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HSBC was stuck between a rock and the Bank of England’s Financial Policy Committee.On the one hand, it wanted to give its employees cash bonuses because that’s what its employees wanted.
On the other hand, the BoE wanted HSBC to maintain its capital levels, which cash bonuses could deplete.
In simplified terms, if HSBC gave out cash bonuses, regulators would frown. If HSBC gave out equity, employees would be upset.
Then, HSBC remembered its shareholders.
So instead of going with one of the two suboptimal choices, The Wall Street Journal‘s Max Colchester reports HSBC came up with a plan that to to suit both employees and regulators:
[HSBC] plans to pay the nondeferred part of bonuses over £50,000 ($79,000) by creating new shares and then immediately selling them on the market, the person said. The cash proceeds would be used to fund bonuses.
HSBC’s tactic is designed to placate the Bank of England’s Financial Policy Committee, which requested that banks keep a sufficient capital cushion even after bonus handouts. The move also aims to please HSBC staff members who prefer to be paid in cash rather than receive more bank shares.
Colchester’s article ends with a comment from a compensation expert at PWC noting that it’s common for firms to attempt to both manage capital and retain employees by issues shares to employees.
The comment is interesting, because that’s not quite what HSBC is doing. Instead of issuing shares to employees, even on a fully vested basis, it has decided to turn to shareholders.
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