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I have a software engineer on my staff that has been very useful. He basically trains himself on new technologies on a weekly basis, and can memorize and apply the latest O'Reilly textbook over a weekend, and master the content within a month. He's been on board with our company (5000+ as of January) for a little over 4 years, and has done well with us (i.e. stocks, bonuses), puts in at least 15 hours overtime per week, etc.; and has received a promotion from intermediate engineer to senior engineer in his first year (mostly due to his hiring manager messing up and hiring him "too low").

He's had a lot of success these past 3 years, and is pushing (excessively) for a promotion to "engineering director", which is the next level up (2 levels beneath me). In his words, he's got the knowledge, drive, and mindset to make it to this level, and plans to "be a director before he's 33". While I wish that for him, the company doesn't promote people unless they've worked in a role for a least 3 years and can prove they're ready for the next level.

He's recently completed his annual review, and while he got a raise and encouragement that he's close to reaching the next level/promotion, he wasn't happy. He insisted on knowing every detail of how he's not yet ready for the next promotion, and insisted on having checkins each month to know if/when he's ready so he can be promoted early rather than having to wait another year "needlessly" to be promoted during annual reviews. I tried to encourage him to be patient, but he's insistent that "time spent in the current chair shouldn't be a factor", while management insists that it's important to "de-risk" a candidate.

We've had a serious problem with him this month: since a formal meeting where he's noted he's not happy being magically promoted on a whim, he's made a point of cutting OT to nothing, focusing on his personal blog/LinkedIn to show off his knowledge, focusing on generic skills/abilities (at the expense of company-specific skills/technologies) and encouraging other engineers to do the same. This has caused a lot of disruptions in the company, and I'm receiving recommendations to encourage this millennial to quit. How do I straighten out this formerly useful employee? He has accrued 2 years of severance in lieu of OT (due to unique circumstances), and senior management (on principal) doesn't want to pay $700,000 to "fire" someone.

he's made a point of cutting OT to nothing, focusing on his personal blog/LinkedIn to show off his knowledge, focusing on generic skills/abilities (at the expense of company-specific skills/technologies) and encouraging other engineers to do the same.

So let me sum this up: you told your employee that the time he invests and the skills he brings do not advance him. The only thing to advance him in your company is more time of his rear end spent in a companies chair. Because that is what counts.

And you are surprised, that he promptly decided to focus on plain time spent in his chair, instead of his skills and time he invests?

It's exactly what you told him: "Do not expect to be promoted just for the hard work you do or the knowledge you have". Why would he do those things, that I guess are on his own dime and time? You have your rules. They have theirs.

If you expect overtime and learning in their free time, you should have written that into their working contract the last times you promoted them.

Doing (only) what is in your contract hardly constitutes a legal reason to fire someone (assuming you are in a country with labor laws where you need a reason).

Encouraging others to do what is in their contracts might not be what your company likes, but I have a feeling that it will also not be against the duties of an employee in your country.

The question you have to ask is: if they came from the outside, would you consider them for a director position? If so, your company policies basically force them to go look for opportunities outside, because you won't "hire" them based on where they come from. Maybe it's time for that to change. Maybe not. But you probably will lose this person to another company sooner or later. If you would not consider them for a director position if they applied from the outside, then you need to tell them why so they can improve. And it's probably something else than "3 years in the chair".

Right now you are between a rock and a hard place. Neither of you can give in and expect the other side to not remember that in future negotiations.

Maybe the easiest way is to have a talk with them and tell them that you would give them a glowing recommendation for a director job at another company, if they start working their "normal" OT schedule again. That should solve your 700K problem as far as I understood you. If they cannot find a director job outside your company with their current skillset, maybe they'll be more humble and find a compromise to stay at yours.