Bonus 3.0: The discretionary bonus
> September 2016

Not a genuine solution for measuring variable compensation components.
Discretionary bonuses are the latest idea when it comes to designing variable compensation components. These clauses are becoming more and more common, particularly in contracts for executives. Discretionary bonuses are set unilaterally by the employer.
You might think that this was an appropriate way of bringing ballooning bonus payments in line with the economic reality of a company. An employee is promised a bonus, but the actual amount can be “adjusted” later in line with the hard criteria related to the economic performance of the company, as well as the - and this is frequently more of a factor - the soft criteria related to the company’s willingness to pay the employee in question. Employees might occasionally be told that the company is, unfortunately, not in a position to pay them a bonus this year.

However, the Federal Labour Court (BAG) recently put up some significant legal boundaries around discretionary bonuses. In its decision of 03/08/2016 (10 AZR 710/14), the BAG clearly stated that a discretionary bonus is (as the term suggests) a bonus which is set on a discretionary basis. However, this means that it must be determined within the framework of Section 315(3) sentence 1 of the German Civil Code, rather than in a completely arbitrary manner. It is therefore necessary to make a careful and balanced determination of the scope within which employers can set the bonus and then exercise their discretion. This means that reducing a discretionary bonus to zero is only possible is the most extreme of circumstances.
The BAG also stated that the amount of a bonus is subject to full judicial review, and can therefore be set to an appropriate amount by the courts if it is found to be inadequate.

In conclusion:
Any employer which decides to include a bonus payment in its employment contracts should agree on clear and reviewable requirements for the payment of the bonus. Employers are advised not to use discretionary bonuses if they intend to use them as a tool to reduce bonus payments inappropriately.