Bonus model
Definition and origin
A bonus model refers to a system of variable remuneration in which employees can receive performance-related payments (“bonuses”) in addition to their fixed base salary. These payments are based on individually agreed or company-wide goals as well as measurable results achieved within a defined timeframe. The term became especially popular in the context of modern HR and compensation strategies in the late 20th century and gained significance with the increasing economic competitiveness and performance orientation.
Significance in law firm or corporate context
In companies, consulting, or commercial law firms, the bonus model is a key instrument of remuneration policy. Its purpose is to motivate employees for exceptional performance and to involve their commitment in the company’s success. Typically, bonuses are awarded as recognition for achieving specific goals, such as revenue targets, client acquisition, team performance, or qualitative criteria (customer satisfaction, compliance, process improvements). Additionally, aspects such as personal initiative, contribution to corporate culture, or continued education can be factored into the bonus calculation.
The bonus model can be applied at different hierarchical levels, from entry-level positions through various career stages up to company leadership. The exact design varies depending on company size, industry standards, and the respective corporate culture.
Framework conditions
Legal aspects
Bonus models are subject to labor law provisions. The structuring of bonuses must be clearly and transparently regulated in employment contracts, supplementary agreements, or works agreements. In particular, the group of eligible individuals, the criteria for bonus payment, the calculation basis, as well as the time of payment must be unambiguously defined. Framework conditions such as non-discrimination and the principle of equal treatment must be taken into account.
Organizational and market standards
The introduction and administration of bonus models require organizational measures such as standardized goal setting, transparent performance evaluation, and comprehensible communication to employees. In many industries, certain standards have been established: It is common to find a blend of individual and collective objectives. Typical for the industry are annual or semi-annual payment intervals, with the amount of the possible bonus usually linked as a percentage of annual salary.
Transparency and traceability
Another important framework aspect is the traceability of evaluation mechanisms. The criteria should be objectively measurable and known to all employees in order to ensure acceptance and fairness within the team.
Impact on career paths and development opportunities
Bonus models have a significant impact on individual career paths. They provide goal orientation, strengthen intrinsic motivation, and give employees the opportunity to contribute independently to their career advancement. Often, bonus eligibility is linked to the personal development review and the annual target agreement. Furthermore, ongoing achievements and resulting bonuses can be factored into performance evaluation and career development, and, for example, influence promotions, project responsibility, or participation in strategic initiatives.
Advantages and disadvantages as well as discussion points
Advantages
- Motivation and performance incentives: By offering bonuses, employees are motivated to achieve above-average performance.
- Transparency in performance evaluation: Clear objectives and transparent evaluation criteria enable comparability.
- Alignment with corporate objectives: Individual and collective bonus criteria support strategic business goals and foster teamwork.
- Flexibility: Bonus models can be adapted to company- or team-specific requirements.
Disadvantages
- Subjectivity and potential for disputes: Vaguely or non-transparent criteria can lead to resentment or dissatisfaction.
- Focus on short-term goals: Excessive focus on quantitative targets can hinder sustainable development and team spirit.
- Potential for inequality: Unbalanced criteria can amplify perceptions of unequal treatment.
- Increased administrative effort: Ongoing review, evaluation, and documentation of performance require resources.
Typical discussion points
Bonus systems are often discussed, particularly with regard to fairness, impact on corporate culture, suitability of the chosen criteria, as well as the balance between individual and collective targets. Questions about the long-term nature of objectives and the integration of non-measurable achievements are also subject to regular adjustments and ongoing development.
Practical examples and application scenarios
Example 1: Revenue-based bonus model
A team member receives a bonus for reaching or exceeding a revenue target defined together with management at the beginning of the year. When a set revenue threshold is reached, a percentage of the revenue earned above this threshold is paid out as a bonus.
Example 2: Team and individual bonuses
In addition to individual performance agreements, there is a shared bonus goal for the entire team. If this value is reached, all team members receive the same bonus. This strengthens collaboration and fosters a culture of mutual support.
Example 3: Qualitative target agreements
Not only measurable key figures, but also qualitative achievements, such as active participation in internal projects or optimization of work processes, are rewarded with an individual bonus. The evaluation is conducted based on pre-defined criteria during the development review meeting.
Frequently asked questions (FAQ)
How is a bonus model usually determined? The bonus model is usually governed in writing in the employment contract or in special performance agreements. The criteria and conditions for bonus payouts are communicated transparently.When is a bonus paid out? The payout occurs, depending on the model, annually, semi-annually, or at shorter intervals, usually after the relevant evaluation period has ended and performance has been assessed.Does a bonus have to be paid? A claim to a bonus exists in principle only if this is expressly stipulated by contract or works agreement and the agreed goals have been achieved.What effect does a bonus model have on career development? Regularly earned bonuses and the corresponding documented achievements are considered in the evaluation and can have a positive effect on promotions and future development opportunities.Can a bonus also be suspended? Yes, if the requirements for achieving the targets have not been met or special economic conditions exist (e.g. significant company losses), bonus payments may be wholly or partially withheld, provided this is contractually stipulated.
A bonus model thus serves as a central element of modern compensation and performance evaluation systems and promotes goal-oriented work as well as transparent development opportunities for all employees regardless of entry level or experience.
Frequently asked questions
What statutory requirements apply to the introduction and amendment of a bonus model?
When introducing and amending a bonus model in a company, both individual and collective labor law provisions must be observed. First, it must be checked whether the bonus model is regulated individually by contract, by works agreement, or by collective bargaining agreement. If a works council exists, it has a co-determination right under § 87 para. 1 nos. 10 and 11 of the Works Constitution Act (BetrVG) if the matter concerns operational wage structuring and company bonus schemes. Interventions in existing bonus models are subject to stricter requirements if they have become part of the respective employment contract—in this case, amendments require termination for change or written amendment agreements. Furthermore, the requirements of the General Equal Treatment Act (AGG) and the transparency requirement must be observed. Unilateral changes by the employer are only possible with an explicit and effective reservation of revocation, voluntariness, or amendment clause, which must be clearly and understandably regulated in the contract. In addition, no essential contractual primary obligations may be adversely affected by the bonus model. In companies bound by collective agreements, the provisions of the collective agreement take precedence.
Under what conditions is a bonus model legally binding?
A bonus model is legally binding if it is part of the employment contract, a works agreement, or a collective bargaining agreement. For contractual arrangements, it is decisive whether the bonus scheme is sufficiently specific and clearly understandable for both parties. Unclear or overly general provisions may be interpreted in favor of the employee in case of doubt. A clause of voluntary payment (“voluntary special payment”) or a clause of revocation can restrict binding effect—but only if these are sufficiently clear and transparent. Any subsequent unilateral revocation of the bonus without a contractual basis is legally invalid. In cases where a bonus has been provided unconditionally on a regular basis, a company practice may arise, giving employees an enforceable entitlement. In companies subject to collective agreements, the bonus model is generally binding according to the collective agreement. Ultimately, it always depends on how the bonus scheme came about, what wording was chosen, and whether the employer has expressly reserved the right to provide or revoke the benefit voluntarily.
What co-determination rights does the works council have concerning the bonus model?
The works council has extensive co-determination rights under the Works Constitution Act with regard to the introduction, modification, and design of bonus models. Central here is § 87 para. 1 no. 10 (matters of company wage structuring) and no. 11 (principles of the company’s suggestion scheme, which also includes bonus systems) BetrVG. This means that the employer cannot introduce, change, or abolish bonus arrangements without the approval of the works council. Co-determination particularly includes the criteria for bonus calculation, the transparency of targets, selection of participants, deadline regulations, and the handling of special cases (e.g. sickness, parental leave, departure). However, the co-determination does not cover the “if” of an additional remuneration, i.e. whether a bonus system is introduced at all, provided this is not regulated by collective agreement or contract. If no agreement is reached, the conciliation committee may be called.
How is the bonus model to be treated during maternity leave, parental leave, or illness?
During maternity leave, parental leave, or in the case of prolonged illness, the question arises as to whether and to what extent the employee is entitled to bonus payments. According to current case law, it is crucial whether the bonus model is linked to work performance or also covers periods of continued remuneration (such as maternity pay or continued pay in case of illness). For variable salary components paid as compensation for work performed, § 3 EFZG (Continued Remuneration Act) applies, so that during the six-week period of continued pay in the event of illness, there is generally an entitlement to the average bonus. During maternity leave, according to § 11 MuSchG (Maternity Protection Act), the average remuneration of the last three settled months, including all variable components (i.e. also bonuses), must be paid. During parental leave, the employment relationship is generally suspended; claims to a bonus usually do not exist unless otherwise regulated or the bonus agreement expressly includes periods of parental leave. It is therefore advisable to make bonus models as specific as possible regarding the handling of special cases to avoid legal uncertainties and later disputes.
Can bonus models constitute discrimination within the meaning of the AGG?
Yes, bonus models can result in direct or indirect discrimination within the meaning of the General Equal Treatment Act (AGG) if they are based on criteria that disadvantage a group of employees, e.g., due to gender, ethnic origin, religion, disability, age, or sexual identity. A frequent issue arises when part-time employees are evaluated according to the same targets as full-time employees, which can lead to disadvantages. Focusing on certain objective or so-called “performance-based” criteria can also be indirectly discriminatory, especially when employees with family obligations, long periods of absence due to maternity/prolonged illness, disability, etc. are disadvantaged. Employers are required to ensure bonus models are free from discrimination and to regularly review whether any groups are disadvantaged. Affected employees may assert claims for damages or compensation in accordance with § 15 AGG in case of discrimination.
How are target agreements within a bonus model treated legally?
Target agreements are often an integral part of modern bonus models. They are only legally effective if the goals to be achieved are individually, clearly, and unambiguously agreed between the employee and employer. The employer is obliged to negotiate the goals and cannot set them unilaterally (see BAG, judgment dated 12.12.2007, 10 AZR 97/07). If a target agreement is not concluded due to the employer’s culpable omission, the employee may regularly claim compensation in the form of the missed bonus from the employer (§ 280 BGB). It is then up to the employer to prove that the goals could not be agreed due to infeasibility or that the employee refused to agree on targets. The design of the target agreement must be such that the requirements for payment of the bonus are always verifiable; unclear or non-binding formulations are to the employer’s disadvantage.
When can an employer legally refuse to pay a bonus?
The employer may refuse to pay a bonus only if a corresponding contractual provision explicitly allows this, for example by an effective reservation of revocation, voluntariness, or repayment. The prerequisite is that these reservations comply with the transparency requirement and do not violate the principle of good faith (§ 242 BGB) or the prohibition of unreasonable disadvantage (§ 307 BGB). The reasons for revocation or non-payment must be specifically stated in the employment contract or bonus regulations; general wording is invalid. Even in the case of valid reservations, claims that have already arisen or been earned must generally be fulfilled. Refusal may be justified as an exception if the employee, due to gross violations of contract (e.g. theft, fraud) in the relevant payment period, no longer has a legal claim. A repayment right arises if bonuses already paid subsequently turn out to have been wrongly granted (e.g. due to false information). Any refusal or reclaim must always comply with statutory requirements and is subject to strict review by labor courts on a case-by-case basis.