leaver” status is granted by REMCO, which shares will be released according to the original vesting schedule. The figures are calculated using the closing price of HSBC ordinary shares and exchange rate on December 29, 2006. |
(3) | The figures above represent a full vest of the outstanding restricted shares assuming a termination date of December 31, 2006 and are calculated using the closing price of HSBC ordinary shares and exchange rate on December 29, 2006. |
(4) | Does not include additional awards accumulated through December 31, 2006, the assumed termination date. |
197
Marlon Young
Executive Benefits and Payments Upon Termination | Voluntary Termination | Disability | Normal Retirement | Involuntary Not for Cause Termination | For Cause Termination | Voluntary Good Reason Termination | | Death | | Change in Control Termination | |
Cash Compensation | | | | | | | | | | | | |
Base Salary | — | — | — | $ | 86,538 | (1) | — | — | | — | | — | |
Short Term Incentive | — | $1,000,000 | (1) | — | 1,000,000 | (1) | — | — | | $1,000,000 | (1) | — | |
Long Term Incentive | | | | | | | | | | | | |
Restricted Stock (4): Unvested and Accelerated | — | 2,073,322 | (2) | — | 2,073,000 | (2) | — | $2,073,000 | (2) | 2,073,000 | (2) | $1,573,322 | (3) |
| | | | | | | | | | | | | | |
(1) | Under the terms of the HSBC Severance Policy, Mr. Young will receive 12 weeks of his current salary upon separation from the company. Pursuant to his offer letter, Mr. Young would also receive his guaranteed cash bonus for 2006 and 2007. |
(2) | The figures above represent a full vest of the outstanding restricted shares assuming a termination date of December 31, 2006 and assuming “good leaver” status is granted by REMCO. The figures are calculated using the closing price of HSBC ordinary shares and exchange rate on December 29, 2006. |
(3) | The figure above represents a full vest of the outstanding restricted shares assuming a termination date of December 31, 2006 and assuming “good leaver” status is granted by REMCO. These figures are calculated using the closing price of HSBC ordinary shares and exchange rate on December 29, 2006. |
(4) | Does not include additional awards accumulated through December 31, 2006, the assumed termination date. |
198
Janet L. Burak
Executive Benefits and Payments Upon Termination | Voluntary Termination |
Disability
| |
Normal Retirement
| Involuntary Not for Cause Termination |
For Cause Termination
| Voluntary for Good Reason Termination | |
Death
| Change in Control Termination | |
Cash Compensation | | | | | | | | | | | | | | |
Base Salary | — | — | | — | $ | 215,497 | (1) | — | — | | — | | — | |
Short Term Incentive | — | — | | — | | 736,383 | (1) | — | — | | — | | — | |
Long Term Incentive | | | | | | | | | | | | | | |
Performance Shares (9) | — | $364,673 | (2) | — | | 364,673 | (2) | — | — | | $364,673 | (3) | $364,673 | (3) |
Restricted Stock (9):
Unvested and Accelerated | — | $794,118 | (4) | — | | 812,002 | (5) | — | $97,549 | (6) | $1,438,256 | (7) | $714,453 | (8) |
| | | | | | | | | | | | | | | |
(1) | Under the terms of the HSBC Severance Policy, Ms. Burak will receive 28 weeks of her current salary upon separation from the company and a pro-rata amount of her earned bonus. The figures above represent the bonus payment earned in 2006 assuming a termination date of December 31, 2006. |
(2) | The figures above represent a full vest of the Performance Shares, assuming “good leaver” status is granted by REMCO, a termination date of December 31, 2006, and 100 percent of the performance condition being met on the third anniversary of the date of grant. If the performance condition is not passed on the third anniversary, the award is subject to a re-test provision on the fourth and fifth anniversary of the date of grant. If the performance condition is not passed on the fifth anniversary, the award is forfeited. The amount is calculated using the closing price of HSBC ordinary shares and exchange rate on December 29, 2006. |
(3) | The figures above represent a full vest of the Performance Shares that would vest three years from the date of grant assuming a termination date of December 31, 2006, and is calculated using the closing price of HSBC ordinary shares and exchange rate on December 29, 2006. |
(4) | The figures above represent (a) a pro-rata portion of the November 20, 2002, March 31, 2005 and March 31, 2006 outstanding restricted share awards based on the number of months elapsed between date of grant and date of termination ($551,039) and (b) a full vest of the 11/3/03 outstanding restricted share award ($243,079) assuming a termination date of December 31, 2006 and assuming “good leaver” status is granted by REMCO. The figures are calculated using the closing price of HSBC ordinary shares and exchange rate on December 29, 2006. |
(5) | The figures above represent (a) a pro-rata portion of the March 31, 2005 and March 31, 2006 outstanding restricted share awards based on the number of months elapsed between date of grant and date of termination ($471,374) and (b) a full vest of the November 20, 2002 and November 3, 2003 outstanding restricted share awards ($340,628) assuming a termination date of December 31, 2006 and assuming “good leaver” status is granted by REMCO. The figures are calculated using the closing price of HSBC ordinary shares and exchange rate on December 29, 2006. |
(6) | The figures above represent the full vest of the November 20, 2002 outstanding restricted share award assuming a termination date of December 31, 2006 and assuming “good leaver” status is granted by REMCO. The figures are calculated using the closing price of HSBC ordinary shares and exchange rate on December 29, 2006. |
(7) | The figures above represent (a) a pro-rata portion of the November 20, 2002 outstanding restricted share award based on the number of months elapsed between date of grant and date of termination ($79,665) and (b) a full vest of the November 3, 2002, March 31, 2005 and March 31, 2006 outstanding restricted share awards ($1,358,591) assuming a termination date of December 31, 2006. The figures are calculated using the closing price of HSBC ordinary shares and exchange rate on December 29, 2006. |
(8) | The figures above represent (a) a pro-rata portion of the March 31, 2005 and March 31, 2006 outstanding restricted share awards based on the number of months elapsed between date of grant and date of termination ($471,374) and (b) a full vest of the November 3, 2003 outstanding restricted share award assuming a termination date of December 31, 2006 ($243,079). The figures are calculated using the closing price of HSBC ordinary shares and exchange rate on December 29, 2006. |
(9) | Does not include additional awards accumulated through December 31, 2006, the assumed date of termination. |
199
Director Compensation
The following table and narrative text discusses the compensation awarded to, earned by or paid to our Directors in 2006.
Director Compensation
Name
|
Fees Earned or
Paid in Cash
($)(1)
|
Stock Awards ($) (2)
|
Option Awards ($) (3)
|
Non-Equity Incentive Plan Compensation ($) (4)
| Change in Pension Value and Nonqualified Deferred Compensation Earnings ($) (5) |
All Other Compensation
($) (6)
|
Total
($)
|
Salvatore H. Alfiero | $60,000 | — | — | — | $25,000 | — | $ 85,000 |
Donald K. Boswell | 50,000 | — | — | — | — | — | 50,000 |
James H. Cleave | 56,000 | — | — | — | — | — | 56,000 |
Sandra L. Derickson | — | — | — | — | — | — | — |
Frances D. Fergusson | 52,500 | — | — | — | — | — | 52,500 |
Michael F. Geoghegan | — | — | — | — | — | — | — |
Martin J.G. Glynn | — | — | — | — | — | — | — |
Stuart T. Gulliver | — | — | — | — | — | — | — |
Richard A. Jalkut | 83,500 | — | — | — | 25,000 | — | 108,500 |
Peter Kimmelman | 56,000 | | | | — | | 56,000 |
Siddarth N. Mehta | — | — | — | — | — | — | — |
Charles G. Meyer, Jr. | 52,500 | — | — | — | — | — | 52,500 |
James L. Morice | 50,000 | — | — | — | — | — | 50,000 |
(1) | In 2006, the non-management Directors of HUSI received an annual cash retainer of $50,000 for their services on the boards of HUSI and HBUS (with the exception of Mr. Jalkut, who as Lead Director and Chair of the Executive Committee, received a retainer of $75,000). In addition to the Board retainer, Mr. Cleave, Mr. Jalkut and Mr. Kimmelman each received an additional $6,000 for their membership in the Audit Committee, Mr. Alfiero received an additional $10,000 as Chair of the Audit Committee, Mr. Meyer received an additional $2,500 as Chair of the Fiduciary Committee, Dr. Fergusson received an additional $2,500 as Chair of the Human Resources & Compensation Committee, Mr. Jalkut received an additional $2,500 as Chair of the Nominating & Governance Committee. Other than as stated above, HUSI does not pay additional compensation for committee membership, or meeting attendance fees to its Directors. Directors who are employees of HUSI or any of its affiliates do not receive any additional compensation related to their Board service. In September 2006, the Nominating & Governance Committee reviewed its directors’ compensation philosophy compared to other same sized financial and professional service organizations and determined that the current compensation structure should be reevaluated. Non-management Directors elected prior to 1999 may elect to participate in the HUSI/HBUS Plan for Deferral of Directors’ Fees. Under this plan, they may elect to defer receipt of all or a part of their retainer. The deferred retainers accrue interest on a quarterly basis at the one to two year Employee Extra CD rate in effect on the first business day of each quarter. Upon retirement from the Board, the deferrals plus interest are paid to the Director either in a lump sum or in quarterly or annual installments over a one, five or ten year period. No Director elected to defer receipt of their retainer for 2006. |
(2) | HUSI does not grant stock awards to its non-management directors nor do any portion of employee directors’ stock awards reflect services related to their Board positions. |
(3) | HUSI does not grant stock option awards to its non-management directors. |
(4) | HUSI does not award non-equity incentive plan compensation to its non-management directors nor does any portion of the employee directors’ non-equity incentive plan compensation reflect compensation for services related to their Board positions. |
(5) | The HUSI Directors’ Retirement Plan covers non-management directors elected prior to 1998 and excludes those serving as directors at the request of HSBC. Eligible directors with at least five years of service will receive quarterly retirement benefit payments commencing at the later of age 65 or retirement from the Board, and continuing for ten years. The annual amount of the retirement benefit is a percent of the annual retainer in effect at the time of the last Board meeting the director attended. The percentage is 50 percent after five years of service and increases by five percent for each additional year of service to 100 percent upon completion of 15 years of service. If a director who has at least five years of service dies before the retirement benefit has commenced, the director’s beneficiary will receive a death benefit calculated as if the director had retired on the date of death. If a retired director dies before receiving retirement benefit payments for the ten year period, the balance of the payments will be continued to the director’s beneficiary. The plan is unfunded and payment will be made out of the general funds of HUSI or HBUS. |
200
| (6) | Non-management directors are offered, on terms that are not more favorable than those available to the general public, a MasterCard/Visa credit card issued by one of our subsidiaries with a credit limit of $15,000. HUSI guarantees the repayment of amounts charged on each card. Under HUSI’s Matching Gift Program, HUSI matches charitable gifts to qualified organizations (subject to a maximum of $10,000 per year), with a double match for the first $500 donated to higher education institutions (both public and private) and eligible non-profit organizations which promote neighborhood revitalization or economic development for low and moderate income populations. Each current independent Director may ask us to contribute up to $10,000 annually to charities of the Director’s choice which qualify under our philanthropic program. |
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Security Ownership of Certain Beneficial Owners
HSBC USA Inc.’s common stock is 100 percent owned by HSBC North America Inc. (“HNAI”). HNAI is an indirect wholly owned subsidiary of HSBC.
Security Ownership by Management
The following table lists the beneficial ownership, as of January 31, 2007, of HSBC ordinary shares or interests in HSBC ordinary shares and HSBC’s American Depositary Shares, Series A, by each director and the executive officers named in theSummary Compensation Table on page 181, individually, and the directors and executive officers as a group. Each of the individuals listed below and all directors and executive officers as a group own less than one percent of the HSBC ordinary shares. No director or executive officer of HUSI owned any of HUSI’s outstanding series of preferred stock at January 31, 2007.
|
Number of HSBC Ordinary Shares Beneficially Owned (1) (2)
| HSBC Ordinary Shares That May Be Acquired Within 60 Days By Exercise of Options (3) |
HSBC Restricted Shares Released Within 60 Days (4)
|
Number of HSBC Ordinary Share Equivalents (5)
|
Total HSBC Ordinary Shares
|
HSBC Holdings plc American Depositary Shares,
Series A (6)
|
Directors | | | | | | | |
Salvatore H. Alfiero | 259,000 | — | — | — | 259,000 | 325,000 | |
Donald K. Boswell | 220 | — | — | — | 220 | — | |
James H. Cleave | 220,465 | — | — | — | 220,465 | — | |
Dr. Frances D. Fergusson | 100 | — | — | — | 100 | — | |
Michael F. Geoghegan | 113,525 | — | 45,449 | — | 158,974 | — | |
Stuart T. Gulliver | 1,192,823 | — | — | — | 1,192,823 | — | |
Paul J. Lawrence | — | — | — | — | — | — | |
Richard A. Jalkut | 250 | — | — | — | 250 | — | |
Peter Kimmelman | 5,335 | — | — | — | 5,335 | — | |
Charles G. Meyer, Jr. | — | — | — | — | — | — | |
James L. Morice | 631 | — | — | — | 631 | — | |
Named Executive Officers
| | | | | | — | |
Sandra L. Derickson | 93,003 | 661,250 | 70,710 | 27,079 | 852,042 | — | |
Martin J.G. Glynn | 80,263 | — | — | — | 80,263 | — | |
John J. McKenna | 3,000 | — | — | 1,550 | 4,550 | — | |
Joseph A. Belfatto | 26,451 | — | 71,668 | — | 98,119 | — | |
Marlon Young | — | — | 10,486 | — | 10,486 | — | |
Janet L. Burak | 17,982 | 80,250 | — | — | 98,232 | — | |
Brendan McDonagh | 40,960 | 27,900 | — | — | 68,860 | — | |
Joseph M. Petri | — | — | 199,702 | — | 199,702 | — | |
All directors and executive
officers as a group |
2,120,240
|
815,900
|
398,015
|
30,156
|
3,364,311
|
325,000
| |
| | | | | | | | | | | | |
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(1) | Directors and executive officers have sole voting and investment power over the shares listed above, except as follows. |
The number of ordinary shares held by spouses, children and charitable or family foundations for which a director or executive officer does not have voting and investment power and beneficial ownership of which is denied is as follows: Mr. Kimmelman, 1,756; Ms. Burak, 910; and Directors and executive officers as a group, 3,612.
(2) | Some of the shares included in the table above were held in American Depository Shares, each of which represents five HSBC ordinary shares. |
(3) | Represents the number of ordinary shares that may be acquired by HUSI’s Directors and executive officers through April 1, 2007 pursuant to the exercise of stock options. |
(4) | Represents the number of ordinary shares that may be acquired by HUSI’s Directors and executive officers through April 1, 2007 pursuant to the satisfaction of certain conditions. |
(5) | Represents the number of ordinary share equivalents owned by executive officers under HSBC-North America (U.S.) Tax Reduction Investment Plan and HSBC-North America Employee Non-Qualified Deferred Compensation Plan. Some of the shares included in the table above were held in American Depository Shares, each of which represents five HSBC ordinary shares. |
(6) | Each depositary share represents one-fortieth of a share of HSBC’s 6.20% Non-Cumulative Dollar Preference Shares, Series A |
Item 13. Certain Relationships and Related Transactions, and Director Independence
Transactions with Related Persons
During the fiscal year ended December 31, 2006, HUSI was not a participant in any transaction, and there is currently no proposed transaction, in which the amount involved exceeded or will exceed $120,000, and in which a director or an executive officer, or a member of the immediate family of a director or an executive officer, had or will have a direct or indirect material interest, other than the agreements with Messrs. Glynn and Petri and Ms. Derickson described in Item 11. Executive Compensation - Compensation Discussion and Analysis - Compensation of Officers Reported in the Summary Compensation Table. During 2006, HBUS provided loans to certain directors and executive officers of HUSI and its subsidiaries in the ordinary course of business. Such loans were provided on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to HUSI and do not involve more than the normal risk of collectibility or present other unfavorable features.
HUSI maintains a written Policy for the Review, Approval or Ratification of Transactions with Related Persons, which provides that any “Transaction with a Related Person” must be reviewed and approved or ratified in accordance with specified procedures. The term “Transaction with a Related Person” includes any transaction, arrangement or relationship, or series of similar transactions, arrangements or relationships, in which (1) the aggregate dollar amount involved will or may be expected to exceed $120,000 in any calendar year, (2) HUSI or any of its subsidiaries is, or is proposed to be, a participant, and (3) a director or an executive officer, or a member of the immediate family of a director or an executive officer, has or will have a direct or indirect material interest (other than solely as a result of being a director or a less than 10 percent beneficial owner of another entity). The following are specifically excluded from the definition of Transaction with a Related Person:
• | compensation paid to directors and executive officers reportable under rules and regulations promulgated by the Securities and Exchange Commission; |
• | transactions with other companies if the only relationship of the director, executive officer or family member to the other company is as an employee (other than an executive officer), director or beneficial owner of less than 10 percent of such other company’s equity securities; |
• | charitable contributions, grants or endowments by HUSI or any of its subsidiaries to charitable organizations, foundations or universities if the only relationship of the director, executive officer or family member to the organization, foundation or university is as an employee (other than an executive officer) or a director; |
202
• | transactions where the interest of the director, executive officer or family member arises solely from the ownership of HUSI’s equity securities and all holders of such securities received or will receive the same benefit on a pro rata basis; |
• | transactions where the rates or charges involved are determined by competitive bids; |
• | loans made in the ordinary course of business on substantially the same terms (including interest rates and collateral requirements) as those prevailing at the time for comparable loans with persons not related to HUSI or any of its subsidiaries and that do not involve more than the normal risk for collectibility or present other unfavorable features; and |
• | transactions involving services as a bank depositary of funds, transfer agent, registrar, trustee under a trust indenture or similar services. |
The policy requires each director and executive officer to notify the Office of the General Counsel in writing of any Transaction with a Related Person in which the director, executive officer or an immediate family member has or will have an interest and to provide specified details of the transaction. The Office of the General Counsel, through the Corporate Secretary, will deliver a copy of the notice to the Chair of the Nominating & Governance Committee of the Board of Directors. The Nominating & Governance Committee will review the facts of each proposed Transaction with a Related Person at each regularly scheduled committee meeting and approve, ratify or disapprove the transaction.
The vote of a majority of disinterested members of the Nominating & Governance Committee is required for the approval or ratification of any Transaction with a Related Person. The Nominating & Governance Committee may approve or ratify a transaction if the committee determines, in its business judgment, based on the review of all available information, that the transaction is fair and reasonable to, and consistent with the best interests of, HUSI and its subsidiaries. In making this determination, the Nominating & Governance Committee will consider, among other things, (i) the business purpose of the transaction, (ii) whether the transaction is entered into on an arms-length basis and on terms no less favorable than terms generally available to an unaffiliated third-party under the same or similar circumstances, (iii) whether the interest of the director, executive officer or family member in the transaction is material and (iv) whether the transaction would violate any provision of the HSBC North America Holdings Inc. Statement of Business Principles and Code of Ethics, the HSBC USA Inc. Code of Ethics for Senior Financial Officers or the HSBC USA Inc. Corporate Governance Standards, as applicable.
In any case where the Nominating & Governance Committee determines not to approve or ratify a transaction, the matter will be referred to the Office of the General Counsel for review and consultation regarding the appropriate disposition of such transaction including, but not limited to, termination of the transaction, rescission of the transaction or modification of the transaction in a manner that would permit it to be ratified and approved.
Director Independence
The HSBC USA Inc. Corporate Governance Standards, together with the charters of the committees of the Board of Directors, provide the framework for HUSI’s corporate governance. Director independence is defined in the Corporate Governance Standards, which are based upon the rules of the New York Stock Exchange. The HSBC USA Inc. Corporate Governance Standards are incorporated by reference to Exhibit 99.1 of this Form 10-K and are available upon written request made to HSBC USA Inc., 452 Fifth Avenue, New York, New York 10018, Attention: Corporate Secretary.
203
According to HUSI’s Corporate Governance Standards, a majority of the members of the Board of Directors must be independent. The composition requirement for each committee of the Board of Directors is as follows:
Committee | Independence/ Member Requirements |
Audit Committee | Chair and all voting members |
Fiduciary Committee | Chair and all voting members |
Human Resources & Compensation Committee | Chair and a majority of members |
Nominating & Governance Committee | Chair and all voting members |
Executive Committee | Chair and all voting members, other than the
Chief Executive Officer |
Messrs. Alfiero, Boswell, Cleave, Jalkut, Kimmelman, Meyer and Morice and Dr. Fergusson are considered to be independent directors. Mr. Geoghegan currently serves as Group Chief Executive Officer; Mr. Lawrence currently serves as President and Chief Executive Officer of HUSI and HBUS; and Mr. Gulliver currently serves an HSBC Managing Director and Head of CIBM. Because of the positions held by Messrs. Geoghegan, Lawrence and Gulliver, they are not considered to be independent directors.
During 2006, Sandra L. Derickson, Martin J.G. Glynn and Siddharth N. (Bobby) Mehta served as directors of HUSI and HBUS. Ms. Derickson also served as President and Chief Executive Officer – Designate of HUSI and HBUS for part of 2006, Mr. Glynn served as President and Chief Executive Officer of HUSI and HBUS in 2006 and Mr. Mehta served as Chief Executive Officer of HSBC Finance Corporation, another principal subsidiary of HNAH, in 2006. Because of the positions held by Ms. Derickson, Mr. Glynn and Mr. Mehta, they were not considered to be independent directors.
See Item 10. Directors, Executive Officers and Corporate Governance – Corporate Governance for more information about HUSI’s Board of Directors and its committees.
Item 14. Principal Accounting Fees and Services
Fees billed to HUSI by its auditing firm, KPMG LLP, were as follows.
Year Ended December 31 | | 2006 | | 2005 |
| | | (in thousands) |
Audit fees: | | | | |
| Auditing of financial statements, quarterly reviews, statutory audits, preparation of comfort
letters, consents and review of registration statements |
$
|
5,522
|
$
|
5,137
|
| | | | | | |
Audit related fees: | | | | |
| Employee benefit plan audits, due diligence assistance, internal control review assistance,
and certain attestation services | |
467
| |
870
|
| | | | | | |
Tax fees: | | | | |
| Tax related research, general tax services in connection with transactions and legislation,
and assistance with preparation of certain required filings | |
34
| |
51
|
| | | | | | |
Total KPMG LLP fees | $ | 6,023 | $ | 6,058 |
Audit Committee Pre-approval Policies and Procedures
It is the practice of the Audit Committee of HUSI’s Board of Directors to approve the annual audit fees, including those covering audit services beyond HUSI’s financial statements, before any audit procedures are undertaken. Prior to 2003, management had the implicit pre-approval of the Audit Committee to engage KPMG LLP, or any other professional service firm, to perform tax and other services. Any such services provided by KPMG LLP were reported to the Audit Committee after the fact. Beginning in 2003, the Audit Committee assumed responsibility for pre-approving all auditing services and permitted non-auditing services, including the related fees and terms thereof.
204
PART IV
|
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K |
|
| | | |
(a) | (1) | Financial Statements |
| | HSBC USA Inc.: |
| | | Consolidated Balance Sheet |
| | | Consolidated Statement of Income |
| | | Consolidated Statement of Changes in Shareholders’ Equity |
| | | Consolidated Statement of Cash Flows |
| | HSBC Bank USA, National Association: |
| | | Consolidated Balance Sheet |
| | Notes to Financial Statements |
| | | |
| | |
| (2) | Not applicable |
| | |
| (3) | Exhibits |
| | 3 (i) | Articles of Incorporation and amendments and supplements thereto (incorporated by reference to Exhibit 3(a) to HUSI’s Annual Report on Form 10-K for the year ended December 31, 1999, filed with the Securities and Exchange Commission on March 30, 2000, Exhibit 3 to HUSI’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, filed with the Securities and Exchange Commission on November 9, 2000, Exhibits 3.2 and 3.3 to HUSI’s Current Report on Form 8-K dated March 30, 2005, filed with the Securities and Exchange Commission on April 4, 2005, Exhibit 3.2 to HUSI’s Current Report on Form 8-K dated October 11, 2005 and filed with the Securities and Exchange Commission on October 14, 2005 and Exhibit 3.1 to HUSI’s Current Report on Form 10-Q dated May 16, 2006, filed with the Securities and Exchange Commission on May 22, 2006). |
| | | |
| | 3 (ii) | By-Laws dated February 5, 2007. |
| | | |
| | 4 (i) | Senior Indenture, dated as of October 24, 1996, by and between HUSI and Bankers Trust Company, as trustee, as amended and supplemented (incorporated by reference to Exhibits 4.1 and 4.2 to Post-Effective Amendment No. 1 to HUSI’s registration statement on Form S-3, Registration No. 333-42421, filed with the Securities and Exchange Commission on April 3, 2002, Exhibit 4.1 to HUSI’s Current Report on Form 8-K dated November 21, 2005 and filed with the Securities and Exchange Commission on November 28, 2005). |
| | | |
| | 4 (ii) | Subordinated Indenture, dated as of October 24, 1996, by and between HUSI and Bankers Trust Company, as trustee, as amended and supplemented (incorporated by reference to Exhibits 4.3, 4.4, 4.5 and 4.6 to Post-Effective Amendment No. 1 to HUSI’s registration statement on Form S-3, Registration No. 333-42421, filed with the Securities and Exchange Commission on April 3, 2002. |
| | | |
| | 12 | Computation of Ratio of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends |
| | | |
| | 14 | Code of Ethics for Senior Financial Officers |
| | | |
| | 18 | Letter from Independent Accountant Regarding Change in Accounting Principles (incorporated by reference to Exhibit 18 to HUSI’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 filed with the Securities and Exchange Commission on November 13, 2006). |
| | | |
| | 21 | Subsidiaries of HSBC USA Inc. |
| | | |
| | 23 | Consent of Independent Registered Public Accounting Firm |
| | | |
| | 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | | |
| | 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | | |
| | 32 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | | |
| | 99 (i) | HSBC USA Inc. Corporate Governance Standards |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | |
HSBC USA Inc. | | |
|
Registrant | | |
| | |
| | |
/s/ Janet L. Burak | | |
| | |
Janet L. Burak | | |
Senior Executive Vice President, General Counsel | | |
and Secretary | | |
| | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on March 5, 2007 by the following persons on behalf of the registrant and in the capacities indicated: |
| | |
| | |
| | |
/s/ John J. McKenna | | Michael F. Geoghegan* |
| | Chairman of the Board |
John J. McKenna | | |
Senior Executive Vice President and | | Salvatore H. Alfiero* Director |
Chief Financial Officer | | Donald K. Boswell* Director |
(Principal Financial Officer) | | James H. Cleave* Director |
| | Frances D. Fergusson* Director |
| | Paul J. Lawrence* |
| | Director, President and Chief Executive Officer |
|
| | Stewart T. Gulliver * Director |
/s/ Clive R. Bucknall | | Richard A. Jalkut* Director |
| | |
Clive R. Bucknall | | Peter Kimmelman* Director |
Chief Accounting Officer | | Charles G. Meyer, Jr.* Director |
(Principal Accounting Officer) | | James L. Morice* Director |
| | |
| | * /s/ Janet L. Burak |
| |
|
| | Janet L. Burak |
| | Attorney-in-fact |
206
