The Middle East is such a large and divergent region, that it is very difficult to make generalisations and to explain

it adequately to those living outside it. This article therefore looks primarily at the Gulf Cooperation Council (GCC) countries within the region, which present some similarities in terms of labour policies and compensation trends. The GCC is a political and economic union of the countries in the Arabian Peninsula. It is composed of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and UAE (Yemen is in talks to be included in the group by 2015). All of these countries are oil exporters, so present a very different picture from the economic situation of budget deficits, rising unemployment and social unrest that is more common in the oil importing countries of the Middle East, such as Tunisia, Egypt, Syria and Jordan. Not even the oil exporting countries are immune from global economic meltdowns, of course, but so far the pressures from the European debt crisis and slowing growth worldwide have been contained. The GCC economies are the most dynamic within the Middle East, with the largest proportion of expat workforce and where most regional head offices of multinationals are based. While some of these countries show a trade deficit, oil revenues remain high, and the non-oil sector of their economy is showing steady growth. This region is also characterised by huge government spending, which contributes to economic growth but impacts inflation and salaries. We have summarised our key economics findings for these countries for 2012 in the table below: Background Inflation High oil revenue and government Upward trend (shortage of good housing), Saudi Arabia spending on education and housing 4.9% programmes Non-oil sector (tourism, trade, Prices stable, inflation under control (1.5UAE transportation) growing 2%) Big hydrocarbon projects and Moderate pressure on inflation at 2-3%, Qatar government investment leading up to adequate supply of housing, government 2022 World Cup not so effective at controlling prices Oil revenue high, but very high public Inflation high 4%, salaries raised following Kuwait spending mass demonstrations Oil accounts for majority of economy; Oman Inflation under control, 3% diversification plans are underway Most diversified economy, but still Bahrain dependent on oil. Losing talent to others Inflation under control, 1.5% in the region, some social unrest As an aside, in Iran inflation is officially at 25%, but unofficial estimates place it at around 40%, so the economic situation in that country is spiralling out of control, especially following the devaluation of the currency and the economic embargo by most Western countries. Compensation and benefit trends are quite unique to this region and are characterised by the following particularities: 1) Workforce (particularly in the private sector) is dominated by foreign expats, up to 90% in UAE and Qatar, up to 50% in Saudi Arabia. 2) Sponsorship system of employment makes it difficult to move between employers. A foreign expat with no sponsorship from a regionally-based employer has no legal right to live and work in the country. In Saudi Arabia and Qatar no-objection letters are required from the employer for moving jobs or exiting the country. Obtaining no-objection letters from previous employers is often Country

difficult and often involves a lengthy process of reapplying for a work visa. 3) Extremely generous suite of allowances (housing, transportation, meals, even lifestyle support allowance). This is a historical legacy, allowances provided for expatriates, which have now found their way into local contracts. In some instances, such as the UAE, allowances have survived and grown as a percentage of total compensation, as employers try to reduce their liabilities under the end-of-service benefits scheme. On average the end-of-service benefit represents one months salary for every year of employment. Since this is calculated by base salary, the system of allowances traditionally enabled companies to reduce their end-of-service benefit liability. 4) The end-of-service benefit scheme is common across all GCC countries and applies to expat employees only. It is a service award, acting as a proxy for expat pension schemes. There is a growing trend amongst multinationals to introduce western-style international pension plans as a retention tool and substitute to end of service benefit: however the laws surrounding this are not clear, so professional advice is required. 5) Tax-free environment, which often makes it a challenge to move people out of the region. 6) Local plus structure of compensation has expanded to cover even GCC national contracts. Purely local contracts no longer exist in the GCC. 7) More recently, there has been a drive towards nationalization of the labour force, with added incentives or regulation to increase the percentage of national employees working in the private sector. Pay increases in the Middle East follow a very different pattern to that in the Western world. They are usually well above the forecasted inflation rates. The predicted annual increase in base salary for UAE, for instance, is 5%, while inflation is only 1.5%, which raises the question: what other elements factor in the budgeting process? Does it reflect a lack of trust in inflation figures, or merit increases? Most often, it appears to be a case of benchmarking with peers and other countries in the GCC, as well as a reflection of perceived growth in the economy and the organisation. While benchmarking is good practice generally, it may lead to spiralling costs. For example, many organisations increase the housing allowance as well as the base salary annually, which represents essentially a double increase in real terms. If we look at the Mercer annual quality of living rankings, Abu Dhabi and Dubai are consistently rated top across the Middle East, which makes them understandably popular with expats. Of course, it depends on what data is included in the quality of living index: the Mercer data also looks at factors such as political stability, personal safety, medical services and housing. According to these criteria, Doha, Qatar, is coming up the ranks, although it may not have as much sociocultural variety as Dubai. Overall, the gap in terms of quality of life is shrinking between the countries of the GCC. The cost of living index has also changed recently, with Beirut overtaking Dubai and Abu Dhabi for the first time and becoming the most expensive city in the Middle East as of March 2012. The Mercer cost of living considers housing prices and rents predominantly in areas where expats would actually want to live, and any change in the price of accommodation has a high impact on overall ranking. What this means in practical terms is that, if an organisation wants to move an employee from Dubai to Beirut on international assignment, they need to pay on average 5% of base salary more as cost of living allowance. This can be very difficult to justify to incumbent expats in Beirut, especially when you take into account that salaries are already higher in Dubai. Schooling doesnt

even enter into the cost of living equation, but companies are trying to find ways to offset education expenses, which are on the rise in Dubai and Abu Dhabi. The remuneration structure in the Middle East is heavily biased towards base salary and guaranteed allowances, which can add up to more than 80% of the total remuneration. For comparison purposes, in the US base salary accounts for only 30% of executive pay on average, with long term incentives accounting for the largest proportion of the total remuneration package. Companies in the GCC either aggregate allowances into one single payment, or tend to keep the most prevalent type of allowances (housing and transportation) separate. Before 2008, when housing prices were escalating dramatically in this region, every company reviewed and raised their housing allowances. Companies are now monitoring housing prices once more, looking to make adjustment where needed. Hiring projections continue to be robust within this region, with 70% of companies looking to increase their headcount over the next year. Turnover is estimated at 7-8%. What are some of the greatest changes that multinationals operating in the region should take into consideration when setting out their strategies for attracting and retaining talent? The first is the gradual move away from sponsorship systems. Increasing pressure from humanitarian organisations has persuaded regional governments to relax their sponsorship system. Saudi Arabia announced a move towards establishment of third party employment companies which will lead to more mobility among expatriate employees. Bahrain has relaxed its sponsorship system, while Qatar is in the early stages of establishing a cross-industry trade union for the protection of interests of private sector employees. The second factor creating a significant pressure on multinationals is the quota system for employing nationals in the private sector. Multinationals operating in Saudi Arabia, for example, need to ensure, depending on their sector, that 30% of the workforce is represented by Saudi national employees, before they can obtain work permits for any other employees. Yet attracting Saudi nationals to the private sector is notoriously difficult and 43% of companies are at risk of losing privileges because they cannot meet the quota. One of the ways in which companies are trying to fulfil the stringent government regulations is by employing absent workers (employing them on paper only), which defeats the stated purpose of integrating more locals into the private sector. Most of the GCC nationals in the labour market are employed by the public sector, while expats have been brought in to fill jobs and talent gaps in the private sector. In the UAE it is difficult or private sector employers to compete with the public sector in terms of allowances, benefits and working conditions, so nationals with the right talent become a very popular commodity for headhunters. The third factor is additional housing legislation. For example, in some GCC countries, shared accommodation is illegal unless a couple is married. New UAE visa requirements mean that each employee needs to have a housing contract in their individual name, which will increase pressure on accommodation availability and rents. The government of Abu Dhabi has decreed that any employee working within any of the Abu Dhabi government or government-owned institutions must live in Abu Dhabi, rather than in the more popular neighbour Dubai. This creates a captive rental market in Abu Dhabi causing rising rents: for existing tenants standard annual raises are capped at 7%, while there is almost no upper limit for contracting with new tenants. The fourth trend which is starting to have an impact is that longer-term incentives are becoming part of the remuneration package commonly offered to employees by international publicly listed companies. However, it would be fair to say that short-term incentives are still widely prevalent. The most commonly offered benefits in the region are mobile phones and private

medical insurance. However, companies are struggling to keep up with rising medical inflation. Typical annual increases for premiums are 20%, even with a good claim history, so companies need to be more proactive about creating awareness around claim behaviour and choice of medical facilities amongst employees. Employers are also looking at ways to reduce medical policy, such as introducing deductibles, i.e. expecting employees to pay a certain percentage of the costs themselves. In conclusion, it is no surprise that, when it comes to the global ranking of net salaries, the UAE is in first place, ahead of Switzerland, while Saudi Arabia is in third place. It is not hard to find candidates for expat positions in these countries, but companies need to carefully consider whether the costs are sustainable in the long run. The high tax-free salaries and generous allowances mean everyone wants to move to the region, but very few want to move out, and allowances have now become the market standard even for local employees. Organisations need to learn to be more strategic at managing their talent in this part of the world, and carefully consider all of the elements of the compensation and benefits structures.