But although employers do account for ESB in their balance sheets, in most cases they do not set aside a separate fund, but instead, commingle it with their working capital. The risks this approach carries were made painfully obvious when the financial crisis of 2008 hit, with companies declaring bankruptcy and with no money secured to pay employees.

Research conducted by Towers Watson in 2010 said that the combined ESB liability of employers in the GCC was around USD 16-17 bn and could increase to over USD 75 bn by 2020. Is there a more recent number?

There is not. I think the reason why they have not issued any more numbers is probably the unclear methodology behind it and the difficulty with validating this sort of estimate. But whatever that number was in 2010, it is going to be higher in 2014. The drivers for that number are growing at a rapid pace.

There is little publicly available data on the matter and that is the reason why we started our survey in 2013. Everybody says they are doing something to address the issue but in the end, it turns out most are doing nothing at all. We tried to clarify how companies are treating this liability and how much understanding they have on the issue at all.

Your survey found 54 percent of companies are commingling their ESB funds with their working capital. Does that mean that the other 46 percent have set the funds aside or invested them?

No, another 24 percent of HR professionals we surveyed did not know how their organisation’s ESB funds were being managed and we believe this percent is also a part of the `not doing anything with those funds’ club. So actually, the commingling number is closer to 78 percent.

And then there is the 8 percent that said their company has set up a trust. That leaves another 14 percent.

These 8 percent are part of the 22 percent that are doing something with that money, but most are still keeping it inside the company and within their balance sheet, where the risk lies. That is just not the way anybody else does it anywhere in the world. This is your employee’s money your toying with, and without asking too. But in the region, 92 percent of employers are used to this bad habit. And, it is nothing more than a bad habit. Why it has developed into a market practice, only history can tell.

What are or could be the consequences of such a bad habit?

We have seen a lot in 2009, when local companies and multinationals as well were struggling. A large Australian multinational is a good example of what can happen. They decided to move all the capital from all the subsidiaries, left them cash negative and declared a bankruptcy in Australia. All of a sudden, the subsidiaries were left with no money to pay their employees’ ESB and 2,200 employees in the Middle East were left empty-handed.

So, working for a large multinational institution offers no guarantees?

People think since they are working for such a company, they are safe, but that is not the case, because these are subsidiaries of  large groups and there are many examples where very shrewd maneuvers were made to get the money out of the subsidiaries, as the liabilities are limited to the region and people took the hit. Many employees have gotten more nervous as a result of that.

We had a recent example of a client that was very cash-rich and the government awarded him a project. All of a sudden, there is no more spare cash and 2,500 employees have gone from a situation where they believed they worked for a very cash-strong balance sheet company to one where they are going to have debt on the balance sheet and no cash left, should something go wrong. So businesses change, dynamics change and what employees need to know is that their money is protected. Again, not doing it is nothing but bad behaviour which has become business practice.

So in practice, bad management of ESB is the employees’ problem, not so much the institutions’?

It is a problem the companies should take care of and we are trying to make them understand how important it is to do so if they want an engaged, loyal employee that stays with the company. Employers that provide ESB transparency enjoy a 37 percent higher staff retention than those who do not.

Retention translates into engagement; engagement leads to higher productivity and productivity translates into higher revenues. So, at the end of the day, it becomes an employer problem or opportunity. You could be a trustworthy employer and have a good public image to attract the best of workers or you can lose them for not trusting you.

Another thing in the Middle East is, 96 percent of people in the GCC are both the employer and the employee. I am an expat and a manager, but I am also an employee of the firm, so to protect my own interests, I need to protect those of my employees as well.

Where talking as it is all about public image and employee trust and retention, but there are laws that guarantee the ESB to every employee.

The labour laws across the GCC since the 1980s have been very clear and have defined the amount of money and the rules around this. What has been historically lacking is the support and the enforcement of the laws.

But in the last two years that has been changing and what we see in the UAE is the Ministry of Labour supporting the employees in their cases against the employers. Previously the support has been a bit…fluid, but now it is much more in the favour of the employees in ruling in these items.

In the past, the employers artificially reduced the base salary to be 30 percent of the total compensation but courts are now ruling it to be a trick used by employers and are awarding the ESB in proportion to total compensation. So, enforcement has been missing, but I think we have seen good progress lately. In addition to that, in the UAE, the Ministry of Labour has made it free of cost to file a complaint in such cases.

The second aspect is on the auditor, on the accounting side. International standards require the liability to be recognised on the balance sheet of the companies but as at first it was a small amount, 1-3 percent of the balance sheet, it could be hidden and not treated with the detail the law required.

But, again, in recent years, the auditors are getting more bothered with this item and want their clients to treat it much more seriously and recognise it as a separate number on the balance sheet. And, while many companies are still not doing it, we are seeing a slow cultural change happening. And, it is a cultural change that has to happen.

Are there any differences between the GCC countries? 

end of service benefits, ESB, middle east, GCC, Jahangir Aka
Jahangir Aka, Managing Director and the head of the Middle East Business at SEI

On the whole they are similarly aligned and the remunerations are respectably high. Bahrain is a bit less generous in the short term, but more in the longer, but these are nuances. Personally, I do not expect the employers to do more, just to do it right. There is no need for legislative change, there is just a need for the laws to be enforced.

In your survey you found that enhancements in ESB lead to longer staff tenure. What enhancements are you referring to?

The simplest things already have a big impact. Transparency is one such basic, namely, to separate assets on the balance sheet and a website where people can check the amount of money that has been accumulated in their name.

That gives the employees a sense of trust, of security. This is level one – I am separating your money from my working capital and I am protecting you. Level two – I am now showing you that your money is available with your name on it, should you need it.

Up to that point the employer did not put any additional amount in the equation, but it already works miracles. It is an easy win for both sides as it influences loyalty and productivity in a significant way, as we have shown.

The next level is, when you say – if you stay with me for five years, I will pay you 50 percent more gratuity than the law requires of me. If you stay with me for eight years, I’ will pay you a 100 percent more, etc. We have seen a number of companies that have done additional retention payments with great success.

In the West, companies use stock options as well, but in the Middle East, private companies are not listed, so ESB is used as a very strong retention tool instead. There are many ways in which an employer can use this money cleverly, but one has to see it as an opportunity and get informed about it.

There are many inventive employers who try to circumvent the law; by paying the gratuities at the end of each year, for example..

This is an area that comes up a lot, but the view of the law in such cases is very clear. Doing so does not negate the employer’s liability. We are amazed at how many tricks people have come up with to avoid their responsibility; this is the bad behaviour I was talking about. The law states that you have to pay your employee on his final salary.

If someone is with you for nine years, you have to pay them based on their ninth-year salary. There have been court cases on such grounds and the court has ruled that the money paid at the end of the year was part of the employee’s annual compensation and the company still has to pay the ESB on the employee’s final salary.

Employers could maybe get away with such tricks before, but in the age of the Internet, word gets around very quickly, even if people do not take you to court. But of course, the employees have to do their part as well and challenge such bad behaviour.

Are there a lot of court cases being filed on these grounds?

The number is rising. One of the law firms we work with has seen an increase from where they were handling eight to 10 cases a month to eight to 10 cases a week in the last three years.

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