Target Agreements and Target Setting: New Pitfalls for Employers

This article was first published in Betriebs-Berater and is reproduced here with the publisher’s permission.

Employers often use performance-related bonus schemes as a tool to incentivise employees and drive performance under a management-by-objectives approach. The general framework is typically set out either in the employment contract or in a collective arrangement such as a works agreement. Given that significant remuneration is often at stake, bonus schemes increasingly become the subject of employment litigation.

Recent disputes have focused in particular on the relationship between mutually agreed targets (target agreements) and unilaterally determined targets (target setting), as well as on disruptions in the process of defining targets and assessing achievement. The German Federal Labour Court (Bundesarbeitsgericht, BAG) has now clarified the relationship between target agreements and target setting.

According to the BAG, it is impermissible for a bonus framework to provide for targets to be agreed between the parties while at the same time allowing the employer, in the event that no agreement can be reached, to determine the targets unilaterally. Such a mechanism unduly expands the employer’s discretion and correspondingly restricts the employee’s scope for participation in the target-setting process.

Employers must therefore choose one approach or the other: either bonus targets are agreed jointly with employees, or they are set unilaterally by the employer. The latter may appear administratively simpler, but it comes at the cost of reduced employee “buy-in” and engagement.

Read the full article here (only in German): Zielvereinbarung und Zielvorgabe – Neue Fallstricke für Arbeitgeber - Online Portal von Der Betrieb.