Executive pay in the Gulf: Aon explores the case for equity-based compensation

Across the Gulf, executive compensation remains overwhelmingly cash-based. According to an in-depth analysis by Aon, this approach places the region out of step with global compensation practices and means both organizations and executives may be missing opportunities to create greater long-term value.

In a major study on executive compensation, Aon’s Human Capital practice examined the value of adopting equity-based long-term incentives across the Gulf. The research applied an equity-based long-term incentive model to 100 listed companies across the Gulf Cooperation Council (GCC), providing insights into the potential impact, benefits, and broader implications for companies and their leadership teams.

Vamsi Srinivas (Partner) and Ramzi Amiri (Senior Associate Consultant) from Aon, who both contributed to the research, walk through the analysis, its findings, and what equity-based compensation could mean for the future of executive rewards in the Gulf.

Where the GCC Stands Today

Walk into a board meeting at any major GCC company and ask about long-term incentives, and the conversation will almost certainly revolve around cash. Fixed salary, annual cash bonuses, and perhaps a deferred cash plan constitute 85% to 95% of total executive remuneration in most Gulf companies.

Equity-based instruments – restricted shares, stock options, and performance shares – account for a negligible share. And where long-term incentives exist, they are typically structured as deferred cash bonuses rather than equity-based awards.

This is not for lack of awareness. Board members and CHROs across the region know that global practice is different. At a typical S&P 500 company, equity-based long-term incentives represent 50% to 70% of CEO pay. In Western Europe, the figure is 30% to 50%. The gap between the GCC and global norms is not one of ignorance but of perceived barriers.

The Historical Barriers
The GCC’s cash-heavy approach had real justifications. Many of the region’s largest companies are majority-owned by sovereign wealth funds, royal families, or founding families, with free floats of just 20% to 40%. Equity compensation exists largely to align dispersed shareholders with hired managers – but when one shareholder controls 60% to 80% of the equity, that problem barely arises.

Liquidity was a genuine concern too. Thin trading volumes raised real questions about whether executives could sell vested shares without moving the price, and the rules governing equity plans were less developed than in mature markets. On top of that, the region has long preferred guaranteed, predictable pay. Variable, market-linked compensation asks for a shift in mindset at both board and executive level, and many companies chose not to make it.

What Has Changed
Those barriers were real. They have also largely fallen away. Liquidity is no longer binding for the large-cap companies most likely to adopt equity plans: GCC exchanges now exceed $4 trillion in combined market capitalization, and Tadawul alone trades over $2 billion on an average day. MSCI’s inclusion of Saudi Arabia and Kuwait has drawn in foreign institutional money, sharpening price discovery and deepening analyst coverage, so share prices track fundamentals far more closely than a decade ago.

The competition for talent has intensified at the same time. As every GCC economy pushes diversification and nationalization at once, executives are being courted by multinationals that offer equity as standard, and cash-only packages increasingly fall short. The precedent is set: both stc and Saudi Aramco now use equity to incentivize employees, and administrators oversee employee share plans for many companies listed on the Saudi Exchange.

The Case for Equity-Based LTIPs

The findings from our research are consistent with a large body of academic research on executive incentives. When a meaningful share of pay is delivered in equity, executives behave more like owners: they focus more sharply on capital allocation, are more disciplined on costs, and are more willing to pursue value accretive but risky investments over a multi year horizon.

Equity-based LTIPs therefore help address the classic agency problem by tying a greater portion of total compensation to long term shareholder outcomes rather than short term cash metrics.

At the same time, it is important to distinguish correlation from causation. High performing companies are more likely to adopt sophisticated equity plans, and strong share price performance can make equity awards appear attractive in hindsight.

Our contribution is not to claim that equity causes better company performance, but to hold the compensation cost constant and compare alternative instruments on the same underlying companies. By fixing the IFRS 2 expense and simulating different LTIP structures on identical performance histories, we isolate the value transfer mechanics of equity versus cash.

On this basis, we show that, given the performance these GCC companies actually delivered, equity-based LTIPs would have transferred more value to executives per dollar of IFRS 2 expense than cash-only LTIPs. Boards that choose equity-linked instruments over deferred cash can therefore achieve stronger alignment and greater upside participation for the same accounting cost.

How Aon Tested the Case

We ran a retrospective simulation over January 2016 to December 2025, across 100 listed GCC companies in Saudi Arabia, the UAE, Qatar, Kuwait, Bahrain, and Oman, spanning financials, telecoms, petrochemicals, real estate, consumer, energy, industrials, and utilities.

For each company, the researchers modelled a hypothetical LTI granting $100,000 of value annually on a three-year cliff, across eight cohorts (2016-2023 – the only grants that fully vest by the December 2025 data cut-off). Each grant is priced at the prior year-end close, so the 2016 cohort vests at end-2018 and the 2023 cohort at end-2025.

Four instruments were compared on identical performance histories:

• Cash: $100,000 per grant, paid at vesting, no compounding.
• RSUs: valued at the average share price over the four years from vesting onward, with full dividends during vesting and partial dividends through the holding period.
• Stock options: at-the-money, valued via the Merton (dividend-adjusted) Black-Scholes using company-specific yield and price volatility and a six-year expected life; options accrue no dividends.
• Blend: 50% cash, 50% RSUs.

Where a valuation window runs past December 2025, it is truncated at that date and all open positions are marked to the closing price – applied identically to RSUs and options.

The period spans a full cycle – the 2015-16 oil downturn, the 2020 Covid-19 shock, the 2021-22 commodity boom, and 2023-25 normalization – so no single phase dominates.

A couple of caveats to highlight. First, requiring continuous listing introduces survivorship bias; delisted or acquired companies are excluded, so the true equity premium over cash may be somewhat lower than reported.

Second, RSUs and options are valued over a four-year post-vesting window – reflecting the holding requirements and trading restrictions typical of executive equity, and reducing single-date timing luck – while cash, which has no holding period, is valued at vesting. This gives equity additional market exposure; valuing all instruments at vesting instead would lower the median RSU by roughly 3% to 4% without changing the conclusion.

What the Data Shows

A deep-dive into the analysis and its main takeaways:

The Headline: Equity Wins, But the Instruments Are Not Interchangeable
Across the 100 companies with complete data, the results are clear. Every equity-based instrument outperformed cash at the median. But the instruments behave very differently, and choosing between them involves a genuine trade-off that boards need to understand.

The table reveals the central tension. Options delivered the highest absolute value – almost double cash at the median. But RSUs delivered the strongest alignment with shareholder value creation, with a Spearman rank correlation of 0.95 versus 0.89 for options. RSUs also beat cash more consistently: 85% of companies versus 67% for options.

This means RSUs are the more reliable instrument. Across a vast majority of companies, an executive holding RSUs would have been better off than with cash. Options, while potentially more lucrative, are also more hit-or-miss – they delivered extraordinary returns at some companies and nothing at others.

Why Options Delivered More but With Less Consistency
The option results may surprise readers who expected options to underperform in a high-dividend market. The explanation lies in mechanics. When we properly account for dividend yield in the Black-Scholes valuation, the fair value of an at-the-money option falls significantly. This means each $100,000 grant buys substantially more options. When the stock appreciates, the leverage effect of holding more options delivers high value.

But this leverage is a double-edged sword. In companies where stock prices were flat or declined, options delivered nothing – the executive received zero for that grant cycle despite the company booking an IFRS 2 expense. RSU holders in the same companies still received shares worth something, plus dividends accumulated during the vesting and holding period. This is why RSUs beat cash more consistently: they never go to zero.

For boards, this distinction matters enormously. Options create higher peaks but deeper troughs. RSUs create steadier, more predictable value that tracks shareholder outcomes more faithfully. The choice between them should reflect what the board is trying to achieve: maximum leverage (options) or maximum alignment with manageable risk (RSUs).

The Country and Sector Perspectives
The story varies meaningfully across GCC markets. The UAE and Saudi Arabia – the region’s deepest and most liquid markets – showed strong equity premiums, driven by companies like Emirates NBD, Aldar Properties, Al Rajhi Bank, and Jarir Marketing that delivered sustained capital appreciation alongside robust dividends.

Kuwait and Qatar showed more mixed results, reflecting the specific market dynamics of the study period. Bahrain and Oman, with smaller samples, still showed RSUs outperforming cash on average.

The key takeaway is that the equity premium is not a single-country phenomenon. Across all six GCC markets the median company saw equity outperform cash, though the margin varies.

The equity premium persists across sectors – particularly for Financials, industrials, energy, and telecom. Real estate was bifurcated – few spectacular outperformers, particularly from the UAE and several losers.

What It Costs: The Value Transfer Ratio

Boards care not just about what the executive receives, but what it costs. Since every instrument in our simulation receives $100,000 of grant-date fair value per cycle, the cumulative IFRS 2 expense over eight grants is $800,000 for all instruments and all companies. The denominator is the same. What varies is the numerator – how much value the executive actually realizes.

This gives us a simple but powerful metric: the value transfer ratio. For every dollar of compensation expense, how many dollars of actual value does the executive receive?

RSUs convert $1.00 of expense into $1.41 of realized value. Options convert it into $1.89. Cash is one-for-one by definition. From a pure cost-efficiency standpoint, equity instruments deliver meaningfully more motivational and alignment value per dollar of accounting cost than cash.

However, the option figure requires a caveat. The high transfer ratio reflects the fact that the Black-Scholes fair value – which determines the accounting expense – is significantly lower than the stock price for high-dividend GCC companies.

This is mathematically correct but means the company is granting more options per dollar of expense, which amplifies both upside and downside. The 1.89x ratio is a median; at individual companies the ratio ranges from near zero (options went underwater and expired worthless, expense wasted) to over 5x.

6. The Tax Advantage

One of the most powerful arguments for equity compensation in the GCC is the one that gets the least attention: the tax regime.

In the United States, restricted stock vesting triggers ordinary income tax at rates up to 37% federally, plus state taxes. Stock option exercises face similar treatment. In the UK, rates reach 45% plus National Insurance. In France, social charges can push the effective rate above 50%.

In the GCC, there is no personal income tax. The executive captures 100% of the value at vesting or exercise. This means a $100,000 RSU grant that appreciates by 40% over three years delivers $140,000 of actual purchasing power to a GCC executive, versus roughly $88,000 – $91,000 after tax in the US for the same appreciation. The effective premium for equity compensation in the GCC is therefore substantially higher than the pre-tax numbers suggest.

From Instrument Selection to Plan Design

The empirical analysis answers the first question boards face: should we use equity, and which instrument? But instrument selection is only the beginning. The next question – how to design the plan – is equally important. We recommend boards think about plan design as a sequence of four decisions, each building on the previous one.

Step 1: What Proportion Equity versus Cash?
Start at 50/50. This is the blend tested in our analysis, and it beat cash in 85% of companies while preserving a meaningful cash floor. As the organization builds comfort with equity mechanics over two or three plan cycles, increase the equity proportion gradually. Global best practice for senior executives is 60% to 70% equity, but reaching that level should be a journey, not a day-one target.

Step 2: What Instrument?
RSUs for most companies. They offer the strongest combination of alignment, predictability, and simplicity. They are easier to explain to executives, easier to administer, and they never go to zero. Options may suit specific situations – early-stage companies, turnarounds, or contexts where the board wants maximum leverage – but they introduce complexity and payout volatility that most GCC boards are not yet equipped to manage. Start simple.

Step 3: Time-Vested or Performance-Conditioned?
Start at 50/50. Half the equity grant vests based on time only (the executive stays for three years and the shares vest). The other half vests only if the company achieves specified performance targets – creating a direct link between pay and results.

This split serves two purposes. The time-vested half provides baseline retention and shared ownership. The performance-conditioned half sharpens the pay-for-performance link and signals to shareholders that equity isn’t a giveaway.

Step 4: What Performance Metric?
For companies benchmarking against peers, total shareholder return is the natural choice – it is externally observable, not subject to accounting manipulation, and directly reflects what shareholders experience. For companies that want executives to have more direct line-of-sight to outcomes, earnings per share growth or return on equity may be more appropriate. Some companies use a combination.

We deliberately did not backtest performance-conditioned instruments in this study. Performance conditions can be applied to any instrument cash, RSUs, or options – and testing one without the others would have biased the comparison. Our analysis focuses on the instrument; the performance conditions should be considered next. As per IFRS rules, the combination of the instrument and the performance measure(s) impact(s) the accounting treatment.

Taken together, these steps form a practical design ladder that boards can climb over successive plan cycles:

• Cycle 1: 50/50 cash–RSU, time-vested. Get the infrastructure right – plan documentation, regulatory approvals, IFRS 2 accounting, executive communication.
• Cycle 2: Introduce performance conditions on 50% of the RSU tranche. Build target-setting capability and remuneration committee governance.
• Cycle 3: Increase the equity proportion. Introduce relative TSR or sector-specific metrics. Expand eligibility deeper into the organization.

8. Addressing the Dilution Question

The first question any major shareholder will ask, particularly a sovereign wealth fund holding 60% to 70% of a company’s equity, is: how much dilution does this create? The answer, for most companies, is: very little.

Consider a company with one billion shares outstanding and a market capitalization of $10 billion. An RSU plan covering 20 senior executives at $100,000 annual grant value would require approximately 200,000 shares per year (at $10 per share). Over a ten-year plan life, total shares issued would be roughly two million (or 0.2% dilution). Even a broader plan covering 100 participants at varying grant levels might consume 1% to 2% of outstanding shares over its lifetime, well within the 3-5% dilution budget that is standard globally.

Companies can further manage dilution by purchasing shares in the open market (treasury shares) rather than issuing new equity. This eliminates dilution entirely while still delivering shares to executives. Several GCC companies with existing equity plans already use this approach.

Key Takeaways for GCC Organizations

The data from a decade of GCC market history tells a clear story. Equity-based compensation delivers more value to executives than cash, creates stronger alignment with shareholder outcomes, and does so at the same accounting cost. The structural conditions – deeper liquidity, improving price discovery, intensifying talent competition, and a uniquely favorable tax regime – have never been more supportive.

But the data also tells a nuanced story. Options and RSUs are not interchangeable. Options failed to beat cash at 33% of companies versus 15% for RSUs. Options delivered effectively zero at 9 companies, while no company produced a zero RSU outcome.

Those zero payouts are alignment working as designed, but an instrument that frequently delivers nothing is a weaker retention and motivation tool. RSUs, by never falling to zero, keep the incentive intact even through flat periods – which is why they are the more dependable choice for a first equity plan.

For most GCC companies considering equity compensation for the first time, we recommend starting with restricted shares in a 50/50 blend with cash. This is the conservative, high-alignment entry point that our data shows beats cash in more than eight in ten companies while preserving the predictability that GCC executives and boards expect.

Options can be considered later, once the organization has developed comfort with equity mechanics and governance, and where the board specifically wants to create leveraged upside for transformational performance.

The companies that act decisively will attract better talent, build stronger cultures of ownership, and create more value for both their executives and their shareholders. The time for equity-based compensation in the GCC has arrived.