Delayed bonus targets

Delayed bonus targets: The Federal Labour Court (BAG) strengthens employees’ rights regarding bonus payments and clarifies the risks of damages claims for employers.

Insight into the Federal Labour Court (BAG) judgement of 22 April 2026, 10 AZR 28/25

In its judgement of 22 April 2026 (Ref. 10 AZR 28/25), the Federal Labour Court has further tightened and clarified its case law on variable remuneration and, in particular, on target-setting. At the heart of the decision is the question of what legal consequences arise when employers fail to fulfil their obligation to communicate company targets in a timely manner. The court upholds the employee’s claim for damages and, at the same time, clarifies the criteria for calculating such damages as well as the allocation of the burden of proof and the burden of presentation.

The starting point for the decision is the distinction between a target agreement and a target setting. Whilst target agreements are established by mutual consent, target setting constitutes a unilateral right of the employer to determine performance within the meaning of Section 315 of the German Civil Code (BGB). In the present case, the claimant’s variable remuneration was linked both to individual targets and to a company-related financial modifier, the specific details of which were set out in a works agreement. The decisive factor here was that the specific company targets had to be set at the start of the target period and communicated to the employees.

The Federal Labour Court (BAG) makes it clear that the mere internal setting of targets is not sufficient. Rather, for a target to be valid, it is essential that it be communicated to the employee in good time. Only in this way can the target fulfil its function as a steering and motivational tool. Failure to provide this notification constitutes a culpable breach of duty on the part of the employer. Of particular practical relevance is the court’s finding that a target cannot be set retrospectively after the target period has expired, as it can no longer fulfil its purpose – guiding work performance – with regard to the past.

The immediate consequence of such a breach of duty is a claim for damages by the employee. The Federal Labour Court (BAG) emphasises that, in such cases, it must generally be assumed that the employee would have achieved the set targets. The employer can only rebut this presumption by demonstrating specific circumstances that would have precluded the achievement of the targets from the outset. Merely referring to a poor financial year or the individual employee’s lack of influence is expressly insufficient for this purpose.

Of particular practical significance is the relaxation of the burden of proof in favour of the employee when estimating damages, as confirmed by the BAG. In accordance with the principles of Section 252 of the German Civil Code (BGB), it is sufficient for the employee to demonstrate that achieving the targets would have been probable in the ordinary course of events. The courts may then estimate the amount of damages. In the case in question, this led the BAG to assume that the target had been fully achieved (100%) and to award the employee the difference between the target bonus and the bonus actually paid.

Another key aspect of the ruling concerns the allocation of responsibility within the target-setting system. The BAG makes it unequivocally clear that the burden of initiative and organisation in setting targets lies exclusively with the employer. Employees are neither obliged to work towards the setting of targets, nor do they have to actively demand the setting of targets where these are lacking. Contributory negligence will also generally be ruled out in such circumstances.

The ruling has far-reaching consequences for employers. Companies must review and, where necessary, adapt their processes for setting and communicating targets within bonus and incentive schemes. In particular, they must ensure that both individual and company-wide targets are set and communicated in a timely, transparent and comprehensible manner. This applies equally to provisions in employment contracts and to works agreements. The ruling also makes it clear that unclear or incomplete provisions – such as missing annexes or unspecified target systems – can give rise to significant liability risks.

From a strategic perspective, it is advisable to structure bonus models clearly, making a distinct distinction between target specifications and target agreements. Furthermore, employers should document when and in what form targets were communicated, so that they can fulfil their burden of proof and presentation in the event of a dispute. Finally, it must be borne in mind that company-wide targets which influence the bonus must also be made transparent, even if the individual influence of specific employees appears limited.

The ruling forms part of a series of recent judgments by the Federal Labour Court (BAG) which strengthen employees’ rights in relation to variable remuneration and significantly increase the requirements placed on employers. Overall, the ruling confirms that bonus and target systems are not merely performance-management tools, but also give rise to substantial legal obligations, the breach of which can lead to significant financial risks.