GCC Executive Compensation Survey Report April 2015
GCC Executive Compensation Survey Report April 2015 Contents Section 1: Introduction
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Section 2: Survey results
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2.1 Countries and sectors covered 5 Figure 2.1a. Percentage of companies by country 5 Figure 2.1b. P ercentage of companies by ownership/origin 5 Figure 2.1c. Percentage of companies by sector 5 2.2 Base pay increases 6 Figure 2.2a. B ase pay increase for executives and non-executives
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Figure 2.2b. B ase pay increase for executives and non-executives in the KSA and UAE 6 2.3 Analysis by Towers Watson Global Grades 7 Table 2.3a. Incumbents in Global Grade 23 to 15 7 Figure 2.3b. Total guaranteed cash levels (in USD per annum) 7 Figure 2.3c. Chief Executive Officer total guaranteed cash levels (in USD per annum) 8 Figure 2.3d. Profit Centre Head total guaranteed cash levels (in USD per annum)
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2.4 Short-term incentives (STI)
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Figure 2.4a. Formula-driven and discretionary annual incentive plans
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Figure 2.4b. Median target and actual STI
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2.5 Long-term incentives (LTI)
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Figure 2.5a. Pay mix for executives in Global Grades 19 to 16 (incumbents who received LTI) 11 Figure 2.5b. LTI vehicles
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Figure 2.5c. How many survey participant companies operate LTIPs in the region? 12 Figure 2.5d. What types of LTIP do we encounter in the region (international and regionally owned companies)? 13 Figure 2.5e. What types of LTIP do regionally owned GCC companies have? 13 Figure 2.5f. Grant levels
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Section 3: Evolving executive compensation trends
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3.1 A segmented approach to executive compensation 14 3.2 A clear executive compensation philosophy 14 3.3 LTIs as a key attraction/retention tool 15 3.4 Retirement benefits 15 3.5 More involved and informed compensation committees 15 Section 4: Appendix
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4.1 Participating companies 16 4.2 Compensation elements definition 17 4.3 GCC Executive Compensation Survey timeline 17 Section 5: Team contacts
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Section 1: Introduction This report summarises the results of the first focused survey of executive compensation conducted by Towers Watson in the GCC countries. The survey joins the large number of executive pay surveys that Towers Watson conducts globally. The GCC Executive Compensation Survey has captured data from 73 companies located in the six GCC countries, as listed in the Appendix, in respect of the levels and components of pay for 1,385 incumbents in 176 roles, which range in size from GG 15 to GG 23 as measured by Towers Watson’s Global Grading system. The survey collected data on the components of pay which make up total direct compensation: basic salary, regular allowances, annual bonus (STI) and long-term incentives (LTI). In addition to actual and target values of the various components, we also sought information on design features and practices in annual bonus and long-term incentives. The information we
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collected is summarised in this document and we hope it will be helpful to companies considering developing new incentive plans. We have run this survey to respond to increasing demands from clients for a survey that is specifically about executive pay. More and more, we have found that clients are asking for concrete evidence of how much and how other companies pay their top management team members. In general, this first Towers Watson survey of executive compensation in the GCC has produced a positive outcome and will be helpful for all participants. However, there remains plenty of scope for further improvement, in particular by increased participation numbers, deeper coverage of specific roles and greater accuracy in the information provided. We will be working to achieve these improvements and look forward to your participation in the 2015 survey.
Section 2: Survey results 2.1 Countries and sectors covered The following figures describe the participating companies in terms of country, regional/international origin and sector. This is important to consider when using the data in this report, as pay levels can vary by country and sector.
Figure 2.1a. Percentage of companies by country 3% 7% 8% 9%
56%
18%
56% UAE 18% KSA 9% Bahrain 8% Qatar 7% Oman 3% Kuwait
Figure 2.1b. Percentage of companies by ownership/origin
58% International firms 42% Regionally owned firms 58%
42%
Figure 2.1c. Percentage of companies by sector 10% 28%
10%
13%
17%
23%
28% General industry 23% Financial services 17% High tech and telecom 13% Pharmaceutical 10% Energy/Oil and gas 10% Logistics
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2.2 Base pay increases Figure 2.2a below offers a comparison between the base salary increases for executives and non-executives. The base salary for executives increased by 7% while for non-executives, as
captured in our General Industry surveys, the increase was only 5%. This finding mirrors that in developed economies such as the US and UK, where salary increases for executives have typically outpaced those for other employee segments.
Base pay increase
Figure 2.2a. Base pay increase for executives and non-executives 8% 7%
7%
6% 5%
5%
4% 3% 2% 1% 0%
Executives
Non-executives
Base pay increase
Figure 2.2b. Base pay increase for executives and non-executives in the KSA and UAE
8% 7%
7
6%
6 5.5
5%
5
4% 3% 2% 1% 0%
KSA
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Executives
UAE
Non-executives
Executives
Non-executives
2.3 Analysis by Towers Watson Global Grade The survey had 1,385 incumbents spanning from Towers Watson Global Grades 15 to 23. The table below illustrates the number of incumbents in each Global Grade from 15 to 23.
Table 2.3a. Incumbents in Global Grades 23 to 15 Global Grade
Number of incumbents
22/23
6
21
10
20
40
19
101
18
243
17
316
16
445
15
224
The figure below shows the annual total guaranteed cash (TGC) pay levels by Towers Watson Global Grade. As executives progress to higher levels of responsibility, the
fixed-pay slope gets steeper. The increase in median TGC from GG 20 to GG 21 (29%) is 9 percentage points greater than the increase in median TGC from GG 15 to GG 16 (20%).
USD
Figure 2.3b. Total guaranteed cash levels (in USD per annum) 900000
29%
800000 700000 600000 500000 400000
20%
300000 200000 100000 0
GG 21
GG 20
GG 19
GG 18
GG 17
GG 16
GG 15
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The figures below indicate the TGC levels for the two most prevalent executive roles: Chief Executive Officer (CEO) and Profit Centre Head.
USD
Figure 2.3c. Chief Executive Officer total guaranteed cash levels (in USD per annum) 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 GG 20
GG 19
GG 18
USD
Figure 2.3d. Profit Centre Head total guaranteed cash levels (in USD per annum) 600,000 500,000 400,000 300,000 200,000 100,000 0 GG 20
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GG 19
GG 18
GG 17
GG 16
GG 15
2.4 Short-term incentives (STI) Most of the participating organisations provide some form of short-term/annual incentive plan, although the precise nature of the plan may vary between individual organisations. In the GCC we generally observe two types of annual cash incentive plans for executives: those based on some form of financial or market-based metrics and those that rely heavily on board or compensation committee discretion. Our General Industry survey findings indicate that of the sample companies, 89% had a formula-driven plan that included at least one financial or market-based performance metric. At companies with these plans, executives must achieve pre-established metric targets in order to receive cash payouts.
Discretionary plans, on the other hand, do not have strictly measurable financial goals, and the final payout of the plans depends on judgements made by each company’s board or compensation committee. Of the sample companies in our General Industry survey analysis, 11% utilised discretionary plans. The international companies, which have a greater representation in our General Industry survey sample, overwhelmingly have formula-based plans. However, in our experience of working with regionally owned companies we observe a marked increase in the movement from discretionary plans to the adoption of formula-based plans, in line with best-practice incentive design.
Figure 2.4a. Formula-driven and discretionary annual incentive plans 100% 90% 80%
89%
70% 60% 50% 40% 30% 20% 10% 0%
11% Formula-driven
Discretionary
Furthermore, a majority of the participating companies in our General industry survey (82%) indicated that they had formally established targets with regard to the annual incentive plan for their executives.
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Figure 2.4b indicates median target and actual STI expressed as absolute values and as a percentage of base salary for Towers Watson Global Grades 15 to 20. Most executives appear to have exceeded their targets and received bonuses
greater than their target opportunity. This reflects the strong growth and corporate performance that GCC companies have achieved in the past financial year but may also point to more generous assessment of individual performance.
USD
Figure 2.4b. Median target and actual STI 200,000
160,000
120,000
80,000
40,000 0 GG 20
GG 19
GG 18
GG 17
GG 16
GG 15
GG 17
GG 16
GG 15
Median target STI Median actual STI
70% 60% 50% 40% 30% 20% 10% 0% GG 20
GG 19
GG 18
Median target STI as % of base Median actual STI as % of base
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2.5 Long-term incentives (LTI) While it is common for annual incentive plans to reward short-term operating and individual results, long-term plans typically focus on consolidated corporate performance over a multi-year time horizon: •• Rewards for longer-term value creation •• Fosters alignment with shareholder interests •• Encourages teamwork and collaboration across groups and geographies •• Balances focus on short-term results that are driven by annual incentives
across the GCC. Multinational companies operating in the GCC typically offer some form of LTI plans to their executives, however regional GCC companies have been somewhat slower in the introduction of LTI plans, and especially share-based plans, than in other international jurisdictions. Figure 2.5a below indicates the pay mix of executives in Towers Watson Global Grades 16 to 19 who received LTI grants. The companies in the survey seem to indicate that their STI and LTI opportunity levels are similar, although these increase as executives assume greater levels of responsibility.
Over recent years, we have seen a gradual increase in the prevalence of LTI arrangements
Figure 2.5a. Pay mix of executives in Global Grades 19 to 16 (incumbents who received LTI)
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% GG 19
GG 18
GG 17
GG 16
Long-term incentives Short-term incentives Total guaranteed cash GCC Executive Compensation Survey Report 11
The typical structural elements of LTI plans are: •• Multiyear performance period for performance plans (generally three years) •• Cliff or graded vesting •• Measured at corporate level, co-ordinated with annual plan measures – generally not overlapping •• Selective participation, especially below senior management level The figure below provides an illustration of the typical LTI vehicles commonly used by companies.
Figure 2.5b. LTI vehicles
Long-term incentive plans
Cashbased
Sharebased
Appreciation only
Stock options
Stock appreciation rights (SARs)
Restricted stock
Figure 2.5c. How many survey participant companies operate LTIPs in the region?
LTIP prevalence
51% 49% 51%
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49%
No Yes
Full value shares
Performance cash/unit plan
Performance shares
Restricted stock units
Deferred bonus
Our findings are that half of the participating companies in the survey operate one (or more) LTI plans. However, there is a marked difference in practice between regionally owned companies and multinational companies from outside the GCC that have a presence in the region: approximately 2 in 3 international companies operate a LTI plan, whereas only 1 in 3 regionally owned companies do.
Retention bonus
Figure 2.5d. What types of LTIP do we encounter in the region (international and regionally owned companies)? 35% 30% 29% 25% 22%
20%
20% 17%
15%
12%
10% 5% 0% Performance shares
Restricted stock
Cash plan
Deferred bonus
Stock options
Figure 2.5e. What types of LTIP do regionally owned GCC companies have? 35% 30%
33%
33%
25% 20% 15%
17%
10% 8%
5%
8%
0% Performance shares
Restricted stock
Cash plan
In our survey sample, we found that companies in the GCC make use of the wide array of LTI vehicles available, with performance share plans being the most common vehicle. If we look at regionally owned companies only, cash plans are the most commonly employed vehicle. This is partly because many of the regional companies are not listed entities and, also, among the listed entities there is reluctance to offer share-based plans to employees that may result in dilution of existing shareholders’ equity. A notable trend with regard to LTI plans in the GCC has been the adoption of deferral programmes by financial services firms. Following the banking crisis, regulators in Europe and the US introduced mandatory deferral programmes. The reasoning
Deferred bonus
Stock options
that has guided the regulators’ new approach has been that the best way to mitigate the risks inherent in paying large bonuses earned on the basis of one-year performance is to defer a proportion, which then vests in tranches after one, two and three years. In the GCC, the central banks are also forcing a change in the banking pay model. Saudi Arabia issued banking compensation regulations in 2010 and Kuwait followed with a consultation in 2011. In 2014, Oman and Bahrain introduced and required compliance with compensation regulations. The UAE and Qatar central banks are under increasing pressure from the GCC Banking Supervision Committee to follow their GCC counterparts.
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While generally less prescriptive than some of the global regulations, nonetheless the GCC regulations have pushed banks to defer variable remuneration for covered persons or ‘material risk-takers’ and incorporate risk management and other control processes to support balanced incentive arrangements. GCC banks that have been forced to implement pay regulations are finding that their ability to recruit executive-level talent is
being impacted by rules around bonus guarantees, onerous deferral and clawback features. In line with the leading practice in the developed world, companies typically measure the performance of their executives over the span of three years.
Expected LTI (% of base salary)
Figure 2.5f. Grant levels 30% 25% 20% 15% 10% 5% 0% GG 16
GG 17
GG 18
GG 19
Our analysis shows that the expected value of the LTI grant (as a percentage of base salary) rises significantly between Global Grades 17 and 18 – from 16/17% up to 26% of base salary.
Section 3. Evolving executive compensation trends 3.1 A segmented approach to executive compensation The story of executive pay in the GCC in recent years is one of great encouragement – encouragement in the sense that the growing alignment with international best practices, professionalism and maturity will help companies to perform not just well (as they have in the past) but as well as possible when it comes to resource utilisation, growth potential and successful market entries. A cornerstone of this development is that companies have begun to introduce differentiated reward programmes for their executive cadre (that is, segmentation), thus optimising what they spend on rewards and incentivising those behaviours that encourage long-term growth. Take a large UAE company as an example of this approach. The company first identified its key executive roles. Then, it developed customised reward programmes for said roles that could be used to emphasise or de-emphasise key rewards principles such as performance orientation, competitiveness and career development. As a result, employees in executive roles have a higher
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annual upside potential, access to LTI plans and leadership effectiveness training – in other words, the company has positioned itself in a way that it would reward exceptional performance, whilst not having to pay high amounts for below-par performance.
3.2 A clear executive compensation philosophy The second cornerstone is a distinct trend towards organisations viewing compensation at the executive level as a key strategic tool and an essential driver of the company’s strategic initiatives. Hand in hand with this realisation comes the need to articulate an effective executive compensation – in particular in the current environment of increased competition for executive talent and a renewed focus on growth and performance. In short, boards of directors and their compensation committees are moving to use a well-designed executive compensation philosophy as a tool to influence management’s performance and to reaffirm the business strategy.
3.3 Long-term incentives (LTI) as a key attraction/retention tool The third indicator of the GCC’s developing maturity (closely linked to the segmented approach to executive compensation) is the fact that the balance of pay for executives is shifting towards a greater emphasis on variable pay (or ‘pay at risk’). This development has done away with the formerly common ‘cash now’ mantra. Today, variable pay constitutes between 20% to 40% of the value of the compensation package. In terms of LTI vehicles, however, the differences between Europe and North America, on the one hand, and the GCC, on the other, is still pronounced: in the developed markets, performance share plans continue to dominate LTI, with total shareholder return and profit-related performance measures (such as earnings per share) at the core of more than half of all long-term incentive plans (for STIs, metrics are multifarious). In the GCC, on the other hand, phantom equity (or LTI vehicles that link value creation to cash payout) is the common pattern. We expect this gap to close in the near future, because many of the listed entities in the UAE and KSA are planning to introduce real equity-linked long-term incentives and, in addition, more private companies target a first public offering. On a separate note, the annual value of the LTI in the GCC tends to be equivalent to that of the annual bonus (at target) and the performance period is aligned to global standards (three years).
3.4 Retirement benefits The end-of-service benefit schemes required by law in GCC countries provide lump sums when someone leaves an organisation. Many HR professionals are beginning to recognise that these are not sufficient enough to motivate and
retain expatriate executives who are spending more time in their companies and seeking long-term careers in the GCC. Companies may need to adopt different approaches to providing security by establishing suitable pension and savings plans.
3.5 More involved and informed compensation committees In the GCC, the compensation committees (Committee) have historically been less informed about the business strategy and operations of the business compared to their US and European counterparts. This has often led to committees being concerned about how to calibrate performance and establish stretch performance goals. The most frequently asked question by GCC committees has been: ‘How do we know we have set the right targets?’. Many committee members have also complained that an over-reliance on external market data from a peer group or survey has led to a ‘ratcheting’ effect. The same group of comparator organisations benchmark against each other’s pay levels, so that what was a 75th percentile market positioning one year is a 50th percentile positioning just two years later. However, we see that committees are beginning to get more involved and informed in the setting and monitoring of corporate performance goals and targets that align to the business strategy and positively impact shareholder value. Committees also have become proactive in challenging the externally focused, peer-group-driven approach to benchmarking executive pay. Towers Watson welcomes the fact that compensation committees are beginning to devote more time and attention to executive compensation design and governance.
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Section 4: Appendix 4.1 Participating companies
AbbVie Abu Dhabi Commercial Bank Accenture ACE Group Aggreko Agthia Al Ghurair Al Jazeera Al Muhaidib Al Rajhi Banking & Investment Aramex AXA Insurance Gulf AXA Services Bahrain Credit Bank of Tokyo-Mitsubishi UFJ Bank Sohar Boehringer Ingelheim Bristol-Myers Squibb Bupa Arabia Chemanol Cisco Systems Compass Dell DHL DHL Express DHL GBS DHL Global Forwarding DHL Exel Supply Chain Dubizzle Ecolab Emaar Emirates Integrated Telecommunications Co. Etihad Airways Etisalat Euler Hermes First Gulf Bank Fujitsu
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Garda General Electric GlaxoSmithKline GlaxoSmithKline Consumer Healthcare GlaxoSmithKline Regional Office Gulf Business Machines Hoffmann-La Roche IBM InterGlobal International Turnkey Systems Intigral Johnson Controls Majid Al Futtaim Group Marafiq Mashreq Bank Milaha Mond¯elez Munich Re Group National Bank of Abu Dhabi Noor Bank Oman Telecommunications Oracle OSN Pfizer Sapphire Saudi Aramco S-Chem Schlumberger SITA SKAI Residency Smith & Nephew SNC-Lavalin Stanley Black & Decker United Arab Shipping Company Western Union Zurich Insurance Group
4.2 Compensation elements definition Base salary
+
Total allowances
Total guaranteed cash
+
Short-term incentive
Total compensation
+
Long-term incentive
Total direct compensation
4.3 GCC Executive Compensation Survey timeline Towers Watson solicits companies
Data submission deadline 31 December 2014
Availability for consultancy work
Sept – Dec 2014
Jan – Feb 2015
Feb – Apr 2015
Data collection commences
Data validation and cleaning process
Publication of GCC Executive Compensation Survey
Invitations to participate in the survey
Validation queries sent to participants
Presentation of the survey results 22 February 2015
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Section 5: Team contacts Richard Lamptey
Ashwin Shetty
Practice Leader, Executive Compensation in the Middle East, 26 years of experience (eight years in the GCC).
Consultant, seven years of EC experience (three years in the GCC).
BA in Economics and MA from Cambridge University, MBA degree from City University Business School (Cass). +971 55 1000 332
[email protected]
Billy Turriff Practice Leader, Data Surveys and Technology in the Middle East, 17 years of experience (eight years in the GCC). MA Business Organisation, Heriot-Watt University +971 55 1000 331
[email protected]
Laurent Leclère Practice Leader, Data Services in the Middle East, 15 years of experience (five years in the GCC). Graduate degree in Management from the HEB Lucia De Brouckère, Brussels. +971 56 603 1261
[email protected]
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MBA from Xavier School of Management (XLRI) in the field of Human Resources. Engineering degree from PES College, India. +971 55 1000 332
[email protected]
Mini Agarwal Consultant, five years of experience (four years in the GCC). BA in Economics from Ramjas College of Delhi University, India. +971 50 910 8532
[email protected]
Andreas Burkard Analyst, Executive Compensation team BA degree from Wadham College, Oxford, MPhil from St Antony’s College, Oxford, in the field of Modern Middle Eastern Studies. +971 50 189 6069
[email protected]
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About Towers Watson Towers Watson is a leading global professional services company that helps organisations improve performance through effective people, risk and financial management. With 16,000 associates around the world, we offer consulting, technology and solutions in the areas of benefits, talent management, rewards, and risk and capital management. Learn more at towerswatson.com
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