A common and frequent complaint we hear from our clients in Dubai is the following: As a result of the poor economy, difficult trading conditions and associated profit squeeze experienced by companies, there are no funds available for HR to embark on retention strategies for critical talent or to improve the Employee Value Proposition (“EVP”).
This seems a fair comment. However, if HR professionals are to lobby CEO’s for a share of scarce resources, they had better have facts, figures and statistics at their fingertips. In this article, we conduct a high-level overview of the local economy. We also provide some advice regarding what strategies HR managers should consider in order to overcome the limitation of cash constraints and obtain their rightful share of the pie.
Real GDP growth in Dubai slowed in 2017:
What is patently obvious is that 2017 represents the low point in growth but some improvement is anticipated, both this year and the next. The salient reason for this assertion is that 5.0% of Dubai’s GDP will be spent on related expenditure for Expo 2020. A further, 2.2% of Dubai’s GDP will be spent on metro expansions.
This embryonic confidence is beginning to manifest itself in the Emirates NBD Purchasing Managers’ Index (“PMI”) for the UAE. In April 2018, 50% of companies expected their output to be higher in 12 months’ time. To recognise the improvement, this figure must be compared to the March reading of 28% and a meagre 15% in February. Confidence is undoubtedly returning.
Aaron Levenstein stated that “Statistics are like bikinis. What they reveal is suggestive, but what they conceal is vital”. This is true of the statement that on average, the Dubai economy performed poorly in 2017. Not all sectors experienced low growth and the graph below shows that the hospitality related sectors performed exceptionally well - hardly surprising considering that almost 16m visitors graced our city in 2017; a 6.2% increase from 2016.
Our optimism for the local economy is corroborated by the recent Euromonitor International study where they projected that Dubai’s retail market is projected to grow at 5.6% per year over the period 2018 to 2021, reaching a total of $ 43.8bn.
The Employment Environment
How are employees faring in this market? They are being buffeted by two forces:
- The Employment Index recovered slightly to 50.7 in April from 50.3 in March however, the average year to date reading is 50.9. This offers tangible evidence that we are now experiencing weaker job growth since the beginning of 2018; and
- Inflation has increased significantly with the introduction of VAT in January 2018. Inflation averaged 1.8% in 2017 and our recent article (http://www.axiomatic.co.za/news/2018-salary-increases-in-the-uae/) forecasts an average inflation rate for 2018 of 4.0%.
Employees will see a reduction in their real disposable income and the natural reaction, under such circumstances, would be to look to change jobs if it results in higher remuneration and more disposable income.
Strategies for HR
So, what is the case that HR managers should put forward to executives?
- Yes, the market is tough now however, the Dubai average GDP is expected to improve from 2.8% in 2017 to 3.5% in 2018.
- Already some degree of promising optimism and confidence is creeping into the business sector. The April 2018 PMI shows that 50% of companies anticipate higher output in 12 months’ time.
- Given the fact that inflation is expected to average 4.0% in 2018, from 1.8% in 2017, employees’ real disposable income is reducing. This represents a flight risk for top talent.
Of course, the logical response to this “pitch” would be the question – “So what do you propose we do”? To counter this, as an HR manager you now need to have a strategy and concrete proposals to strike while the iron is hot. However, of cardinal importance is that any proposal must take cognisance of cash flow constraints. Here are some suggestions:
- Introduce a Short-Term Incentive (“STI”) scheme for select employees where the threshold represents some stretch in performance. For example, if the company exceeds the Net Profit budget by more than 10%, then AED X is paid to the employees. This is “self-liquidating” – the incentive will only be paid from additional value created for the company.
- The STI scheme can be introduced only for top talent or employees who represent a flight risk. This can be restricted to a pre-determined maximum AED amount.
- Both STI schemes mooted above should have delayed vesting periods – the incentive is paid out over multiple years so that it simultaneously acts as a retention tool. The role that an adroitly designed STI scheme can play in talent retention was explored in our recent article. (http://www.axiomatic.co.za/news/talent-retention-uae/)
- Consider a Long-Term Incentive (“LTI”) If the company is not listed, a phantom share scheme can be proposed. The initial vesting period should only be in say, 3 years’ time so cash flow, if the performance conditions are met, will only commence in the future when the economy has improved.
- Consider substituting the End of Service Benefit with an International Pension Plan. The cost to the company is small but enhances the EVP, promotes retention and allows the employee to also make voluntary savings towards their retirement income.
- Consider permitting “flexing” of remuneration packages. The needs of a 25-year-old single employee are significantly different to those of a 55-year-old employee with a family. This costs the company nothing but inculcates the perception that the employee has control of their own pay-mix.
Axiomatic Consultants has significant experience with designing solutions which will enable you to adequately answer the question “So what do you propose we do”? whilst also demonstrating that the solutions take cognisance of cash flow constraints.
At the very least, these solutions will demonstrate to executives that HR is a strategic thinker who recognises macro-economic issues, financial business constraints and concomitantly, deserves their seat at the C-Suite table.
For more information please contact Brett Hopkins, Head of our Dubai office, on + 971 50 380 5217 or firstname.lastname@example.org