Variable remuneration & targets
Variable salary components are a popular means of incentivizing performance in certain industries and positions: People who perform better earn more money.
Although targets and target agreements are essentially different, the results are largely the same. In the case of targets, the employer unilaterally sets the target to be achieved pursuant to its right to determine performance. In contrast, a target agreement is concluded between the employer and the employee.
In both cases, the payment of the variable part of the remuneration then depends on whether or to what percentage the employee has achieved the defined target.
Employers need to ensure that the targets remain realistic. If this is not the case, the employee will be entitled to demand the full variable remuneration if the targets are unachievable, as the targets or agreements were ineffective.
Employers also need to bear in mind that variable salary components also play a role with regard to pay discrimination. See our article “Bonuses and variable salaries: Pitfalls for pay discrimination?”.
Late targets are expensive targets
The case before the Cologne State Labor Court (LAG) examined the time at which an employer set a specific target.
The employer and an employee with management responsibility agreed on fixed and variable salary components. 50% of the fixed agreed salary was agreed as a bonus upon achieving the target.
A corresponding company agreement for 2019 stipulated that the targets were to be defined by March 1. However, the employer took considerably longer and only announced the actual figures and weightings for the target in mid-October 2019.
When the employee left the company in November 2019, the employer only paid out approximately 50% of the variable remuneration – measured against the communicated, achieved targets.
Dissatisfied, the man sued and demanded 100% of the variable remuneration, arguing that the defined company targets were ineffective due to the late announcement. Consequently, he demanded 100% of the agreed variable remuneration as compensation.
No longer an incentive but rather compensation
The Cologne Labor Court did not agree with the formal employee’s arguments. The late announcement did not make it impossible to achieve the target.
However, the Cologne State Labor Court reached a different conclusion, citing the case law of the Federal Labor Court concerning target agreements.
The key argument is that a target can only fulfill its function as an incentive if the employee is fully aware of the targets when performing their work.
Communicating specific targets far too late – in mid-October instead of early March 2019 – made achieving the targets impossible in this context. Given that three quarters of the corresponding year was already over, the target was no longer able to meaningfully fulfill its incentive function. Therefore, the target should be treated as though it had never existed.
As a consequence, the employee successfully claimed 100% of the agreed variable remuneration as compensation.
What can we do for you?
Do you have any questions about targets and variable salary? Do not hesitate to contact us!
Summary of the key facts:
- Employer targets are a sound foundation for paying variable salary components.
- Yet if employers fail to set the targets on time, employees may be entitled to payment of the full compensation for the corresponding targets.
- The Cologne State Labor Court has ruled that targets cannot fulfill their incentive function if three quarters of the year has already elapsed. It remains to be seen whether the Federal Labor Court will confirm this decision.
