Risk-Adjusted Release of Deferred Compensation: A Framework for UAE Banks

Since the Central Bank of the UAE introduced landmark regulations governing deferred compensation for Material Risk Takers and Senior Management in 2019, UAE banks have meticulously implemented deferral structures. With the first cycles of deferred variable pay now maturing, banks are compelled to address a critical regulatory and strategic challenge.

This challenge revolves around the following question: Should deferred compensation be fully released, partially adjusted, or forfeited based on risk-adjusted performance?

Unlike the initial phase of setting deferral policies, banks now face the nuanced task of implementing rigorous, structured frameworks to assess compensation payouts. Experts from Aon explore detailed methodologies, best practices, illustrative scenarios, and strategic considerations that UAE banks can adopt in addressing this imperative effectively.

1) Introduction: The Regulatory Journey and UAE Context

Since the Central Bank of the UAE (CBUAE) introduced deferral regulations for variable compensation in 2019, UAE banks have established frameworks that defer significant portions of variable pay – primarily for Material Risk Takers (MRTs) and Senior Management – for a minimum of three years. The intent was clear: to align compensation with long-term risk outcomes and financial sustainability.

Today, banks face a new, critical challenge: evaluating whether deferred payouts should proceed unconditionally or if risk-based adjustments are necessary. The CBUAE explicitly mandates that compensation outcomes must reflect risk outcomes, underscoring the need for banks to move from compliance-oriented deferral structures to rigorous, risk-adjusted execution mechanisms.

2) The Regulatory and Strategic Imperative

CBUAE regulations require deferred compensation outcomes to be explicitly symmetric with risk outcomes. Specifically, banks must:

• Conduct annual assessments of compensation plans, processes and outcomes.
• Adjust deferred payouts downward or even revoke them entirely if significant risk failures, financial underperformance, or governance issues are identified.
• Ensure robust governance oversight by the Nomination and Remuneration Committee (NRC).

Banks now face an operational challenge: transitioning from compliance-focused implementation to robust, structured, and data-driven execution. This involves clearly defined, defensible methodologies to determine whether deferred compensation should be released, adjusted downward, or forfeited.

3) Global Best Practices

Banks globally have grappled with similar compensation challenges. Consider the following examples:

UAE banks can learn significantly from these markets, adopting structured governance frameworks and clear evaluation methodologies to align deferred compensation accurately with risk outcomes.

4) Designing a Robust Risk-Adjusted Release Framework

UAE banks require a structured, rigorous framework for evaluating deferred compensation. Amongst many other factors, five critical evaluation factors include:

5) Implementation Methodology

For a successful implementation, UAE banks are advised to follow a three-tiered governance model.

Tier 1: Annual Bank-Wide Risk & Performance Review
Macro-Level Assessment: Evaluating Overall Organizational Risk and Financial Health.

Objective:

To assess the overall financial, risk, and regulatory performance of the bank before deferred compensation is considered for release.

Key Actions:

• Conduct a comprehensive annual review of the bank’s financial health, risk exposure, and regulatory compliance.
• Identify systemic risk events, regulatory actions, and financial performance deviations that could impact deferred compensation decisions.
• Benchmark against peer institutions and industry-wide risk trends to assess relative performance.

Tier 2: Individual & Business Unit-Level Adjustments
Micro-Level Assessment: Evaluating Individual & Departmental Contributions to Risk & Performance.

Objective:
To assess individual accountability and business unit performance in relation to risk outcomes and financial performance.

Key Actions:

• Conduct granular reviews of business units and individual executives.
• Link payout adjustments to specific risk events, performance achievements, and regulatory compliance at the unit level.
• Differentiate between enterprise-wide risks (e.g., macroeconomic downturn) and individual/business unit accountability (e.g., misconduct, poor risk management).
• Use peer benchmarking to ensure UAE banks maintain competitive compensation structures while maintaining accountability.

Tier 3: Final NRC & HR Oversight for Payout Decisions
Ultimate Governance & Accountability: Ensuring Transparency & Fairness in Final Payouts.

Objective:
To ensure executive compensation decisions are fair, transparent, and aligned with long-term risk and performance outcomes.

Key Actions:

• NRC conducts final reviews of deferred compensation amounts, ensuring alignment with CBUAE regulations and internal policies.
• HR communicates decisions transparently to executives, ensuring alignment with talent retention strategies.
• Apply malus and claw back provisions where necessary, ensuring that executives who contributed to risk failures do not receive undue compensation.
• Document all decision-making processes to maintain regulatory defensibility.

6) Strategic Challenges and HR Implications

Implementing a risk-adjusted release mechanism for deferred compensation presents several key challenges for UAE banks. While regulatory compliance is a priority, banks must also ensure that their approach supports long-term business sustainability, executive motivation, and governance transparency.

Balancing Risk Sensitivity with Talent Retention
An overly aggressive approach to adjusting deferred compensation based on risk outcomes may demotivate key executives, particularly if reductions are perceived as unfair or disproportionate. This can lead to talent attrition, reduced leadership engagement, and challenges in attracting top talent in a highly competitive banking sector. To mitigate this risk, banks must:

• Ensure clear, objective criteria for payout adjustments, reducing uncertainty among executives.
• Maintain market competitiveness by benchmarking against peer institutions to avoid excessive reductions that could disadvantage the bank in executive hiring.
• Communicate decisions transparently, ensuring executives understand how payout adjustments align with risk performance.

Addressing Subjectivity in Compensation Decisions
Without a standardized methodology, compensation adjustments risk being influenced by subjective opinions or inconsistent interpretations of risk events. This can create disputes and erode trust among senior executives. To prevent this, banks should:

• Implement data-driven scorecards that assess financial performance, risk incidents, and compliance failures using quantifiable metrics.
• Establish governance committees that review payout decisions based on structured guidelines rather than discretionary judgments.
• Use peer benchmarking and historical data to ensure consistency in decision-making across different executive roles and business units.

Ensuring Regulatory Alignment Without Overcorrection
The CBUAE mandates that compensation outcomes must reflect risk outcomes, but an excessively punitive approach may discourage prudent risk-taking. If executives feel that any risk exposure will lead to financial penalties, they may become excessively risk-averse, hindering innovation and strategic decision-making. Banks must:

• Apply proportionate and measured adjustments based on the severity and recurrence of risk events.
• Ensure that malus and clawback provisions are enforced fairly, targeting only executives directly responsible for governance failures.
• Align executive compensation policies with long-term business sustainability, ensuring that risk sensitivity does not hinder growth.

Strengthening Data Quality and Governance for Risk-Adjusted Assessments
Many banks face challenges in consolidating financial, risk, and compliance data into a single, reliable framework for compensation decisions. Without high-quality, real-time data, banks risk making inconsistent or inaccurate payout adjustments. To enhance data governance, banks should:

• Invest in integrated compensation governance platforms that centralize relevant data for a holistic risk-adjusted assessment.
• Ensure that risk, finance, and HR teams collaborate closely, aligning their assessment criteria for deferred compensation decisions.
• Conduct regular audits and stress-testing of compensation frameworks to ensure they remain robust and adaptable to evolving regulatory requirements.

Communicating Decisions Transparently to Executives
Executives may resist payout adjustments if they feel the process lacks transparency. Poor communication can lead to dissatisfaction, disengagement, and even legal disputes. To address this, banks should:

• Develop structured communication protocols that explain the rationale behind payout decisions in a clear and consistent manner.
• Provide executives with detailed performance reports, linking compensation outcomes to specific risk-adjusted metrics.
• Ensure that the Nomination and Remuneration Committee (NRC) plays an active role in explaining and justifying payout decisions to affected executives.

7) How Aon Supports with Risk-Adjusted Payout Mechanisms

Aon provides specialized advisory services to help UAE banks design and implement structured, regulatory-compliant, and strategically balanced risk-adjusted compensation frameworks. Our expertise spans governance frameworks, risk-sensitive compensation models, and executive pay benchmarking.

Developing Structured Risk-Adjusted Compensation Scorecards
Aon helps banks design customized scorecards that objectively evaluate financial performance, risk exposure, and compliance breaches. These structured frameworks:

• Ensure consistent and transparent payout decisions, reducing subjectivity.
• Provide quantifiable risk-adjusted metrics that align with regulatory requirements.
• Enable NRCs and HR teams to make defensible compensation adjustments.

Benchmarking Against Global and Regional Best Practices
Aon provides comparative insights from leading financial institutions, ensuring UAE banks maintain a competitive yet risk-sensitive compensation structure. Our benchmarking analysis includes:

• Global regulatory frameworks such as CRD V (EU), PRA & FCA (UK), and MAS (Singapore), helping UAE banks align with best practices.
• Regional banking trends, ensuring that UAE banks remain attractive to top talent while meeting compliance expectations.

Enhancing NRC and HR Governance for Transparent, Defensible Decisions
Aon works closely with NRCs and HR teams to implement strong governance mechanisms for deferred pay decisions. Our approach includes:

• Establishing clear documentation protocols to ensure all payout decisions are well-justified and defensible in regulatory audits.
• Training NRC members on best practices for risk-adjusted compensation governance.
• Developing structured review frameworks for NRCs to assess deferred compensation payouts in a consistent and strategic manner.

Supporting Malus and Clawback Implementation
Aon helps banks define and enforce malus and clawback provisions to ensure accountability while maintaining fairness. Our advisory services focus on:

• Crafting targeted policies for malus and clawback application, ensuring that only executives directly responsible for governance failures are affected.
• Ensuring alignment with CBUAE regulatory requirements while maintaining a market-competitive compensation structure.

Strengthening Communication Strategies for Executive Engagement
Aon helps banks develop clear and proactive communication strategies to ensure executives understand how risk-adjusted payout decisions are made. Our approach includes:

• Designing executive briefing materials that explain payout adjustments with supporting data.
• Training HR and NRC teams on effective communication techniques to maintain executive trust and engagement.

8) Conclusion: Achieving a Balanced, Risk-Sensitive Compensation Framework

As UAE banks transition into the critical phase of deferred compensation releases, ensuring a structured, transparent, and risk-adjusted payout mechanism is essential. The key challenge lies in balancing regulatory compliance, executive motivation, and long-term business sustainability. A well-designed framework must align compensation adjustments with measurable risk outcomes while maintaining a competitive and fair executive pay structure.

Banks that successfully integrate governance-driven, data-backed compensation models will benefit from enhanced accountability, defensibility, and regulatory alignment. Implementing quantitative scorecards, structured risk reviews, and transparent communication protocols will be crucial in ensuring that executives understand and accept compensation decisions.

Aon plays a vital role in supporting UAE banks through this transition. By leveraging our expertise in executive compensation strategy, regulatory compliance, and governance frameworks, we help financial institutions develop compensation structures that are both risk-sensitive and strategically effective.

Our tailored advisory services ensure that banks maintain regulatory compliance while preserving market competitiveness, implement objective, data-driven compensation frameworks that reduce subjectivity, and enhance governance processes for transparent and defensible payout decisions.