It's possible to be really clear without going ad hominem. Reality is usually already harsh enough. I'd prefer the first with a clear indication that the company will probably not be able to continue keeping to employee since they need to save a lot of costs. So the person can get a new job in time. IMHO it should be the minimum standard for anyone working in management to maintain a respectful and clear communication.

The context here is the mortgage market is declining as rates rise. These are people who mostly were performing but there's no longer a market fit.