The rise of disposable income

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Declan Ball, head of corporate human resources at EFG Hermes, the Middle East's leading homegrown investment bank, has witnessed the changes in compensation schemes in the region over the past 20 years. He tells Arabian Business: "In terms of compensation there are three components: fixed compensation, annual variable compensation, and long-term variable compensation.

Fixed compensation is the money you can guarantee at the end of the month, namely salary and benefits. Variable is a bonus that is paid for performance over a year. Long-term variable compensation is based on performance for more than a year, and usually consists of equity."

One reason why disposable incomes are high in the region is because companies need to attract talent, and they cannot use equity for a number of reasons. "First, some regulatory environments do not allow it. It is easier in the UAE than in Saudi. Companies in Saudi can do it, but they can't provide equity, what they provide is a performance plan which mirrors equity."

The second reason is that the view is often taken that GCC stock markets are much more volatile than the developed world as there is more speculation... and the third reason is that many companies, especially the large family owned companies are psychologically reluctant to give equity."

To offset the lack of equity compensation, disposable incomes have soared. This has a detrimental effect on regional companies. Ball says: "If you get an equity scheme correct, the beauty of it is that it pays for itself. You join a company that pays you US$200,000 - that is out of the pocket of the company and they have to pay you that. If your performance is related to genuine performance in the company's profits, it pays for itself, and if they give you shares in the company, the money comes from stock market performance. People are only prepared to take the risk if they know the legal system protects them, and secondly that there is trust that the company will live up to its obligation."

Attracting talented managers is an essential business objective for the development of competitive global companies, and compensation is one of the most important draws. Equity will become a more important component not just to attract employees, but also to retain them. Ball has experienced this first-hand in his quest for talent: "As people gain seniority in a company, they will eventually demand equity."

Salary structures will inevitably change, especially as the region adapts more to the needs of foreign workers. Performance and long-term incentives will become more prevalent. "The more market driven the GCC economy is, the more it will reflect global standards. Because there was a tendency in the region to emphasise cash, the reform and changes will not happen overnight, and will be gradual," Ball says.

Another factor that will force change is the declining dollar and competition from other emerging markets. Gandhi, at Hay Group, says: "India was ranked 36 in terms of compensation, but with growth rates of 15 to 20%, it is catching up to the rest of the emerging markets. The depreciation of the dollar (and the strength of the rupee) is making it more difficult for companies to compel Indians to leave their country."

High disposable incomes (the expatriate model) will continue to be the main attraction for workers, but equity will eventually contribute more to the overall compensation package. For senior managers in the region, like our friend at the insurance company, the choice is between a windfall now, or a potentially bigger windfall in the future.

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READERS' COMMENTS

DISPOSABLE INCOME
Posted by Buddhadeb Mookerjee, Dubai, UAE on Tuesday 31 July 2007 at 17:00 UAE time


Admittedly disposable income of some expats employed in the UAE must have increased, although the doubling theory seems far fetched. But the beneficiaries represent a miniscule part of the society. Majority of the expats earning fixed salaries are witnessing erosion in their disposable income thanks to the relatively new phenomenon of inflation caused mainly by the steep rise in rents.

The rise of disposable income
Posted by Hombil, Muscat, Oman on Monday 30 July 2007 at 16:00 UAE time

The author has concentrated on Western expats, who benefit tremendously in GCC because of high salaries and no income tax. Same cannot be said for the Asian expats, who by virtue of being Asians, get lesser salaries/perks. Today country like India has much more to offer by way of salaries and perks, in spite of income tax, because of which there is not only a reversal flow of professionals from GCC to India, but getting good new recruits from India is next to impossible.

Double Salaries
Posted by J.A., Abu Dhabi on Monday 30 July 2007 at 09:00 UAE time

I agree with Kevin. However, I do believe there is a biased manner of recruitment preferring racial status to experience and education. I've met quite a few people who are blatantly inexperienced but occupy managerial positions in various companies - which they jokingly say they got thanks to their race and their accent. In a country where racial profiling is accepted as a criteria to tier remuneration this comes as no surprise. In case of those who claim to have doubled their salaries I wonder what status they had in their home countries?

The rise of disposable income
Posted by Kevin Edmonds, Dubai on Sunday 29 July 2007 at 17:00 UAE time

How very surprising. I haven't seen any evidence of senior executives "doubling their salaries" by moving to the GCC region. In my experience, salaries are in line with Western cities, including London. We have spent the last few months educating the market not to expect huge hikes in salary, I'm not sure on what data this research is based, but I think many people (including clients) would be pretty surprised at the results. In our experience, salaries are competitive, but competitively similar to other big cities. Kevin Edmonds, Managing Director, R3 Retail ME

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