Authors: Robyn Davies, Mike Shutt, Sarah Alford, Sam Evans
Board takeaway: senior manager exits will need stronger governance, clear performance metrics, evidence-based documentation and robust contractual documentation post January 2027.
From 1 January 2027, the risk profile around senior management exits is set to change significantly.
For many years, boards have often approached executive departures as commercial negotiation: manage the relationship, agree on the exit terms, protect reputation and confidentiality, and swiftly move on.
That will no longer be enough.
The Employment Rights Act 2025 changes that are coming into force on 1 January 2027 mean ordinary unfair dismissal protection will apply after six months’ service (rather than the current two years), and the current cap on unfair dismissal compensation will be removed, bringing uncapped compensation. As there will be no transition period for unfair dismissal reform, this means that all employees recruited on or before 1 July 2026 will gain unfair dismissal protection on 1 January 2027.
Under the current framework, the compensatory award in statutory unfair dismissal claims is capped at the lower of 12 months’ gross salary or the statutory maximum (currently £123,543). Senior executives usually earn well in excess of the capped amount. Therefore, under the previous framework, bringing an unfair dismissal claim generally had very little financial value.
For most employees, this is unlikely to dramatically change the value of a claim. But for board-level and senior manager departures, the implications are substantial.
Senior manager remuneration is rarely just about salary.
It often includes annual bonus, deferred bonus, LTIPs, share options, growth shares, carried interest, phantom equity, retention awards, pensions and other incentive arrangements. Once the unfair dismissal cap is removed, the financial exposure in a poorly handled exit could extend far beyond basic pay. That changes the conversation in the boardroom.
An executive who previously had limited financial incentive to bring an ordinary unfair dismissal claim could now have a much more valuable route. Where equity awards or bonus expectations are in play, the gap between a commercial settlement and a potential tribunal award could widen considerably. We are likely to see senior executives at the end of their career argue career loss cases which could run into years of lost salary and benefits, including share options and pension entitlements.
Boards should not panic. But they should prepare.
The organisations that manage this well will be those that treat senior departures as a governance issue, not just an HR and employment law process.
So, what should boards be doing now?
1. Review the existing contractual arrangements and insurance cover
Many senior contracts were drafted in a world where unfair dismissal compensation was capped. That world is changing.
Boards should review notice provisions, garden leave clauses, PILON wording, suspension provisions, bonus discretion, leaver provisions, share scheme rules, clawback and malus clauses, confidentiality obligations, articles of association and post-termination restrictions.
If employers have insurance policies in place it would be prudent to review insurance policies to ensure levels of cover adequately reflect the increased risk of unfair dismissal tribunal proceedings and larger awards.
Commentators have also suggested that an innovative approach could be including a severance clause within the employment contract / service agreement at the start of the relationship, so parties are clear around termination payment expectations – i.e. the termination amount being agreed at the start of the relationship rather than at the end. It remains to be seen whether these will be used in practice as valid settlements require independent advice, which may not be an ideal scenario with lawyers getting involved at the start of the relationship! Nevertheless, we have seen occasions where these have worked well in practice previously and certainly assist in managing expectations.
2. Review the existing structure of the senior leadership team and wider workforce
While we would advise against knee jerk reactions, as the cumulative cost of employing staff rises and flexibility reduces, many organisations should now consider reviewing head count, leadership structures and role design while they still have time to do so. This transitional period before the changes take effect offers a valuable but limited opportunity to rationalise workforce models and carry out any restructuring exercises.
Prior to 1 January 2027, boards should review their C suite and consider whether to address any genuine performance or role-fit issues in good time, ensuring that any decisions are properly evidenced, fairly managed and commercially justified.
3. Tighten board-level performance management
Senior people are often not performance managed with the same discipline as other employees.
Previously, concerns may have been discussed informally following a nod from the Chair. Feedback may have been softened. Board minutes might have been vague. Difficult conversations might have been avoided until the relationship has broken down.
Going forward, if a senior departure is challenged, the organisation will need evidence: clear objectives, documented concerns, fair process, proper warnings where appropriate, and a rational basis for the decision.
A loss of confidence could be commercially understandable. But on its own, it may not be enough. Boards should also consider introducing probationary periods for senior executives with structured review points (i.e. every 4 weeks).
4. Revisit settlement strategy
Settlement agreements will remain a vital tool. But the pricing of senior exits are likely to change.
Boards should expect more detailed negotiations around bonus, equity, vesting, good leaver status, references, announcements, regulatory disclosures and tax treatment.
The old approach of calculating a few months’ pay and adding a contribution to legal fees is unlikely to be sufficient where significant incentive value is at stake.
Boards should scenario-plan before negotiations begin.
· What is the best-case outcome?
· What is the realistic litigation risk?
· What is the potential value of bonus and equity claims?
· What reputational issues arise if the matter becomes contested?
In the event a settlement is not reached, and claims are presented to an employment tribunal, claims are taking anywhere between 1-4 years to reach a final hearing. Therefore, potential compensation liabilities could be sitting on balance sheets for a significant period.
5. Train remuneration committees and nomination committees
Remuneration committees need to understand how bonus discretion, performance conditions, vesting decisions and leaver classifications can be scrutinised.
Nomination committees need to understand the employment law consequences of succession decisions, failed appointments and early executive departures.
The board should be joined up – HR, legal, finance, company secretarial, operational performance and the remuneration committee should not be operating in separate silos.
6. Be careful with probation and early exits
The move to a six-month qualifying period means early decisions matter more.
For senior hires, boards should build in structured check-ins during the first six months, with documented feedback and clear decision points.
If the appointment is not working, the organisation should not drift.
Boards should also avoid last-minute dismissals on the cusp of the six-month qualifying period because the law adds a week to an employee’s qualifying service if they have more than one month of service. Therefore, in the case of a senior executive who started on 1 July 2026 and received notice of termination on 29 December 2026, the law will add an extra week of notice and mean that the individual has more than 6 months’ service.
7. Protect privilege and process
Board-level departures often involve sensitive material: Investor views, regulatory issues, financial performance, conduct concerns, customer information, strategic disagreement or breakdowns in trust.
Boards should take advice early and structure communications carefully. Any settlement agreement with senior executives should incorporate robust confidentiality restrictions.
Loose emails, informal WhatsApp messages and poorly worded board papers can all become problematic later.
The aim is not to restrict every management decision. It is to ensure that serious decisions are taken carefully, documented properly and supported by a fair process.
8. Update the risk register
For organisations with highly paid executives, significant bonus schemes or equity participation, the removal of the compensation cap could materially increase employment litigation exposure – an item for a Board Risk Register.
That does not mean every senior manager exit will become contentious. But it does mean that boards should understand the potential financial, governance and reputational consequences.
The practical takeaway January 2027 is not just an HR compliance date. It is a board governance issue. Senior departures will need more planning, robust documentation, and a more proactive and sophisticated approach to settlement. The boards that prepare now will be in a stronger position when difficult conversations arise. The boards that wait until the first contested executive exit may find that the cost of delay is much higher than expected.
This article is intended as general commentary only and should not be treated as legal advice. Boards should take specific advice on executive exits, incentive arrangements and settlement strategy.