A Yearly Challenge: What Happens When Employers In Germany Fail To Set Bonus Targets?

Author:Mr Timo Kloster (Kliemt)
Profession:Ius Laboris

This article explores employers' duty to set targets for performance-related bonuses, and what can happen when they fail to do so.

Variable compensation via annual target agreements (or unilateral target setting) is enjoying unbroken popularity as a means of motivating employees. At the same time, employers often underestimate the time and effort involved in setting targets, and it is therefore not uncommon for organisations to fail to take the necessary care to do it properly over time, sometimes even to the point of not setting any targets at all.

If, however, objectives are not negotiated or a target is not set, the employees concerned may be entitled to compensation. Even setting the target achievement bonus at 'zero' is only possible in certain cases. A recently published ruling of the Paderborn Labour Court shows that this risk can also affect a business acquirer after the transfer of the business.

Missing or delayed determination of targets

Target agreements are usually divided into two parts. Framework provisions such as the amount and due date of the target bonus as well as the procedure for setting targets and determining the achievement of targets are regulated in the employment contract, or company or collective agreement, while the concrete targets themselves are set separately for a certain period of time (usually a year). The setting of objectives can be structured as an agreement on objectives (between employer and employee) or by unilateral target setting (the employer exercising its right of determination).

If the employer does not meet its obligation to negotiate targets or to set unilateral targets, or does so only belatedly, this can result in claims for damages by the employees concerned for loss of bonus payments. In calculating the amount of the bonus, case law generally assumes 100% achievement of targets.

Burden of initiative and documentation

Against this background, the bonus framework agreement should already clearly regulate who has the duty to take the initiative to agree objectives and what concrete duties of cooperation the employee has in this respect. If the employee himself is also responsible for an omitted or delayed determination of objectives, this will at least reduce the amount of any claim for damages.

In case of doubt, the employer must be able to prove that it has set or proposed appropriate or realistic objectives for the employee in a timely manner. The execution of the process of (attempted)...

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