Organization of targets
When defining the targets, it is necessary to differentiate between whether the achievement of targets is dependent on the individual performance of the employee (individual targets), a number of employees (group targets) or the performance of the company (company targets). Common practice in companies is often well behind the standards set by case law when it comes to the specific definition of the targets, but also when it comes to the time when the targets or the objectives are agreed between the parties or set by the employer.
Specification and objective measurability of the targets
On the one hand, specification of the targets is often lacking as is the objective verifiability of the target achievement or lack thereof. Insufficient, for example, would be the objective or agreement for the employee to increase turnover, improve operational climate, integrate new employees or organize his department more economically and effectively. These kinds of deficiencies in the formulation of targets are at the expense of the employer. If the precise target to be achieved is not communicated or objective monitoring of the level of target achievement is not possible, case law would tend to recognize the targets as having been achieved.
Written form of the target agreement and objective
Most employment contracts contain written form clauses. According to this, supplements to the employment contract only take effect if these are formulated in writing, i.e. signed by both parties in original copy (»wet ink«). There is frequently a failure here because target agreements and objectives are exchanged by email or filed – somewhere – on the intranet, e.g. as »Target Policy 2017«. Should it come to a legal dispute regarding the level of variable remuneration, the employer must be able to prove that the targets were agreed or given in a proper manner. If the targets are not formulated in writing, there is a risk that a court of law would award the result of variable remuneration to the highest level, because the targets were not effectively included in the employment contract.
Target agreement and objective before the start of the target period
It frequently occurs that employers simply fail to agree or set targets. Generally, it is the employer who should formulate the target agreements and present them to the employee. If the agreement is made in the contract that the targets should be set solely by the employer, then the employer must also do this. The employee himself is under no obligation to demand the objectives from the employer or to demand a copy of the target agreement. If there is no other agreement between the two parties, the burden to take the initiative lies with the employer.
Without a (timely) specific target agreement or objective, the employee cannot know in which direction he should focus his/her performance in order to earn the variable remuneration. In the case of missed setting of company targets, the employee is also left »in the dark« and cannot appropriately focus his/her activities. In the case of targets which are set too late, e.g. only in the second half of the agreed or given target period, or even complete failure to set targets, the legal situation is clear: The employer must pay the variable remuneration, in fact as compensation. The level of variable remuneration on complete achievement of targets forms the basis for determining the compensation.
Individual targets, group targets and company targets must be formulated as specifically as possible and their achievement must be objectively verifiable (known as SMART targets). Target agreements and objectives should where possible be concluded before the start of the new target period and at the latest at the start of the new target period. The target agreement and objective should be set out in writing and signed by both parties. If the target period is the end of the calendar year, then urgency is required!