Why the GCC is facing a pay freeze

21 January 2016

Author: Mark Atkinson


Why the GCC is facing a pay freeze

Plunging oil prices are hitting salaries, say experts. What will it mean for recruitment, engagement, and the role of HR?

There are plenty of surveys and studies that promise to tell you what’s really happening when it comes to recruitment and remuneration. But you’ll only hear the unvarnished truth if you hit the shop floor. And on the streets of Dubai, among both multinationals and local businesses, there is for the first time in living memory a barely disguised nervousness over pay.
 
At a senior level, bonuses and salary increases are quietly reigned in. Recruitment is slowing and contractors are finding jobs harder to come by. It isn’t a crisis – most Gulf economies are too well-calibrated to suffer the sudden shocks that have sporadically blighted other parts of the world – and it hasn’t made a significant dent in the mainstream media yet. But it’s summed up by one entrepreneur in the travel sector, who says: “No one is hiring… on the contrary, some people are taking a 30 per cent pay cut. The real investors are nervously waiting to see what happens.”
 
The statistics tell their own story. Robert Mosley, founder and CEO of Lemon Pip – an HR consultancy specialising in the Middle East and Asia – has 25 years’ experience in global reward strategy. He says that, as a broad measure, pay is likely to increase at around 3 per cent for employees in the GCC during 2016 – a dramatic reversal from the 4-5 per cent most reward experts were forecasting in the first part of 2015. Companies that budgeted at the higher rate, which includes many large multinationals, risk overspending compared to their competitors.
 
In many sectors, and at various levels, pay freezes are likely – for the first time in a generation in countries raised on a diet of ever-increasing rewards. Mosley points to construction, healthcare and the public sector as areas where pay has taken a downward turn in recent years (banking, insurance and real estate, by contrast, are still on an upward trajectory). But a wider tightening of belts could also drag oil and gas, petrochemicals, technology and telecommunications, among others, into the red.
 
A forecast issued by Korn Ferry Hay Group, meanwhile, suggests that while salaries are expected to rise on a global basis in 2016, the outlook for the Middle East is relatively modest. GCC countries, in its estimation, can expect a real wage increase of just 2.3 per cent, with the UAE at 0.9 per cent when inflation is taken into account. Mercer Consulting’s most recent quarterly Salary Movement Snapshot survey suggested that Saudi Arabia would see pay rises dip below 6 per cent for the first time since 2009, and predicted “salary freezes and job cuts” spreading from the oil industry into financial services and beyond.
 
The effects of such headline figures go further than the impact on individual pay packets, says Vijay Gandhi, regional director of productised services at Korn Ferry Hay Group. Pay scales and structures haven’t been updated to take account of increasingly fractious market conditions. Over the last few years of rapid growth, organisations have needed to balance maximum pay bands with the pressure to increase salaries for top talent. Those days are over. “The current economic conditions seem to be here to stay for at least the medium term, pushing companies to slow down on any immediate salary increases,” says Gandhi.
 
The backdrop to such shifts is, of course, the plummeting oil price, which not only squeezes profitability at oil majors but more broadly affects consumer confidence and inward investment to GCC countries. In turn, that makes it harder for businesses to plan for the future – and makes them too nervous to splash the cash, particularly as the jobs market becomes less frenetic.
 
But it is too easy to pin declining reward on oil alone. “While oil prices have an impact on confidence, this does not directly correlate to pay movement, which tends to reflect industry-specific issues,” says Martin McGuigan, compensation and reward specialist at Aon Hewitt Middle East. “For example, while banking and oil and gas may be nervously looking ahead and capping fixed costs and salaries in particular, industries such as healthcare and education are under real pressure to pay more to attract and retain talent.”
 
Whatever the reason, the implications of pay freezes are widespread, and easy to overlook. A region weaned on regular, generous salary increases has got used to a certain level of talent mobility and a unique psychological contract. McGuigan points out that talented individuals who believe they can command higher salaries elsewhere are the most likely to become disengaged or leave altogether when the money stops. And at a macroeconomic level, if the figures are correct in suggesting the GCC’s slowing wage growth is out of kilter with the rest of the developed world, that has a broader impact on its attractiveness both to expats and blue collar immigrants.
 
Cost of living is the key metric here – and while it rarely matters personally to those round the boardroom table, it is one of the key drivers of recruitment and talent mobility. It is often characterised, Mosley says, as the ‘Big Mac Index’, which measures how many meals from the world’s most recognised fast food chain can be purchased by the average local employee. The GCC sits broadly in the middle of the market by this measure – behind high rollers such as Switzerland, Hong Kong and Singapore, as well as most of Europe and the US, but ahead of Asia, South Africa and South America. That is changing rapidly, adds Mosley: “The most significant trend is that, with the cost of living so much higher now, you don’t come to the GCC to save and send [your money] home.”
 
There are those who wonder, too, what impact a more conservative approach to remuneration – and potential constraints on recruitment – will have on nationalisation. Mosley points out that the UAE has an 82 per cent expat population, which puts Emirati nationals at a considerable premium, being paid an average 45 per cent more for the same role according to some estimates. This contrasts with a 60 per cent expat population in Qatar and just 40 per cent in Oman, where there is relative pay parity between Omani nationals and their expat counterparts.
 
Gandhi says he has observed general convergence in pay between nationals and expats in most of the GCC over the past decade, though he points to Saudi Arabia and Kuwait as outliers. But while a reining in of senior pay is likely to help flatten reward structures between the two groups, a broader downturn is unlikely to do much to encourage a greater transfer of public sector employees to the private sector, and may harm entry level and graduate recruitment of nationals.
 
Already, says Mosley, high inflation and the increasing cost of living in the GCC has had an intriguing effect on pay differentials inside organisations when it comes to seniority: “For the last 20 years, we’ve always seen that if the market is increasing by, say, 5 per cent, senior managers’ compensation has risen by slightly more and junior employees’ by slightly less. But 2015 was the first time the trend reversed and the biggest increase was among lower-level workers.” Mosley says this trend hasn’t affected board-level executives. And he predicts that, by 2017, the status quo of larger rises for mid-level managers will be restored.
 
The two decades of pay inflation for senior staff may be related to a broader move away from fixed pay scales to merit-related increases. Mosley’s research (see page 16) suggests that, in 1995, three quarters of pay rises were awarded because of fixed increments, but by 2015 this had dwindled to just 10 per cent, with more than three quarters of awards given on merit alone.
 
This mirrors the increasing prevalence of performance-related pay in Europe and parts of Asia. But what’s consistently surprising to external commentators is that the nascent Gulf economies have steadfastly declined to embrace bonuses and benefits packages. Indeed, there are signs that even relocation allowances that bridged the compensation gap between expats and nationals are beginning to dwindle as large businesses come under both financial and political pressure to reduce their reliance on imported talent.
 
“More and more companies are moving away from discrete allowances and paying a total compensation figure,” says McGuigan. “In the past, allowances were appropriate when there was a true expat culture and people came and went. But this is no longer the case. And the allowances were left out as part of the end-of-service gratuity calculation, so it was effectively a way of minimising this cost. Employers are increasingly looking to pay for the job rather than the family circumstances of the employee. That means allowances will be under increased cost pressure as they are consolidated into the ‘rate for the job’ equation.” Hardship allowances, once a common aspect of Middle East postings, are now virtually unheard of, he adds.
 
Mosley says the trend towards a total compensation package is closely aligned to broader economic prosperity. When times are booming, a range of individual allowances are more likely; when the economy takes a downturn, employers will reach for a more consolidated model.
 
The broader economic outlook means attitudes towards bonuses and benefits are likely to harden. “The GCC is a ‘cash now’ environment, and employees value base salary rises much more than bonuses,” says Nuno Gomes, principle information solutions leader at Mercer Middle East. “In most professional roles, bonuses don’t go above one month’s basic salary.”
 
Whether it’s true or not, many business leaders fear implementing a more flexible range of benefits would raise overall base salary costs: people without children, for example, might opt out of those benefits relating to childcare and take cash instead. Enhanced medical and life insurance are two exceptions and are becoming more prevalent, particularly in the UAE. And a small number of companies have begun experimenting with allowing staff to adjust the amount of annual leave they take, sacrificing or increasing their salaries accordingly.
 
For most, however, rigidity still rules. “The tax regimes in GCC countries do not create the incentive to implement flexible benefits programmes as they did in Europe a couple of decades ago,” says Gomes. “The tax-free environment almost enables the most flexible plan ever – everything paid in cash. Fewer than 10 per cent of organisations in Mercer’s most recent surveys had a flexible benefits package in place.”
 
Housing allowances, adds Gomes, have become a major bone of contention. Between 2013 and 2015, rental costs in Dubai increased by an average 52 per cent. But for the first time, employers began to take a more cautious approach and decoupled allowances from the broader rental market, restricting rises to around 10 per cent.
 
The impact on the cost of living isn’t hard to guess, and Gomes says health insurance may be the next flashpoint: “Medical inflation in the GCC is at 12-15 per cent, and it isn’t rare to hear cases of premium rises of more than 20 per cent. In the longer term, this situation is unsustainable.”
 
Given such complexities, and the likely increase in pay pressures over the coming year, the scope for compensation and benefits specialists to balance the needs of employees, budgets and long-term talent planning ought to be obvious. Gomes says there is reason to believe companies now understand this: “The prevalence, scope of work and capability of remuneration specialists in the region has been rising dramatically over the last decade, as have many HR specialties. Remuneration specialists are now expected to add value to the function through detailed benchmarking analysis, correlation of compensation data with employee demographics, performance reviews, career track record, aspirations and social interests.”
 
At the same time, McGuigan feels expertise in setting senior salaries is still lacking – which may be a factor in the way senior pay has been allowed to outpace both inflation and broader pay trends. “The lack of remuneration committee expertise at an executive level is shockingly evident,” he says. “Given they set reward strategy in a top-down way, they need to understand the complexities of the area. For many companies, pay makes up 50-plus per cent of operating expenses. Yet [boards] still don’t apply the appropriate level of due diligence and review that an in-house expert or qualified non-executive director could supply.”
 
That matters, says Mosley, because pay doesn’t have to be a source of pain. It can become a ‘hygiene factor’ if handled properly, and the conversation can switch from whether employees are paid enough to be sufficiently motivated, to how to increase both engagement and productivity. “If a company’s voluntary resignation rate is above 15 per cent then something is wrong and it’s almost certainly pay,” he says. “But if you get pay right then the factors that motivate employees in the GCC are things such as ‘who is my boss’, ‘what sort of work am I doing’, ‘is my work challenging enough’ and ‘have I got career opportunities two years ahead?’”
 
In Mosley’s book, paying too much is almost as detrimental to productivity as paying too little. All of which means how HR handles the compensation question in 2016 has never been more crucial.
 
How much are you worth?
 
Average salaries for HR professionals in GCC countries are expected to rise by around 2 per cent in 2016, according to executive search specialist Robert Half. But the figures mask significant discrepancies: the agency expects HR directors to receive an average 4 per cent uplift, while heads of L&D will receive 5 per cent, a reflection of what Robert Half says is a scarcity of learning specialists – compensation and benefits specialists are similarly in demand. Learning and development managers will receive the biggest hike of any HR role, of 7.6 per cent. The best news is that 40 per cent of HR leaders expect to increase salaries for key performers in 2016, as they worry about losing talented HR staff. How does your role stack up?
 
Average expected salary for 2016
 
US$171,00 – $265,250
HR director
 
$82,500 – $147,250
HR manager/HR business partner
 
$115,500 – $172,500
Head of recruitment
 
$119,700 – $178,500
Head of learning and development
 
$81,750 – $132,500
Operations/payroll manager