Legal lowdown: The CEO five-year sell-by date

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Ex-Barclays chairman David Walker has put a sell-by date on CEOs, but how can you ensure this is managed in a legally-sound way?

Ex-chairman of Barclays David Walker has put an actual ‘sell-by’ date on CEOs, saying that once they have been at the helm for more than five years they should be dismissed. His reason was that they can become too dominant and influential and other board members find it difficult to challenge them.

Whether you agree with this or not, it does throw into relief the issue on how to deal with senior-level departures. A CEO has the same rights as any other employee and after two years’ employment they have a right not to be unfairly dismissed. Relevant fair reasons for dismissal are capability or conduct but (except for gross misconduct) both usually require a series of warnings before a dismissal notice in order to be a fair dismissal.

So what should you do if you're concerned by Walker’s comments and the prospect of dismissing a long-standing CEO?

Realistically a company is not going to put a CEO through a lengthy performance management process. The law recognises that if the organisation is not performing then the buck stops with the person at the top. But if the business is doing well and the CEO is leaving simply because they have been there for five years then this is likely to be grounds for unfair dismissal.

Given that the current cap on compensation in an employment tribunal is £78,335 or a year’s salary (whichever is the lowest) a company may feel it is a small price to pay to get fresh blood in at the top. The real value for a CEO in these circumstances, however, is not in a claim for unfair dismissal but in their notice provisions.

To comply with the UK Corporate Governance Code listed companies should not give directors more than one year’s notice. Private companies should follow suit. The service agreement must dictate if this is basic salary only or basic salary plus bonus and benefits. Including these can significantly increase the amount payable to a departing CEO and these things need to be considered at the outset of their appointment.

The company will not want a departing CEO hanging around and so service agreements should include a payment in lieu of notice (PILON) clause and the ability to place them on garden leave if needs be. Failure to include these can lead to restrictive covenants potentially being invalidated if a company does either without a contractual right. Well-drafted service agreements will say that even if the business makes a PILON this will be done monthly, and the CEO is under an obligation to look for another role so will only be paid in lieu up to and including the point they secure another position.

While a blameless CEO should be treated fairly and with dignity, the organisation does not want to write a cheque for £500,000 only to discover that the CEO has stepped into a new and better-paid role. Bonus and incentive schemes are usually provided partly in share options. If CEOs are to be ousted in a no-blame situation then consideration will also have to be given to whether it is fair that they lose their shares. It will impact on recruiting a replacement if word gets out that this is how a well-performing CEO is treated, leaving the company exposed to a less effective replacement.

Beverley Sunderland is managing director of Crossland Employment Solicitors

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