BENEFITS &COMPENSATION

INTERNATIONALT O TA L R E M U N E R AT I O N A N D

P E N S I O N I N V E S T M E N T

law, and a lack of clarity on companyobligations, such as tax and social securitylaws. As multinationals move into themarket and local companies begin trading,there is a thirst for information oncompensation and benefit issues andtrends which makes for an interesting story and ademanding job for HR teams.

ADDRESSING THE KEY ISSUESIraq’s labour law has not been updated in recent yearsand is not readily available. Companies are thereforefinding it difficult to establish and track their policies.Some documentation surrounding pay andcompensation levels is available in Arabic only, which isthe first hurdle for the multinational companies that arekeen to have a piece of this expanding market.

Labour law has specific rules relating to thecompensation of employees working in the publicsector and for the Government, as follows:

These employees should receive a specific set ofallowances that are dependent on such factors as thelevel of education, job level, geographical location,marital status and the number of children.

Social security contributions should be paid at therate of 5% by the employee and 12% by the employer,with the latter increasing to 25% for organizationsoperating in the oil and gas sector. This contributiongoes towards the workers’ and dependants’ medicalbenefits, sickness and maternity, old-age, death anddisability, and unemployment benefits.

There is still much uncertainty and unclear, sporadic communication involving social securitypayments as to whether the same rules apply to expatriates who are based in Iraq on a rotator or commuter basis and local expatriateemployees. There is also a lack of clarity aroundexemptions and the registration process. Gradually,things are becoming clearer and companies are hopingthat this information will be more readily available in thenear future.

Another key challenge is personal safety, which remainsa major issue for companies operating in Iraq.Precautions need to be taken by companies to supportthe health and safety of their employees.

Compensation and Benefits in Iraq

Mirna Charaf El Dinne

Mirna Charaf El Dinne is a consultant with Hay Group in the Middle East and is responsible for thefirm’s clients in Iraq. Working with corporate head offices in Dubai and internationally, she is theauthor of Hay Group’s Compensation and Benefits Report for Iraq, which is published annually,

and hosts the firm’s Iraq HR Forum, which is held quarterly. In addition to working with organizations in Iraq, Ms Charaf is responsible for a number of other emerging markets,

including Lebanon and Jordan. She has a degree in Business Management from the American University of Science and Technology in Beirut.

Following decades of conflict and stagnation, Iraq’sonce-thriving economy is emerging again as a new andexciting frontier market, with vast potential forinvestment and growth that is not limited to the oil andgas sector. Expansion is projected for the transport,construction, manufacturing, financial services, health-care and education sectors as the nation focuses on acommitment to diversifying industry and creating asustainable national workforce.

Economic growth is being driven and supported by theIraqi Government, which is taking steps to attractforeign investors into the country and to establish thevital infrastructure needed to sustain business. Trainingand development of the country’s workforce is muchneeded to keep up with the current business andtechnological advances, since the scarcity of talentremains a major obstacle for the recruitment of Iraqinationals. Many educational and training programmesare being introduced to deal with this issue. Theseprogrammes are aiming to reduce the very high rate ofunemployment among nationals.

A large number of companies are now starting upoperations and recruiting in Iraq while still maintaininghead office functions in nearby countries, such as theUnited Arab Emirates (UAE) or Jordan, which have easylinks with Iraq.

GETTING TO KNOW IRAQThere are distinct markets within Iraq, with theKurdistan region located in the north of Iraq developingits oil and gas reserves quickly through the involvementof multinational companies. Further south, the focus ismainly on infrastructure, construction and theprivatization of functions that have, in recent years,been under the umbrella of either the United Nations orthe Iraqi Government.

Within the labour market, nationalization of theworkforce (creating employment for Iraqi nationals) is apriority for the Government; the public sector isworking hand in hand with private-sector organizationsto get Iraqi nationals into the workforce. In addition tothe national workforce, there is a large number ofseconded expatriate employees who work on arotational or commuting basis.

Naturally, with huge opportunities come challengescommon to new markets, such as antiquated labour

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The latest estimates by United Nations representativesin Iraq show that the unemployment rate is at a high of28%. Some of the main reasons for this high level ofunemployment are failures of the developmentprogramme to address the social aspects of economicgrowth as well as the diversion of resources to wars andsubsequent economic sanctions.

THE GOVERNMENT’S INFLUENCEThe lack of clarity around the labour law is having aheavy impact on the current pay market and packages.Pay packages must be acceptable to the State as well asto employees, so foreign-owned organizations have towork closely with the Government (see TABLE 1 oppositefor statutory allowances and benefits). There is alsosome confusion as to whether joint-venture employeesshould be paid as per the public- or the private-sectormarket.

Another issue faced by companies is segmenting payaccording to the criteria laid down by the Governmentthat include paying bonus based on the education levelwhich removes the focus from pay for performance.Furthermore, when the Government is movingemployees from the public sector to the private sector,these candidates have high salary expectations that arenot tied to performance. There is an additionalchallenge in that the skills most in demand are scarceand many roles require competencies that the localmarket has not experienced before.

PAY TRENDSPay trends between 2008 and 2010 fluctuateddramatically due to a relatively high and unstableinflation rate before 2007. Instability was also presentdue to the fairly new nature of the Iraqi market, astrends and common market practices are still beingestablished among new entrants to the market.

Salary increases in 2008-09 stood at an average of 17.5%as organizations struggled to compete with highinflation that had surged to 53.2% in 2006. Inflationgradually started to stabilize along with the salaryincreases that dropped to 12% in 2009-10 and 6.3% in2011, which was just above inflation. The inflation ratewas estimated to be 5.6% in 2011 and is forecast to be5.5% in 2012. The latest salary forecast for companiesfor 2012 is 9.0% which is 2.5% higher than the forecastgiven a few months ago. This is common for anemerging market like Iraq where companies are fightingfor talent and are willing to use any means to attract andretain the right talent. Pay increases for 2012 areforecast at an average of 6.5%, just ahead of inflation(see FIGURE 1 above).

The forecast for Iraq’s real GDP* growth rate in 2012 is10.9% compared with an estimate of 5.5% made in 2010.Reports suggest that private investment in the economyis set to triple as energy, agriculture and housingprojects accelerate under the leadership of the newGovernment. The Iraqi planning ministry stated that, aspart of its strategic plan, the rate of economic growthwill reach 47% by 2014 and per capita income will surgeto US$9,000† from the current US$4,000 as a result of asharp increase in Iraq’s oil output and higher marketprices for oil. The new per capita income forecast meansthat Iraqis’ living standards are expected to more thandouble in less than four years.

* gross domestic product† £1 = US$1.59; €1 = US$1.31 as at 6 April 2012

FIGURE 1 Salary Increases versus Inflation Rates in Iraq (2009-12)

0

2

4

6

8

10

12

14

16

18

20

2009

Year

Percen

tage

increa

se

Source: The Economist Intelligence Unit (for inflation rates) and Hay Group’s Compensation and Benefits Report for Iraq (for salary increases), 2012

2010 2011 2012 (f)

17.5%

3.5%

%

Salary increase

Inflation

2.4%

5.6%

5.5%

12.0%

6.3%

9.0%

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The tax situation is complex for organizations, as tax is not deducted at source. Organizations are obliged to pay tax to the State and the number of days for which an expatriate employee is in the countrydetermines whether or not he or she is required to paytax. Tax is between 0% and 15%. Most organizationsbelieve that the time threshold for paying tax in Iraq is180 days but this has not yet been confirmed by theGovernment.

There are many categories of tax, including pension taxand government tax, and the levels differ depending onthe number of employees an organization has.

RECRUITMENTThe focus of recruitment between 2009 and 2011 hasremained on the same functions, with organizationsfocusing on the recruitment of key jobs for theiroperations. Sixty-seven per cent of companies areplacing a focus on engineering jobs and 50% on financeand accounting; 50% are recruiting for human resources,42% for information technology and 42% for sales.

The number of new entrants to this year’s workforce isone of the highest within the Middle East, averaging at30%, while the percentage of leavers is only around 5%.Companies have many positions to fill. However, therecruitment of nationals in technical positions is achallenge, as the years of turmoil have depressededucation levels and Iraqi nationals have been pushedinto working for the Government, the public sector andnot-for-profit organizations. As this has been their focusfor many years, there is a lack of transferable skills formoving into the private sector, such as the oil and gasindustry.

In order to address the skills gap, there is a governmentscheme whereby employees from the Government canbe seconded to private companies. Such employees canremain with an employer during a training period whilestill being paid by the Government.

Once the national has received sufficient training anddevelopment to reach the required skill level for therole, he or she can be employed on a full-time basis. Atthis stage it is important for employers to make it clear

to employees that moving into the private sector willaffect their compensation and benefits as they willeffectively be cutting all ties with the public sector.Private companies therefore need to make thesepackages very attractive.

Iraqi nationals are very much motivated by careerprogression over the long term as well as opportunitiesfor training and development. They are interested inworking for an organization that will develop theirskills. From a compensation perspective, they are most attracted by a package that will support theirfamily as it is commonplace for Iraqi nationals to have alarge number of dependants. Overseas trainingprogrammes are also an attractive element of totalreward but Iraqi nationals face difficulties in obtainingvisas to certain countries and much training is thereforeconducted within Iraq.

There are different categories of employee working inIraq and their compensation and benefit packages arebased on two factors: nationality and location. On oneside, there are the locally based employees who aremainly Iraqi nationals who are paid according to Iraqimarket conditions and, on the other side, there areexpatriate employees who are seconded to Iraq oneither a rotating or a commuting basis.

Rotators are employees rotating between their basecountry (usually home country) and Iraq. The pay for therotators is based on their home country and the typicalarrangement for the rotation period is 28 days in,followed by 28 days out. Commuters are employees whotypically live as expatriates in the UAE (or other GCC*countries) and regularly commute to Iraq for work. Thefamilies of commuters are usually relocated to thecountry of residence and the commuter’s pay package isbased on either the home country or the residencecountry or a combination of the two.

These expatriate employees have a different set of rules that guide their pay and benefits. They typically

Statutory Allowances and Benefits for Iraqi Nationals

Allowance/Benefit

Annual leave

Death benefit

Disability benefit

Maternity leave

Medical benefit

Overtime rate

Coverage

20 days’ paid leave or 30 days when a person works under hazardous conditions;after five years of service the annual leave is increased by two days for everyadditional year of service with the same employer

12-48 months’ basic salary

10-36 months’ basic salary

70 days

Social security or private company; family coverage

1.5 times for a normal working day; 2 times for a weekend or public holiday

TABLE 1

* Gulf Cooperation Council

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receive additional allowances and benefits comparedwith locals, such as housing allowance, company car and driver, security protection through a private security company or armed security guards, food, andcleaning and laundry services. In addition, suchemployees are provided with special premiums or a hardship allowance for working in Iraq and tax equalization or tax protection in their home country.

MEDICAL BENEFITSMedical benefits are provided by all organizations inIraq either through social security for nationals orthrough a private insurance company. This is typicallyprovided for the employee only at junior levels and forthe employee and family at managerial levels.Employees normally have a choice of hospital from arestricted list within the country or the company has aspecial clinic or hospital for treatment of its employees.At the moment, health care is generally poor as theinfrastructure is currently being built. For expatriateemployees, where medical cover is provided it needs toinclude repatriation or evacuation from Iraq fortreatment.

Death and disability is another crucial benefit providedfor employees in Iraq and, again, it is covered througheither social security or a private company for allemployees in the company. Payment of 12-48 months’

salary is provided on death and 10-36 months’ salary fordisability.

It is hard for companies to find insurers that will providesufficient coverage in Iraq and there are typically someexclusions from the coverage. It is a particular challengeto provide this benefit for expatriates travelling onbusiness who have an existing medical insurance policy,as this can become invalid once they enter a war zone.

PROMISING OUTLOOKThe outlook for Iraq appears promising, as the countryis gaining economic and political stability. The growthpotential in Iraq is massive and those companies thatare able to take advantage of this opportunity now will be the ones with the greatest competitiveadvantage.

The market is still developing and drastic changes andcontinuous salary increases for the short term areexpected as more and more jobs become available in themarket. The scarcity of talent will continue to bite,leading to higher pay for talented people with technicalskills that will put further upward pressure on salaries.There will be continuing pressure on both organizationsand the Government to develop programmes that canrespond to this demand and aid Iraq’s drive towards asustainable workforce. Ω

Copyright © Pension Publications Limited 2012.Reproduced from Benefits & Compensation International, Volume 41, Number 9, May 2012.

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