Even as the Middle East region offers a greater pull, grander lifestyles and more gratifying salary-hikes than most other traditional greener pastures, the need to employ and hone local talent has never before been felt more acutely. Of course, an economic boom across the region may be responsible for fatter take-home cheques and bulky bonuses, but as companies—both local and multinational—are realizing it the hard way, merely inflating the salary packages and making counter offers to poached employees may not be enough to retain the best talent.

Studies have revealed that candidates who accept counter offers from their current employers eventually leave within six months. In the war for talent-retention, the focus must shift from reactive counter-offers to proactive training and skill-enhancement exercises, from across-the-board salary increments to performance-based compensation packages, from pre-defined bonus levels to cost-of-living-linked flexi-benefits. The Persian Gulf Business’ 10th Annual GCC Salary Survey benchmarks industry-wise salary levels of local and expatriate talent across the GCC and provides a bird’s-eye view of the talent-nurturing and retention policies and ploys practised by companies in the region.

Compensation packages across the GCC are increasing considerably at a time when the need for superior talent is intensifying. In percentage terms for 12 months to August 2005, Qatar topped the salary hike table with a 7.9 percent jump while Saudi Arabia recorded 7.4 percent, Kuwait 6.9 percent, the UAE 6.5 percent followed by Bahrain’s 6.3 percent and finally, Oman clocked a 5.9 percent hike in the overall salary levels.

While being a multinational may not be an insurance against employee turnover, the presence of multinationals has indeed helped institutionalize the compensation review processes.

The median basic salary expectation of Saudi graduates of King Fahd University of Petroleum & Minerals (KFUPM) is around $26,000 per year (SAR 8,000 per month). For a national in Kuwait, it is KD600-700 ($2,000-$2,300) vs. KD300-500 ($1,000-$1,650) for a non-national. For Siemens, a multinational operating across the GCC, the salary for an entry-level engineer in a technical job is Dhs5,000 ($1,350) plus accommodation, a jump of 5 percent for the year 2005.

The move by some of the GCC countries to de-sensitise their economies of the vagaries of the oil prices—namely the property markets in Dubai and Qatar, the tourism push by Dubai and the evolution of the banking system in Bahrain—is a recent and interesting phenomenon which is altering salary structures in the region.

The situation turns dire as the desired pace and direction of change often outstrips the ability to quickly source appropriate talent from within the region. Looking for other reasons behind the growth in the demand for talent, there is also in play a link between salary levels and the size of the economy, GDP and the number of new organizations being launched—all hugely positive indicators.

New business initiatives by the government and local companies in uncharted sectors, e.g. freehold properties, stock markets, and foreign direct investments, require companies to get overseas expertise to execute their business plans. Consequently, the rise in salaries is broad-based across the regional economic sectors.

Part of the above causes may be cyclical, the product of a strong economy approaching the peak of its phase. But what is keeping many CEOs awake at night is a number of trends that threaten a wide-ranging shortage in talent over the next few years. Surprisingly, these developments are occurring in a market defined by low attrition rates. Even technology companies such as Siemens boast of an attrition rate of about 3% per annum. And many of these employees move within the company to its other global operations.

There is a dearth of professionals in investment banking, mortgages, Islamic banking and the legal sector and therefore, greater premium.

If it is a big MNC brand, they have already recognized the value of people and the value of developing them. So, they already have good HR practices to nurture good talent. If the local organizations have to stay in the market and compete, they have to adopt similar HR practices. While being a multinational may not be an insurance against employee turnover, the presence of multinationals has indeed helped institutionalize the compensation review processes.

Compensation design versus ad-hoc demand-based salary hikes is starting to be practised by a minor set of companies. We attribute these developments in a large part to the entry of multinationals, which are bringing with them these systems. While some of the multinational firms have had an important role in highlighting the importance of effective compensation and benefits policies, these very changes are themselves putting upward pressure on salary structures.

 This boom directly impacts the real estate, banking, hospitality and the logistics sector in particular, creating new demand-supply frontiers. Whilst there is still high demand for specialist management within the logistics supply chain sector throughout the Persian Gulf, increasing availability of skilled, qualified nationals from the region has driven salaries down in some positions.

There is a dearth of professionals in investment banking, mortgages, Islamic banking and the legal sector and therefore, greater premium. The recruitment needs of the banking sector have been growing by between 15 and 20 percent whereas the available regional pool is becoming smaller due to increased demand. Currently, 50 percent of the recruitment is done from within the region. Such is the shortage that there is between a 20 and 30 percent vacancy at any point due to the lag between the search for an employee and his/her joining time.

Take Islamic banking. Within that, it is people with skills to manage a sukuk who are in high demand and not branch managers or tellers. With credit cards, a growing segment, product managers are in high demand whereas within asset management, it is structured products. The demand pressures in the banking sector led to packages marked by increasing joining bonus figures during 2004-2005. Similarly, the huge investments being ploughed in the oil and gas sector in the Middle East and neighboring regions is creating prospects of shortage of skilled personnel in this segment as well.

Right now, there is not too much of a gap between the middle level and senior level management in most industry segments.

Alongside, increasing sophistication of the market, greater demand and increasing competition is forcing companies to go into more specialized areas which require more specialized people albeit at higher salaries. Growth sectors of retail, logistics and finance are prime examples. Even the setting up of the Dubai International Financial Centre (DIFC) is causing fundamental changes in the job market. The kinds of people these segments are attracting are settled in matured markets with very high salaries. With business plans and ambitions growing bigger and projects becoming more complex, companies are also seeking longevity.

Right now, there is not too much of a gap between the middle level and senior level management in most industry segments. Salaries at the senior levels are generally rising slower than those at the entry or middle levels. The senior levels are being ‘incentivised’ more from a ‘pay for performance’ perspective, and stand to make higher bonuses if they meet or exceed their target expectations.

However, as companies with increasing sophistication of functions start to seek specialists, the qualifications and hence the salaries are bound to go up. The skills that are being sought after would not permit a faster turnover. Besides, there are geo-political factors that have contributed to macroeconomic factors. The ongoing reconstruction of Iraq has helped the Kuwait and Jordan economies to boom, unleashing fresh demand. Counterbalancing these factors is an assortment of trends affecting the supply of talent to the region—some positively and some negatively.

The post dot.com crash and the politically charged atmosphere in the US post-September 11, 2001, have also encouraged many North American Muslims of Arab or Asian origins to consider opportunities in the Persian Gulf. With constrained growth rates in the advanced countries, professionals from there are seriously looking at the Middle East as an area of tremendous opportunity. People of Arab origin in particular are keen to relocate at marginally higher salaries prevailing in the market as it offers them higher saving potential, as well as proximity to their country of origin.

Consequently, the GCC is maturing as a resource pool. Earlier we had to go out to seek people. Now 60 to 80 percent of our recruitment is done within the GCC. People available here now not only have five to six years of relevant regional experience, but they are also exposed to the specific business environment and cultural issues. This does not include people with visit visas as they are normally fresh with little relevant regional experience.

Whilst it is true that the higher economic profile of this region is attracting increasing applications from abroad, this is unlikely to significantly depress salary rates as these professionals are still looking for suitable levels of remuneration in order to relocate.

Both foreign and local capital is coming back to Kuwait, which is leading to economic expansion. There is a lot of capital which needs to be invested somewhere. Hence, companies are a little bit more willing to invest in human capital to get the best people to manage their capital in the best way.

Qatar, according to most recruiters, is competing with the UAE as a destination of choice and is recording the fastest jump in salaries. Also, the savings potential is said to be higher in Qatar and Oman. Disparities are prevalent among the GCC countries for reasons other than the differential rise in cost of living and general inflation. Saudi Arabia is considered a hardship country and companies do pay higher salaries in order to attract the right talent. Kuwait comes next in this regard. Indeed, colored by perceptions of security threats, the salary for, say, a brand manager in Saudi Arabia has gone up from between $60,000 and $80,000 to $120,000 per annum, and yet it is difficult to get people to move there.

This uneven growth across the GCC combined with limited mobility within a country has made it easy for recruiters to source candidates from anywhere in the region. People from Saudi Arabia and Kuwait move for the lifestyle while from other places, it is more towards growing opportunities. As for moving to Kuwait and Saudi Arabia, Jordanians and Saudi nationals are found to be more willing.

However, the bulk of GCC candidates are only considering the UAE and even then, many have difficulty fitting in and finding a home for their skills as their qualifications and experiences are not easily recognized or in some cases even understood by employers in the Persian Gulf. Furthermore, with the US and European markets coming back in growth mode once again, this particular flow could slow down markedly in the near future.

On the flip side, turnover has increased at the middle management level as employees are willing to move within the GCC. It is no more a question of just Dubai. A positive fallout of the increased availability of better educated resources within the GCC has been the rise in minimum qualifications level.

While India continues to be a good source for employees in the lower management cadre, it is becoming difficult to get people for senior and specialized functions from India. This is especially true for local companies as they have limited career progression options. For the Indian resource pool, the Persian Gulf has lost its shine. Mainly because India is increasingly home to tremendous job opportunities, good career prospects, leading-edge technology, respected and internationally recognized exposure and lifestyle. Salaries are rising 14 percent on an average, making it increasingly difficult to attract top Indian talent to the Persian Gulf. I know people have taken a salary cut and moved back to India because they know that, with five years’ investment, they could be somewhere.

A number of expatriates from countries such as Canada and the West in general do not view the UAE as a country of domicile and are deterred from coming back. This region does not offer total solutions in terms of citizenship and, apparently, this is important even to the Arab expatriates. It is now up to the companies what they want to project and whom they want to attract. “The people who want to come back are mainly from the pool of people who have been on the expatriate treadmill for years or looking for junior positions (which are still more lucrative in the GCC).

Most recruiters believe that other possible sources such as Pakistan and Sri Lanka don’t have the maturity to become a resource pool, pushing up the salaries for specialized Indian resources. Other popular resource pools such as Jordan and Lebanon are also catching up and it is not easy to attract people from anywhere anymore.

Salaries here are not as good as they are in the UK or Hong Kong in the construction field, and we struggle to find candidates who will accept the salaries on offer here. The attraction of Dubai as a desirable location does help, but it is not always enough to lure good candidates. Others argue that emerging markets which previously had no access/presence in the region are now making inroads. These include China, Eastern Europe and CIS countries.

The factors behind the demand-supply pull are tuned by the specific industry requirements. In the high-tech industry, there is more availability and limited job options within the GCC region, putting downward pressure on salaries. Lately, however, this has been more than compensated by the rising cost of living and housing.

 The company is looking at offering either a rental budget or a cash component if employees decide to buy residential property in the UAE. We have just done our increments and hiked our salaries by between 7 and 10 percent. The cost to the company has gone up by 25 percent and a large chunk of this is the housing component.

Two broad trends are being observed to account for the rise in housing costs. In cases where there is a separate housing allowance, the average increase in the housing allowance has been slightly higher than the increase in basic salary, making housing a larger proportion of the overall package than it has been previously. For instance, at Siemens, the accommodation allowance is handled separately, taking care of most of the specific inflationary pressures in the various GCC countries. For Dubai and Qatar, the company’s housing allowance was revised up by 15 percent during the middle of 2005 and again upwards by another 10-15 percent a couple of months later.

But it is still not marked to the market. For general managers and above, accommodation is provided at actual. If the rent is a separate variable component, companies hope to revisit it when the rents actually come down. Some believe that rent hikes have been the biggest challenge for regional companies.

On the other hand, many companies are scrapping individual housing, transport and other allowances and offering, instead, a single consolidated cash amount as total remuneration (although healthcare and annual tickets still remain).

If you look at the property market of completed properties, most of the people buying there are from middle management—they are seeking a home. The companies are debating whether to pay just the interest cost of the loan or meet rent expenses. Most companies, following global trends, will not subsidize their employees’ investment program.

Although the rent-mortgage interest argument is not yet matured, highly competitive compensation—particularly long-term wealth accumulation—is an essential ticket to the game of attracting and retaining top talent. The crux of the matter will be the ability of people to move within the market, and labor mobility could be a natural progression from property ownership.

However, inflation and rent hikes, though primary, are not the only two reasons why salaries are expected to go up. “Education, transport, labor laws and political developments in the region are also contributory factors,” says Merchant. Company performance, length of service and individual performance are also being mentioned by other recruiters.

Besides, as some recruiters mentioned, the introduction of road toll could reinforce the imbalance in housing prices as people will be forced to move into Dubai from, say, Sharjah and Ajman. From an HR perspective, it will escalate costs for the company.

Given the varied nature of industries that the Jumbo Group operates in, we have successfully instituted a Variable Pay plan for some sections of our employees in businesses such as IT and telecom. For the leadership team, we have instituted a gain-sharing program that is expected to encourage entrepreneurship and drive performance. For the frontline salespersons, customized incentive schemes have been launched across the company for different business divisions and different categories of employees based on their unique business drivers. For the management staff, however, Performance Bonus Scheme has been implemented.

Currently, multinationals are paying more by between 10 and 15 percent in the banking sector. But this gap is expected to be covered in two to three years time. MNCs working through their branch offices have to follow global structuring of wages whereas local companies are working out of their head offices and can make faster decisions. More importantly, there is a greater leveraging of salaries and the gap between nationalities and local and multinational companies is diminishing.

There is a definite upward pressure on salary structures in the region for both ‘demand-pull’ and ‘cost-push’ reasons. Since the majority of the workforce in the region remains of an expatriate nature and expatriates by definition work in countries outside their native home, salary remains the primary motivating factor to shift from their native homes.

However, this upward pressure has yet to fully translate into the kind of salary increases many are looking for. Companies are attempting to keep their cost structures under control, and lifestyle factors mean that the supply of labor remains strong. This equation is becoming more balanced and the scenario could shift in the next year or two. Besides, restrictions on visa transfer between employers obviously serve to restrict labor mobility. This does allow some companies to keep their costs under control as their employees are unable to move jobs.

Meanwhile, companies are now only partly competing on salary, with other factors playing an increasingly important part in the overall value proposition.

No one has declined our offer letter so far. It is not so much the salary as the challenge that Islamic Insurance offers in this region. Money is not a motivator, but it can be a de-motivator. In a company survey at Siemens, the top five employee motivators were found to be long-term career growth and opportunities for development; stability; low risk, non-erratic management style and at number five was salary.

Perhaps this explains why, in spite of better salaries in GulfTalent.com’s survey of graduates at Saudi Arabia’s KFUPM, the list of the top 30 most popular employers included 18 multinationals, 11 Saudi companies, and one non-Saudi GCC-based company.

A short-term implication of the rising HR costs is that companies are increasingly hiring workers from lower cost countries from where the manpower may not have the requisite experience but the salary expectations are lower. Aman Insurance has adopted a 2006 strategy to recruit ‘freshers’ and train them internally rather than continue to pay steep premiums for their growing staff numbers.

At Al Rostamani, 3 to 4 percent of the employees are now internally promoted. “We also welcome people who had left us without any integrity issues and going forward, there would be more appointments at entry levels,” says Lobo. More companies are willing to invest in graduates and are conducting their own graduate recruitment drives or ‘milk-runs’ in several countries such as Jordan and India.

Continuous demand for talent could also strengthen prospects of continued increases in salary ranges for the foreseeable future. If the macroeconomic factors allow these structures to be sustained, the salaries across the board will rise in the longer term. Even a 5 percent salary rise every year is very high. About 3 percent per annum is the ideal rise as it assumes that the business is growing at more than 20 percent.

At the middle level, where there is much more of a supply, the downward pressures will begin to reflect on lower salary levels. At the very senior management level, however, the relevant experience becomes even more valuable as organizations grow and hence their salaries will continue to face upward pressures. What could change is the disparity between nationals’ and expatriates’ salary structures. The perceived salary difference between nationals and other staff is a known cause of demoralization.

The ILO (International Labor Organization) has advised the local government to pass a legislation asking the private and public sector not to differentiate in terms of salaries of locals and expatriates. Should the government enact such a law, it will lead to a considerable rise in salaries for the employees in lower levels up until the middle management. At the top management level, there is minimal difference in salaries between multinationals and government employers.

Meanwhile, increasing salaries will lead to higher disposable incomes coupled with an even higher cost of living. Higher salary structures feed into a generally inflationary economic climate as companies will seek to pass on these higher costs when possible. There is, therefore, the risk of an inflationary cycle. As for the employers, the increase in competition and pressure on margins would influence their decision to fix the costs and hence the employee compensation.

In the end, it could be more a question of relative well-being compared to the home country or other countries especially for the expatriates. Most people are in the wait-and-watch mode to see what direction the market goes—if it becomes any worse, they will definitely opt to go back.

With retention becoming more difficult, training will start to play a more important role. But this would only bring the region closer in line with globally accepted practices. Multinationals typically invest between 5 and 10 percent of the payroll cost in developing people as they know that they can harvest between 25 and 30 percent return on that investment.

“We have been devoting 1 percent of our gross profit towards employee training for the last nine years,” informs Lobo. As a corollary, the existing wide variation amongst what companies are willing to offer for the same qualification could also narrow down.

KRB gets around 70 new registrations a day from the GCC and are hoping to reach a figure of 150 a day. Forum International Executive Search gets a total of about 200 new registrations every day. Another major, Nadia Recruitment, used to get 25 people registering a day. Now it gets, on an average, 250 people coming to the Dubai office alone. Combining all regional offices takes the figure to at least 500 with another 1,000-1,500 people coming online to register.

In the long term, organizations will need to have benchmarks and standardize the salary structures to make them competitive and provide assessment tools to employees to make them more career resilient.

Companies have to start working with universities and agencies both locally and in other countries for nurturing potential talent. Even today, the main way in which top expatriate managerial talent is finding its way into the region is through ‘secondments’ of managerial staff by multinationals. This has to definitely change.