In order to follow the regulators’ advice regarding cash conservation, HSBC Holdings Plc. (HBC) is planning to issue shares to pay cash bonuses to its UK-based senior executives. After issuing new shares, the company will sell the same in the open market. The proceeds from the sale of these shares will be utilized to pay non-deferred cash compensations of more than ?50,000 ($79,000).
However, employees who receive total cash bonuses below ?50,000 will be getting the same as they used to get from the company’s cash balance.
The total incentive payable to HSBC’s UK-based top executives will not be lowered. The company will be issuing millions of pounds worth of new shares to cover the non-deferred cash bonuses. Last year, about 20% of the bonuses to top-executives were paid upfront in cash. Currently, the total number of employees affected by the new payment structure is not known.
This new system of paying incentives to its employees is being used by HSBC for the first time. Moreover, this came at the time when banks are getting pressurized by the financial regulators to maintain a stable cash balance to meet the stringent capital requirements and to cushion against the probable global meltdown.
Further, HSBC’s move will appease employees who prefer cash bonuses over company shares. However, the shareholders’ value will be eroded as new shares will have a dilutive effect on the earnings going forward.
While HSBC will be undertaking this new system to stop curtailment of cash bonuses, other UK based banks including Barclays Plc (BCS), Royal Bank of Scotland Group Plc (RBS) and Lloyds Banking Group (LYG) will put a cap on the cash incentives to preserve their capital.
Currently, HSBC retains a Zacks #4 Rank, which translates into a short-term Sell rating.
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