Costs are going up in the Arabian Gulf and now is a good time for firms to take stock of what they offer recruits - and to make sure it is both understood and valued.
Spectre of inflation in the Arabian Gulf prompts reality check
Alarm bells will be ringing for employers after the IMF announced that inflationary pressures in the Arabian Gulf will push up living costs this year.
From an employer's point of view, pressure has been attributed to rises in rent, costs of children's education, health care, and transport, including the price of vehicles. Given that these four elements comprise 40 to 50 per cent of an average household's spending, any unexpected or inflated increase will have a huge impact on employers' payroll costs.
It isn't long ago that corporate HR battled through the 2007 to 2009 years of inflationary pressures on direct employment costs, particularly housing and education, resulting in two years of frenzied fire-fighting on the salary front.
During this period organisations resorted to twice yearly pay reviews, heaping fixed cash on to housing and education allowances in attempts to compensate for escalating living costs. The squeeze was intensified by a drought of new joiners as expatriates were deterred from moving to the GCC because of the high costs of settling here.
Last December HSBC's purchasing indexes rose to the highest level in 19 months in both Saudi Arabia and the UAE; highlighting rising public spending, the first sign that inflation will climb this year. Employers would therefore be wise to take steps now to guard against spiralling costs should inflation exceed current official forecasts. Employers will need to respond by taking a very different approach this time, having learnt from pre-economic crisis times when packages simply became untenable once inflation topped 10 per cent.
Thankfully, smarter ways of managing fixed costs, a more extensive global talent pool and realistic growth forecasts afford employers more flexibility in how they deal with inflation next time around.
Employers are much more cost- conscious about fixed costs in 2013 than they were in 2007 and they are also aware a regional salary ceiling has been reached in the private sector. GCC management salaries are now on par with developed economies, especially within multinational organisations, and are raising eyebrows with global management teams that are receiving 1 to 2 per cent pay rises in developed economies, while being asked to give 4 to 5 per cent rises to employees in the GCC.
In the private sector, allowances during the 2007 to 2009 period increased 15 to 20 per cent. However, rents rose 25 to 30 per cent in the same period - therefore still falling short of compensating for rising costs, and applying constant pressure to businesses. Retrospectively we can see that packages offered during this time were designed based on overly optimistic growth projections that did not materialise. Hence, simply increasing basic cash to match inflation is an oversimplified solution.
This time, growth is more realistic and in this environment HR and leadership teams should consider reinforcing their current offering to help to keep employees engaged as fears of inflation return. Total reward statements explaining the overall cash, allowances and benefits provided to each employee on an individual basis give clarity and reassurance, and explain the full value of their package.
Over the last decade Gulf countries have experienced years of double-digit pay rises and varying rates of inflation. At management level and above, pay in the UAE and Qatar has risen by 64 and 80 per cent respectively. Pay rises during this period and in particular over the past five years have had a cumulative effect on end-of-service benefits, with liability increasing year on year.
In the current environment, businesses leaders have the opportunity to think carefully about manpower planning and hire in line with business strategy, therefore helping to reduce this liability.
By getting the right people in the right roles through a rigorous recruitment process, the risk of turnover is significantly reduced. In the majority of cases, HR and leadership teams do not realise the opportunity cost of turnover: losing a management-level employee costs the business 18 months worth of that individual's salary in order to get a new hire up to the same level of performance, in addition to the leaver's end-of- service payment.
The supply equation has also completely changed since 2007, as despite a more realistic pace of growth and increasing involvement of nationals in the workforce, a new type of expatriate is looking at the region.
We are seeing an increase in expatriate talent from Europe and the United States, from those searching for international experience in fast-growing markets. For example, in Spain and Greece where more than half the population under the age of 35 is unemployed and job creation has come to a standstill.
Therefore, in contrast to 2007 to 2009, new expatriate hires are now being taken on at lower salaries than the existing market rate; the reverse of previous expatriate hires who were recruited at the mid-point or top of pay bands. Sign-on bonuses have also all but disappeared, making it easier for companies to justify new hires.
Companies have learnt a lot from the recent past about how to deal with inflation and take the appropriate degree of business risk in reward decisions.
This time around, we should see fewer knee-jerk reactions and short-term fixes, and more long- term thinking about managing talent. Whether the IMF forecasts are accurate or not, it is a good time for companies to take stock of their offering - and make sure their employees understand and value it.
Vijay Gandi is the regional director at Hay Group in the Middle East