BAG: Bonus plan without transparent distribution rules invalid

The Federal Labor Court ruled that a company’s bonus plan is invalid if it leaves key distribution decisions to management without clear guidelines. The decision (1 ABR 23/25) affects both performance-based bonuses and profit-sharing for employees.

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Ruling: Bonus plan must define distribution rules

The Federal Labor Court (BAG) ruled on February 24, 2026 (case no. 1 ABR 23/25) that a company’s bonus plan is invalid if it doesn’t clearly define how bonuses are distributed. The court found that leaving key decisions—like how performance ratings translate into payouts—to management without transparent rules violates workers’ rights to fair pay structures.

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Why the court intervened

The case centered on a company’s annual incentive plan (AIP) and profit-sharing scheme for employees. While employers can decide whether to offer bonuses and how much money to set aside, German labor law requires that how bonuses are distributed must be jointly determined with the works council. The court found the plan failed to meet this standard because it didn’t specify how performance ratings would translate into actual payouts.

What happened in this case

A semiconductor company introduced a global bonus plan with two components: a performance-based bonus for non-union employees and a profit-sharing scheme for unionized workers. The works council challenged the plan, arguing it gave management too much discretion over payouts. For example, the plan allowed managers to adjust bonuses within broad ranges (e.g., 50–125% for „Valued Contributors”) without clear criteria. The court agreed, ruling the entire plan invalid because it didn’t provide a transparent framework for distributing the bonus budget.