Delayed Setting of Performance Targets: Impact on Target Bonuses

Target Bonuses – Potential Impact of Delayed Setting of Performance Targets

In a recent decision dated 19 February 2025 (case no. 10 AZR 57/24), the Federal Labor Court (BAG) confirmed that employers may be liable for damages if they fail to set performance targets in a timely manner.

Target Agreements and Unilateral Target Setting

Target agreements are negotiated between employer and employee and unilateral performance targets are set by the employer. The key factor for this distinction is the agreement with the employee. The BAG previously decided that the conclusion of a target agreement is no longer possible after the target period expired because it no longer fulfils its purpose. If an employee is unaware of targets during the target period the incentive and motivation function of the agreement cannot be achieved. This may results in a potential compensation claim for damages in the amount of the agreed full bonus based on 100% target achievement, unless the employer proves special circumstances (e.g. non-achievement in previous years), refuting the assumption of full target achievement. Employee contributory negligence, such as not requesting a target agreement, may reduce the compensation amount. With its latest decision, the BAG has now also decided for unilateral target setting.

Delayed Setting of Targets

In the decided case, the plaintiff was entitled to a target bonus, requiring the employer to set targets unilaterally. The employer failed to set individual targets and delayed company targets until three-quarters of the period had passed. The court considered this as a breach of duty, undermining the intended motivation and incentive function of the targets. The BAG also rejects the possibility of a determination of targets by the court (gerichtliche Leistungsbestimmung nach § 315 BGB) itself for the same reason. The court obliged the employer to pay damages applying basically the same principles of damages as described above, i.e. a potential compensation claim for damages in the amount of the agreed full bonus based on 100% target achievement, unless the employer proves special circumstances, refuting the assumption of full target achievement. However, for unilateral target setting, unlike target agreements, employee contributory negligence is generally excluded, as the employee is responsible for initiating target setting.

Practical Implications for Employers

Employers are advised to establish clear and transparent regulations for variable compensation. To avoid liability risks, target agreements or target setting must be agreed or set timely and must include realistic and achievable targets motivating employees. Targets should be communicated formally to employees.