By Mohammed Aly Sergie
Saudi Arabia and the UAE are the global leaders in senior executive remuneration. But are rising pay packets the only way to attract senior management?
Saudi Arabia and the UAE are the global leaders in senior executive remuneration. But are rising pay packets the only way to attract senior management to the Gulf, or will companies offer new incentives to lure in the big shots?
If you ask any of your colleagues why they are working in Abu Dhabi or Dammam, you might be surprised when they say something along the lines of ‘you can't beat 365 days of sunshine'. While it is true that the region is sunny (and banal talk about the weather never goes out of style), what really attracts foreigners to the region is the cocktail of high incomes and low taxes.
Managers in Saudi and the UAE enjoy soaring levels of take-home pay.
This fact has been reinforced by Hay Group's global study of senior management compensation. Managers in Saudi Arabia and the UAE receive the highest disposable income in the world, averaging more than US$220,000. This is nearly three times the average compensation in the UK and twice as much as the US. The potential to double incomes by moving to the GCC is the main factor in attracting experienced managers.
A senior executive at a global insurance company, who wishes to remain anonymous (she says it is "uncouth" to discuss salary), says that she left a comfortable living in London for Dubai. "It wasn't just the money, although I am making more than twice my previous salary. The Gulf is very attractive because it is an emerging market, and there are not many of those around. To be in a place where growth is 25 to 30%, compared with two to five percent, is exciting, and being able to contribute at the infrastructure phase is both a fulfilling and valuable experience. The international exposure and skillset will be valuable for me in my next move, and I am also putting away significant savings for my future."
While senior managers in the region are enjoying the fruits of high disposable incomes, employers are looking at different compensation schemes in order to lower costs and align interests. "Managers in Saudi and the UAE enjoy soaring levels of take-home pay, as employers in this region pay more attention to cash rather than performance-based incentives," says Vijay Gandhi, reward information services manager for Hay Group in Dubai.
"But as demand for experienced managers remains high, companies in the region are looking more closely at the use of long-term incentives as a way of attracting and retaining international talent," he continues.
Long-term incentives, such as stock options, performance pay, and pension schemes are practices endemic to public corporations throughout the developed world, and will eventually become standard practice in the region as more companies are listed and need to implement modern compensation structures. Gandhi agrees but provides Arabian Business with a caveat: "Salaries are high because in this region there is high demand for top talent, and supply at the top end of the market is very low. A high salary is one of the attraction points in the Middle East, but demand for experienced executives remains strong which pushes the salaries higher."
The dynamic of high demand for talent and an expatriate model of compensation, is delaying reform in pay. "The majority of workers are expatriates who are more interested in what they take home now, rather than long term incentives."
Our friend at the insurance company agrees with Hay Group's findings, but based on her compensation package, which is similar to those awarded to other top executives, she believes that the disposable income portion of compensation is high due to three reasons. "First, companies need to incentivise talented managers by offering excessive cash; second, expat packages heavily subsidise housing, transportation, education, and healthcare costs, which frees up a lot of disposable income; third, the tax regime in the GCC is very favourable. Not only are local taxes low to non-existent, expats enjoy significantly reduced rates in their home countries."
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."
As people gain seniority in a company, they will eventually demand 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.