Key facts
- UK companies face uncapped financial liabilities for unfair dismissal claims from January 1, 2027.
- The removal of the statutory cap is expected to increase financial and reputational exposure for boards during executive exits.
- Around one-third of FTSE 100 CEO departures in the last 18 months were disclosed through negotiated settlements.
- Remuneration Committees are advised to seek legal counsel and document performance more rigorously.
- Companies should model potential pay scenarios and develop formal settlement frameworks.
- Reviewing Directors' Remuneration Policies for clear leaver safeguards and flexibility is recommended.
The removal of the statutory cap on compensatory awards for unfair dismissal claims in the UK, effective January 1, 2027, is poised to significantly increase the financial and reputational exposure for companies when C-suite executives depart. Historically, the approximately £120,000 cap limited potential exit liabilities to predictable costs, typically comprising salary, pension, and benefits over the notice period, along with pro-rated bonus and long-term incentive plan (LTIP) awards for 'good leavers'.
With the cap's removal, potential liabilities could substantially increase, encompassing other actual and future losses. This change comes at a time when UK executive packages are growing, with incentive awards in the largest FTSE companies exceeding 10 times annual salary. The shift is expected to alter power dynamics in exit discussions, pushing boards into new territory.
Experts advise Remuneration Committees to proactively plan exit processes, including seeking legal counsel and meticulously documenting performance. They recommend modeling potential pay scenarios, considering contractual entitlements, and developing formal settlement frameworks. Reviewing Directors' Remuneration Policies to ensure clear 'good' and 'bad' leaver safeguards and adequate settlement authority is also crucial. Furthermore, the design of incentive plans and their metrics may need re-evaluation in light of potential scrutiny from investors and the increasing disparity in executive compensation between the UK and the US, where S&P 500 CEOs earn an average of $16 million compared to £4.1 million for FTSE 100 CEOs.