Trend signals a major departure from the region's traditional employee compensation practices
A growing number of Middle Eastern companies going public are planning to offer share allocations in their IPO to their management and employees, according to a study just released by GulfTalent.com.
The finding marks a major departure from traditional employee compensation practices in the region which generally exclude any form of employee share ownership. With over 100 of the region's most prominent companies planning to go public over the next two years, the new trend could have wide-reaching implications for employees, shareholders and regulators.
GulfTalent.com's report, entitled "Employee Participation in Middle East IPOs" was based on interviews with a representative sample of CFOs, HR Managers, investment banking professionals and regulatory authorities across the GCC. [See full report ]
According to the study, the recent surge in IPOs across the Gulf and Middle East markets and the heavy oversubscription of these offerings has created an opportunity for companies to reward their employees with a preferential allocation of shares in the IPO. Under this, employees would subscribe to the shares with their own funds and at the same price as other retail investors, except that they would have a certain number of shares reserved for them.
Given the current pattern of heavy oversubscription of IPOs, such an allocation would mean that, while ordinary investors may receive just 1-2% of the shares they bid for, the company's own employees can potentially receive all or most of the shares they can afford to purchase. According to GulfTalent.com, with share prices typically surging on debut, such an allocation in itself would represent a significant reward to the employees, at no cost to the company or its shareholders - since the employees would be paying the same price as any other investor in the market.
A common practice in the developed markets of Europe and North America, and increasingly being practiced in emerging markets such as India, IPO allocation to employees has been virtually non-existent in the Gulf so far. Of the 20 recent or planned IPOs surveyed by GulfTalent.com, only one had given an employee allocation or had confirmed plans to do so.
On the other hand, over half of the companies surveyed, mentioned that the question of allocating shares to employees had been tabled during IPO discussions. The General Manager for Human Resources in a major Saudi company interviewed said "We discussed employee share allocation in our IPO but it was ruled out. A lot of our employees felt that they should have received an allocation."
The main barriers to employee allocation cited by companies participating in the survey were the inability to obtain regulatory approval from capital market authorities, or the lack of sufficient clarity on the regulation governing such allocation.
The report highlighted the growing competition for talent in the region and increased emphasis on employee attraction and retention as the main factors driving the debate on employee IPO allocations, with top management in particular increasingly demanding a stake in the companies they manage. One Bahrain-based investment banker told GulfTalent.com interviewers "What I hear from our senior management is that, the next career move they make will have to involve equity".
The report predicts employee share allocation in Middle East IPOs to increase significantly over the next two years. The key drivers are expected be regulatory reform in the financial sector making such allocation easier, as well as the increasing competition for talent. The Middle East's growing integration with the developed markets is also helping to bring best practice into the region and leading to greater acceptance by shareholders of the culture of employee equity participation.
GulfTalent.com's earlier research in September 2005 had pointed to increased compensation levels in the region, revealing an average year-on-year salary increase of 7% across the GCC. The latest findings provide a strong indication that the compensation debate is continuing, with the addition of an equity component in pay packages increasingly being discussed at the highest corporate levels.
Commenting on the report, an analyst at GulfTalent.com who led the study said "There is no doubt that this is the wave of the future. As the regional markets develop and there is a gradual shift from capital-based to knowledge and talent-based economies, employee equity participation will become a critical factor, particularly for publicly traded companies. It is only a matter of time."