Malus and Clawback in Gulf Executive Pay: The Untested Clause

Malus and clawback are the two clauses that let a company take back pay it has promised or paid: malus reduces an award before it vests, clawback recovers it afterwards. In JOH Partners' observation they now appear in the deferred and long-term award documents of larger Gulf groups, usually carried in from an international template. Nobody has put much weight on them yet. This piece looks at what the UK Corporate Governance Code and the United States rule on recovery require, why the Gulf position is less clear than the wording suggests, and what a remuneration committee should settle before a first case turns an untested clause into a live dispute. It is written for chairs and remuneration committee members, and it is not legal advice; a board should take local counsel on anything it intends to enforce.

Malus and clawback: two clauses, one purpose

The terms are often used as if they meant the same thing, so it helps to separate them. Malus applies before pay reaches the executive. A deferred bonus that vests over three years, or a share award that is still unvested, can be reduced or cancelled if something is found to have gone wrong. Clawback applies after pay has been received. It lets the company ask for money back, or for vested shares to be returned or their value repaid.

Both clauses serve the same purpose. They make sure that an executive who is rewarded for results is not also rewarded for results that turn out to have been misstated, or achieved by conduct the board would not have accepted. Both depend on the contract spelling out when they apply, and both depend on someone being willing to apply them.

What the UK Code and the US rule ask for

The UK Corporate Governance Code 2024 is specific. Provision 37 asks that directors' contracts, or the other documents that cover their pay, should include malus and clawback provisions that let the company recover or withhold sums or share awards, and say when it would be appropriate to do so. Provision 38 goes further. The annual remuneration report should describe the circumstances in which the provisions could be used, the period they cover and why that period suits the company, and whether they were used in the last reporting period. If they were, it asks for a clear explanation. The Financial Reporting Council publishes the text.

The United States takes a different route. The Securities and Exchange Commission adopted Rule 10D-1 on 26 October 2022, as its press release records. It requires listed companies to recover incentive pay that was erroneously awarded to current or former executive officers when the company has to restate its accounts, looking back over the three completed financial years before the restatement was required. The trigger is the restatement itself, not a finding against any individual.

The two approaches show the range. The UK asks the board to write the clause, publish the circumstances and report on use. The United States tells the board to recover, formulaically, once the accounts are restated. Neither is a model a Gulf board has to follow. Both are useful reference points for a committee deciding how far its own clause should go.

Most pay documents say a bonus can be taken back. Very few say who decides, on what evidence, and what happens next.

A composite: the bonus paid before the restatement

The details are changed and combined from several situations. This is not any one client's story.

A listed Gulf group pays its chief financial officer and two other executives a deferred bonus, one third in cash and the rest in shares vesting over three years. The award document includes a malus and clawback clause in standard London wording. In the second year, the group's internal audit function finds that a block of contract revenue was booked a year early. The accounts are restated. Profit for the earlier year falls, and the bonus targets for that year, which were close to being missed, would not have been met on the corrected numbers.

The committee meets. The clause allows the company to reduce unvested shares and to seek repayment of cash paid in the affected year. It does not say who decides whether the error was the executive's responsibility, what standard of proof applies, or whether the executive is heard. The chief financial officer says the error was made by a regional finance team and approved by the external auditor. The chief executive says that the group has more pressing things to do than to go to war with its finance chief.

In the end the unvested shares for the year are reduced, the cash is not pursued, and the committee records that it will write a process before the next case. The outcome is reasonable. The lesson is that the group learned what its clause meant in the middle of a dispute, and with the audit committee, the external auditor and the chief executive each holding a different view of who should decide.

Where the Gulf stands: the clause arrives before the case

JOH's earlier comparison of senior executive pay across the Gulf, London and Singapore described deferral and clawback as rare in Gulf packages and standard in London. That was a fair summary of the market and it is changing at the top of it. As Gulf groups introduce long-term awards, the documents increasingly arrive with the recovery language of the London template. JOH's perspective on the long-term incentive plan for family groups without an exit explains why those awards are being introduced; the clause comes with them. JOH's research on the Gulf executive reward report is the reference for how pay is built across the region.

What does not arrive with the clause is the experience of using it. In JOH's observation across compensation mandates, the larger Gulf boards have the wording and few have a process. The wording is usually copied. The process has to be designed, and it raises questions that the template does not answer.

Three reasons a recovery clause may not do what it says

The first is enforceability. Employment in the Gulf is governed by the law of the place where the executive works, and that law often limits what an employer can take back. In the UAE, Article 25 of Federal Decree-Law No. 33 of 2021 says that no deduction may be made from a worker's wage except in listed cases. As reported by Gulf News, the listed cases include recovering overpayments, capped at 20% of the wage, and the total of all deductions may not exceed 50%. Whether a clawback of a bonus counts as a deduction from wages, or as a separate claim under the contract, is a question for local counsel. JOH has not seen the point tested in the mandates it works on, and a committee should not assume the answer.

The second is evidence. A clause that allows recovery for "material misstatement or misconduct" is only as useful as the committee's ability to show that either happened. That usually means an internal audit finding, an external review or a regulator's action. JOH's perspective on the chief audit executive explains why the person who holds that evidence needs a line to the audit committee. JOH's engagement building three group functional leaders into a Tadawul-listed Saudi industrial holding, which included a group head of internal audit, is an example of how that function is staffed at group level.

The third is leaver terms. When an executive leaves, the rules of the award decide what happens to anything unvested, and good-leaver and bad-leaver wording can change what a grant is worth by a large margin. A recovery clause sits alongside those terms, and the two need to be read together. A plain-English explainer on how options, restricted units and performance shares are valued once leaver terms apply is a useful check for any committee member who has not worked with the instruments directly.

The real test is whether the committee will use it

The clause can be well drafted and enforceable and still go unused, because the decision to use it is hard. The evidence may be disputed. The executive may have left, or may have been in post for fifteen years. In a family group the executive may be a relative, or the owner's close friend. The reputational cost to the company is real whichever way the decision goes, and the person who has to take it is often a non-executive director with a good relationship with the individual.

This is where the remuneration committee differs from the other committees of the board. The audit committee has an auditor, and the nomination committee has a process. The remuneration committee has a set of principles and a great deal of discretion, and the discretion is what makes recovery uncomfortable. JOH's research on remuneration committees in the Gulf looks at who sits on them and what they actually decide. A committee that has agreed in advance how it will act finds the first case much easier than one that is working it out in the moment.

A recovery clause only protects the company if the committee is willing to use it. The time to find out whether it will is before the first case, not during it.

What a committee should settle before the first case

A committee does not need to rewrite its award documents to prepare. It needs to make four decisions and write them down.

First, define the triggers in plain language: a restatement of results, misconduct, a breach of risk limits, conduct that damages the company's reputation. Decide which of these are automatic and which are for the committee's judgement. Second, say who investigates and who decides, and make sure the person who decides is not the person whose own performance is affected. Third, set the period. The UK Code asks companies to explain why their chosen period is the right one, and a Gulf committee can use the same discipline. Fourth, decide how the board will tell the executive, and where applicable the shareholders, what it has done and why.

Then check the documents against the law. Ask local counsel whether the clause can be enforced against an executive employed in each jurisdiction where the group has senior staff, including the specific limits on deductions and on recovery after employment ends. A board that discovers the answer in a dispute has a harder conversation than one that discovered it in a committee meeting.

Boards that want a standing view of how pay, incentives and the executive layer are working together, and not a once-a-year review, increasingly use platforms such as Board Pulse to keep that picture current between committee cycles. The group holdings sector page sets out where JOH sees multi-entity pay structures most often, and the question of who decides becomes harder when the executive works across several of them.

Sandrine Bardot's conversation on personalising rewards for the modern Middle East workforce is a useful listen for a committee thinking about how pay design is changing. JOH's perspective on executive severance in the Gulf covers the other end of the same conversation, what a departure costs, and where recovery and payment terms meet. And when a family group hires its first outside chief executive, as in JOH's engagement for a Saudi industrial group, the incentive terms are often written for the first time.

Who carries the weight

The standard in the UK is that the committee writes the clause, publishes the circumstances and reports whether it was used. In the United States, the company recovers when the accounts change. In the Gulf, the clause is arriving ahead of the practice, and the weight falls on the remuneration committee to decide, in advance, what it would do. That is a task a committee can complete in an afternoon, and it is far easier to do when nothing has gone wrong.

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Key takeaways

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JOH Partners is an executive search and senior executive recruitment firm advising chairs, remuneration committees and family groups on executive appointments and pay across the GCC, the UK and Singapore. A committee reviewing its recovery terms can start with the full Gulf executive reward report, which is available to download, and then engage a partner for a confidential conversation about how your group's incentive terms compare with what executives are being offered elsewhere. Boards that want continuing visibility of the executive layer can also request a Board Pulse demo.