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GCC COMPENSATION AND BENEFITS TRENDS IN 2014INSIGHTS FROM TOP COMPANIES

SuMMARy

As the economic forecast for the region brightens up, many organisations are preparing for business growth and expansion. This has a great impact on the people operations in the business and especially on compensation and benefits to ensure employee pay and benefits are competitive to retain and engage top talent.

The report summaries a GCC wide survey conducted with nearly 160 companies across many sectors. Respondents were asked to report on key pay indicators inside their companies in 2012 – 2014 to analyse major pay movements and trends. A trends analysis of various compensation and benefits instruments in the region including flexible benefits and employee wellness is then presented.

The report also outlines the key strategic priorities for the profession in the next 3 years while forecasting some of the key challenges to C&B that come with growth.

SAlARy MOvEMENTS, BONuSES AND ATTRITION RATES IN THE GCC

There seems to be an upward trend in annual pay reviews in 2014 compared to 2013. Last year, nearly half of companies survived reported salary increases of 4.5% or less. That number dropped significantly to about one third of companies in 2014. This signalled a big jump in salary increases of over 4.5%.

Nearly 25% have or will pay 5 or 5.5%, while only 14.5% of companies reported 6% increase or higher in 2014.The survey also highlighted that a full 29% of companies did not know how much they would pay on salary reviews in 2014.

Given the trends and comments on inflation and rising cost of living, it is not surprising to see a significant increase in the numbers of companies paying 5.5% or 6% and higher on pay reviews in 2014.

A STuDy By

Don’t know

6.5% or higher

6% 5.5%

5%

4.5%

4%

3.5% or lower

29%

34% 18%

15%

5%

5%

6%

10%

27% 18%

4%

9%

7%

4%

10%

2014

2013

REPORTED PAy REvIEw INCREASE IN 2013 vS PROjECTED INCREASE IN 2014

With economic recovery and positive market outlooks, total rewards professionals are presented with a new set of challenges and priorities.

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The movement of bonus payments is also expected to continue to 2015 as 56% of companies estimate they will be paying the same rate or higher.

This trend could be attributed to a multitude of factors but namely the renewed growth outlooks for the region, as well as the impact of the Dubai Expo 2020 and the 2022 FIFA World Cup in Qatar.

EMPlOyEE RETENTION REMAINS A BIG CONCERN

More than 40% of companies in the region have reported an alarming 8% or more attrition rate in 2013 with nearly 20% of those expecting more than 10% attrition.

These figures are reflective of the ‘war of talent’ the region is experiencing as a result of economic recovery and changes in the regional labour landscape.

EMPlOyEE ATTRITION RATES IN 2013

HOw 2014 IS lOOkING COMPARED TO 2013EMPlOyEE ENGAGEMENT IS NOw TOP PRIORITy

Participants were asked to indicate the top 3 priorities for their total rewards strategies in in 2014 - 2015, and the results are quite telling.

Employee engagement is now at the top of strategic agendas for HR in the region. More and more, companies are realising the long-term imperative of an engaged workforce.

Naturally, employee retention comes 2nd and as seen earlier, reward managers now clearly see the link between engagement, retention and total rewards overall.

Revamping salary scales to accommodate the changes in pay trends in the region has now become a key priority for compensation professionals for 2014 and beyond.

DIvIDED REACTIONS TO INCREASING HOuSING COSTS

For about one third of respondents, cost of living and inflation pressures were identified as significant enough to become a new focus of their C&B strategy this year. Most notably in the UAE, the rise in housing costs and employee expectations is now a major concern.

This however does not seem to apply to all companies. A selection of respondents declared that they are not going to do anything about housing costs as their

packages are currently well positioned to accommodate the changes.

Some have also highlighted that there is now more “noise” from employees, but as the costs were not reduced in the deflation following the recession in 2008, they feel they are still in a good position to manage.

For companies who have already taken actions to mitigate housing cost, it is obvious that every company is approaching the issue differently. The key approaches by companies in the GCC can be summarised as follows:

Increasing housing allowances is the most popular approach at the detriment of basic salary increases

Increasing base pay or gross salary Adjusting the Cost of Living approach Linking housing allowance to housing

cost indices Looking for accommodation at lower

costs Moving back to providing company

accommodation

Similarly, a significant number of companies expressed concern over education costs and that they are monitoring such costs as they may have an impact in 2015.

The impression however, is that while there is adaptation to increasing costs, companies are cautious not to get into an uncontrollable spiral of increasing labour costs. A typical reaction was:

4% or lower

5%

6%

7%

8%

9%

10% or higher

Don't know

31.0%

11.4%

7.0%

3.8%

12.7%

10.8%

17.7%

5.7%

Employee engagement is now at the top of strategic agendas for HR in the region. More and more, companies are realising the long term imperative of an engaged workforce.

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MORE COMPANIES ARE NOw CONSIDERING FlExIBlE BENEFITS

The issue of flexible benefits in the region seems to be causing a big divide. While some companies are interested in the concept and are actively considering it at varying levels, a lot believe it won’t work in the region and have dismissed it entirely. Only one company reported that there is a ‘flex’ program in place in their organisation.

Just like in 2013, most are sceptical of its application in the Middle East. This is very clear as ‘employee benefits’ are at the bottom of strategic priorities for Compensation & Benefits in 2014, as reported above.

The enforcement of mandatory medical benefits in Abu Dhabi and Dubai was occasionally highlighted as an opportunity to implement flexible benefits. Generally speaking however, the sentiment now is that “it is doable, but requires an organisation that is ready for it. Before it is introduced, it needs a corporate culture that is open to flexible benefits and more importantly, the expertise to establish, manage, communicate and administer the program”.

Some common advice was to start with a small number of benefits, or apply flex for “certain categories, not all, with appropriate awareness and education”.

And “whilst this is favourable to employees, it has the potential to become a higher direct salary cost for employers where certain benefits are restricted to certain grades. It is important to show a holistic approach to benefit management if considering this option. The balance of costs needs to be taken into account, as well as employee retention and attraction to really see the value of such a model”.

Another respondent commented that “it is very expensive to hire someone to manage and integrate flex. It would be a very valuable tool for employers if it can be done in-house”.

Some of the main challenges to implementing flexible benefits as highlighted by respondents:

There is no tax advantage to flex in the GCC

Providers in the Middle East don’t seem well equipped to handle requests for flexible benefits yet

The portfolio of benefits offered by companies is limited to statutorily required or practice driven - hence offering flexibility really adds no value

With fixed labour contracts, the chances of easy implementation are weak

Flexible benefits are not envisaged at this stage for blue collars and low-skilled / low-pay employees

Many expats in the region are looking for fixed pay and cash compensation, and a major challenge is to drive change in employee mind-sets

EMPlOyEE wEllNESS IS NOw A TREND IN THE GCC – OR IS IT?

More than half of companies interviewed seem to have some form of an employee wellness programme in place. A number of companies indicated they are working on introducing or revamping their schemes based on results from internal opinion surveys or employee engagement surveys, showing that they are taking into account feedback from these studies.

52%

TOP AREAS OF STRATEGIC FOCuS

Improve employee engagement

Improve employee retention

Revamp salary scales / grades

Manage cost of allowances

Manage salary increases

Moving to a Total Rewards framework

Other issues related to compensation

Working on an EVP Model

Integration with HR

Employee mobility

Other issues related to benefits

Executive compensation / retention

Introduce employee wellness programmes

44%

43%

30%

25%

24%

16%

11%

11%

10%

10%

10%

6%

No flexible benefits revolution in the Middle East in sight, but more regional companies are starting to consider it.

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MORE GROwTH IS ExPECTED BuT NEw CHAllENGES EMERGE

When asked about growth and expansion plans, most respondents indicated that their organisations are planning to grow primarily in the GCC, with some moderate expansion and growth planned for the Levant and Africa.

Challenges however are outlined in the difficulty to obtain good and relevant compensation data for these new markets. This is coupled with fierce competition to attract and retain talent in these markets with few skilled local Nationals and hard-to-mobilise expats - due to real or perceived, risk levels - in the Levant and Africa.

Looking 3 years ahead, respondents also identified a series of challenges in managing Total Rewards in their industry.

After years of relatively stable packages during the aftermath of the global crisis, employee expectations are on the rise again. There concerns about cost of living increases and higher inflation, especially in respect to housing and schooling, which are major expenditures for all families in the GCC.

This will have a big impact on retention and attraction of talent, especially in view of the expected increase in competition in the market. Companies anticipate a renewed war for talent fuelled by the return of solid growth in the region, and compounded by the impact of hosting World Expo 2020 in Dubai, and the 2022 FIFA World Cup in Qatar.

NATIONAlISATION IN THE GCC AT THE FOREFRONT

Nationalisation challenges become more pressing and are expected impact the work of Compensation professionals. In Saudi Arabia, it is said that over 900,000 expats left the country at the end of 2013 following the crackdown on illegal workers spurring a direct increase in labour costs.

All GCC countries have national plans in place to increase the number of local Nationals in the private sector. Attracting and retaining Nationals will be a key challenge to HR and C&B specialists. There will be a need to become creative in designing schemes that allow their companies to make the best of the available local talent pool.

Respondents have also forecasted a need to create or introduce flexibility in package design. Many organisations, especially local ones, are conglomerates in the region and even though they address different industries, they often offer unified packages. This may have to change in order to effectively face the specific needs of each of the industries they operate in. Total Rewards approaches will have to be developed, accompanied by intense awareness and communication campaigns to educate employees and ensure they understand the full extent of the value of their package.

Better performance management and individualisation of pay was also forecasted to be needed in order to keep attracting and retaining key talent. As one respondent puts it: “Transitioning to a skills/performance-based pay will become our key challenge.”

In contrast, about the same number of respondents said that they had introduced wellness plans in their organisations, but faced a number of challenges in the uptake from employees which may be due to issues in properly executing and communicating the scheme.

Others indicated challenges in identifying suitable providers and getting top-level buy-in as well as resistance from middle managers.

Majority of companies however believe that there is still much education needed in some organisations to convince all stakeholders (management as well as employees) that wellness programmes have a tangible impact on the bottom line through reduced absenteeism, lower increases in healthcare premiums, and higher employee engagement.

A 3 yEARS OuTlOOk FOR TOTAl REwARDS IN THE GCC

Nationalisation in the GCC is now among key priorities for compensation and benefits in the region.

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DATA, MANAGING COSTS AND POlITICAl STABIlITy ARE ON TOP OF THE lIST

When asked about the most challenging aspects of being a C&B specialist in the region, many respondents reported some technical aspects of the job.

Obtaining good quality data in the region has been notoriously difficult for years, and the comments are still as valid as ever, citing issues around availability and validity of market data as well as transparency and credibility of data providers.

In particular, a significant number of respondents highlighted the lack of reliable information by industry, which is very much needed to assess packages, especially with the current backdrop of renewed war for talent.

In such a context, keeping up-to-date with trends proves difficult, and attracting talent while keeping costs low in a context of increasing competition is a conundrum that many are facing. As one reward professional said, it is a struggle to maintain the balance “between a company’s capacity and willingness to pay, and market rates”.

A few factors, specific to the region, complicate things further.

The political instability of the region, leading to uncertainty along with the speed of change in that landscape, has left many C&B specialists struggling to play effective roles in their organisations.

Furthermore, the composition of the workforce creates its own challenges, with a very diverse workforce with different expectations.

Nationalisation has had an indirect impact on rewards offering and the ability to be consistent and communicate a transparent framework to other employee segments. The constant focus of some Nationals on career development without as much emphasis on gaining experience is influencing the reality of salaries. Compensation professionals reckon that it is still difficult to attract, retain and develop Nationals in the current context.

On the expatriate side, the issue of ‘transient population’ where employees focus on a job rather than a career and are willing

to move on for a small increase in pay is making it difficult to keep staff motivated for a long time. This highlights the imperative need for stronger employee engagement programmes.

Lastly, a general lack of transparency about pay is seen as a breeding ground for further issues such as having to deal with exceptions and individual rewards. When employees don’t know their salary bands or compa-ratio, it is more difficult to get buy-in to move into a pay-for-performance culture.

A CAll FOR THE RECOGNITION

Just as importantly, there seems to be a need for more recognition of the role of C&B in the business, and the education of management to help move away from a traditionally administrative role. C&B specialists feel they need to be looked at as people with insight and knowledge into the fabrics of the workforce that will be used to improve overall performance. They however have to be agile and ready to respond to change in the new dynamic reality of business nowadays

wHAT IT IS lIkE TO BE A COMPENSATION MANAGER IN THE MIDDlE EAST

Great times for C&B in the region with big opportunities to aid business growth but challenges will intensify.

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ABOuT

The Annual Compensation and Benefits Forum is the industry's leading event in the Middle East and Africa. 2014 marks the Forum’s 18th edition of bringing together heads of compensation & benefits, rewards, performance and HR strategy to discuss the discipline’s hottest topics and pressing issues in the Middle East and beyond. See more at www.iirme.com/compensation

#TotalRewardsME

COMPIlED BySandrine Bardot

For almost 20 years, Sandrine took on positions with increasing responsibilities in Compensation & Benefits in multinationals such as Microsoft, Apple, Airbus and Fiat, leading to global positions of Head of Performance and Reward at Majid Al Futtaim (Dubai) then Mubadala (Abu Dhabi). She is now offering specialised C&B training, consulting and keynote speaking services throughout the GCC and Asia. As part of her outreach to educate the HR community on these topics, she authors a blog, Compensation Insider, with over 250 articles published to date. See more at www.compensationinsider.com

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ABOuT THE REPORTWe would like to thank all the compensation professionals who took part in this edition of the survey and helped to reach a realistic glimpse of the priorities and challenges they face across the region.

This report cannot be considered as professional advice as it only aims to give an overview of some complex contextual issues.

160 companies from the GCC participated in this anonymous survey. Respondent were from the UAE, Saudi Arabia, Oman, Kuwait, Qatar and Bahrain.