Read the law to ensure you have calculated your gratuity pay correctly Image Credit: Thinstock

Dubai: Losing employees, or a high turnover rate, is bad for business. It just doesn’t have financial repercussions, it can impact employee morale. This is why organisations in the UAE are rethinking on the provision of end-of-service benefits (EOSB).

A growing number of organisations - mostly multinational or global - are beginning to realise that if they don’t offer better gratuity benefits, they are simply going to lose their top talent to their more generous counterparts.

The UAE has no mandatory pension system in place for foreigners, so the majority of expatriates who choose to go back to their home country and retire will likely have to rely solely on their gratuity to get by as they grow older.

Gratuity serves as a separation pay for employees at the end of their contract, but it is often deemed inadequate for retirement. The amount received depends on the staff’s latest basic salary and the length of service. Allowances and other compensation outside the basic salary are usually not included in the calculation

Michael Brough, director and international benefits specialist at Willis Towers Watson, said the good news is that more companies in the UAE and the rest of the Middle East are enhancing their EOSB offering.

Their latest survey showed that almost half of organisations in the UAE (45 per cent) continue to offer enhancements to their staff gratuity packages. Among those who are taking positive steps towards better rewards, nearly six out of ten (56 per cent) are offering savings plans that can ultimately lead to a higher lump sum at the end of the employee’s term.

“The number of companies providing an enhanced benefit has increased from the 2015 survey. The reasons for offering [better gratuity package are] to retain key talent within the organisation [and] to comply with local or industry best practice,” said Brough.

Other employers opt to make changes to the EOSB formula, to boost the gratuity package, which can either be by increasing the number of days for the first five years, including bonuses or other allowances in the calculation instead of just the basic pay and extending the benefit cap to more than two years’ salary.

Employers who offer defined contribution savings plans open a series of individual employee savings accounts. In most cases these contributions are placed in a trust, which is funded with employer and/or staff contributions. The pooled funds are then invested in growth assets and provide a better lump sum benefit on leaving service, or retirement by the employee.

Brough said they expect more employers to offer savings plans as an enhancement to gratuity benefits, especially since the mandatory EOSB is deemed as an “inadequate retirement” or savings vehicle.

“Employers are recognising that there are more ways to retain key talent than simply increasing [the monthly pay],” said Brough. “Alternatives through enhancing broader benefits policy can achieve this objective and deliver a valuable final reward. Companies can introduce a supplementary savings plan for employees, with service-based vesting periods, to tie the employees in to a period of service, before a full benefit is provided.”

Among the companies in the Middle East that are seeking to provide better benefits, 60 per cent offer enhanced gratuity packages across the board. However, there are  a few that are still being selective, with 16 per cent and 17 per cent of companies providing better EOSBs only to non-nationals and top management, respectively.

The Wills Towers Watson’s End of Service Benefits Survey was based on responses from almost 180 organisations from 18 industries in the Middle East. The majority of the respondents were multinationals or global companies with operations in multiple regions around the world.

How companies can enhance their end-of-service benefits:

1)     By an adjustment to the defined benefit (DB) EOSB formula, which has various components:

a.      Number of days: In the UAE formula, the mandatory days are 21 for the first 5 years and 30 for service beyond 5 years. Enhanced EOSB could provide more days than these minimums, for example, 30 days for the first five years.

b.     Salary:  in the UAE formula, the salary is regular pay or base pay and certain allowances. Enhanced EOSB could include a wider definition of salary, for example, including bonuses or other elements of compensation in the calculation.

c.      Years of service: The EOSB is based only on accrued years of service but   enhanced EOSBs can include more years of service.

d.     Waiting period: in the UAE, there is a one year waiting period before the gratuity pay is calculated. Employers who want to offer better lump sums can waive this provision.

e.      Benefit cap: in the UAE, the EOSB is capped at two years’ salary. Organisations can ignore this ceiling for a higher financial reward at the end of the employee’s service.

2)     By an additional defined contribution (DC) savings plan, in addition to the EOSB, or in lieu of  the EOSB, as long as it is set up properly and the benefit delivered is greater than what is prescribed by law. The DC plan is a series of individual employee savings accounts (often inside a trust) that might be funded with employer and/or employee contributions, that is invested in growth assets and provides a lump sum benefit on leaving service, or retirement by the employee.

Source: Michael Brough, Willis Towers Watson