News & Insights

What’s Changing?

From 1 January 2027, the rules around dismissing senior executives will change significantly, meaning financial stakes for employers will rise.

Currently, compensation for unfair dismissal claims is capped at £123,543 or 52 weeks’ gross pay (whichever is lower). Because many senior executives earn above this threshold, bringing an unfair dismissal claim has rarely been worth their while.

That cap is being removed. From January 2027, executives will be able to claim compensation that better reflects their actual financial losses, which could include:

• Salary, benefits, and bonuses
• Share awards, equity incentives, and long-term incentive plans
• Lost opportunities tied to future events, such as an IPO, sale or takeover

Historically, most senior exits have been handled through settlement agreements for the benefit of both parties, as everyone understood that terminations had a maximum value. However, that approach is unlikely to remain attractive. Senior executives will expect far greater packages, and employers may not be able to meet those expectations.

Key Risks for Employers

Here’s what this means in practice:

• Disputes over valuation. Calculating the value of lost bonuses, equity, or pension benefits is rarely straightforward, and these disputes can be time-consuming and expensive.
• Reputational and governance risks. High-profile senior exits, particularly in listed or regulated businesses, can attract attention from shareholders, regulators, employees, and the press.
• Longer and more costly legal proceedings. High-value claims tend to involve more evidence, longer hearings, and expert witnesses, all of which increase legal costs.
• Harder to predict costs. Without a compensation cap, it becomes more difficult to budget for senior departures or plan clean exits with certainty.
• Risk to post-termination protections. A poorly handled dismissal can undermine the enforceability of confidentiality clauses, non-compete agreements, and other exit terms.

What Should You Do Now?

There are practical steps you can take before 1 January 2027 to reduce your exposure:

• Review executive contracts, paying close attention to notice periods, payment-in-lieu-of-notice clauses, and any provisions that limit claims for lost bonuses or share awards.

• Check your bonus and incentive plan rules to understand how termination, performance management, and leaver status are handled.

• Create a senior-level dismissal process – one that is proportionate to the seniority of the role, but still follows the right steps.

• Keep clear records. Document performance concerns, reasons for dismissal, and the decision-making process as you go, not after the fact.

• Think carefully before skipping straight to a settlement agreement, particularly in performance-related cases where some process should be followed first.

• Review post-termination protections such as confidentiality clauses, garden leave provisions, and restrictive covenants, and make sure your approach to dismissal doesn’t inadvertently undermine them.

• Don’t overlook director-specific obligations, including the correct process for removing someone from office and any market notification requirements.

• Review budgets and insurance to account for the possibility of higher-value claims.

For further information, please contact one of our Employment experts.

 This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.