Perhaps the only comforting prospect in times of crisis is that the wheat gets separated from the chaff. Accordingly, organizations throughout the region have come to realize that they have to adopt more scientific and technical approaches to executive compensation if they want to remain competitive and attract the right kind of talent from a truly global pool of executive candidates. “Organizations that learn from the current crisis and build much stronger [executive pay] foundations by moving to more market-based and grounded executive compensation, as well as top team development and retention, are the ones who are not only going to tie over the present scenario, but position themselves at the forefront of opportunity once the economy stabilizes,” commented Debabrat Mishra, principal & consulting business leader Middle East at Hewitt Associates. “There are no borders for talented people and executives anymore. Competition is with regional, local, as well as global executives,” said Panos Manolopoulos, managing partner Middle East/CPS global practice leader at Stanton Chase International Executive Search Consultants.
The international pool of executive candidates coupled with a global economic downturn has created a unique opportunity for a region that is still growing, albeit at a pace that is much slower than expected, while other developed and developing countries are contracting. Executive pay in the region is seen by many in the industry to be undergoing a renaissance as executives the world over are logically looking at the region in a better light, now that traditionally developed economies are in tatters. “We are definitely getting more traffic from all the [global] markets. Across all our [global] markets, we have experienced 30 percent more traffic, so there has definitely been an increase in interest in our region,” said Dany Farha, chief operating officer at Bayt.com, the most visited job site in the Middle East. “We have seen about 30-40 percent more interest in the Middle East from North American [executives] since last year,” added Manolopoulos. Consequently, regional organizations are looking at their executive compensation structures to attract this wider pool of candidates and integrate their practices with those of their competitors. “There is a vastly increased interest in what is happening in the [regional] market and what other organizations are paying for jobs of a similar nature or for similarly qualified talent,” said Peter Christie, director of executive reward for Hay Group in the Middle East.
Who’s paying what and for whom?
The increased need to find out what the fair market rate for executives is has prompted companies across the region to take a much harder look at how they graduate and benchmark their executive pay values and practices. In some cases, this may lead to a decrease in the exorbitant amount of compensation being offered to many executives over the past few years, which inevitably resulted in vast discrepancies in the executive pay market. “For someone with similar educational, demographic and even experiential background working for two different firms who could be multinationals, local companies, or family conglomerates, you could have as much as 100 percent variance in pay,” said Farha. Others in the industry point to an even wider divergence in regional executive compensation. “The market is not the same [everywhere]. We have cases where the president of one company makes $1 million and another one that makes $150,000, in companies that are of a similar size,” explained Manolopoulos.
In order to compensate for such loose pay practices brought about by the pre-crisis hiring frenzy, regional companies now have to recollect themselves and drill down their executive roles to accurately allocate pay for tasks completed. “We actually do job matching meetings where we have to sit down, raise queries, check for validity and then match jobs because the region is pretty liberal on the use of designations,” explained Mishra. The haphazard way in which the region has handed out titles has even reached the point where it borders on the ridiculous. “The roles are not yet regulated, the titles are not regulated,” complained Manolopoulos. “In some family businesses there are CEOs, GMs, and senior managers that are merely marionettes. The family owner is actually running the whole show and has found someone who is just an operational person, not a decision maker, who receives less remuneration than they should be getting, which creates confusion in the values.”
In addition, different industries offer different pay for different executive positions, which further obfuscates benchmarking practices in the region. “Executive pay is not just title driven, it is the nature of the business that plays the most essential role,” added Pon Pitchai, reward manager of a large regional real estate developer. Add industry specific praxis to the equation and you are left with an even hazier looking picture. “We see differences in pay for roles in different industries because of the size and scale of operations and there are a large number of differences that you come across in terms of practices. Therefore it becomes essential to look at it in a granular fashion,” furthered Mishra.
As if that wasn’t enough, the traditional secrecy regarding what companies pay their employees is beginning to backfire as the need for accurate benchmarking increases. “Until companies begin to become much more active participants in surveys and to actually exchange information without putting themselves at a competitive disadvantage, they will always be somewhat prone to being at the mercy of rumor and disinformation,” said Richard Lamptey, principal and head of executive remuneration consulting Middle East at Mercer. “If people don’t disclose and share information on an anonymous basis, they won’t get back good information that says where the market really is.” The more pressing issue may be how to benchmark local nationals in the GCC where unique and traditional models of executive compensation models remain obscure and at times immeasurable. “If you look at the expatriates, particularly in large multinationals… those organizations by-and-large participate in compensation surveys and generally have quite an open attitude,” explained Christie. “Where it becomes difficult is when you have locally employed executives working for locally owned organizations where there isn’t the legally mandated transparency that exists in other countries.”
Since most executive candidates also come from outside the region, companies have to adopt a more global perspective if they expect to attract the right kind of talent to do the jobs that they require. “You have to benchmark using the local market and the international market. A lot depends on where people are coming from because you have to benchmark their salaries according to their local markets and local industries,” explained Pitchai. However, this sometimes creates some unexpected advantages. “If you are a business that is having to go out [of the region] into the wider market to recruit, you then need to pay whatever the wider [global] market pays. Then you can benchmark against where there is more disclosure and where there is more transparency,” explained Lamptey. The only silver lining with regards to technical benchmarking in the Middle East may be that countries that have not had the luxury of oil revenues have had to graduate their pay structures in a more formalized manner. “In the Levant, things are much more regulated and easy to understand. Especially in Lebanon where you have a benchmark figure for a position that has a variation of 10 to maximum 20 percent,” explained Manolopoulos.
There is no substitute for performance
Now that the region is no longer sitting pretty on top of a barrel of oil and growth figures are beginning to reflect a certain sense of normalcy, organizations can stop trying to keep up with growth and start concentrating on the efficiency of their businesses and who is going to get them where they want to be. “Decision makers, boards and consequently the human resource departments are starting to play a strategic role in development and are becoming more conscious of the way they are spending their money,” commented Manolopoulos. Inevitably, this means that executive compensation will become more performance-related and executives will be held to the numbers coming out of accounting departments across the region. “Due to the current economic situation, this is a time where executive pay has to be rationalized and realigned with company performance,” explained Pitchai. “Now executive pay will have to be evaluated in the same way as any other pay.”
The focus on performance based executive compensation will indubitably level the playing field in the executive arena and iron out any excesses in pay that may have seemed justifiable in the past. “There was hardly a differential between high performers and medium performers. Now that differentiation has defiantly started, because they know that [companies] need this high performing talent much more now than they ever did before,” said Mishra.
In order to achieve a more representative executive pay structure as well as to maintain a cost cutting perspective, organizations in the region are expected to experience a paradigm shift in the composition of executive pay packages. “I think the problem previously was that a lot of one’s remuneration was fixed and bonuses were not as linked as they should have been to performance, which is what got us into this trouble in the first place,” remarked Farha. Shifting the focus of executive compensation from fixed elements to variable ones, not only predicates an organizational compensation infrastructure that more accurately represents the state of the wider market, it also allows companies to defer fixed costs related to executive pay, somewhat of a Godsent now that cash is sparse. “What companies are saying is that it makes good sense to put more of the potential pay into the variable [elements] and to make these performances related,” explains Lamptey. If the oil-rich countries of the region can learn from their Levantine cousins then the region may well see a more reflective benchmarking in years to come.
Retention and rate of pay
As performance based pay becomes the mainstay of the regional executive pay environment, other short-term issues that were affecting executive compensation levels have also been dramatically corrected by the ongoing global economic downturn. The two most pertinent aspects of pay that were driving regional executive pay forward were the need to retain executive staff and consequently increase their remuneration as a result. “A few months ago there were a lot of ‘mercenaries’ around looking for that increment [in pay], and as a result some people were getting massive increments and changing jobs very frequently,” commented Farha. A recent study by the Hay Group estimates that the region has had some of the highest base salary increases over the last year at 15 percent, but the organizations are moderating their plans for 2009 with increases being reduced from a forecast 12 percent to eight percent on average with up to 10 percent for top performers. “In order to keep someone, you would have to promote them faster than global policies would require. This is changing and we are going into more mature approaches of different and slower rates of pay increases,” furthered Manolopoulos.
In spite of all the dismal elements that the current global economic downturn has brought with it, companies now it seems may finally be able let out a sigh of relief knowing that they won’t have to pay as much to hire or retain their staff. “I don’t think that is sustainable for the rate of [pay] increase that we have seen in the past couple of years to continue. I think that will come down,” said Christie. Executive increments won’t become a thing of the past, they will have to fall in line with the economic realities of the region. “Until an economic recovery actually takes place, the double digit salary increases we have seen over the past few years will definitely go down to single digit figures,” said Mishra.
For those who got caught at the end of the regional executive shuffle, the worst has come to bear. “I know some people who have left their jobs over the last few months and before they started their new jobs have been told, ‘you know what we have changed our minds,’” said Farha. Executives would do best to hold on for the ride.
