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Variable Pay Funding Finance Accrual Model Update

Variable Pay Funding Finance Accrual Model Update. 7/25/2008. Project Summary Project Scope Progress to Date Current 2008 Accrual Pool Accrual, Funding and Allocation - Global Model Proposed HNAH Model Framework Finance Factor Illustration Other Components Discussion Items

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Variable Pay Funding Finance Accrual Model Update

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  1. Variable Pay Funding Finance Accrual Model Update 7/25/2008

  2. Project Summary • Project Scope • Progress to Date • Current 2008 Accrual • Pool Accrual, Funding and Allocation - Global Model • Proposed HNAH Model • Framework • Finance Factor • Illustration • Other Components • Discussion Items • Decision Points • Next Steps • Appendix Agenda 2

  3. Background • Historically, North America business entities use different bonus accrual methodologies and adjust accruals at different times • This disjointed approach causes inequities across our businesses • Connecting variable pay to business performance is a key element of the new global rewards strategy • Objectives • Variable Pay funding (both cash and shares) is linked to business performance • The influence of business maturity, business model and market accrual amount and approach are fully understood and reflected in the accrual approach • Funding is reviewed throughout the performance year and is adjusted to reflect changing conditions and assumptions • Determine feasibility of adopting common accounting practice across entities for 2009 Project Summary 3

  4. Project Scope • Includes employees in the following bonus / incentive plans • Management Incentive Program (MIP) • HSBC Associate Reward Program (HARP) • Operations Rewards Program (Opt-in) • Mortgage Corp Incentive Program (MCIP) • Excludes employees in the following bonus / incentive plans • Technology Services Incentive (TSI) – global plan • Business Unit Specific Incentive plans (sales, production and service plans) • Executives (GCB 0 & 1) bonus pool will be determined separately and added to the total accrual • International Assignees (IMs, ISs, ICEs, STAs) • Outbound Assignees are excluded • Inbound Assignees bonus pool will be determined separately and added to the total accrual 4

  5. Project Team formed in April 2008 • Team is comprised of representatives from HR and Finance • A Steering Committee was formed to provide guidance, make decisions and ultimately present the program to the Senior Executive Team for review and approval • Data gathered on current accrual process for each business unit/entity • Entities differed on methods (centralized vs. decentralized) and payout levels • Historical bonus payouts were compared to financial results • Correlation between financial results and bonus payouts was not evident • Proposed framework for North American model developed and reviewed with Steering Committee • Solicited feedback and gained agreement on fundamentals • Identified other items to consider Progress to Date 5

  6. Current 2008 Accrual • Total HNAH accrual $263MM (includes 0’s & 1’s) Finance to revise and add more specific data on process See Appendix A for Business Entity breakdown 6

  7. + $ Cash Incentive Pool – $ Allocation by Business Entity and Business Unit Market Influences HNAH PerformanceROP PBT Future Potential Exceed Historicals Business Entity and Business Unit Performance Risk of Attrition Achieve Individual Performance* Job-related Market Data Performance Comparison Below ROP Manager Judgment and Discretion Avoid under accrual/Write-back excess accrual Review accrual quarterly and make appropriate adjustments. Individual Performance Pool Accrual, Funding and Allocation - Global Model Individual Annual Cash Incentive *Bottoms up approach 7

  8. Actual Annual Variable Pay Pool $ Business Maturity Market Trends Full Year Accrued Variable Pay $ Accrual Rate % Or $ ‘Windfall’ Gains/Losses Business Model Adjust? Risk Factors Market Amount / Approach Write - Back Excess Accrual Avoid Under Accrual Strategy Elements • Variable Pay Funding linked to Business Performance • Key Measures of Alignment: • Variable Pay funding (cash and shares) linked to business performance • Influence of Business Maturity, Business Model and Market Accrual Approach fully understood and reflected in approach • Funding reviewed throughout the performance year and adjusted to reflect changing conditions and assumptions

  9. Centrally determine available bonus pool at a HNAH level based on • Total Cash (market salary and bonus data) • Employee compensation (excludes shares for 2008) • Performance rating distribution of 20/70/10 • Apply a Finance Performance Factor (FPF) to adjust bonus pool based on HNAH performance against Planned Profit Before Tax • Adjusted for exclusions including extraordinary items (Appendix B) • Compare HNAH performance to peer groups (Appendix C) to adjust pool based on consistent performance measures • Allocation of bonus pool among HNAH Entities • Calculate pool using top down and bottoms up approach, which may result in a gap requiring Senior Executive discussion • Senior Executive Team to determine level of allocation within the business based on management discretion, performance against ROP and comparison to peer groups • Recommend mirror HBCA practice to allow flexibility for allocating down to cost center level, as appropriate Proposed HNAH Model - Framework 9

  10. Individual Performance Proposed HNAH Model – Process Overview Individual Annual Cash Incentive Accrual Process Allocation by Business Entity and Business Unit Future Potential 1Q Review and communicate Business Entity and Business Unit Performance Risk of Attrition Sarah working on this – may not be needed 2Q Adjustment Job-related Market Data Manager Judgment and Discretion 3Q - Pool generated and distributed 4Q - Adjustment based on Year-end Financials* 10 *As needed

  11. Approach Summary • Other unforeseen factors • Windfall gains/losses • Changing business environment • Market • Competitor accrual rates • Bottom-up analysis • Market trends Adjusted Variable Pay Accrual Rate(2) Variable Pay Pool Variable Pay Accrual Rate(1) • History • Historical accrual/pay-out levels • Known risks/issues • Pools • HNAH – Overall Funding • Entity – Adjustments • Business Unit – Allocation • Business factors • Business maturity • Business model • Growth plans • Acquisitions • Re-orgs • Regulatory changes • Quarterly Accrual Reviews • 1Q - Review • 2Q – Adjustment • 3Q – Allocation • 4Q – Final Adjustment • Initial accrual rate (% or $) set at beginning of performance year • Accrual assessed throughout year on a quarterly basis

  12. Proposed HNAH Model – Finance Performance Factor • Established annually and tied into the economic factors impacting HNAH’s ability to deliver on their ROP • Chart below provides 2008 recommendation • Correlation to payout levels takes into consideration the extremely challenging environment currently faced by HSBC and its peer groups Finance Performance Factor Exceed Plan Greater than 30% Over 200% Between 20% and 30% Up to 200% Between 10% and 20% Up to 175% Between 0% and 10% Up to 150% Meet ROP 120% Miss ROP Between 0% and 5% Up to 110% Between 5% and 15% Up to 100% Between 15% and 25% Up to 90% Between 25% and 50% Up to 85% Greater than 50% 80% 12

  13. Proposed HNAH Model – Illustration • (Total Cash Opportunity*) – (Actual Salary) = Bonus Pool • (Bonus Pool) x (Finance Performance Factor**) = Adjusted Bonus Pool • $1,700MM (total cash opportunity) - $1,400MM (actual salary) = $300MM (bonus pool) • HNAH Performance – Meet ROP = Finance Performance Factor of 120% • $300MM x 120% (FPF) = $360MM (adjusted bonus pool) • Expected distribution by performance rating 27% Spread 43% Spread Note: (*) Total Cash – based on 20/70/10 performance management rating scale (**) Peer Group Adjustment applied, as applicable 13

  14. Salary Adjustments (Merit) • 2008 – Separate pool based on market trends and considering current position against base salary market data (compa ratio) • 2009 - One pool based on total compensation market data - considering current position against base, total cash and total compensation market data • Shares Other Pay Components Working on this 14

  15. New model yields significant increase in pool • Total cash/total comp approach creates greater bonus opportunities for employees below market base (HBUS and HBCA) • Impact of new market data also a consideration • Desired payout distribution based on performance rating • HNAH level pool “carve out” to accommodate adjustments • Global businesses and functions – Input on bonus pools from global functional leaders (i.e. Insurance, HTS, HR, Finance, Legal) • Funding for salary increases and shares for 2008 – recommend using 2007 process • Bermuda – identify opportunities and challenges with alignment to HNAH model Items for Consideration 15

  16. The team is requesting feedback and/or decision on various items by July 18, 2008 to enable dependent activities Decision Points • Obtain agreement on the following: • Proposed framework • Pool determined at HNAH level – agreed • Use of Finance Performance Factor - agreed • Use of Peer Group Adjustment – agreed to concept, not as factor/multiplier • Pool distribution across entities at discretion of Senior Executive Team with recommendation/information provided by Finance – agreed • Use 2007 process to determine funding for salary increases and shares for 2008 – not covered; pending decision • Global functions • Regional head responsible for gathering input from respective global head - agreed • Decide on the following: • Level of pool distribution – recommend Senior Executive Team determine allocation down to cost center, as appropriate – agreed • Desired payout distribution based on performance rating – agreed in concept, pending review of pools. • Peer Group performance measures and adjustment factor – agreed with recommendation to use a factor not as a multiplier, pending confirmation of measures to be used. • Global functions review and approval process • HR RM is responsible for ensuring these discussions take place within established timeframe - agreed 16

  17. Assuming agreement on decision points and discussion items is reached by July 18, 2008, the following activities will take place Next Steps 17

  18. Variable Pay Funding Appendix

  19. Appendix • A: Business Entity Breakdown • B: Exclusions from PBT • C: Peer Groups • D: Pay Review Timeline • E: Pool Allocation Process (to be developed) 19

  20. Business Entity Breakdown 20

  21. Fair Value Options • Extraordinary Items • Sale of Business • Goodwill • Change in Accounting Rules • Global Banking and Markets • Private Banking Exclusions from PBT 21

  22. US • American Express • Capital One Financial • Countrywide Financial • Fifth Third Bancorp • National City • PNC Bank • Regions Bank • SunTrust • US Bancorp • Washington Mutual • Wachovia • Wells Fargo • Canada • Bank of Montreal Financial Group • Canadian Imperial Bank of Commerce • National Bank of Canada • Royal Bank of Canada • Scotia Bank • Toronto Dominion Financial Group Peer Groups 22

  23. This timeline outlines pay review activities relative to pools and funding, reward recommendation and approval processes. 2008 Year-end Pay Review Timeline The items shaded in yellow relate to funding. 23

  24. US • Canada Pool Allocation Process 24

  25. Appendix A

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