Economic uncertainty means base salary increases for executives are slowing down

Author: Kirsty Tuxford | Date: 4 May 2016

Organisations are looking at different incentives including performance-based share plans

New research shows that economic uncertainty is causing more organisations in the region to look at variable pay for senior employees.
 
During 2015, more than half of all executives surveyed in the GCC did not receive an increase to their base salary, according to Willis Towers Watson’s GCC 2015 Executive Compensation Survey Report. The research found that GCC organisations are coming under pressure to manage fixed pay costs, while recognising and rewarding employees whose skills, experience and performance are critical to achieving their goals.
 
The survey included both internationally headquartered and regionally based organisations. There was a clear difference in policies applied over 2015: regionally domiciled organisations reported a median base salary increase of zero, while those with an HQ outside of the GCC reported a three per cent median base salary increase for high-level executives.
 
“Executive compensation in the GCC has been influenced by the low oil price and its knock-on effects on the economy,” says Andrew Marshall, director of executive compensation at Willis Towers Watson. “Although the impact felt differs across countries within the GCC and economic sectors, overall business confidence in the region has deteriorated. Companies will still face challenges on executive pay, albeit different to those in a booming economy.
 
“Organisations are seeking to really get to grips on fixed costs, including fixed salary and allowance,” he says. “Consequently, this has put pressure on getting the variable pay right, but here too organisations face challenges. Compared to other parts of the world, the structure of executive pay in the region is typically weighted towards base salary and allowances rather than annual or long-term variable pay. This has meant that organisations have struggled to manage pay costs since there is less flexibility to align pay with performance.
 
“Even where variable pay is in place, setting goals for annual incentive plans one year out can be tough for many organisations where the future economic environment is difficult to predict. Should performance expectations be relaxed or should performance be measured within a broader definition of 'target' performance? Should the performance standards be applied as in the past and reviewed at the end of the financial year by the board, who can then make a call on how well management performed after taking into account the performance of peers and the economy more broadly?” adds Marshall.
 
There are signs that organisations are looking to introduce better alignment between pay and performance as well as more flexibility in how pay is received. The survey findings confirmed the trend in the increasing incidence in the provision of long-term incentive arrangements in the GCC – cash incentives or performance-based share plans are offered by approximately one third of companies surveyed, and this trend looks to continue.
 
“We can conclude that the next few years will present both challenges and opportunities for boards to think carefully about how executive pay is decided and in line with the organisation’s performance and shareholders’ interests,” says Marshall.