That brought to an end an association that, apart from McFarland's spell as player-manager of Bradford City in 1981-82, was unbroken for 28 years.
McFarland, 47, joined Derby as a player when Brian Clough signed him from Tranmere Rovers for £25,000 in 1967. He blossomed into one of England's leading post-war centre-halves.
He was promoted from assistant manager in October 1993, when Arthur Cox resigned on health grounds. This season, he was forced to sell some of his best players, such as Paul Kitson to Newcastle and Tommy Johnson to Aston Villa, to ease financial problems.
He raised £6.5m in five months and Pickering admitted on Saturday: "This has been a very difficult decision. Roy has done a very good rebuilding job at Derby while at the same time helping to get the finances right.
"But the board has given him his chance over the past two seasons. Gates are down and the fans expect Derby County to at least make the play-offs."
Pickering insisted that he had no one in mind to take over from McFarland but said: "The person we are looking for will need to be an entertainer."
The final details of McFarland's settlement have not been concluded but Pickering said: "We hope to settle Roy's final financial position amicably."