One in three human resources executives don’t know how their ‘end of service benefits’ (ESoB) liability is being managed. Given that the end of service benefit is usually one of the three largest payouts a company makes to its employees, this point is hard to ignore.
Based on a survey of over 140 CFOs (chief financial officers) and HR heads across the GCC, a report by SEI has shed light on how companies are managing the ‘EoSB’ liability accruing on their balance-sheets, and how they plan to support objectives of improving performance and productivity of their employees. The report focused primarily on the UAE, where the majority of respondents’ employees were based (77 per cent). The number of companies that participated in the study has increased, from 90 companies in 2013 to over 140 last year, demonstrating an escalating interest in EoSB and the maturing of the regional employment market.
The majority of companies in the GCC comingle their EoSB funds with their working capital, making their employees vulnerable in case of insolvency. This practice certainly has its dangers as evidenced in the case of Hastie Group, whose sudden insolvency in 2012 saw 2000 workers suddenly without jobs and in demand of their EoSB payouts.
While companies are compelled by law to ensure that the EoSB payouts are made to employees on dismissal, not enough make the effort to truly protect the asset.
The report also notes that companies in the region are forecasting exponential growth, with 86 per cent planning on increasing headcount over the next three years. Additionally, 72 per cent of companies surveyed expect salary increases of 5 per cent or more per year and staff attrition continue to decrease, which means employees are choosing to stay with their companies for longer.
These three factors are leading to an exponential increase in the companies end of service benefit liabilities, highlighting the growing risk this liability will pose to companies in the region going forward.
In the current environment of rising costs, HR heads are under increasing pressure to maximise dollar cost productivity. One way this can be achieved is through utilising alternative methods of reward.
The survey reveals that 66 per cent of companies choose to rely on traditional methods such as cash incentive and bonus schemes to retain and recruit top talent. This method is costly and overlooks a critical component of a reward strategy — the common occurrence of employees resigning immediately after the bonus payment.
A retention strategy with a clearer retention component is one linked to EoSB or savings scheme matching programmes, which reward employees for their long tenure by providing an uplift to their EoSB payment or their savings plan contributions once they meet certain thresholds.
Furthermore, the report finds that companies that have utilised creative approaches to retention through enhanced EoSB schemes and savings plans, have enjoyed 37 per cent higher retention rates than companies that do not use such methods.
The last couple of years have seen increasing awareness of the risks associated with the traditional methods of managing EoSB within the region, as well as greater recognition of the benefits a scheme can offer. However, the various tasks and components that need to be managed by an organisation using the ‘do it yourself’ approach can prove to be both cumbersome and resource intensive. Given the complexity and scale involved in managing an EoSB scheme, it comes as no surprise that 36 per cent of companies surveyed would consider outsourcing the entire scheme management to a third-party.
A well run scheme is based on separation of the asset from the balance sheet, establishment of a risk management framework, asset allocation program, investment implementation, and administrative and reporting services to provide oversight of the whole EoSB Scheme. A sign of the growing interest in this subject is that 46 per cent of respondents to the survey would consider an EoSB and/or savings scheme for their companies.
The writer is the Head of SEI Investments Middle East.