The Middle East has emerged from the recent global economic crisis in better shape than most other regions. It successfully maintained positive economic output throughout the crisis (driven mainly by oil exports), and is expected to sustain even higher growth in 2010. Despite this relatively positive performance, the recession and the subsequent recovery have highlighted the region’s ongoing struggle to attract and retain global talent.
Historically, the region has focused on attracting two types of foreign employees: Western and Eastern expatriates. As a general rule, Western expatriates migrate from the US and Europe attracted by high salaries, low (or no) taxes and the payment of expenses such as schooling and flights. They typically arrive and depart on a three to five year cycle. Eastern expatriates from countries such as India, on the other hand, are typically drawn by a far more basic package, but one that is still substantially more advantageous than what they could earn at home.
This simple but hitherto efficient model has been put under growing pressure in recent years by the rapid emergence of the BRICs economies and the consequent rise in the competition for global talent. Traditional employee feeder countries, such as India, have seen their economies blossom, leading to an expansion of the domestic demand for skilled labour and higher salaries. In this context, the appeal of the GCC model has in many cases faded relative to the option of remaining at home. Furthermore, the discovery of more oil in Brazil is also bound to increase the worldwide demand for oil industry skilled workers, a segment of the global labour market in which the GCC is heavily reliant.
But why is the loss of these expatriate employees a problem? The numbers alone are staggering: around 87 percent of employees in the UAE are foreigners, 69 percent in Kuwait and 51 percent in Bahrain. Only in Oman and Saudi Arabia do local workers exceed the number of expatriates in the labour force. In this context, and in an economy looking to grow on a long-term basis, a reduction in the skilled workforce could be disastrous.
The solution to this issue can be broken down into two key elements: how the Gulf region can continue to attract talent, and, once this is achieved, how the region can retain it.
Even if traditional elements such as pay and allowances still play an important role in attracting talent, in an increasingly global labour market, the GCC can no longer expect to differentiate itself from its competitors by these sole means. One of the key strategies rapidly gaining acceptance in the region is the move from a short term to a longer term (or even permanent) employment plan, where the central factor of appeal to an employee is the prospect of a successful career path. In practice, this approach requires a number of changes to the structure of employment packages proposed by employers.
Firstly, companies should move from activity-specific allowances (such as school fees) towards a more “Western” flexible benefits model where employees select how and where pooled allowances are allocated. Secondly, RBC Corporate Employee & Executive Services (RBC cees) and other industry providers have seen a dramatic increase in the demand for longer term benefits such as retirement plans.
While according to the Mercer 2008 GCC Benefits Survey only 8 percent of UAE companies offered retirement plans to employees, the same survey in 2009 shows that not only did these figures reach 30 percent, but also that 65 percent of UAE companies were seriously considering the introduction of such plans. Until now, the typical nature of these plans has been what is called “Defined Contribution” plans, in which employees are given a range of investment options, and often the ability to make personal contributions.
Notwithstanding the clear strategic benefits that longer employment focus could bring to the region, this approach is not without problems. As highlighted by the recent economic crisis, longer term employment focus could significantly increase End-of-Service-Payments in case of mass redundancies. Recent crisis-related lay-offs in the region have epitomized the cash flow issues that can arise when gratuity liabilities are left unfunded. As longer term employment is set to increase, turnover rates fall, and salaries rise, this type of liability is only bound to spiral. According to Towers Watson’s End of service benefit liabilities in the GCC 2009 survey, in Saudi Arabia alone such liabilities could jump from $7 billion today to $40 billion by 2020. Funding is therefore necessary if this strategy is to pay off in the long-run.
Given that the recruitment and training costs for an employee are a substantial investment, it is in every company’s best interest to retain a newly recruited talent. To achieve this there are two different approaches which are often used in tandem: the alignment of executive remuneration on performance, and the use of deferred compensation. The move towards performance-based compensation schemes is evident from the increased share of bonuses in total compensation packages. In the American and European financial services industries, allocated bonuses are typically deferred as part of the initial contract. The bonus may either be invested for the employee in company shares, or the employee may be given investment control. Generally, bonuses are tied up for three years, with the employee forfeiting it if they leave within the period. After a few years bonuses will roll on an annual basis, but there will always be the incentive to the employee to stay for the next vesting, year on year. Such a scheme could considerably increase the ability of the region to retain skilled workers.
To conclude, although the points discussed here form the “human capital” planning basis to recruit and retain talent, another key element to increase the competitiveness of the Gulf region in world labour markets is the corporate governance practices of the companies themselves. To compete on the global stage the GCC must continue to adopt formal and transparent policies for remuneration as this will act as a beacon of credibility in a competitive market. But this is another story.
Julian Gardner - a Geneva based EMEA Director of the Royal Bank of Canada Corporate Employee & Executive Services
