The luxurious Dorchester Hotel in London was the setting for an uncomfortable meeting between the world’s private equity (PE) chiefs, where there was no doubt nervous exchanges as to how the global financial crisis has impacted their companies and what the future is for private equity. Some analysts are claiming that PE is at death’s door due to the huge amounts of leverage that PE firms took on. This led PE firms, it is argued, to get caught up in the asset bubble and to pay grossly over-inflated prices for companies landing them now in serious financial trouble. The value of companies owned by PE firms, according to The Economist, fell by 50 percent and, according to Deloitte, they expect the same percentage of PE houses to close or to return whole funds next year. However, others are not so pessimistic as to global prospects for PE in 2009 and the affect of the global financial crisis. Coller Capital, in their ‘Global PE Barometer’ report, stated that although large buy-out funds — in excess of $3 billion — will find it difficult in 2009, smaller PE firms will still be able to find good value on the market. Further to this, as companies forcibly deleverage, some PE firms will be able to step into the breach.

Good news in bad times

If the global financial crisis was inevitable, then for PE firms in the Middle East the timing was fortuitous. The sector has managed to side step the worst of the crisis primarily due to the fact that regional PE firms were not highly leveraged. “The crisis has had an affect but only limited. We are still raising funds, investing and divesting, this is the core of our business,” said Gilles de Clerck, a senior manager at Capital Trust. However, the drop in Initial Public Offerings (IPOs) has hit PE firms as it has cut the possibilities that they have to exit their investment. PE firms in the region are taking a serious look at their portfolios, reassessing their business plans, delaying exits and fund raising. So there is a general expectation among analysts that PE will see a lot more portfolio management and a lot less buyouts in the Gulf.

PE chiefs in the Middle East are all congratulating each other on the limited amount of leverage they took on. “In Europe or the US you could see deals with 80 percent leverage, but here leverage was only used for the large deals and even then it was 40-50 percent,” explained de Clerck. This low level of leverage is seen by many as the central reason that PE in the region has escaped the worst affects of the crisis. However, with leverage now severely restricted and becoming much more expensive, there will be significant constraints on PE operations in 2009. The key to the regional PE market is that the economies of the Middle East continue their robust growth, as this is how they have been able to escape the use of significant amounts of leverage previously. “We [Capital Trust] are currently raising a fund so we know there is still cash out there. In terms of investments, the companies in the region still need to grow. There is less growth but they are still going to grow at 20-30 percent so they need more funds to invest in machinery and so on, with banks becoming more cautious and the stock market being a no go PE has an important role to play,” said de Clerck of Capital Trust. “If you have the right companies which are ones that are regional and have the right management and team you will always have a market [in this region].” PE houses in the region may be breathing a sigh of relief, but they also know 2009 will be a difficult year — only the fittest will survive.

The immaturity of PE in the region has been a highly beneficial attribute with regard to the global financial crisis and its affects on the industry, but the learning curve ahead will be steep. Ziad Maalouf, vice president of MENA Capital explained that, “[PE] is so new to the region, it only started in the last three or four years. Not a lot of companies have been taken public so many PE investments have yet to be realized.” Thus, many of the PE firms in the region — especially the micro PE houses — feel they can take the hit delivered by the financial crisis and wait it out. As Gilles de Clerck of Capital Trust stated, “PE is a five to seven year investment so a loss of a year is not a big deal. Our firm continues to invest because we want to be there when growth picks up again because some of the players will not be here when things pick up.” When the economy of the region does ‘pick up’ again, it is clear that PE will have to be a leaner and more astute industry than before the financial crisis. Sitting back and letting the exponential growth of the region and the hype of Initial Public Offerings (IPOs) do the work for PE firms will no longer be an option. “In the past people were bullish and PE firms were investing in a wide array of companies in the hope of taking them public, when the stock market was booming and investors would buy in to that story. But with capital markets affected as they are, with less liquidity, PE firms have to be more selective,” said Maalouf. He also stated that those PE firms that survive will be those that are, “more careful and selective in the type of industry invested in, the quality of management, the structure of financing, the structure transaction and the legal structure.”

P.E. houses in the region know 2009 will be a difficult year — only the fittest will survive

Buying at the right price

However, for those PE players that bought at a high valuation, there will be a tougher lesson to learn and they may have a long wait before they get a return on their investment, if ever. “The key in the PE game is buying at the right price… Probably some of the other players, due to the excess liquidity of that time, might have paid higher prices and some places where we were competing with these players we pulled back,” said de Clerck of Capital Trust. For those PE firms that bought at highly inflated prices and conducted badly constructed deals, the future is going to be a lot less forgiving. The Middle East is getting what is probably a well-needed purge of the PE industry. For 2009 and beyond, the industry will have to be much better managed and the result should be more sustainable and productive deals. PE firms in the region may have escaped the crisis in part because of their immaturity, but now it will be those which show their maturity that will survive. 

OPEC is in a state of panic, as the downward trend in the price of oil shows no sign of abating. OPEC’s move to stem production has not managed to shift the market upwards and oil prices have seen a drop of 68 percent, since their record high in July 2008. While the gloomy global economic data is the primary reason for the inability of OPEC to push up the price of oil, the inability of OPEC to confirm the amount of oil their member countries are producing is also a major obstacle. This dilemma was illustrated at the recent OPEC gathering in Cairo where the market was expecting an announcement that oil production would be cut further. Instead OPEC was still striving to ensure previous production cuts had been carried out. The challenge of verifying whether production cuts — agreed to by its members — have actually been carried out or not is a near impossible task for the organization. OPEC is unable to deliver either accurate or timely oil production data with the figures that its member countries submit. Thus, it was a long time ago OPEC decided not to rely on its member country submitted oil production numbers but on ‘secondary sources’. This severely prescribes the effect OPEC is able to have on the price of oil.

For national security reasons, OPEC member countries guard information about their oil output as state secrets. The consequence of this is that the member countries are leaving themselves exposed to the whim and competence of Western ‘secondary sources’ in influencing the price of oil. The realm of secondary sources is murky, unaccountable and replete with espionage. Considered ‘secondary sources’, many organizations use a huge range of resources to try and uncover more accurate oil production data than that issued by national agencies. Tanker tracking companies are seen by most traders as the principal method in which real-time oil production data is gathered. Three companies lead the market: Petro-Logistics, Oil Movements and Lloyd’s Intelligence Marine Unit. Tanker tracking companies gather information regarding the number of tankers leaving ports from spies at oil ports and ‘friendly’ officials at oil companies leaking data. Conrad Gerber, the owner of Petro-Logistics, runs his small team from an office on Lake Geneva. Gerber first learned the trade of collecting and analyzing data of the world’s oil supplies in the 1970s when he was ‘helping’ Zimbabwe (then Rhodesia) circumvent international sanctions and procure illegal oil. Despite the obvious difficulties in obtaining accurate data that Petro-Logistics face, their figures are seen as more reliable than the OPEC member countries’ data, hence they have considerable clout in affecting oil prices.

Dodgy business with dodgy numbers

Oil producing countries do not appreciate tanker tracking companies and many prohibit reporting vessel data. There have been unconfirmed reports that informants for tanker tracking companies have even paid for their collaboration with these companies with their lives. Yet, despite the lengths tanker tracking companies go to gather this data, many oil analysts are doubtful as to the accuracy of the figures. Alexander Wöstmann, Director of www.gas-oil-power.com, stated that, “oil is transported in many more ways than just tankers and the figures that these tanker tracking companies gather from the Middle East are notoriously vague. The information they are collecting has little to do with production figures.” Rafiq Latta, Gulf and OPEC editor for MEES, which is one of secondary sources that produces oil production data and is used by OPEC, explained that, “There is a big difference between exports and well head production, with the latter essentially being what [oil] quotas are about.” Latta pointed out though that it is possible to get accurate figures through tanker tracking companies for a country like Iraq where there is very little storage. But for countries like Iran the tanker tracking data is useless as, “Iranians typically bring in a lot of offshore storage and put oil in tankers [but] wait for the market to improve before selling them on. So you can get wild oscillations in Iranian exports that do not accurately reflect oil head production at all.”

Rafiq Latta explained the complex process that he goes through in order to get more accurate oil production data than tanker trackers and official country figures. Latta’s system depends on the adding up and deducting of certain variables that range from news wire services looking at “what has happened in terms of disruptions over the month or anything coming down for maintenance,” to taking into account seasonal changes, for instance “Gulf domestic usage often goes up for air conditioning” in summer. Latta also uses the information gathered by tanker tracking agencies, as well as informers in oil companies that are somewhat reliable. All this, Latta admitted, “is a very imprecise science and it is astonishing how much relies on it. There is no oracle out there.” Ultimately, even with secondary sources, exact figures for how much oil is produced are not attainable. Secondary sources simply have a more accurate figure than the official figures produced by OPEC member countries. This is accentuated by the fact that Iran and Venezuela are seen as the two main offenders in terms of quota busting by the core Arab countries, but as Latta explained, “the secondary sources for both these countries leave a lot to be desired.”

Slippery statistics

Wöstmann is at a loss as to why a region wide metering system has not been established to solve this problem. OPEC however, has not been passive about the lack of transparent oil production data. In the late 1990s, due to the high volatility in oil prices blamed on the lack of transparent oil data, the Joint Oil Data Initiative (JODI) was set up in June 2001. JODI was created with the objective of trying to “provide a complete, timely and comprehensive database that is accessible, reliable and gives an accurate assessment of the global oil situation.” To circumvent the problem of national agencies not releasing data, JODI tried to put pressure on the oil industry to provide oil production data. But this has failed and eight years on JODI is still not seen as a credible source of data. Rafiq Latta stated that the problem with JODI is that the data received is just not trustworthy. “For OPEC, JODI can never be relied on that much. Ironically, I actually think that because analysts mistrust [JODI], they are quite accurate but the moment people start relying on JODI, or they become more timely, they will be wide open for abuse.”

Thus, the mysterious industry of secondary sources will continue to have an overbearing influence on the price of oil for the foreseeable future. As the price of oil continues to slide beneath that needed for OPEC countries to balance their budgets, there may be renewed effort to improve the transparency of oil production data. This is unlikely however, due to the internal political animosity between OPEC members and the limitations that OPEC has as an organization. As Latta pointed out, “If there was a high level of coordination and OPEC had a system that everyone trusts, then OPEC would be a far stronger organization. But there is a reason why this has not happened that goes beyond small mindedness. It is because each country has very different reasons for being in the organization and so for OPEC to have a greater level of control would make it a very different organization.” For those producing secondary sources the only threat to their business is oil running out, as the internal political squabbles of OPEC appear to be anything but finite.

About a year ago, Abu Dhabi’s sovereign wealth fund (SWF) injected $7.5 billion into an ailing Citigroup. Kuwait’s fund also invested $2 billion into Citigroup and it put another $3 billion into Merrill Lynch. At the time, officials in the US and Europe suspected SWFs posed a possible threat to western nations’ economies and national security. They rang alarm bells over the funds’ lack of transparency. However, with the financial crisis sweeping the globe, western governments are now begging for investment from the GCC, as the Gulf countries have some of the few large pools of available cash in the world.

British Prime Minister Gordon Brown toured the GCC in November, asking the governments of Saudi Arabia, Qatar and the UAE to pump money into international institutions and British companies to help dampen the effects of the global crisis. During his trip, Brown told reporters the UK “welcomes investment from sovereign wealth funds.”

Just before Brown arrived, the United State’s Deputy Treasury Secretary Robert Kimmitt made a similar trip. Partly due to the new “Santiago Principles” agreement between 23 countries that outlines funds’ code of conduct, and partly because of the need for cash to free up frozen credit markets, Kimmitt wanted to make clear that GCC SWF money was also welcome in the US.

GCC funds are largely uninterested right now and much of the West’s charm offensive has gone to waste. The financial crisis has hit the SWFs’ overseas investments, destroying tens of billions of dollars of wealth. Low oil prices have only compounded the problem at a time when GCC economies need their cash to prop up ailing stock markets, real estate investments and the banking sector.

Just after Brown’s visit in November, the mood in Dubai ranged from gloomy to outright apocalyptic. The bunker attitude was evident at a private equity fund conference in Dubai. As a speaker used a PowerPoint presentation to summarize the growing role of SWFs in the global economy, fund managers from around the world drank coffee and nibbled biscuits in an adjacent ballroom, which one fund manager called “the trading floor.” There didn’t appear to be much trading going on however. Many of the managers, like Ejaz Shamsi, a senior vice president at Pakistan Private Equity, came here looking for cash. Unfortunately, everyone else Shamsi ran into was looking for cash too.

Liquidity drought

“One and a half years ago when I attended there were so many investors available,” Shamsi said. “But at this point in time, the scenario’s totally different… [the SWFs] are sitting on their cash.”

“They’ve already made a lot of losses on investments, so they are reluctant to invest money right now. So it’s difficult for us to convince them, and for them to trust us, and for them to trust the market.”

The private equity fund managers would be lucky to get just a fraction of the cash sovereign wealth funds are currently estimated to possess — the United States Treasury estimates the world’s 26 SWFs currently possess two to three trillion dollars in assets. In the next five years that amount could mushroom to between seven and 11 trillion dollars.

Of those assets, Gulf SWFs have an estimated 700 billion dollars invested overseas, according to the Institute of International Finance. That includes investments across the world, across a variety of sectors, with a majority in Europe and the US. SWF’s are estimated to hold broad portfolios valued at $200 billion in the US alone that include stocks, real estate and bonds, and their exposure to the financial crisis has been just as extensive.

Eckart Woertz, GCC economic program manager at Dubai’s Gulf Research Center, estimates the Abu Dhabi Investment Authority and the Kuwait Investment Authority have 60 percent of their investments in equities, and just as anyone with a retirement plan knows, those equities aren’t worth nearly as much as they were one year ago. But because of the secrecy surrounding SWFs, it’s hard to be sure exactly how much they’ve invested and how much they’ve lost.

Brad Setser, an expert on SWFs at the Council on Foreign Relations, told BusinessWeek the Abu Dhabi Investment Authority may have lost $100 billion over the last few months. Woertz estimates ADIA may have lost up to 25 percent of its investments and the same for KIA.

KIA’s chairman, Bader Al Saad, told Al Arabiya Television in September that his fund had lost around $270 million from its investment in Citigroup. Woertz says Saudi Arabia’s fund is best positioned as the fund was largely invested in bonds. But Saudi’s experience is the exception to the rule and now many Gulf investors have hidden their money under the allegorical mattress.

“Frankly speaking, I don’t want to invest right now,” Dubai International Capital’s chief executive Sameer al Ansari told a business conference in November, according to the Associated Press. “It’s not the time to be brave and go out there and try to hit the bottom of the market.” Al Ansari added that the world is going into a “a deep recession,” which may last two or three years, and he said his fund would be “extremely conservative” and would try to protect its assets, valued at $12 billion.

As the financial crisis took down Lehman Brothers and Merrill Lynch, KIA was less enthusiastic about bailing out US banks or seeing cheap prices as a good investment opportunity. “We are not responsible for saving foreign banks,” Al Saad said. “This is the duty of the central banks in these countries. We have social and economic responsibilities towards our own country.”

Simon Williams, HSBC chief economist for Gulf markets, says SWFs are taking a wait-and-see attitude. “I think most prudent investors, even those with time horizons as long as [the] region’s Sovereign Wealth Funds, will wait for clarity in the global financial markets before establishing positions,” he said. “I think some deals will go through, but I think they’ll be small in number.”

Braving the storm

There has been a big one recently. Late last month, Abu Dhabi’s royal family bought $11 billion worth of shares in Barclays, Britain’s second biggest bank. That gives the family a 16 percent stake in the bank, making it the largest shareholder. Barclays also sold 15 percent of its stock to investors from Qatar’s government, and reports reveal the bank had to promise to pay higher interest payments to their new partners from the Gulf.

But with oil prices falling, economists don’t expect to see a lot of these deals going through. The Institute of International Finance (IIF) estimates oil prices in 2009 will average $56 per barrel — dangerously close to the break-even mark for many Gulf governments who need higher oil prices to keep their budgets out of the red.

The Organization of Petroleum Exporting Countries has been trying to stabilize prices in the $70 per barrel range. Woertz noted that if oil can’t be stabilized, the Gulf economies will need to “plug a lot of holes in their economies at home… Some research shows that with oil prices at $50 per barrel, everyone but Kuwait will face a deficit in 2009,” Woertz said. “The International Monetary Fund is more optimistic. At $60 the GCC should have a significant income, but both reports are pretty negative.”

Meanwhile, the low oil prices come at a time when “pressures have risen on Sovereign Wealth Funds to redirect their investments to the local markets,” said IIF first deputy managing director and chief economist, Yusuke Horiguchi, in a press release.

If oil prices remain in the $50 range, most GCC countries “will need to take recourse to savings — not only for bailing out local banks and propping up local stock markets but for their normal ongoing expenditures and operations,” Woertz told the Oxford International Review.

There are already unofficial reports that this has been occurring. Reuters reported in November that Kuwait repatriated $3 billion to back up its beleaguered stock market and banking sector.

Williams says he doesn’t think funds will start selling foreign assets en masse, but he says their level of aggressiveness in the long term will be decided by this crisis.

“I think what’s going to be interesting over the next months, or years, is what conclusions Sovereign Wealth Funds draw about investing overseas,” he said. Either the funds will see the crisis as a “great time to increase their position,” or “they will look at losses they incurred over past few months and say these were markets we perhaps didn’t understand as well as we thought we did, and can’t control, and maybe it’s better to keep the money in markets we understand.”

Sovereign wealth funds “will look at losses they incurred over the past few months and say these were markets we perhaps didn’t understand as well as we thought we did.”

The region’s top developers have been shedding hundreds of jobs over the past two months in order to cut costs in the face of a regional real estate bubble burst. Damac (200 jobs cut), Nakheel (500 jobs cut) and Dubai Properties (estimated 600 jobs cut) have all made staff redundant, while other major developers such as Emaar are still reported to be reviewing their staff numbers.

However, the most disconcerting aspect related to the job cuts at some of the largest real estate employers was the fact that they seemed to have been caught completely unaware by the magnitude of the crisis. “We were told more than once by upper management that we have nothing to worry about,” said Raja Khouri, former senior public relations executive at Dubai Properties. “What was told to us was, ‘We are going to cut all expenses, however, the one thing we are not going to do is fire employees.’ In fact, exactly one week before I was fired, the CEO of Dubai Properties gave a speech telling everyone not to worry in order to put us at ease.” Another senior executive at Dubai Properties who preferred to remain anonymous commented, “It just goes to show that they had their heads in the sand the whole time.”

Furthermore, the employees that were let go at some organizations appeared to be those that were deemed expendable and most costly. “The firings were based on two things. One was the tenure of how long people had been there. Everyone who was still on their probationary period of six months was let go. On top of that, all the highest paid people in their departments were let go, so all the seniors were let go,” said Khouri. “The three major senior managers in the marketing department were let go, moreover they kept all of their national employees.”

Severance practices were reported to have varied, but ultimately people have been put in a tough spot. “People that are getting fired are getting three months severance pay,” said Tarek Akkad, former IT policies & procedures coordinator at Nahkeel. Khouri added that: “They gave us one month severance pay as well as unused holiday days, which is the amount contracted to employees who spend more than one year in the company… Basically they are giving us what we are due, but they are not giving us anything on top of that.”

Leave on your own or get the boot

The process that some real estate developers took when it came time to give their employees the axe further pointed to desperation. “The director of each department gave the employees two notes. One note was a resignation letter and one was a termination letter and we were asked to choose which one we wanted to sign,” explained Khouri. Moreover, neither letter stipulated any reason why the staff was being laid-off. “We are still in discussions with the [former employer] in order to attain a specific reason for being made redundant,” said the source who formerly worked at Dubai Properties. “The fact that they are not acknowledging that they made some mistakes is what really leaves a bad taste in your mouth,” he said.

For many expats who work in the Gulf, the next few months will be crucial to finding out if they can hold onto their jobs or even find new ones. “I think that under normal circumstances, two months would have been enough time, but under these [economic] circumstances I don’t think it is going to be enough time. Now everyone who has been fired is looking for a job and nobody is hiring,” said Akkad. “I’m scrambling against the last three weeks of my visa validity to basically try and find something, because otherwise the bank will freeze my account, seize my car and probably take the money in my account. It’s just messy.” Indeed the mess that started only a few months ago in the US has begun to surface in the Middle East and only time will tell how many pieces of how many lives will have to be picked up, before this is all over.

As the battle over shareholders’ ability to control executive earnings rages in Europe and the United States, regional protests over excesses in executive compensation have been relatively muted. Perhaps this is because it was not the region’s lax regulatory policies that resulted in the economic crisis the world finds itself in today. Nevertheless, the region was happy to ride the economic tidal wave of the past few years as long as it felt it was getting something in return. “I think the attitude here is: we don’t mind paying but we want to see that we are getting something for it,” said Richard Lamptey, principal and head of executive remuneration consulting Middle East at Mercer.

Moreover, the nature of Middle Eastern societies itself traditionally lacks the notion of social responsibility that is linked to executive pay in other more developed economies. Consequently, this is seen to facilitate the notion that the sky is the limit in terms of how much is too much. One high-ranking member of a major global compensation consultancy who preferred to remain anonymous remarked, “in the West and capitalist free market democracies, there are different views that come up from society than you might get from more monarchist types of countries. There are different social attitudes that those different political and social organizations give rise to. I expect that people here [in the region] are more tolerant of pay.”

As a consequence, until recently the region has been loathe to face up to the fact that the divide between executive compensation and unskilled labor creates social tensions. In March of 2008 about 1,500 migrant workers in the UAE torched offices and vehicles over lack of pay and 45 Indian nationals were sentenced to six months in jail followed by deportation. “The divide between executive pay and the lowest paid worker in the largest regional companies is about 100 to 125 times,” explained Pon Pitchai, reward manager at a large regional real estate developer. However, the region may still fare better than even the most developed economies with respect to differences between executive and worker’s pay. A joint study conducted by the Institute for Policy Studies and United For a Fair Economy in the US recently published a report saying the pay of S&P 500 CEOs averaged 344 times the pay of a typical American.

Nationality is key

Another aspect indigenous to the region is the unique demographic composition of nationalities that make-up the executive population. However illogical it may be, nationality still affects the way executives in the region are paid. “There is definitely a distinguishing in the market based on where people come from and we see it in salary surveys published in the local media,” said Dany Farha, chief operating officer at Bayt.com. Pitchai elaborated that, “in this part of the world, nationality still plays a very curtailed role in terms of executive pay levels, even at senior levels.” Additionally, it has been candidates from more developed economies that have taken the cake when it comes to executive pay. “Traditionally the highest paid executives were Westerns, especially those from Western Europe and the United States,” said Panos Manolopoulos, managing partner Middle East/CPS global practice leader at Stanton Chase International Executive Search Consultants.

Despite the absurdity of the nationality phenomenon, it seems to be changing as the need to steer companies in the right direction during times of crisis supersedes any xenophobia that may persist in the region. “Going forward, most qualified candidates are going to get paid the best salaries no matter where they come from because people are going to have a larger mix of variables in their compensation scheme and therefore the people who bring in the honey will be rewarded accordingly,” said Farha.

Moreover, the more pertinent reality that organizations in the region will eventually have to deal with is the effect the current global downturn has had on executive confidence levels in the region. Since a large portion of the region’s workforce, the executive one included, comes from the Indian subcontinent that is currently growing at rates greater than or equal to that of the region, a flight of talent out of the region by these traditional labor elements is in the works. “The nationality issue will become a double-edged sword for organizations, because once the economic situation stabilizes there will be a flight of talent out of the region from traditional elements of the expatriate population,” explained Debabrat Mishra, principal & consulting business leader Middle East at Hewitt Associates. “People have seen that this part of the world is not as immune as they previously thought it was. Companies would do well to create a good balance of nationals in the workforce to prepare themselves for a flight of foreign workers from the region,” Mishra suggested.

Many companies and governments in the region are taking heed of Mishra’s advice and have over the past few years enacted localization polices in their labor markets in order to increase the number of local nationals in the workplace. This is good news for local executives who can expect to be generously rewarded for their efforts. “Job for job, it is the case that a local national will be paid more in totality than an expat. Where you have localization policies and a limited number [of nationals] to go around, the supply and demand imbalance will create pressure to pay more,” said Richard Lamptey, principal and head of executive remuneration consulting Middle East at Mercer.

More importantly, however, the region looks set to become more ‘home grown,’ as Middle Eastern executive talent begins to emerge and reconfigure the executive population in the region. “I don’t see that in the next decade that this area will be only occupied by expats… percentages of 75 percent to 80 percent [expatriate populations] will gradually change,” said Manolopoulos. “The diaspora of Arabs, Middle Easterners and Asian [executives] that were out in markets like the US, Canada and Europe, have been very interested in coming back,” said Farha. “There is now an economic reason with greater development of the [regional] markets, as well as the economic crisis that is going on in these [Western] economies, which may provide an additional reason [for Diaspora populations to return].”

Mars vs Venus

It is no secret that the Middle East is predominately viewed as a patriarchal society. However, when it comes to executive compensation, the region seems to be offering somewhat of a respite from its historical gender stereotypes. Many women in the region are stepping out of their traditional societal roles and taking up executive positions in major industries across the region despite the inherent challenges they face. “More women [executives] are in work in Saudi organizations, but they are starting from a long way back because of their social and cultural situation. In Kuwait I see women in senior positions in many organizations,” said Peter Christie, director of executive reward for Hay Group in the Middle East.

Nevertheless, in terms of actual executive pay and willingness to move to the region, there remain some differences that have yet to be overcome. “The gender issue is still a problem on the executive level. I can hardly tell you that I receive as many CVs from women who want to come to the region,” said Manolopoulos. “If it is a regulated package then yes [pay is similar], but if it is a negotiated package then no, I would say that [pay] is at least 20 percent lower.” Moreover, the traditional elements concerning gender politics and pay in the workplace are in some cases playing out to the advantage of companies and female executives alike. “In the Middle East women are very valuable assets to organizations… because they have something to prove, whereas the males are expected to be in the workplace and they are getting paid the same,” remarked Farha.

If the Middle East can capitalize on the trend that has begun with empowering female executives in the workplace, then it’s not unlikely that at some point in the future men and women could become equal players in the world of business and help to shed some of the age-old perceptions about gender in the Middle East.

The end game

Middle East finds itself at a crossroads when it comes to executive pay. The decisions that are made today by organizations throughout the region will dictate whether or not the Middle East can become a fair and profitable region for executives to work in, or whether it will continue to be plagued by the stereotypes and inefficiencies that have been the bane of the executive compensation market in the past. The executives will have to wait and see.

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.

When ahead of the game in the world of business, no one is really concerned with how much was spent to get there, let alone on whom. More often than not, people are content to jump on board and ride the proverbial train until the last stop. That may have been the case prior to the onset of the current global recession. But today, companies in the region have to equate their positions and organizational structures with the current economic environment in order to remain competitive in the absence of better times. “When there is a storm outside you go back home, lock yourself in and discuss what you are going to do until the storm blows over and the rainbow comes back,” remarked Panos Manolopoulos, managing partner Middle East/CPS global practice leader at Stanton Chase International Executive Search Consultants.

Right now, that rainbow still seems a long way off, as companies across the region begin to restructure their businesses in order to deal with the decreasing growth rates expected in 2009 and beyond. Naturally, this trimming down process has begun with casting off excess labor costs associated with times of growth, especially large executive pay packages. “There has been a lot of over-hiring which has happened in order to be able to recruit and get [executive staff] on-board,” explained Debabrat Mishra, principal & consulting business leader Middle East at Hewitt Associates. “This has resulted in a lot of [executive] overcompensation which is getting corrected right now.” Accordingly, companies in the region are beginning to realize that there is no easy way to restructure their businesses after years of promising growth, however reluctant they may be to admit it. A former senior executive who was recently laid off at the government-owned real estate company Dubai Properties in the UAE said that most departments were being downsized by “as much as 60% across the board.” Recently Dubai Properties announced that they would release a statement addressing the subject of redundancies, but they later recanted on that intention.

However dim the prospects for executive compensation in the region might be in times of a global recession, there are still plenty of silver linings in the ominous clouds compared to many developed economies. “There are people being let go in Europe, the UK and North America who are going to think, ‘Well, the Middle East still offers the opportunity to get a decent job and maybe now is the time to think about going down there,’” said Richard Lamptey, principal and head of executive remuneration consulting Middle East at Mercer. “The Middle East, generally, will be less affected by the global economic downturn than some of the Western economies and I think it will change perceptions about the opportunities that are available down here,” added Peter Christie, director of executive reward for Hay Group in the Middle East.

Moreover, the nature of economies in the GCC as tax havens continues to provide an attractive setting for experienced executives to come to the region. According to the Hay Group, net disposable income (gross pay adjusted for taxes and cost of living) for executives in the Middle East ranks amongst the highest in the world, with five of the six GCC countries ranking in the top 10 and four new entrants in the top 20. “When you look at net disposable income… that shows very clearly that executive pay in Saudi Arabia, Qatar and the UAE are at the top of the pile and that is because of the very favorable tax rate,” said Christie.

Total compensation for executives in the region, however, remains lower than the rest of the world. The main reason is that the region still lacks meaningful long-term incentives for executives. Without these incentives, executive compensation in the region persists in being strongly underpinned by large allowances offered in compensation for the increasing cost of living and the opportunity cost of relocating to the region. “The fundamental difference between the way that executives are paid in the Middle East and the way that they are paid in Western economies… is that the balance here is towards base salary and substantial allowances, which are generally free of taxation, and discretionary bonuses which may or may not be quite large,” commented Lamptey.

The opportunity for executives to be well compensated in the region remains linked to the outcome of the ongoing economic downturn. The inherent growth potential of the region coupled with the lack of highly talented individuals still presents a labor market that is relatively easier to perforate than many of the world’s economies. “Despite what most people say, the Middle East and especially the GCC lack talented people and hence there is a very big need to attract good talent,” said Manolopoulos. Consequently, the lack of qualified executive candidates will continue to push executive salaries upwards, albeit in a fashion that is more fitted to the current economic scenario. As Pon Pitchai, reward manager at a large regional real estate developer concluded, “We have not reached the zenith of executive pay and there is ample room for increasing executive compensation.” Considering the hundreds of recent layoffs in the real estate industry, these are encouraging words — executives that can still expect to be plentifully rewarded, as long as they can keep their jobs.