Lack of Employee Stock Ownership Plans in GCC Detrimental to Employee Productivity and Retention
Around 70 percent of the private companies in the GCC are family owned and run largely by expatriate management; ESOPs increase profitability by about 2.3 percent to 2.4 percent over non-ESOP companies
The number of Employee Stock Ownership Plans (ESOPs) companies has grown substantially during the past 10 years, and they are currently estimated to hold more than half a trillion dollars in assets and cover over 10 million workers in the US alone. The main reason for this growth is that ESOPs succeeded in increasing employee loyalty and commitment to an organization which resulted in improving corporate financial transactions significantly.
According to a recent comprehensive study – which paired 1,100 ESOP companies with 1,100 comparable non-ESOP companies – ESOPs appear to increase sales, employment, and profitability by about 2.3 percent to 2.4 percent over non-ESOP companies. The study also examined whether ESOP companies stayed in business longer than non-ESOP companies and found that 77.9 percent of the ESOP companies followed as part of the survey survived as compared to 62.3 percent of the comparable non-ESOP companies. Moreover, 82 percent of companies involved in the study indicated that their revenue increased after applying ESOPs while 72 percent indicated that they saw an increase of their profitability.
In contrast to this trend in developed markets, stock ownership by employees in Gulf region –where the majority of privately held companies in the GCC region (around 70 percent) are family owned and run largely by expatriate management – is still extremely rare.
To highlight the challenges and the advantages of adopting ESOP in the GCC countries, Al Tamimi & Company Advocates and Legal Consultants, one of the leading law firms in the Arabian Gulf region, today announced that it will host the upcoming ‘Employee Stock Ownership Plan (ESOP) Seminar’ to take place on April 22nd 2008. Richard Lamptey, a principal with Mercer, Marcus Wallman, associate at Al Tamimi & Company and Lynda O’Mahoney, senior manager, Corporate Fiduciary Services at Standard Bank will present their ideas about the subject.
A particular emphasis will be placed on the UAE’s ESOP structures in relation to documentation, control of plan, fundraising and other legal and compliance issues.
“In the UAE, there are some legal restrictions that should be addressed in regard to getting an ESOP approval and the fact that the expat employees in the Gulf are not allowed to own stock in UAE national owned companies,” said Richard Lamptey, a principal with Mercer. “I think there is an urgent need to increase the degree of legal flexibility available in the creation of an ESOP, which will allow employers to establish plans to best achieve the defined objectives for which they are established.”
But as the prevalent economic boom in the region has meant that more and more companies are looking for talented employees – particularly at the senior management level – experts expect that many businesses will shift towards greater employee’s equity participation. Currently, Standard Bank is among the first financial institutions to administer ESOPs in the region.
“As demand in the Gulf region for talented and experienced employees increases and retention strategies become ever more critical, the benefits to companies of ESOPs and other long-term incentives, is more evident,” said Lynda O’Mahoney, senior manager, Corporate Fiduciary Services at Standard Bank. “We are seeing unprecedented demand for these types of products, and their adoption in this marketplace will surely contribute to the success of those companies offering such schemes.”
With lack of regulatory framework and lack of clarity on ESOPs rules currently cited as the main obstacle for many companies planning to offer an allocation to employees, a change on this front is likely to pave the way for a significant wave of employee allocations in the future.
“ESOP is a win-win situation for the employee and the employer. It encourages the employee and the employer to work together to achieve the long-term success of the business,” said Marcus Wallman, associate at Al-Tamimi & Company. “As regional markets continually develop and the talent competition fuels, I believe that we will see economies gradually shift from capital-based to talent-based economies; and stock ownership will soon become a critical factor for successful business growth.”
The ESOP Seminar is co-hosted by Mercer, a global leader for trusted Human Resources and related financial advice, products and services and Standard Bank, a South African-based financial services company.
