Employers in UAE are turning to long-term incentives to retain employees

Benefits such as flexible working, summer working from abroad and positive office cultures are all effective and modern examples of benefits that employers have been using to attract employees, however offering those benefits alone does not help employers stand out - financial packages remain a key point of difference for employers in the region. Helped by a more relaxed UAE Companies Law, employers are now turning to LTIs to motivate employee performance while at the same time encouraging long-term loyalty towards the business.

Offering LTIs can strengthen an employee’s association with specific projects or work towards a strategic exit for majority shareholders to the benefit of the employee, the company that employs them and other shareholders.

Examples of long-term incentives

Implementing LTIs requires considerable economic and legal planning. Initially, this will involve determining the type of LTI that best fits the business and desired objectives of the LTI scheme.

LTIs typically fall into one of three categories - restricted stock units (RSUs), stock options and performance-based LTIs.

Restricted stock units

RSU arrangements allow employees to receive a certain number of shares in the future under certain conditions. Shares are usually delivered at the end of a specified vesting period but are not subject to any performance criteria. Employees are not required to pay for the RSUs when they are granted, or for the shares when the RSUs vest. Unlike a stock option plan, an RSU arrangement delivers the entire value of the shares that are awarded to an employee, rather than only the increase in value of those shares.

RSU arrangements best suit situations where the primary purpose of the arrangement is to recruit or retain individuals within the company’s group for a specified period, as there is inherent value in the shares being awarded regardless of whether the company’s share price grows or whether certain conditions are met.

Stock options

LTIs can be structured as stock options which give the holder the right to buy shares at a fixed price – known as the exercise price – on or after a certain date, or subject to certain conditions. Typically, the exercise price of a stock option is set at the current value of a share when the share option is granted – known as a ‘market value option’.

As stock options only deliver an economic return where the value of the company’s shares exceeds the exercise price, they are commonly used as an incentive for employees to contribute to growth in the overall value of the company. Employees who hold stock options then share in the benefit of that increase in value which is realised by other shareholders.

Performance-based long-term incentives

Performance-based LTIs allow employees to receive a certain number of shares in the future for reaching specific performance targets. The time frame for hitting the performance targets is typically set over a multi-year framework, and the performance targets are usually measures which relate to the longer-term, strategic goals of the company, rather than individual key performance indicators set under an annual bonus plan.

Performance-based LTIs are appropriate in situations where the employer wants to incentivise employees to achieve specific, long-term strategic goals beyond just growing the share price.

Shares versus cash

Share-settled LTIs are increasingly common in the UAE. Offering share-settled LTIs is very common in the US and Europe, and the wider Gulf region is catching up with that practice.

Changes to the UAE’s Companies Law (Federal Law No.32 of 2021) permitting public companies to increase their share capital to put in place employee share plans and an easing of restrictions that required a minimum of 51% share ownership by UAE nationals – which disincentivises foreign owners from setting aside additional capital for employee ownership - have made issuing share-settled LTIs in the UAE easier and more appealing for businesses.

Beyond this, while there are corporate law requirements to consider when putting in place a share-settled LTI – which will vary based on the type of company involved and whether it is based ‘onshore’ in Dubai’s International Financial Centre or Abu Dhabi's International Financial Centre - the legal requirements are relatively limited in the UAE. Employers should seek advice before implementing a share-settled LTI scheme to ensure all relevant issues are properly considered, including any labour law, regulatory or tax issues.

While LTIs are increasingly settled in shares in the UAE and wider Gulf region, it is not necessarily the right fit for every company – this can be due to the company’s shares being insufficiently liquid or because the existing shareholders do not want to dilute their ownership. If this is the case, cash-settled LTIs remain an attractive alternative and any of the categories of LTI - RSUs, stock options or performance-based LTIs - can be implemented as cash-settled arrangements, whether in the form of ‘phantom shares’, stock appreciation rights or similar arrangements. 

LTIs can be a valuable tool for employers in the UAE to attract, retain and motivate their key talent and compete with overseas employers who are offering their employees the opportunity to receive equity and become minority owners in the company for which they work. LTIs can align the interests of employees with those of the business and create a sense of ownership and commitment that other short-term incentives cannot replicate. However, LTIs also involve legal, regulatory and tax implications that need to be carefully considered before being implemented. Employers should seek expert advice to design and execute an LTI scheme that suits their needs and objectives and complies with the relevant laws and regulations.

Co-written by James Sullivan-Tailyour of Pinsent Masons.