Changing Times: Reward Practices in the GCC Countries

Changing Times: Reward Practices in the GCC Countries by Geeta Kapoor This article was originally published in Compensation & Benefits International, December 2013 Abstract Five years after the beginning of the global financial crisis, many developed economies are still trapped in a downward spiral comprising a delicate financial sector, rising unemployment, a high debt burden and slower economic growth. Over the last 24 months, countries from the wider MENA* region, such as Sudan, Libya, Egypt and Yemen, have witnessed economic adversity as a result of the political unrest. All these factors have set new challenges for the Gulf countries in luring foreign investment and expatriate workers, the latter being the more crucial for these economies. Despite destabilization of the wider region s socio-economic situation and the fragile global economic system, the Gulf Cooperation Council countries, comprising Bahrain, Kuwait, Oman, Qatar, the Kingdom of Saudi Arabia (KSA) and the United Arab Emirates (UAE), are witnessing an increase in confidence and a return to form. My firm s recent Middle East 2013 Business Outlook Study affirms the positive mood, with two-thirds of participating organizations in the Middle East forecasting revenue growth in 2013 (see FIGURE 1 below). 50% MENA Region GCC Region 40% 30% 20% 37% 29% 39% 21% 41% 33% 43% 36% 10% 0% 2012 (Forecast) 2012 (Actuals) 2013 (Forecast) 2013 (Forecast) Over 5% Over 15% Figure 1: Organisations growing business and profitability (MENA and GCC region) HAY GROUP - JANUARY 2014 PAGE 1

A shifting landscape The production and export of oil and gas have historically been a catalyst in boosting economic growth in the region. The GDP of GCC has quadrupled since 2001, primarily driven by growth in the hydrocarbon sector¹, and the surplus from oil proceeds has enabled the Gulf economies to pursue economic diversification. However, evolving drilling technologies and a change in oil and gas demand from West to East, coupled with competition from North America on the export of natural gas and liquids has put pressure on the GCC to reduce dependency on oil and gas. Furthermore, the expatriate workforce, which has played a pivotal role in developing the region s infrastructure and economy over the last few decades, has come at a cost, namely a pool of underdeveloped local talent. With a strong vision to reduce reliance on activities in the highly volatile and risky hydrocarbon sector, GCC countries have articulated a medium- to long-term development strategy. The vision moving forward is based on diversification of economic activity and the creation of employment opportunities for nationals. Factors influencing reward To a large extent, local culture and global practices have moulded compensation and benefit practices in the Gulf region. Unlike more developed economies, pay packages are distinctive, as follows: Largely driven by an expatriate workforce, remuneration packages across the GCC consist of a basic salary and a basket of allowances, such as housing, transport, utilities or other miscellaneous allowances, which together form the guaranteed takehome pay. These varied allowances were introduced primarily with the objective of attracting and supporting the foreign workforce. However, over the years, this practice has found its way into the employment contracts of nationals. Extended assistance in the form of children s education allowances, health-care benefits and annual vacation travel (or an equivalent cash amount to nationals) are some of the most common benefit practices across the Gulf. Competitive remuneration packages, coupled with the lure of a tax-free environment and a comfortable lifestyle, have allowed the GCC to attract talent from around the globe. This often results in the foreign workforce taking up medium-term job opportunities, making it difficult to move these employees out of the region. Nationalization has been a priority of governments in the Gulf region for over a decade and it has been and still is one of the greatest challenges since nationalization targets were introduced. At one end of the spectrum, countries like Oman and Bahrain have a high proportion of nationals in the workforce while Saudi Arabia introduced the Nitaqat programme to boost the employment of Saudi nationals in the private sector* 2. Several similar initiatives result in differentiation in salaries for nationals and non-nationals, with nationals being paid a premium as part of an attraction strategy to meet nationalization targets. * For further information, please see How the Private Sector Can Gain a Better Return on Pay in Saudi Arabia by Aman Gautam and Majid Al Megil, B&C International, November 2012. HAY GROUP - JANUARY 2014 PAGE 2

The GCC has witnessed a greater influx of Western workers over the past decade, due to the more attractive employment opportunities there than in their home countries, plus higher incomes and living standards. Driven largely by the demands of the oil and gas sector, GCC countries are poised in the short term to attract talent from around the world even with the nationalization agenda being championed by governments. Despite the availability of employees, the GCC is facing a talent crunch. Lack of specific skills, competencies and/or experience in the local workforce makes it difficult for organizations to hire the right employees. In such scenarios, hiring the right person for the right job at the right pay level is the objective for most organizations. To handle the issue of a real shortage of skilled local employees, many organizations have linked up with universities to design the curriculum and provide vocational training to hone the skills of local talent. While there are overriding influences on the GCC markets, it would be a mistake to group them too closely, as each market has its own dynamics. The compensation mix in the GCC countries, shown in FIGURE 2 below, reflects this. I will now look at each of the major markets in turn. Figure 2: GCC Compensation mix 2012 GCC Compensation Mix - 2012 100% 100% 90% 80% 70% 90% 80% 70% 7% 36% 11% 9% 7% 9% 8% 11% 9% 7% 9% 8% 16% 23% 24% 29% 39% 60% 60% 50% 40% 30% 50% 40% 30% 57% 57% 65% 65% 68% 54% 61% 76% Var Fixe Bas 20% 20% Variable Payments Fixed Allowances 10% 10% Basic Salary 0% 0% UAE KSA Bahrain Qatar Oman Kuwait UAE KSA Bahrain Qatar Oman Kuwait HAY GROUP - JANUARY 2014 PAGE 3

UAE: Rising Costs and Emiratization Economic growth over the past decade in the UAE has fuelled inflation and living costs. The expatriate population, in particular, feels the pinch of soaring medical costs, constantly increasing housing rents and upwardly spiralling education expenses. Adjusting salaries and benefits to reflect nuances in the cost of living continues to remain a contentious issue for organizations. On average, insurance premiums have increased by 25-40 % over the last three years. In response to the rising premiums, organizations are moving away from including dental and optical benefits in their coverage, are restricting the choice of hospitals within the country and have reduced maternity coverage. Employers have typically covered seasoned professionals and senior management for children s education benefit in the past. Most organizations cover full fees within the country up to a maximum amount and cap the number of children for expatriate workers. However, employees continue to ask for more, as education costs are on the rise and have been compounded by yet another 6% in 2012 to 2013³. Over the last few years, not only have organizations marginally revised their education allowances, but they have also extended this benefit to employees across the board, safeguarding employers from giving a higher basic salary increase and thereby reducing their long- term liability towards End of Service Benefit. As with other GCC economies, the UAE Government is moving towards increasing the representation of Emiratis in the workforce. State-owned oil and gas organizations and the banking sector continue to have the highest levels of Emiratization. While the Government has introduced several measures to drive the nationalization agenda, private organizations find it difficult not only to attract nationals with the right skill set, but also to retain them. My firm s UAE 2012 Compensation and Benefits Report shows that the majority of organizations find compensation an obstacle in attracting and retaining UAE nationals. In the efforts to meet this objective, organizations typically differentiate in pay by providing a premium to Emiratis either through a higher basic salary or a national allowance. With some variation between positions, the technical requirement of the job and availability of skilled local talent, this premium differentiates the pay between Emiratis and expatriates by c. 65% at basic salary. This differentiation in pay is typically witnessed at the entry-level positions and diminishes with the progression into senior management roles. In addition, some employers take on interns from leading universities to train them on the job and eventually offer them full-time roles. Several organizations have a graduate training programme targeted at vocational training for fresh graduates before they become part of mainstream operations. Often, these organizations have a separate graduate pay policy that is applicable depending on the level of education. HAY GROUP - JANUARY 2014 PAGE 4

Saudi Arabia: Nitaqat s Impact on HR The Kingdom of Saudi Arabia has long been an advocate of nationalization, a practice not restricted to the public sector but also affecting foreign-owned organizations. The Nitaqat programme was introduced to ensure that organizations abide by the mandate of employing Saudi nationals depending on the size of operations. The objective is not confined to reducing high unemployment among Saudi nationals, but includes building a sustainable workforce and ensuring that knowledge transfer takes place with a view to eventually creating a self-reliant economy. Every organization is required to register with the Ministry of Labour and falls into one of four categories based on compliance with Saudization ratios: red, yellow, green and platinum. Although figures indicate the Nitaqat programme is succeeding in augmenting recruitment of Saudi nationals, organizations are challenged by competition from the public sector which is known for its relatively competitive pay packages and attractive working conditions. Employers are witnessing a shortage of skilled talent and experienced Saudi professionals, typically in the fields of IT, engineering, finance, production and HR. This talent crunch, combined with Saudization targets, has resulted in a further widening of the pay gap between Saudi nationals and nonnationals. Saudi nationals now receive 17% higher salaries than the market average. In an attempt to attract Saudi nationals, organizations also offer a premium to new Saudi recruits. In order to tackle low wages and further promote Saudization, the Government has introduced a minimum monthly wage of SR 3,000* for Saudi nationals in the private sector. Failure to comply with this will result in punitive measures being taken against employers. To ensure organizations abide by the minimum wage, the Saudi Government is in the process of implementing a wage protection programme which requires organizations to file employee wage details and will help track delays in salary payments. In addition, the Saudi market is witnessing an increased focus on performance management which is evident from the evolving remuneration mix. The composition of variable pay as a proportion of an employee s total salary of has doubled to 8% over the last three years. This has been even higher at the senior management level. However, the proportion of salary attributed to variable pay is still low in comparison with global standards. With increasing salary costs owing to factors such as Saudization, the introduction of a minimum wage and a skills shortage, HR professionals are being prudent in focusing on pay for performance to remain commercially competitive in a costconstrained environment. * 1 = SR 6.07; 1 = SR 5.17; US$1 = SR 3.75 as at 27 October 2013 HAY GROUP - JANUARY 2014 PAGE 5

Qatar: Focus on Youth and Development Human capital development is one of the four fundamental pillars of Qatar s Vision 2030. Although Qatar has been dependent on the exploitation of its oil and gas resources in recent years, the Government recognizes the need to diversify economic activity and invest in the ability of Qatari nationals who will ultimately shape the nation. As the State has witnessed a significant increase in oil and gas and related industries, it continues to attract sector-specific talent from around the globe. To lure skilled expatriates, Qatar, like other GCC nations, offers a wide range of allowances and benefits. In light of the increasing cost of living over the last 12 to 18 months, many organizations have made significant adjustments to housing allowances. Oil and gas companies, in particular, provide the highest allowances in the GCC. Another unique characteristic of compensation in Qatar is the differentiation in allowances determined by sponsorship and marital status. Typically, employersponsored employees and married employees receive higher allowances compared with colleagues who are not under the employer s sponsorship or who are single. Qatar made the headlines in 2012 by increasing the salaries of Qatari nationals employed in the Government by 60 per cent. Because private-sector activity is predominantly dependent on foreign workers, the 60 per cent increase affected only a small population of Qatari nationals (those employed in oil and gas and financial services). However, it led to a significant divide between the salaries of Qatari nationals and the expatriate population and has been detrimental to the efforts of nationalization in the private sector. Furthermore, frequent job-hopping of Qatari nationals, for a lucrative salary package, has created artificial wage inflation in the country. Preparation for hosting the FIFA World Cup 2022 will help Qatar diversify from the oil and gas sector, as it requires significant investment in construction and infrastructure sectors which will open up opportunities to develop the skill base Qatari nationals. While some organizations are already hiring young Qataris as part of their recruitment drive to train and develop them on the job, others have an arrangement with the universities to select talented nationals currently in high school and then sponsor their higher education and vocational training. The overarching objective here is to nurture homegrown talent and build loyalty towards the organization in the early days of an individual s career. HAY GROUP - JANUARY 2014 PAGE 6

Oman: Minimum Wage and Performance Management One of the GCC countries to feel the brunt of regional unrest, Oman has recently gained popularity as an employee-friendly market. Several government initiatives are aimed towards Omanization, improved working conditions and increasing salaries for low-level jobs. At the start of 2013, organizations gave a minimum salary increase of 3% to Omanis. Mandated by the Government, many organizations perceived the policy to be compulsory, although there is flexibility as long as the organization has appropriate justification for paying below 3%. However, in the absence of a robust performance management system, the increase was in most cases given across the board, thus potentially leaving high performers feeling short-changed, and weak performers none the wiser as to how reward is related to their performance⁴. By and large, this increase was extended to include non-nationals in an effort to maintain internal equity. This was the first year that the minimum rise legislation took effect and there is now a sense of urgency to design, develop and implement a performance measurement process which is fair and transparent and drives a high-performance culture in addition to rationalizing the increase in payroll costs. Over the last two years, Oman has witnessed an increase in the minimum wage of Omanis not once, but twice, from RO 200* to RO 325, representing a sizeable jump of 63%. The Government s underlying objective is to drive Omanization by increasing the attractiveness of the private sector. However, this increase in minimum wage affects the low-level jobs and creates upward pressure on salary scales, making it inevitable that organizations will need to review and align their compensation structure. There is a risk of the Omanization agenda slowing in the short term, as organizations need to re-budget and provide both for the minimum increase and for subsequent adjustments made to salary scales year on year. Unlike other GCC economies, Omanis typically comprise 76% of an industry s workforce and are employed in a diverse range of jobs. Several initiatives have been taken by the Government to boost Omanization and reduce reliance on foreign workers. For example, certain roles, such as Human Resource Manager, are ring-fenced for Omanis.5 These positions remain vacant should no suitable applicant be found. The Government has also invested in developing people by providing vocational training through Technological, Vocation Education and Training Oman (TVET Oman). Despite taking such measures, employers still find it difficult to achieve Omanization targets in certain industries and this is primarily attributed to the shortage of experienced and skilled employees in the Sultanate. HAY GROUP - JANUARY 2014 PAGE 7

Kuwait: Correcting a Demographic Imbalance As part of the ambitious Kuwait Development Plan introduced by the Government in 2010, Kuwait s focus is on the development of its infrastructure. This plan is backed by a partnership between the public and private sectors and aims to create employment opportunities, boosting Kuwaitization in the private sector. Currently, a large proportion of the Kuwaiti workforce is employed in the Government, resulting in salary cost being one of the Government s major expenses. Furthermore, the economy is heavily reliant on the skills of expatriates who comprise two-thirds of Kuwait s population. In efforts to reduce dependence on expatriates, the Government has announced plans to reduce the expatriate population by 100,000 over the next 10 years. However, replacing expatriates in the private sector with Kuwaiti nationals will pose a challenge due to higher salary packages offered in the public sector. To attract Kuwaiti nationals into the private sector, employers currently pay a 37% premium. In addition, Kuwait s employment market is troubled by the issue of attrition which stands at 12% and is higher than that in any other GCC country. However, the oil and gas sector remains unaffected by this challenge, as it continues to be a paymaster offering salaries with a premium of 132% more than the general market. To meet the objective of reduced dependency on expatriates in the years ahead, the Government and private-sector organizations together need to take prudent measures to ensure that the knowledge and skills transfer from expatriates to Kuwaiti national employees takes place in order to fill the void. Bahrain: Stable Reward Practices Following the onset of the global financial crisis and social and political unrest in the country, the economy of the Kingdom has witnessed restrained growth in non-oil and gas sectors, such as tourism, real estate and construction. Well known as the region s financial hub, the economy was hit hard with the onset of political unrest in 2011. Despite the Kingdom s small oil reserves, oil still contributes to 70% of the revenue generated for the economy. During recent turbulent times, many multinational organizations have moved employees to more stable neighbouring countries like the UAE and Qatar. A small number of organizations have also relocated their office base in the interests of safeguarding the business. Reward practices, however, remained stable in this volatile environment. Salary increases in Bahrain have remained within 4% over the last four years. Unlike other GCC states, a large population of the Bahraini workforce is employed by private-sector organizations. My firm s Bahrain 2012 Compensation and Benefits Report highlights that 18% of the employees in Bahrain have been working with the same employer for over 20 years, suggesting a strong employer value proposition and sense of loyalty. HAY GROUP - JANUARY 2014 PAGE 8

Looking ahead By 2020, the population of GCC countries is expected to increase by 30% compared with 2000. Furthermore, with real GDP growth of 4.6% in 201213- being higher than the global average of 3.6%, the GCC forecasts a promising outlook. Surplus proceeds from the production and export of oil and gas have enabled high government spending, encouraging diversification and non-oil industrial growth. The focus will continue to remain on growth in manufacturing and heavy investment in petrochemicals, fertilizers, metal production and construction.6 Looking to the future, in order to boost the influence of GCC on an international platform, talks on moving towards a single monetary union are going to be back on the agenda of the GCC states. However, lessons from the EU crisis will encourage caution. A consolidated monetary union will not only boost internal trade among GCC states, but will also position the GCC economies on a growth trajectory. In addition, the envisaged Gulf Railway which would connect the member states will further boost economic activity in the GCC. The integrated railway system will lead to diversification of the transport industry and will create job opportunities. It is therefore vital that nationalization is implemented with a long-term focus. While some member states are working on reforms in the education sector, there is a need for investment in high-quality education to build a steady pipeline of local talent. This bodes well not just for the growing industries but also for the future of these economies. In the long run, a steadier pipeline of skilled local employees will ensure market factors take over and the salaries of locals vis-à-vis expatriates will fall into line. It will create a much wider talent base and a competitive talent market along with lower demand for expatriates - but there is still a long way to go. While it is clear that there are challenges ahead for each of the GCC markets, they do have a number of fundamentals in common: economic growth through diversified activity is on the agenda, as is long-term human capital development, knowledge transfer and the constant evolution of compensation and benefit practices References 1 GCC Economic Insight 2012, Qatar National Bank SAQ, 2011. 2 Nitaqat in the Spotlight, Hay Group, May 2012. 3 Dubai private schools rake in $1 bn, fees up 6%, Arabian Business, 14 May 2013. 4 Warren D Cruz, New employment law will boost performance in Oman, Times of Oman, 2 April 2013. 5 Omanisation Plan for various Sectors, Sultanate of Oman Ministry of Manpower, 2013. 6 See 1 above and Sultanate of Oman Ministry of Manpower. HAY GROUP - JANUARY 2014 PAGE 9