Germany: New Case Law of the German Federal Labour Court on Compensation for Late Bonus Target Setting

Employers must set targets for variable remuneration in good time. Failing to do so can lead to compensation claims of employees based on a hypothetical full target achievement.

Target agreements and settings for variable remuneration are aimed to motivate employees. According to the case law, if the employer fails to set targets at all or sets targets too late, this can result in compensation claims of the affected employees (cf. our article in the Employment Law Tracker published in May 2024). When calculating such compensation, it is generally assumed that an employee would have achieved his targets unless special circumstances preclude this assumption (cf. our article in the Employment Law Tracker published in September 2024).

 

Background

In the recent case before the Federal Labour Court, an employee claimed compensation for variable remuneration under the applicable works agreement, which stipulated target setting must take place by 1 March of each calendar year, whereas 70% of the variable remuneration depended on achievement of company targets and 30% in individual targets.

However, for the year 2019, the employer only provided the relevant company targets, including their weighting and the target corridor, in October 2019. No individual targets were set for the employee at all. In November 2019, the employee terminated his employment and subsequently claimed further payment of EUR 16,000.00 gross as variable remuneration in light of the flaws in the target setting process.

 

Key Issues 

The Federal Labour Court ruled in favour of the employee and found that the employer culpably breached his obligation to properly set targets for the year 2019 in accordance with the provisions of the applicable works agreement by not setting individual targets at all and by only communicating the company targets after around 3/4 of the target period had already expired. At this point in time, it was no longer possible to set targets that would fulfil their motivational and incentive function.

When determining the amount of compensation the employee was entitled to, the court assumed that the employee would have achieved the company targets at 100% and the individual targets at the average value of 142% if he had been given the appropriate targets. The employer did not present any special circumstances that would exclude this assumption. Furthermore, there was no contributory negligence to be considered on the part of the employee, which could have reduced the claim, as the target setting was the sole responsibility of the employer under the applicable works agreement.

Practical Points

• In several rulings over the past months, the Federal Labour Court has emphasised the importance of a proper process for setting or agreeing targets for variable remuneration. Employers should review their setup in this regard to avoid employees from receiving variable remuneration at a hypothetical 100% target achievement by way of a compensation claim, even if the actual performance would have likely not justified this.
• If the employer is responsible for setting targets under the applicable variable remuneration scheme, this must happen in due time before or shortly after the start of the bonus period. In case targets shall be agreed with the employee, employers should document both the steps they took in this regard and the reaction of the employee.