Mercer | Compensation Planning 2016

Compensation planning 2016: Sluggish economic landscape holds back people investments, but opens other opportunities

By Nuno Gomes*

Oil prices… two words that changed the economic context of the GCC in the last 12 months, and consequently the role of Human Resources in the region. But that’s not all: a continuously struggling financial services industry, the war in Yemen, the conflict in Syria, plus more – how are organizations reacting to the impact of these events to improve their value proposition?

2015 has seen one of the biggest shifts in economic momentum in the Middle East region in recent years, certainly since the 2008/09 global economic crisis. The rapid decline in oil prices, from over $100 to less than $50, is seriously putting at risk the growth plans organizations had for their businesses in the region, spurred by the cuts in government spending observed in the last three to six months.

At Mercer, through our various surveys and client interaction, we see already a number of data points that confirm companies’ concerns over the economic situation.

For starters, salary increases forecasts for 2016 in the UAE and Qatar are now recorded at 4.9%, for the first time in five years below 5%. And in Saudi Arabia, the country in the region most affected by the sharp decline in oil prices, increases are expected to hover around 5%, much lower than the traditional 6% seen in the last few years. Looking back at 2015, according to Mercer’s Total Remuneration Surveys (TRS), pay rises in the UAE were at 4.5% and in Saudi Arabia at 4.4%, a clear sign that organizations have already started being more cautious this year about their people investments.

At another level, hiring intentions have considerably declined over the past year. For example, last year, 71% of organizations stated they planned to increase headcount in 2015, but when asked the same question earlier this year, only 57% declared plans to increases headcount during 2015. In Saudi Arabia, the decline was from 79% to 66%.

Hence, 2016 is looking more and more like a year of restrictions, caution, and a focus on improved efficiency from an HR and compensation and benefits perspective. Companies are looking to introduce new and interesting approaches to rewards, and benefit from the macro-economic environment to make necessary or desirable changes.
 

MANAGING WORKFORCE AND MARKET DIVERSITY

The dominance of expatriate populations in the workforce across the GCC, particularly in the UAE and Qatar, means compensation practices are quite diverse, more than in most countries in the world. In one market and within the same company, employees coming from the lowest-paying countries in the world coexist with other groups of employees recruited from the highest-paying countries in the world.

This has always been a challenge for organizations operating in the region and for many “Western” multinationals a reality difficult to accept at headquarter level. Moreover, for organizations operating across the Middle East region, the diversity in pay practices and pay levels makes this an even bigger challenge – just consider the pay gap between the UAE and Egypt for example.

To this extent, one key trend in the market is a strong effort to manage this diversity in a more efficient way: to increase internal equity, consolidate compensation practices, and removing differencing policies. Most of these initiatives are proving to increase employee engagement and improve internal job mobility as equity is enhanced.

SIMPLIFICATION OF COMPENSATION

For a region without a personal income tax regime (the GCC), compensation is overly complicated: multiple allowances, home leave tickets, etc. Surely things could be easier, ask many HR and C&B professionals. But the historic reasons behind existing practices and the simple answer as to why – “because it’s market practice” – have perpetuated such complexity.

Many organizations are using the economic climate to make changes that will simplify their compensation structures and policies. The most common approach recently had been one of consolidating guaranteed allowances. Housing, transportation and other allowances still exist in most structures since the first expats came to the region in the 1960s as oil exploration began – a time when everything was paid for, and hence it was merely a line item in payroll for each. Times have changed, and most expats come to the region as a career or life choice, and what matters is monthly pay, irrespective of its form.

To this extent, in Mercer 2015 UAE TRS, we observe a 19% prevalence of Consolidated Allowances, an approach where organizations have combined all guaranteed allowances (mostly housing and transportation) into one single component; this is one in every five organizations. The prevalence was 13% last year, and 9% going back to 2012, so a practice that has more than doubled in just three years.

FOCUS ON BENEFITS

Any organization can match pay on salary or allowances with others in the same market.  It’s a simple equation. But matching or providing better benefits is not that easy. This is why many organizations are looking at benefits to improve its employment value proposition.

At a time of budgetary or investment limitations, focusing on initiatives that can have a longer-term return can be the appropriate ones to bet on. And in a region where benefits are not that common, even a better chance to make an impact. The areas where employers are looking at making changes, either increasing current benefits or introducing something new, are pensions and flexible work.

As expats stay longer in the region, and the discussions around changes in state pension schemes increase, employees are starting to become more concerned over long-term savings and retirement planning. Whilst private pension arrangements are not yet prevalent, 10% of companies have one in the UAE according to the 2015 TRS. This can be a differentiating factor for organizations moving into this space right now, with positive attraction and retention outcomes in the future. For the time being, the ones being set up recently are more based on a savings plan rather than a traditional private pension scheme, but the purpose is the same.

And flexible working arrangements continue on the rise: according to the 2015 UAE TRS, 51% of organizations say they offer flexible working hours to their employees, a small increase from 49% in 2014 and 46% in 2013. These are policies that always land well with employees, catering for the diverse workforce typical of companies operating in the UAE. The biggest risk has been in how such policies are managed, especially from the managers’ perspective.

In conclusion, what will you do? Doing nothing is not an option, and your competitors are active as they grapple with their own talent attraction and retention issues. No organization is the same. Business imperatives are different, and so are rewards philosophies. So - do your analysis; consider pros and cons, benefits and constraints, and invest wisely – budgets are not infinite. And maybe one of these three key trends will also be the right solution for your business at this particular point in time.

Mercer’s Total Remuneration Surveys cover all forms of cash and non-cash compensation elements, for over 1,000 benchmark jobs. Across the Middle East and North Africa over 1,600 unique organizations were surveyed in 2015, representing almost 250,000 employees.

*Nuno Gomes is a principal with Mercer in Dubai and leads the firm’s Information Solutions business across the ME
 

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