IS “TOTAL COST TO COMPANY” THE ANSWER FOR THE UAE?

UAE HR practitioners are in a difficult, dichotomous and demanding position. In previous articles, we  discussed the fact that they are currently being required to reduce staff costs through retrenchments (http://www.axiomatic.co.za/news/retrenching-employees-in-dubai-a-scientific-and-strategic-methodology/) while at the same time, they are expected to retain talented individuals (http://www.axiomatic.co.za/news/theres-no-money-for-hr-in-dubai/) – a catch 22 perfect storm.

There is no debate that market conditions are tough. Growth for 2017 has been revised down to 0.8% and the following graph is extremely powerful visual aid to capture the conundrum faced by HR practitioners:

  • Prices charged for goods continue to decline which places pressure on companies’ financial health;
  • Likewise, employment continues to decline as companies retrench or do not replace departing employees - employment growth is currently the lowest since 2010;
  • However, output has increased significantly since September 2015.
  • HR practitioners are therefore being expected to ensure higher output with less employees.

The developments discussed above could be viewed as a positive development as they may indicate an increase in productivity; where HR has been responsible for adroit hiring, resulting in less (and more talented) employees being able to increase output. Retention of these talented and high productive employees is vital to ensure the continuation of the current output levels – well designed incentive schemes are thus essential.

Incentive schemes will motivate employees and elicit the correct behaviour. However, there are additional ways to ensure that the output/ employment ratio continues to increase – by HR controlling employment costs. We have been having some interesting conversations with our UAE clients about the Total Cost to Company (“TCTC”) principle.  This methodology is well-known and widely used in South Africa and India but is a foreign concept elsewhere.

The TCTC methodology is based on the tenet that the total cost of employment (including all benefits, end of service gratuity, health insurance and all allowances) for a specific job, within the company, is the same. For example, take a Project Manager position; the company may decide that the TCTC for the position is AED 500,000. One Project Manager who is single would receive this TCTC as would another married Project Manager with 3 children and further, no differentiation is made between male or female employees.

The fundamental premise is that the company decides what the value of a role is, irrespective of who fulfils that role. Simply put, the total cost of employment that they are prepared to pay for the Project Manager position is AED 500,000 per annum, irrespective of the marital status and family size of the incumbent.

This principle is fundamentally different to the pillars on which the Base Salary methodology is built. Within this structure, the total economic cost for the same job position, will change based on factors such as the marital status and family size of the incumbent because of the divergent cost of benefits.

Therefore, the pertinent question is why the company should pay more or less for two different employees, based on personal circumstances, when both are delivering (and providing) the same service to the company. Each of the respective methodologies are explained in the diagram below:

TCTC, being a unique and different model, may be a challenging concept to introduce in the UAE market however the same objective can be achieved by introducing a generic and standard “Benefit Wallet”. For example, the company will pay a Project Manager a Base Salary of AED 300,000 per annum and a Benefit Wallet of AED 200,000. If the incumbent does not use the full AED 200,000, then the difference will be paid out to them in cash. Conversely, if they use more than the allocated AED 200,000, this will be deducted from their Base Salary monthly. This methodology is gaining increasing popularity in the UK, who for many years have always favoured the Base Salary structure.

TCTC or the Benefit Wallet methodologies introduce flexibility to the remuneration package and recognise the important consideration that the personal needs of a single employee and a married employee with three children are very different. There is conclusive evidence that younger employees (Gen Y and Gen Z) welcome and value this level of personalisation.

Both methodologies concomitantly allow employees to structure their package to suit their personal requirements which may also change as their personal circumstances change.

The advantage to the company include inter alia:

  • Cost containment – ensuring that the Output/ Employment ratio continues to increase; and
  • Introduces internal equity; and
  • Facilitates budgeting and projections

For any questions regarding TCTC and how the methodology can be applied, please contact Brett Hopkins on +971 50 380 5217 or Brett@axiomatic.co.za