Employers in Germany should take note of a significant recent development in employment law. On 19 February 2025, the Federal Labour Court (Bundesarbeitsgericht, BAG) issued a landmark decision (Ref. 10 AZR 57/24) confirming that failing to set performance-based variable remuneration targets on time can create substantial liability — potentially requiring payment of the full bonus as damages.
In this case, the court ordered an employer to pay EUR 16,035.94 to an employee after failing to set individual targets at all and only communicating company-wide targets after three-quarters of the target period had passed. The ruling reaffirms that retroactively setting targets — once the majority of the performance period has elapsed — is inadmissible under German labour law because the targets can no longer serve their intended motivational and performance-guiding purpose.
Why the ruling matters
Variable remuneration systems are designed to motivate employees, align performance with company objectives, and provide a measurable incentive. When targets are not set promptly, employees cannot adjust their performance toward them — undermining the incentive’s purpose. The BAG made clear that:
If targets are set too late, they cannot fulfil their intended motivational role.
Unless an employer can prove exceptional circumstances, it is generally assumed the employee would have achieved 100% of the targets had they been set on time.
Late target setting after three-quarters of the performance period has passed is likely to be deemed ineffective, based on prior case law (LAG Cologne, 6 February 2024, Ref. 4 Sa 390/23).
This applies both to unilateral target setting (employer-determined) and mutual target agreements (jointly agreed with the employee).
Risks in common scenarios
One common situation flagged by employment law experts involves employees who leave early in the year — for example, in March — before targets have been set. Although there is no final court decision on this scenario yet, it is possible that courts may award a 100% pro rata bonus if the target setting is considered too late.
What employers should do now
To comply with German labour law and avoid costly disputes, employers should:
Set targets at the start of the performance period
Ideally in January, or at the start of the business year if it begins mid-year.
Ensure compliance with any contractual deadlines for target setting.
Follow the SMART principle
Make targets Specific, Measurable, Achievable, Relevant, and Time-bound.
Document everything
Record when and how targets were set.
Keep evidence of when employees were informed of their targets.
Review internal processes
Establish clear, repeatable procedures to ensure target setting happens on time each year.
Key takeaway
This Germany employment law update 2025 is a clear signal that timely, well-documented target setting is not only best practice but also a legal necessity. Employers should review and, where necessary, strengthen their processes now to reduce the risk of disputes and potential damages.
How HSP Can Help
Navigating these changes can be complex. HSP is here to help you stay compliant and streamline your HR operations. By partnering with HSP, you can ensure that your business remains compliant with these critical updates while minimizing disruption. Contact us today to get started.
