Abu Dhabi: Banks and insurance companies operating in the UAE have until 11 October to review their existing remuneration systems, identify any gaps against the new regulatory requirements and submit detailed implementation reports to the Central Bank.The deadline forms part of Central Bank Circular No. 5 of 2026, which has already entered into force and introduces a new framework designed to align rewards with sustainable performance and actual risk outcomes while discouraging excessive risk-taking in pursuit of short-term profits.Bonus deferrals and recovery mechanismsUnder the new rules, financial institutions must defer at least 40% of variable bonuses awarded to key risk takers for a minimum of three years.For senior risk takers, the deferred portion rises to 60%, with a minimum deferral period of five years.The regulations also require that 50% of variable compensation be awarded in the form of shares or other non-cash instruments.In addition, institutions are required to include contractual provisions allowing them to reduce deferred bonuses before they vest through a "malus" mechanism or recover bonuses already paid through a "clawback" mechanism.These measures may be applied in cases involving fraud, gross negligence, misconduct, governance failures, regulatory penalties or losses linked to excessive risk-taking that become apparent after bonuses have been awarded.Comprehensive rewards frameworkThe regulations apply to banks, insurance companies and reinsurance companies operating in the UAE, taking into account the size, complexity and risk profile of each institution.Each institution must establish an integrated remuneration framework approved by its board of directors and aligned with its strategy, business plan, risk management framework and governance requirements.The Central Bank said remuneration policies should support long-term sustainability and should not reward increases in revenue or business volume without considering the risks and costs associated with achieving those results.Fixed and variable payThe framework distinguishes between fixed salaries and variable compensation.Fixed pay must be based on experience and responsibilities and remain predetermined and non-discretionary.Variable compensation, meanwhile, must be linked to sustained performance and adjusted for risk. It should incorporate both financial and non-financial indicators, including governance, compliance, professional conduct and implementation of audit and regulatory recommendations.Board responsibilityThe circular places ultimate responsibility for remuneration policies on the board of directors.Boards are required to approve, oversee and monitor compensation systems, including remuneration for high-risk and oversight functions.Institutions must also establish a remuneration committee with independent non-executive representation and ensure coordination with risk, audit and compliance committees.Identifying "material risk takers"The regulations require institutions to identify employees classified as material risk takers, meaning individuals capable of significantly influencing the institution's risk profile.This includes employees with authority over large financing decisions, underwriting operations, trading activities and investments in volatile or illiquid assets.Institutions must also review employees ranked among the top 5% in terms of total remuneration to determine whether their activities warrant classification as material risk takers.Restrictions and prohibitionsThe Central Bank prohibited employees from using hedging mechanisms or obtaining guarantees designed to protect them from reductions or recoveries of bonuses.The regulator also reserved the right to impose limits on variable compensation within an institution or specific business segment if deemed necessary to safeguard financial stability.Guaranteed bonuses are restricted to exceptional circumstances involving new hires and may only be granted during the employee's first year and with board approval.The circular further prohibits institutions from using severance payments to compensate employees for previously reduced or recovered bonuses and bars the granting of termination payments to individuals found to have contributed to an institution's failure or risk of failure.Islamic financial institutionsFor Islamic financial institutions, the remuneration of members of internal Sharia supervisory committees must be fixed.Compensation cannot be linked to the profitability or volume of Islamic products, or to the number of Sharia approvals issued, in order to preserve independence and avoid conflicts of interest.Disclosure requirementsInstitutions will be required to disclose their remuneration structures, deferral arrangements and bonus recovery policies annually.Audited financial statements must include details of compensation paid to senior management, risk managers and control functions.An annual report must also be submitted to the Central Bank within three months of the end of each financial year, covering the top 5% of highest-paid employees, deferred and paid compensation, reductions, recruitment incentives and termination payments.Following the review period ending on 11 October, institutions are expected to achieve full compliance with the new regulations and review existing employment contracts where necessary.The Central Bank warned that non-compliance could result in financial or administrative penalties, restrictions on management and board powers, or exclusion of individuals from working within the UAE financial sector.
