The hidden implications for executive remuneration of the new unfair dismissal rules
17th August 2026
Samantha Gee
For years, executive reward has been built around three familiar objectives: attracting great people, retaining key talent and rewarding performance. From January 2027, there is arguably a fourth objective that deserves just as much attention: managing employment law risk.
The forthcoming changes to unfair dismissal law represent one of the biggest shifts in employment protection for decades. The qualifying period for ordinary unfair dismissal claims will reduce from two years to six months, and the statutory cap on compensatory awards will be removed completely.
Much of the discussion has understandably focused on HR processes and employment law. But there is another consequence that organisations should not overlook.
Reward design itself could become a significant factor in determining both the size of potential claims and the likelihood of disputes arising in the first place.
Why executive reward is particularly affected
For many employees, the removal of the compensation cap may have relatively little practical impact. Tribunal awards are still based on proven financial loss, and many claims have historically fallen below the previous statutory limit.
The picture looks very different for senior executives.
An executive’s financial package often extends well beyond salary to include pension contributions, annual bonuses, long-term incentive plans, private medical insurance, company cars and other contractual benefits. Where dismissal is challenged, each of these elements may form part of the assessment of financial loss.
Tribunals may also consider how long it would reasonably take someone to secure comparable employment. For senior executives, recruitment processes are often lengthy, and suitable opportunities are naturally more limited. In some circumstances, particularly later in a career, an individual may argue that equivalent employment is unlikely to be secured before retirement.
The result is that the potential financial exposure becomes both larger and significantly more difficult to predict.
For organisations, understanding the true value of executive reward packages is no longer simply a remuneration exercise. It is increasingly becoming part of risk management, and an issue that Remuneration Committees may need to consider when overseeing executive pay arrangements and exits.
Reward design now influences litigation risk
One of the strongest protections organisations can have is clarity. Disputes can be triggered following dismissal if the employer and employee have a different interpretation of the package that any payment has been based on.
Employment contracts, bonus plans and LTIP rules should work together and tell a consistent story. Questions worth asking include:
- Are notice, garden leave and PILON provisions clear and up to date?
- Do bonus plans clearly explain how awards are determined?
- Are performance conditions objective and well documented?
- Is any employer discretion clearly defined, including who exercises it and on what basis?
- Do good and bad leaver provisions explain the principles that will normally be applied?
Consider an executive who leaves in February, shortly before annual bonuses are determined, while an LTIP is due to vest a few months later. If the relevant plan rules clearly explain what happens on cessation of employment, discussions are likely to be more straightforward.
If they do not, uncertainty can quickly become expensive.
Discretion is not always as discretionary as organisations assume
Clients often say to me that, because their bonus is labelled as ‘discretionary’, they have control over the decision around whether to pay it or not. But the legal position is often more nuanced.
If bonus payments have followed a consistent formula over many years, or have been paid in a predictable way, employees may argue that certain elements have become contractual through custom and practice.
Similarly, some ‘discretionary’ schemes combine formulaic calculations with limited areas of discretion, for example basing part of the payout on revenue or profit. This blurs the line between which elements genuinely remain discretionary and which are actually contractual.
The answer is not necessarily to remove discretion. It is to define it properly. Organisations should ensure they can clearly explain:
- who exercises discretion;
- the factors that will be considered;
- how decisions are reached; and
- that similar cases have been treated consistently.
Documenting these decisions at the time they are made can prove invaluable if they are ever challenged later.
Governance matters more than ever
The removal of the compensation cap changes how organisations should approach senior executive exits. Dismissal decisions can no longer be viewed solely through an HR or legal lens. Reward, HR and legal teams should work together from an early stage to understand the potential financial exposure, assess contractual obligations and identify areas of uncertainty before decisions are taken.
For senior executives, the Remuneration Committee also has an important role in ensuring that decisions on bonus, LTIP treatment, leaver status and settlement terms are consistent with the organisation’s remuneration policy and wider governance principles.
This can create a difficult balancing act for Remuneration Committees. With the removal of the compensation cap, potential tribunal awards for high earners become less predictable, and this will increase the negotiating leverage of departing executives.
At the same time, boards remain under pressure to uphold pay-for-performance principles and avoid rewarding failure, particularly in listed companies operating under the UK Corporate Governance Code.
Balancing these competing considerations will require stronger governance and clearer decision-making than ever before.
A good time for a reward health check
January 2027 is not simply an employment law deadline. It’s an opportunity for organisations to review whether their executive reward arrangements remain fit for purpose. A practical review might include:
- employment contracts and PILON provisions;
- annual bonus and LTIP documentation;
- good and bad leaver rules;
- alignment between contracts and incentive plans;
- documentation of discretionary decision-making; and
- Remuneration Committee and wider governance arrangements for executive exits.
Well-designed reward arrangements have always supported attraction, retention and performance. Increasingly, they also help reduce uncertainty, minimise disputes and protect organisations from avoidable legal risk.
Reward has become more than a people issue. It is now a governance issue too.
How we can help
At Verditer, we are specialists in executive remuneration and employee reward. Contact us if you’re looking for external expertise to support with executive pay benchmarking, bonus design, or Remuneration Committee advice.
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