Whatever the nature of your business, it’s likely that at some point you will face a tricky termination situation. Handling the exit of a senior executive is a significant challenge but can be handled smoothly if you understand the risks and manage the process with care.

There are a number of reasons why an employer might wish to exit a senior executive – and it’s often not about performance. At board level, differing visions for the business; a desire to bring in fresh talent; or even something as simple as lack of chemistry between colleagues can lead to a parting of ways.

If the company’s objective is to make the transition as smooth as possible – and exit a senior executive without animosity – the process needs to be handled with sensitivity and tact.  It’s important to bear in mind that senior employees are often high-performing individuals who may not have experienced anything similar previously and emotions can run high.

How to Exit a Senior Executive: The Process

In many businesses, the exit of a senior team member necessitates their removal from three main functions: as a shareholder; as a statutory director; and as an employee.

• Removal as a director. The senior executive will need to formally resign their directorship. If there is provision for this in their existing employment contract, the company can handle the resignation on their behalf; alternatively, this will need to be agreed with the director, typically as part of a settlement agreement. Whilst this is usually seen by both parties as a formality, in a contentious departure the fact that it needs to happen can give the employee some leverage.
• Exiting as a shareholder. Senior executives in private companies often own shares – and the company or other shareholders will typically want these back when the executive departs. There may be some provision for this in a shareholders’ agreement, but the company will still need to consider the value of the shares and the logistics of transferring them, and may wish to  formalise this in a separate sale and purchase agreement. Where the executive holds options or any long-term incentive plan, this should also be considered as part of the package.
• Termination of employment. In practice this is often the most complicated element due to the seniority of the staff member involved and the range of issues to be covered off on termination. Formal options leading to dismissal – such as performance management processes or disciplinary procedures – may not be appropriate in order to exit a senior executive, and are also time-consuming and likely to undermine the employee’s standing within the organisation (thus causing bad feeling).  In order to ensure a smooth and timely transition, handling the exit in a way that allows the individual to keep their dignity should be a priority.

Clearly where there is a suspicion of serious misconduct, different considerations apply. The company may wish to investigate the matter and consider disciplinary action – potentially leading to a gross misconduct dismissal – and may also need to decide whether to report the matter to regulatory or criminal authorities.

How to Exit a Senior Executive: Tips for a Smooth Transition

Assuming that you are striving for an amicable parting of ways with the relevant staff member, there are a number of things we’d consider putting in place to ensure a stress-free transition. These include:

Reviewing contracts. Your employment contracts and service agreements should be drafted with exit in mind. They should include provisions entitling you to place the employee on garden leave; or to make a payment in lieu of allowing them to work their notice (ideally the contract should limit the payment to basic salary, rather than salary plus benefits); for employees who are also statutory directors, it should also contain a power of attorney allowing the company to effect the employee’s resignation as a director. Do check the contract prior to holding a first conversation; and remember to look at the length of the employee’s notice period and any post-termination restrictions, too.

Considering the conversation. Section 111A of the Employment Rights Act 1996 gives employers and employees the right to have what is known as a ‘protected conversation’: a conversation about what a termination might look like, but which cannot be used in an unfair dismissal claim. Such conversations can be extremely helpful if you’re thinking about how to exit a senior executive: they allow the parties to have a frank and constructive discussion about potential options.  They should, however, be handled carefully, and in particular the employer must take care not to behave improperly (for example, by stating that the employee’s departure is a foregone conclusion).  Before any conversation, employers should consider: how they want the conversation to go; the ideal timing of the senior executive’s departure; the timing of the conversation itself (ideally at a time that gives them an opportunity to go away and digest the discussion, and which does not preempt any big event such as a major pitch or planned vacation). Thought should also be given to how the employee might take the news, and how best to handle it: some people will not be fazed (to them it might be a natural part of doing business); some will be shocked and horrified; some may even welcome the news.  Handling the discussion with emotional intelligence is key to ensuring a smooth transition.

Think carefully about your financial offer. It’s generally best not to make your final offer first, as the employee may naturally want to negotiate; but you do need to make a sensible and appropriate opening offer. Pitching too low will likely cause bad feeling and sour negotiations. However, every situation is different: if you do feel that your employee is unlikely to want to negotiate, or if you don’t want to negotiate (for example, because you will be making a generous payment in lieu of a lengthy notice period), make it very clear that this is your best and final offer. Bear in mind, too, that there’s little point playing ‘hardball’ if you want to exit a senior executive smoothly and without animosity.

Consider other ‘perks’. There may be items that can be added into the settlement as ‘sweeteners’ which don’t cost the company much but are valuable to the employee. Allowing them to keep their phone (not changing a phone number can be a huge bonus), iPad, or laptop could be attractive, as could the offer of allowing them to retain access to private medical insurance for a period. External and internal communications are also crucial: assuring the exiting executive that messaging will be handled in a positive way could prove advantageous to negotiations, and it is common for settlement agreements to include agreed wording for these.

Encourage the employee to seek legal advice – and consider covering costs. The employee will require basic legal advice on the terms and effect of any settlement agreement, and it is usual for employers to make a contribution to the costs of this.  In some circumstances, it can make sense for the employer to cover the cost of more extensive legal advice: an employment lawyer will ensure that they are fully apprised of what their options are, and –provided your offer is reasonable and appropriate – will advise them to look favourably on your proposal and adopt a sensible approach to negotiations, rather than allowing their emotions to get the better of them.

Does the Challenge Change Depending on the Role?

When thinking about how to exit a senior executive, there are some additional considerations when it comes to dealing with two specific positions: CEOs and HR directors (or chief people officers).

Often, when a high-level member of staff is leaving, the CEO will be heavily involved in the conversation and process. However, if the CEO needs to be let go this duty typically falls to the Chair, and – alongside this – the organisation as a whole will be reporting to the Chair, typically at quite short notice. For HR teams, boards and the broader team, this can be a considerable shift in culture, dynamics and remit. For months or years, the organisation has been governed by that person’s vision: now that individual is leaving. In our experience, to ensure the business can continue operating efficiently – and to avoid an atmosphere of anxiety and instability – there needs to be a very clear plan of action that is both executed promptly and well communicated to the organisation and (where relevant) any external stakeholders.

Another slightly nuanced situation is the exit of chief people officers (CPOs) or HR directors. Normally, if someone senior were to be let go, the CPO would work alongside the CEO to effect this transition. When it’s time for a CPO to move on, the situation becomes trickier – and, in our experience, external help is needed to handle this effectively. Whilst HR directors are often pragmatic about their own departures (being well versed in this process), the company will need to lean more heavily than usual on its external employment lawyers to manage their departure and sometimes to manage parts of the HR director’s day-to-day role during the transition. In some cases, a further challenge presents itself in that the company believes its external advisers may be too close to the CPO – after years of working closely with that individual – to advise on their exit; in these instances, the company will need to turn to another firm with a track record in handling similar situations independently.

Bellevue Law’s expert employment lawyers have extensive experience of advising both employers and employees on the exits of senior team members.  If you need help with the issues discussed in this article, please don’t hesitate to contact us.

Disclaimer: this material is a general overview only, and is not intended to provide legal advice.