Germany: Compensation Claims of Employees if Targets for Variable Remuneration are Set Too Late

Targets relevant for the payment of a variable remuneration that are not set towards the employee until more than three quarters of the financial year have passed can no longer fulfil their incentive function in a meaningful way. In this case, the employee is generally entitled to a payment in the amount of the bonus for 100% target achievement.

 

Background

Mutual target agreements or unilateral target settings for performance-related variable remuneration are intended to incentivize and motivate employees. In accordance with the case law of the Federal Labour Court, an employee is entitled to compensation in the amount of the bonus that would have been due at 100% target achievement if the employer has culpably omitted or prevented the mutual target agreement. A deduction may be made for a contributory negligence on the employee’s part, as he can participate in the target agreement.

However, the Federal Labour Court has thus far explicitly left open the question of whether these principles can be applied to the unilateral setting of targets as well. In a recent ruling, the Cologne Higher Labour Court further developed the case law on compensation claims in the constellation of unilateral target setting.

 

Key Issues

In the present case, the parties are in dispute regarding payment claims due to unilateral targets that were set too late. The employer had regulated the variable remuneration component through a works agreement, which provided that the targets for the employee’s annual variable remuneration be set by 1 March of the relevant year. In the year 2019, the company targets were not set by the employer until October, and the individual targets were not set at all. The plaintiff terminated his employment effective 30 November 2019 and did not receive the full bonus. In court, he claimed the delta between the payment received and the bonus amount at 100% target achievement.

The Cologne Higher Labour Court ruled that the plaintiff is indeed entitled to damages in the amount sought due to the failure of the employer to set targets for the 2019 financial year on time. A mutual target agreement can only fulfil its incentive function in accordance with the idea of increasing performance and motivation if the employee is aware of the objectives to be pursued when carrying out his work. This principle is transferrable to constellations where the targets are not subject to mutual agreement but are set unilaterally by the employer. If the targets are set at a time when they can no longer fulfil their incentivizing function, the employee must be treated as if the targets had not been set at all. In this case, the employee is generally entitled to the bonus payment that would have been due at 100% target achievement. Unlike in the scenario of a mutual target agreement, however, no contributory negligence on the part of the employee comes into consideration, as the targets are set unilaterally by the employer.

Practical Points

• The judgement emphasizes the importance of setting timely and precise targets if a variable remuneration subject to targets has been agreed upon. Failure to set targets can result in significant claims for damages from employees.
• It should be noted that the targets in the case in question were set in the last quarter of the relevant financial year. The Cologne Higher Labour Court has indicated that a slight delay in setting targets does not necessarily result in the claims for damages described above. However, as there is no fixed limit, it is strongly recommended that the deadlines for setting targets in employment contracts and works agreements be adhered to.
• It is, therefore, advisable for companies and managers to review their processes for setting and communicating targets even more closely and adapt them where necessary in order to minimise legal risks.