Target agreement or target specification?
With a target agreement (Zielvereinbarung), both sides negotiate the targets; it is a contractual arrangement. With a target specification (Zielvorgabe), the employer exercises its right of direction and sets the targets unilaterally — in that case they must comply with equitable discretion under § 315 BGB and are subject to judicial review.
Formulating targets correctly
The SMART principle has proven effective: specific, measurable, attractive, realistic, time-bound. So instead of "improve customer satisfaction": "Achieve an average rating of at least 4.3 out of 5 from at least 80 evaluated responses by 31 December."
- Three to five targets per period — more dilutes the effect.
- Set weightings in percentages, totalling 100 percent.
- Specify the metric, the data source and the measurement date.
- Only set targets the employee can genuinely influence themselves.
The legal core: agree targets in good time
If the employer fails to agree targets for a bonus period, established case law holds that it may be liable for damages. Courts then frequently assume 100 percent target achievement. Once the period has ended, targets can no longer be set retroactively — the agreement must be in place beforehand, in practice within the first quarter.
Structuring bonus linkage properly
| Point to regulate | Recommendation |
|---|---|
| Target bonus | Absolute amount at 100% target achievement |
| Payout curve | Define a floor and a ceiling, e.g. starting at 80%, capped at 150% |
| Joining or leaving mid-year | Pro-rata calculation |
| Illness and parental leave | Include a provision for adjusting targets |
| Cut-off-date clause | Generally invalid for performance bonuses — avoid |
Structuring the conversation
- Preparation: review the previous year's figures, company objectives and development topics.
- Review: jointly assess the previous year's target achievement and explain deviations.
- Outlook: derive, formulate and weight the new targets.
- Resources: clarify budget, training and responsibilities.
- Record: have both parties sign, and give the employee a copy.
- Interim check: hold at least one review halfway through the period.
Do not forget co-determination
Where a works council exists, the principles of remuneration — and therefore the system of target agreements — are subject to co-determination under § 87(1) No. 10 BetrVG. The individual level of a given target, however, is not subject to co-determination.
Putting it in writing is half the battle
A signed target agreement that has demonstrably been delivered to the employee prevents disputes about content and timing. For distributed teams or field staff, sending it by post is the simplest, most reliable method.