Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.
Employees in Germany with a bonus arrangement can claim variable compensation if they meet their agreed-upon or specified performance targets. The level of variable compensation upon full achievement of these targets is regularly established in the employment contract or through an employer/Works Council agreement. What should be considered?
Organization of targets
When defining the targets, it is necessary to clarify whether meeting these goals is dependent on the employee's individual performance (individual targets), the work of several employees (group targets) or the company's overall performance (company targets). A company's common practice for defining targets often is well behind the standards set by case law. Company practices also often fall behind on standards for establishing when the targets or the objectives are agreed between the parties or set by the employer.
Specification and objective measurability of the targets
In many cases, target specification is lacking, as is the objective verification of whether the target has been achieved. For example, it would be insufficient to set as a target objective to “increase revenue,” “improve the operational climate,” “integrate new employees” or “organize the department more economically and effectively.” Such vague and unmeasurable targets can ultimately harm the employer. When the precise target to be achieved is not communicated to the employee, or the level of target achievement cannot be monitored, case law tends to recognize the targets as having been achieved.
Written form of the target agreement and objective
Most employment contracts contain ”boilerplate” form clauses. Supplements to the employment contract take effect only if stated in writing, i.e., signed by both parties in the original copy. This often fails to occur because target agreements and objectives are often exchanged by email or filed – somewhere – on the intranet, e.g., as "Target Policy 2017." If a legal dispute arises regarding the level of variable compensation, the employer must be able to prove that the targets were agreed upon or given in a proper manner. If the targets are not expressed in writing, there is a risk that a court of law would award the highest possible variable remuneration, because the targets were not effectively included in the employment contract.
Target agreement and objective before the start of the target period
Parties frequently fail to agree or set targets. Generally, it is the employer that should formulate the target agreements and present them to the employee. If it is agreed in the contract that targets should be set solely by the employer, then the employer must do so. The employee is under no obligation to demand the objectives from the employer or to demand a copy of the target agreement. If there is no other agreement between the two parties, the burden to take the initiative lies with the employer.
Without a (timely) specific target agreement or objective, employees cannot know in which direction they should focus their performance in order to earn the variable remuneration. If targets are set too late, e.g., only in the second half of the agreed or given target period, or not set at all, the law is clear: The employer must pay the variable remuneration as compensation. The employees would be compensated as if they had completely achieved their target goals.
Individual targets, group targets and company targets must be formulated as specifically as possible and their achievement must be objectively verifiable (known as “SMART targets”). Target agreements and objectives should be concluded before the start of the new target period and at the latest, at the start of the new target period, if possible. The target agreement and objective should be set out in writing and signed by both parties.