Executive Compensation and Female Representation on Board: A Case Study of HSBC

Verified

Added on 2024/07/29

AI Summary

This report examines the executive compensation practices and female representation on the board of HSBC, a leading global banking institution. It analyzes the determinants of executive pay, including shareholder value, managerial power, and contract theory. The report also explores the impact of gender diversity on board performance and risk-taking, highlighting the growing importance of female representation in corporate leadership. By examining HSBC's compensation strategies and board composition, the report provides insights into the evolving landscape of corporate governance and the challenges and opportunities associated with achieving gender equality in the banking sector.

Contribute Materials

Your contribution can guide someone’s learning journey. Share your documents today.

Secure Best Marks with AI Grader

Need help grading? Try our AI Grader for instant feedback on your assignments.

TABLE OF CONTENTS
INTRODUCTION........................................................................................................................ 2
EXECUTIVE COMPENSATION IN BANKING SECTOR..................................................................3
FEMALE REPRESENTATION ON BOARD....................................................................................7
CONCLUSION.......................................................................................................................... 11
REFERENCES........................................................................................................................... 12

INTRODUCTION
The board of an organization is mutually responsible for achieving the set goals and success
for the company. The board of directors is responsible for developing strategic planning and
making critical decisions for the day-to-day management and operations of the firm and
provides entrepreneurial leadership and business values for the company. Regardless of
gender, age and demographic all the board members should have provided compensation
with equity on the basis of their performance and experience (Frydman and Saks, 2010). The
given report is based on the remuneration procedure adopted by HSBC bank to understand
the pay strategy adopted by the company and decisions taken by them to provide complete
benefit to their shareholders and without compromising their values. In the first section,
there would be a detailed description of the executive compensation by examining various
theories and concepts to identify its reforms and how it helps the bank to achieve the right
direction. The second section would be to evaluate various legislations which have been
introduced in several countries to provide best practices in corporate governance. This
report will highlight different aspects of female participation on boards of the business
organisations. Furthermore, it would also access whether increasing the female executive
would result in an improvement in the performance of the bank

EXECUTIVE COMPENSATION IN BANKING SECTOR
The major focus of executive compensation is on the determinants of pay, which to a
certain extent is driven by shareholder value. The compensation packages of most of the
managers despite various economic crises constitute of five basic components: salary,
annual bonus, long‐term incentive plans payouts, restricted option grants and stock grants.
In addition to this, managers often receive contributions to defined‐benefit pension plans,
as well as, severance payments which they receive after their departure from the
designated office (Burns, et al. 2017). In the recent years, there has been considerable
change in the importance of these compensation elements. Executive compensation is now
been thoroughly utilized all over the banks so as to decrease the problems faced by the
banks by aligning managers’ interests with those of shareholders. In principle, an executive’s
pay should be based on the most informative indicator(s) for whether the executive has
taken actions that maximize shareholder value. As in real world, the shareholders have little
knowledge about which type of remuneration would favour them the most, so the incentive
contracts conducted by the banks are often directly based on the ultimate objectives of the
bank which is known as shareholder value (Cheng, et al. 2015).
Due to an increase in pay for CEO i.e. managers of the banks in the past three decades,
there has been a surge in the debate to determine the executive compensation for them. At
one end it has been found that the high levels of managers pay are seen as the result of the
inability of the executives to set their own pay and extract rents from the shareholders
which they manage to exploit them easily. The growth in pay for CEO is the efficient result
of increasing demand for effort or scarce managerial talent. However, it has also been seen
as increase misuse of power by the manager which might affect the working of the banks
such as HSBC (Fernandes, et al. 2013).
Managerial power theory has been helpful in explaining observed pay practice which is far
better than explained by the economists. According to managerial power theory, the
executive compensation is somewhat more excessive than the economically efficient
compensation contract and signifies that high earning employees are not necessarily high
performers (Kaplan and Minton, 2012). Managerial power model has two approaches. First
is the pursuing of different objectives by the board of an enterprise in order to maximize the

Secure Best Marks with AI Grader

Need help grading? Try our AI Grader for instant feedback on your assignments.

wealth of the shareholders. Second is limiting the boundary of contracting done with the
shareholders (Kaplan, 2013).
Managerial power is the most critical element for banking sectors as they play a vital role in
enhancing the performance of the banks and in the pay-setting process. It helps in
increasing the pay of a manager of the banks and keeps a check on their misuse of the
power. Managerial power theory predicts that the concentration of decision-making power
would lead to an individual with more power. As manager of any bank is responsible for
organizing board meetings and setting the agendas of these meetings, they have full access
for controlling the information provided to the board of directors (Adams and Ferreira,
2012). This, in turn, increases their power to nominate and appoint new directors who
would usher prosperity for the banks (Vallascas and Hagendorff, 2013). In the corporate
hierarchy, the role of the manager is considered to be at the highest point and have a
significant influence on the pay-setting process of a bank such as HSBC (Anderson, et al.
2011).
There is a tremendous increase in pay of a manager because they have full control over the
corporate board, independent directors and might appoint manager or executives which
they favour and thus results in an increase in their managerial power. Similarly, managerial
power also negatively influences the performance of the firm as when there is a significant
increase in managerial power, the manager becomes concern about their own interest and
ignore other parties in fray such as shareholders, block holders and owners interest
(Beltratti and Stulz, 2012). HSBC bank must take the necessary steps to eliminate the
managerial power in order to avoid poor firm performance and excessive remuneration.
This could only be possible if the board of control is free of excessive power held by the
manager. Independent directors of the bank must work independently without showing any
sympathy towards members of the top management (Bennett, et al. 2015).
Contract theory is the study of the process of construction of an organization via people so
as to develop legal agreements in a definite manner. It analyzes how parties with conflicting
interests build formal and informal contracts. The theory investigates the formation of
contracts in the presence of asymmetric information. This theory draws important points
from various principles such as economic and financial principles and often works in

collaboration with managerial power theory as different parties have different incentives so
as to perform the particular action or not (Berger, et al. 2014).
Malus and Clawback Policy has been introduced in the banking sector way back during the
banking crisis in 2008 and is described by applying the remuneration code of conduct to the
banks such as HSBC. Clawback involves that an individual is required to repay amounts they
have received while malus applies to variable pay that has been “earned” but not yet paid
out, such that it allows the banks to either cancel or reduce it (Bhagat and Bolton, 2014).
Malus helps the Remuneration Committee of HSBC to reduce deferred remuneration before
vesting interest of the company for an individual. A clawback signifies cancellation of the
unvested incentives such as that remuneration which is not received and is based on the
performance and also has already is being paid to the individual (Aebi, et al. 2012). In case
of baking remuneration, only corporate failure is included as a malus event. This would help
HSBC to manage its risk management as well keep a vigil on their employees’ misconduct
(Gillan and Nguyen, 2018).
Deferred compensation could be defined as a portion of the employees' compensation
which is to be paid to them at a later time and also results in deferring of taxes on such
income until it is paid out. This type of compensation plan could act as an effective tool for
HSBC to attract and retain most of the key bank performers and focus on the retirement of
the employees and meeting financial needs. This, in turn, would help to increase the bank
performance and shareholder value and also helps to provide rewards to employees for
their long-term performance so that they would be ensured to work for best until their
retirement (Vallascas and Hagendorff, 2013).
Compensation is a way of communication through which the leadership of the company
prepares a plan to find out the way to head the company, devise strategies as well as key
initiatives, role and expectation of its key people and the reward methods for such
incentives (Bolton, et al. 2015). Long-term incentives are an effective way of rewarding
those who create value and help in providing a significant contribution to the growth of an
enterprise (Nguyen, et al. 2015). It helps an enterprise such as a bank to have a vision for
the creation of a future of the bank and help it to transform in such a bank where there
would be growing all the year round. Thus to realize such a future vision, the long-term

incentive plan is then built around the behaviours and results so as to achieve the desired
objectives (King, et al. 2016).
Thus from the given studies, it could be concluded that there has been a significant
improvement in the executive compensation utilized by the bank to enhance its
performance and achieve its objectives. Also, it was also found that if the managerial power
is utilized judiciously to manage the power of the manager of the bank judiciously, it would
help in providing effective executive compensation for them and would help the bank to
achieve the significant growth not only to fulfill their shareholders but also to fulfill the
needs of their customers in an appropriate manner.

Paraphrase This Document

Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser

FEMALE REPRESENTATION ON BOARD
The female representation is the big issue in determining executive compensation in the
organization. The presence of the gender pay gap has been a critical issue in the corporate
sector. Gender Pay Gap is a difference between the average earnings for men and women
(Frydman and Saks, 2010). In the UK, Over 90% of female employees are getting less pay
than their male colleagues for the same work. According to the report of MacAskill and
James (2018), among 491 leading companies of UK, 97% pay more to men and only 3% pay
women the most and the average gender pay gap among these companies is 15.5%.
According to office national statistics (2017), men earn around 18.4% more than women in
the UK. The UK independent Factchecking (2017) has shown that the median hourly wage
for full-time working women is 9.1% less than that of men and that is approximately £1.32
less per hour.
The disparities in the pay of male and female are highly noticed in the finance and insurance
sector of the country. MacAskill and James (2018) have reported that HSBC has the largest
gender pay gap among all the large organizations in Britain. On an average, HSBC paid men
59% more than women.
The differences between the pay of female and male are also widened up in the increasing
hierarchical position and it is very challenging for females to secure higher positions in the
company. There are several factors that affect the compensation of female in an
organization. Working part-time in motherhood and ageing is the most common factor that
affects the female pay as when the female becomes a mother and works part-time, they lost
opportunity and benefits of experience which is rewarded in the form of higher pay ( Sila, et
al., 2016). The part-time working resulted in closing the opportunities of wage progression
for women. Another factor is the negotiation between the male and females which results
in lesser salary increment for women than men. The men get 4.3% initial salary increment
whereas the women get only 2.7% initial salary increment.
In order to minimize the gender pay gap, the government of several countries have set or
proposed to set quotas for female participation by introducing new legislation or by
voluntary practices of companies through corporate governance codes (Palvia, et al., 2015).

The enactment of legislation for setting the quota of female representatives on corporate
boards has been advanced by the government of several countries such as Norway, India,
Belgium, France, Brazil, Spain, Germany, Iceland, Israel, Malaysia and Italy.
 In India, the quota for at least one female director on board of listed companies has
been imposed by the Company’s Act 2013.
 In 2006, the government of Norway has introduced the law for the listed companies
to have 40% quota of female on board (Deloitte, 2017).
 In Australia, the corporate governance council ASX has proposed to include 30%
quota to its guidelines.
 Spain and Ireland, has introduced legislation for publicly listed companies to have
40% female representation on board.
 In the Netherlands, public companies having 250 or more employees are required to
have 30% female board representatives.
 The public companies in Italy are required to have 33% of either underrepresented
gender.
 33% of female directorship is required by the companies in Belgium.
 In Israel, legislation for one female director for the public company was introduced in
1999 (Deloitte, 2017).
 In Brazil, the quota for female on board is 40%.
 In Iceland, a legislation forced in 2018 has enforced that the men should not be paid
more than women on equivalent work.
Besides of the set quotas and legislation, some countries such as the UK, US and Sweden are
also regulating gender disparities by voluntary adherence of the company’s through
following best practices in corporate governance codes (Srivastav and Hagendorff, 2016).
The corporate governance codes approach is adopted by the governments to address the
gender representation issues.
In the UK the following acts codify corporate governance practices for gender equality:
 Equal pay act 1970: - this act prevents discrimination between men and women in
terms of employment conditions and pay.

 Equality act 2010: - this act protects discrimination in the workplace and in wider
society on the grounds of age, gender, religion and belief. It codifies all equality
enactments in the UK (Srivastav and Hagendorff, 2016).
Despite this, the UK government pressures the organizations to reduce gender pay
disparities. The present government has introduced the mandatory pay gap reporting for
the companies having 250 or more employees to make such information public so as the
organizations should become accountable for improvement in gender pay gap.
Effect of increased female proportion on risk-taking
The corporate board is a composite of several complex factors such as culture, behaviour,
cognition and risk-taking attitude of the board members these factors have a direct impact
on the performance of the company. Both male and female play a significant role in the
success and growth of the organization according to their experiences and skills. But the
efforts of women were always neglected and less valued. In the present corporate scenario,
females are performing dynamic roles and responsibilities equivalent to male counterparts.
According to Adams and Ferreira (2009), the female directors play a significant role in the
inputs of board and impact on the outcomes of the company. The authors have found that
the attendance of female directors is better than male directors in a gender diverse board
and it facilitates better monitoring. The increased female representation in the board could
condition the behaviour of the male members as the females are most likely to undertake a
monitoring role in the business.
Irrespective of the proportion of female board members, the extent of risk-taking did not
differ even during the 2007-08 crises across the banks in the US and it is also founded that
the small banks having female CEO are less likely to fail during the great financial crisis in the
US. During the financial crisis, the excessive risk-taking of executives was arranged against
the increased pay and substantial incentives (Bolton, et al., 2015). It has caused an outrage
over the executive pay in the country. If the CEO were female during the financial crisis and
corporate scandals the outrage over the CEO pay may not be as severe as it becomes
because the pay to the female representative was always less than male representatives
irrespective of their risk-taking abilities and experiences.

Secure Best Marks with AI Grader

Need help grading? Try our AI Grader for instant feedback on your assignments.

Several studies have revealed that the females are more risk-averse than males and it is the
main reason for underrepresentation o females on board. On the contrary, Maxfield et al.,
(2010) have stated that tagging females as risk-averse may adversely affect the firm's
performance and limit the benefits of firm and women from their risk-taking abilities. A
research conducted by Loukil and Yousfi (2016) of the influence of board gender-diversity in
the firm risk-taking in a developing market has shown that the firms with more female on
board hold more cash. However, there is no significant relationship between risk-taking and
gender-diversity on investment and financial policies.
In considering the role of female executives in improving the performance of the company,
Kommends et al. (2018) has stated that a team of female and male creates best dynamic for
working as the male become caring on working with female and female become less
competitive and more caring and it will create a positive working environment and
enhances the performance.
Actually, this report is not about having more and more female representatives, but, having
a proper balance between the females and males within the organization for creating the
dynamic atmosphere. It favours a proper balance between the employment conditions and
compensation among all the board members and other executives of the company. For this,
it is recommended to remove the gender pay gap with the top positions within the
hierarchy of the corporations.

CONCLUSION
This report has focused on two important perspectives for deciding executive compensation
in an organization. The first perspective has highlighted the role of executive compensation
in the banking sector. It is focused on incentives for CEO for maximizing the value of
shareholders and breaks the contrasting claim between the managerial power approach and
the optimal contracting theory. It has critically evaluated the employee compensation
reforms in the banking industry and also explained the concepts such as malus and
clawback, long-term incentives and deferred compensation. The second perspective is
based on the female participation on board of the organization. The legislation and policies
regarding quotas on female participation on board in several countries have been evaluated
the impact of increasing female proportion on the performance and risk taking abilities of
the firm is also discussed. This overall report will help HSBC to determine efficient executive
compensation decisions within the organization.

REFERENCES
1. Adams, R.B. and Ferreira, D., 2009. Women in the boardroom and their impact on
governance and performance. Journal of Financial Economics, 94: 291-309.
2. Adams, R.B. and Ferreira, D., 2012. Regulatory pressure and bank directors’
incentives to attend board meetings. International Review of Finance, 12(1), 227-
248.
3. Aebi, V., Sabato, G. and Schimd, M., 2012. Risk management, corporate governance,
and bank performance in the financial crisis. Journal of Banking and Finance, 36,
3213-3226.
4. Anderson, R.C., Reeb, D.M., Upadhyay, A. and Zhao, W., 2011. The economics of
director heterogeneity. Financial Management, 40(1), 5-38.
5. Beltratti, A. and Stulz, R., 2012. The credit crisis around the globe: Why did some
banks perform better? Journal of Financial Economics, 105, 1–17.
6. Bennett, R.L., Guntay, L. and Unal, H., 2015. Inside debt, bank default risk and
performance during the crisis. Journal of Financial Intermediation, 24(4), 487-513.
7. Berger, A.N., Kick, T. and Schaeck, K., 2014. Executive board composition and bank
risk taking. Journal of Corporate Finance, 28, 48-65.
8. Bhagat, S. and Bolton, B., 2014. Financial crisis and bank incentive compensation.
Journal of Corporate Finance, 25, 313-341.
9. Bolton, P., Mehran, H. and Shapiro, J., 2015. Executive compensation and risk-taking.
Review of Finance, 19(6): 2139-2181.
10. Burns, N., Minnick, K. and Starks, L., 2017. CEO tournaments: A cross-country
analysis of causes, cultural influences and consequences. Journal of Financial and
Quantitative Analysis, 52(2), 519-551.
11. Cheng, I.H., Hong, H. and Scheinkman, J.A., 2015. Yesterday’s heroes: Compensation
and risk at financial firms. Journal of Finance, 70, 839-879.
12. Deloitte, 2017. Wonen in boardroom: a global perspective. [online available at,
https://www2.deloitte.com/content/dam/Deloitte/ch/Documents/risk/ch-en-
women-in-boardroom.pdf] [last accessed on 27th august 2018].
13. Fernandes, N., Ferreira, M.A., Matos, P. and Murphy, K.J., 2013. Are U.S. CEOs paid
more? New international evidence. Review of Financial Studies, 26(2), 323-367.

Paraphrase This Document

Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser

14. Frydman, C. and Saks, R.E., 2010. Executive compensation: A new view from a long-
term perspective, 1936–2005. The Review of Financial Studies, 23(5), pp.2099-2138.
15. Gillan, S.L. and Nguyen, N.Q., 2018. Clawbacks, Holdbacks, and CEO Contracting.
Journal of Applied Corporate Finance, 30(1), pp.53-61.
16. Kaplan, S.N. and Minton, B.A., 2012. How has CEO turnover changed? International
Review of Finance, 12(1), 57–87.
17. Kaplan, S.N., 2013. CEO pay and corporate governance in the U.S.: Perceptions, facts,
and challenges. Journal of Applied Corporate Finance, 25(2), 8-25.
18. King, T., Srivastav, A. and Williams, J., 2016. What’s in an education? Implications of
CEO education for bank performance. Journal of Corporate Finance, 37, 287-308.
19. Kommends, N., Barr, C., and Holder, J., 2018. Gender pay gap: what we learned and
how to fix it. [online available at, https://www.theguardian.com/news/ng-
interactive/2018/apr/05/women-are-paid-less-than-men-heres-how-to-fix-it] [Last
accessed on 27th august 2018].
20. Loukil, N. and Yousfi, O., 2016. Does gender diversity on corporate boards increase
risk‐taking?. Canadian Journal of Administrative Sciences/Revue Canadienne des
Sciences de l'Administration, 33(1), pp.66-81.
21. MacAskill, A., and James, W., 2018. HSBC has the worst gender gap among Britain's
largest companies. [online available at, https://uk.reuters.com/article/uk-britain-
gender-pay/hsbc-has-worst-gender-pay-gap-among-britains-largest-companies-
idUKKCN1HB2DS] [Last accessed on 27th august 2018].
22. Maxfield, S., Shapiro, M., Gupta, V. and Hass, S., 2010. Gender and risk: women, risk
taking and risk aversion. Gender in Management: An International Journal, 25(7),
pp.586-604.
23. Nguyen, D.D., Hagendorff, J. and Eshraghi, A., 2015. Which executive characteristics
create value in banking? Evidence from appointment announcements. Corporate
Governance: An International Review, 23, 112-128.
24. Office national statistics, 2017. Gender pay gap reporting: overview. [online available
at, https://www.gov.uk/guidance/gender-pay-gap-reporting-overview] [Last
accessed on 27th august 2018].

25. Palvia, A., Vähåmaa, E. and Vähåmaa, S., 2015. Are female CEOs and chairwomen
more conservative and risk-averse? Evidence from the banking industry during the
financial crisis. Journal of Business Ethics, 131(3): 577-594.
26. Sila, V., Gonzalez, A. and Hagendorff, J., 2016. Women on board: Does boardroom
gender diversity affect firm risk? Journal of Corporate Finance, 36: 26-53.
27. Srivastav, A. and Hagendorff, J., 2016. Corporate governance and bank risk-taking.
Corporate Governance: An International Review, 24(3): 334-345.
28. Vallascas, F. and Hagendorff, J., 2013. CEO bonus remuneration and bank default
risk: Evidence from the U.S. and Europe. Financial Markets, Institutions &
Instruments, 47-89.