The economies of countries in the Middle East have been experiencing significant growth, driven mainly by revenues from rising oil and gas prices. Governments and locally owned private companies are investing in major new infrastructure projects, while multinationals are establishing operations or creating strategic alliances with partners in the region. However, the HR landscape in this emerging region reflects some distinctive economic and cultural realities that present both local companies and new entrants with significant total rewards challenges.

The HR landscape and recent trends

One element of the HR landscape that profoundly affects rewards practices in the region is the shortage of local labor. Because of the relatively small native population there, both local companies and multinationals must depend on expatriates for as much as 70 percent to 80 percent of the workforce. Compounding this shortage is the legal requirement in some countries and industries that employers comply with quotas for employing nationals. So competition for nationals is fierce, and hiring is driven less by qualifications than by the dictates of the quotas.

Recent economic trends have further exacerbated the problem. First, the region’s traditional talent sources in Southeast Asia and India are drying up. This is due to the weakening of local US dollar-linked currencies against those of Asia and Europe, which has made it much less lucrative for expatriates to choose employment in the region, as well as to competition from high-growth economies like India and China for their own nationals and Asian expatriates. In addition, the booming economy has had a huge impact on the cost of housing in the region. The housing index in Qatar, for example, rose 125 percent from 2003 to 2007, significantly affecting the ability and willingness of expatriates to work in the region.

Another significant feature of the HR landscape in the Middle East is the lack of employee and employment protection under the law. Without trade unions, collective bargaining or minimum wage legislation, employers largely dictate the terms of employment. Compensation at local and government-owned companies is largely dependent on the employee’s national origin, gender and marital status, and rewards practices in those companies are often influenced by the desire to fast-track nationals rather than to reward performance.

Compensation practices

Local companies in the Middle East typically offer different compensation packages to different employee segments, such as nationals, Western expatriates, and Asian and Arab expatriates. Compensation levels have traditionally been based on each organization’s “capacity to pay” rather than market benchmarking. For instance, an oil company might pay its staff above the market because it can afford to do so. While market benchmarking is now gaining momentum, it remains difficult to obtain reliable data in the region.

Consistent with the focus on advancing nationals and the lack of emphasis on personal accountability, local companies have traditionally offered little performance-related pay. While companies have recently begun to move toward less guaranteed pay, performance pay as a percentage of total rewards remains relatively low.

Companies in the region do spend a significant amount on benefits and allowances, such as housing, schooling assistance, medical expenses and vacation travel, although the trend now is to move toward rationalized benefits/allowances. Individuals pay no income tax; employers do not make social security contributions; and expatriates working in the region generally receive no pension (other than an end-of-service payment) or social security coverage.

Key total rewards challenges

For both local and multinational companies, business success is dependent on developing a total rewards strategy that enables the company to compete cost effectively for scarce labor. Yet the economic and legal realities of the region present several challenges in designing and executing a viable rewards strategy.

Although a holistic rewards package comprising not only compensation but also benefits and career development can enable employers to attract needed talent without simply engaging in a bidding war, this strategy is far less successful when competing for expatriates who have come to the region solely to make money to take or send back to their home countries. For these workers, compensation is often the lone motivating factor. Consequently, many local employers offer very limited career or skills development to expatriate staff. The justification for this is that employers are paying for skills transfer from expatriates rather than the other way around. However, this creates little loyalty from expatriate employees toward their employers, and those with portable skill sets are at greater risk of leaving in the current buoyant local employment market.

New entrants to the region face special challenges in competing for nationals and for experienced expatriates. Because local companies typically pay nationals more than they pay expatriates, multinationals must expect to pay a premium in order to attract locals. Hiring experienced expatriates away from current employers is also difficult in some countries because these employers also serve as their local sponsors and must grant them a release before they can join another company.

Multinationals also find it challenging to bring new people into the region, given the ballooning cost of housing. In some countries, landlords require up to one year’s rent in advance, a barrier for most employees unless employers provide assistance. 

Finally, new entrants must decide whether to hold to global rewards principles in the region or to modify them, given the local HR landscape. Few are comfortable with following local compensation practices, such as paying more to men than to women or more to married employees than to single employees. This means that the rules of the rewards game will be different for multinationals than for competing local companies.

What multinationals can do to address these challenges

Mercer recommends that multinationals entering the Middle East take the following steps to address these total rewards challenges. First, it is possible to identify employee segments, including younger nationals now entering the workforce and expatriates who are interested in a longterm career, for whom career development and training are motivating elements of the total rewards package. Companies need to emphasize these noncash elements of rewards to move beyond competing on the basis of compensation alone.

Second, multinationals need to keep very close to the local market in order to understand rapidly changing elements of the local economy, such as housing costs. In this environment of rapid growth, it is not sufficient to review the market and allowances once a year. To compete successfully, companies need to stay on top of what is going on.

Finally, because performance management is not embedded locally, companies entering the region will need to work heavily on setting up processes for performance management and developing a culture of accountability.