Norma Macleod took early retirement from Western Isles IC in February 1995 after a row over a social work overspend of more than £600,000.
Mrs Macleod later insisted she had been forced out. She claimed during the tribunal at Inverness that chief executive Brian Stewart had told her to 'disappear' or read about herself in LGC.
Mr Stewart maintained that Mrs Macleod had accepted she should take early retirement.
Mr Mackay said the council accepted the tribunal's decision, but he hoped the level of compensation would reflect the fact that Mrs Macleod had already received a 'substantial retirement package including discretionary payments'.
A claim for constructive dismissal by Mrs Macleod's former assistant director, Bernard Chisholm, who resigned in April 1995, was dismissed by the tribunal.