Wison was a PITA the first day he stayed on campus. He caused a lot of shit for Fred to clean up.
I personally liked Wilson and thought he was a good football guy, but it's clear he had a ceiling as HC. Fred saw a leader in Allen and a way to get rid of a problem. Wilson had enough strikes against him that it wasn't hard to find a way to get him out, whether it was the lawsuits or his drinking escapades.
That happens all the time in college athletics and, as has been mentioned, if Wilson was winning 8 games a year, all would have been overlooked.
Wilson saw the writing on the wall and knew he at least was violating whatever morals clause he had in his contract. He also knew he could get another job as OC. So he took the settlement and walked, knowing Fred had him by the balls if it came to a lawsuit.