Gulf Businesses Get Familiar With Long Term Compensation

In mature markets, the provision of a long-term incentive for executives and senior management is almost universal among companies. There is a definite increase in interest in long-term incentives across the GCC.

Why is this the case? Would a long term approach to compensation benefit your organisation?

A long-term incentive (“LTI”) is a component of an employee’s total compensation package which is delivered over an extended period. It may come in the form of cash or equity and allow the employee to enjoy a sense of ownership in the company as there is a direct link between company performance and the ultimate size of their reward.

LTIs allow companies to defer their compensation delivery over a multi-year horizon, typically at least three years, ensuring the talent in question is locked into the organisation for that period.

Talented executives who have the business acumen to navigate the changing business landscape in the Middle East are in demand. As the region continues to face economic uncertainty, the market is willing to pay a premium to attract astute executives who have a good sense to manage multiple social, political, and economic opportunities and challenges.

As GCC employers adopt global best practices, the trend has begun to extend to areas of remuneration practice. This coincides with a changing demographic of employees and an increasing focus on the regulatory environment globally.

As expatriates and younger nationals share boardroom space with a generation of executives and founders moving towards retirement, the expectations of a competitive deal are changing. Additionally, as GCC markets continue to open up to foreign investment, external investors expect to see variable pay with a much greater performance-based component.

So why have LTIs consistently been a key feature in Western multinational firm’s executives’ pay packages? Why in recent years are more local firms progressively adopting LTIs?

1. Performance

The primary reason usually given is that a LTI links pay to long-term performance as it ensures that executive pay is really varied in line with actual corporate performance. Performance pay provides cost control and a degree of flexibility in uncertain times. It is better that executive pay fluctuates with performance over a sustained period rather than merely paying fixed salaries and allowances and cash heavy bonuses each year.

LTIs help focus executives on long-term business goals, by paying executives to achieve certain objectives, the company is making it very clear what executives need to concentrate on and the decisions they should make. This aligns compensation with the long-term goals and strategy of the organisation and its owners.

2. Risk

LTIs create alignment with shareholders. An executive team that is rewarded simply for performing over the course of a year will have greater incentive to take risky short-term decisions; the consequences of which, may be disastrous in the long-term after they have left.

Similarly, they may be less likely to make a decision for the long-term benefit of the company that may have negative (and potentially bonus reducing) short-term implications.

A plan which rewards executives for attaining the long-term goals of shareholders will make executives act in shareholders’ interests. A LTI helps to align compensation with the generation of long-term shareholder value, increases focus on corporate governance and promotes the need for steady long term growth rather than boom-and-bust cycles.

3. Retention

There is global competition for talented executives in both developed and fast-growing economies. The GCC is no different. This has driven up reward packages in countries with high turnover rates.

LTIs are a vital tool in defining a more competitive — and aggressive — compensation structure to recruit and retain the best, internationally mobile group of senior executives by paying them over a longer time. Ultimately this will create a “lock-in” for top talent.

4. Regulation

In many global jurisdictions, both regulatory and/or investor pressures leave companies with little choice other than to take a long-term view on executive and senior management compensation. Changes from such external pressures are often first imposed on the financial sector which then sets best practices that guide the broader corporate world.

The GCC is no different in this respect.

For example, the G-20 Financial Stability Board — and accordingly the Saudi Arabian Monetary Agency — recommend implementing a bonus deferral for all staff taking material risk to align pay with the long-term performance of the bank. The deferral should include a “holdback” mechanism where an employee engaged in excessive risk taking or malice would forfeit the deferred amounts.

The Qatar Central Bank also stipulates that a bank’s compensation payout schedule shall be sensitive to the time horizon of risks and as such variable compensation payments should be deferred accordingly.

As external pressures enforce the concept that payment should not be finalised over short periods where risks are realised over long periods, we may expect the focus on long-term pay to pervade the wider market.

source : gulfnews