Marco Gobbetti, a fashion industry veteran and current chairman and chief executive of French luxury brand Celine, is set to be Burberry's new chief executive.
Both men will move into their roles at some point in 2017. Bailey will retain his title of creative chief.
In a statement, the company said that the senior management moves were part of an ongoing business review, designed to hone in on growth opportunities.
Shares in the luxury brand are trading up 6.3 per cent at 1,235p at time of writing. Before the announcement was made, shares had been trading at roughly one per cent above Friday's closing price.
Markets can be brutal. Burberry names a new CEO... pic.twitter.com/wbMqEv5U6E— Jonathan Ferro (@FerroTV) July 11, 2016
"Since taking on the combined role of chief executive and creative chief, Christopher Bailey has done an excellent job set against a backdrop of challenging market conditions," said Burberry chairman Sir John Peace. "The review that he has led into our ways of working is the blueprint for the next phase of Burberry's evolution.
"In order to maximise our ability to successfully implement these plans, Christopher identified the need for a new chief executive for the business who could partner with him as we execute on the new strategies and I am excited to see what they will do together."
There have been some concerns that Bailey has been struggling to keep his head above water in his dual roles.
Commenting on the company's results in May, Paul Thomas, senior consultant at Retail Remedy, said: "Bailey looked to be flourishing in the demands of chief executive and chief creative officer last year, however the story looks somewhat different this year. The appointment of a commercially savvy number two is now imperative to deliver [on the company's plans]."
Read more: Burberry needs some raw executive talent
Commenting on today's announcement, Bailey said: "Marco brings incredible experience and skills in luxury and retail with him that will be invaluable to us. I am delighted to welcome Marco and I am looking forward to working closely with him alongside the rest of our highly talented teams.
"On a personal level, I know that we are going to enjoy a wonderfully collaborative partnership that makes me very excited for our future at Burberry."
Last month, it was revealed that Bailey's pay packet had been slashed by 75 per cent, going from £7.51m to a comparatively measly £1.89m. The main cause of the drop was a lack of bonus, which was cut after Burberry failed to reach its profit target for the year.