Nanocomposite thin films incorporating silver nanoparticles are emerging as photosensitive templates for optical encoding applications. However, a deep understanding of the fundamental physicochemical mechanisms occurring during laser-matter interactions is still lacking. In this work, the photosensitivity of AlN:Ag plasmonic nanocomposites is thoroughly examined and a series of UV laser annealing parameters, such as wavelength, fluence and the number of pulses are investigated. We report and study effects such as the selective crystallization of the AlN matrix, the enlargement of the Ag nanoparticle inclusions by diffusion of laser-heated Ag and the outdiffusion of Ag to the film’s surface. Detailed optical calculations contribute to the identification and understanding of the aforementioned physical mechanisms and of their dependency on the laser processing parameters. We are then able to predetermine the plasmonic response of processed AlN:Ag nanocomposites and demonstrate its potential by means of optically encoding an overt or covert cryptographic pattern.