Missed Targets, Costly Consequences: German Federal Labour Court Clarifies Employer Liability

Authors: Verena Braeckeler-Kogel, MAES (Basel) and Meike Christine Rehner

The Federal Labour Court has ruled that employers must pay compensation if they fail to set the targets that determine variable remuneration in good time at the start of the target period. In the absence of any special circumstances, it can generally be assumed that the targets would have been fully achieved when calculating the compensation.

Variable remuneration schemes are designed to motivate employees to align their work performance with the company’s goals. This presupposes that the relevant objectives are set on time. The Federal Labour Court has made it clear that companies face significant liability risks if targets are not set and communicated in good time.

If a target is not communicated in good time at the start of the relevant target period and is therefore no longer able to fulfil its motivational and incentive function, the employee may be entitled to claim compensation. According to the court ruling, it generally has to be assumed that the objectives would have been fully achieved when assessing the employee’s loss. The risk of a target not being set or being set late therefore generally remains with the employer.

Background

The claimant had been employed as a finance manager for many years. Her employment contract provided for an annual bonus amounting to 15% of her gross annual salary, the specific amount of which depended on the achievement of individual targets and a company-related financial factor. Under a company agreement, the relevant business objectives should be set annually on the basis of the financial plan and communicated to staff eligible for bonuses.

However, the employer did not communicate the relevant business objectives for the 2022 financial year. Nevertheless, in 2023 the company paid a reduced bonus based on a financial modifier of 49%. The employee claimed that she had failed to receive a higher bonus because no target had been set, and demanded the difference as compensation. After the Labour Court and the Regional Labour Court had dismissed the claim, the Federal Labour Court overturned the decision based on the considerations laid out above.

Key Issues

The decision demonstrates that legal risks associated with variable compensation schemes can arise not only from their design, but also from their implementation. Even bonus schemes that have been effectively agreed upon can give rise to significant liability risks if targets are not communicated in good time. If the objectives are not communicated in a timely manner, the employer is generally not able to remedy the consequences of this failure by providing the information retrospectively.

The court’s findings on the assessment of damages are particularly significant in practice. If the employer is responsible for the missing target, the assessment of losses can generally be based on the assumption that the target would have been fully achieved. Without specific evidence to the contrary, there is thus a significant risk that the employer will have to pay the bonus based on 100% achievement for the missing targets.

 

Practical Point

• Employers should set targets for variable remuneration schemes early on at the start of the relevant target period and communicate these transparently to the employees concerned.
• Merely setting corporate objectives internally is not sufficient if employees are to align their work performance with those objectives and thus rely on receiving the relevant information.
• If a target is not set in good time, a claim for compensation may arise because the motivational and incentive functions can no longer be fulfilled once the target period has expired.
• When assessing the compensation, it will generally be assumed that the targets would have been fully achieved, unless the employer can prove specific circumstances that justify a different assessment.
• The decision highlights the significant financial risk associated with setting targets late or failing to set them at all, and underlines the importance of carefully designing and implementing variable remuneration schemes.