Global Remuneration Systems

Variable remuneration systems are often used, particularly in larger companies. According to recent surveys, at least 60% of companies based in Germany use such remuneration systems. These forms of variable remuneration are an important incentive for employees and motivate them to achieve the best possible performance.

Globally active companies have an understandable interest in using standardised remuneration systems worldwide. This standardisation is a considerable administrative advantage and also serves to avoid discussions among the workforce about supposedly unfair local differences in the remuneration structure. Variable remuneration systems are common in the US and UK in accordance with local practice and legislation. But if a globally active employer wants to introduce variable remuneration in Germany, several problems arise.

 

Implementing global renumeration policies in Germany

There are three main options for employers in Germany to apply existing global regulations on variable remuneration at national level.

• Introducing and paying variable remuneration to German employees can take place without specific reference to existing global policies.
  This may appear to be a simple option. But the employer runs the risk of becoming legally bound through a company practice or an overall commitment. This would undermine the purpose of variable remuneration systems, which is to adapt remuneration to certain circumstances to create incentives. Companies have to pay attention to the wording. According to case law, the term "voluntary," generally only expresses that the employer isn’t already obliged to make any other payments.
  
  
• As a second option, the company can refer to the applicable policy in the employment contract. But the reference should be carefully worded.
  
  
• Finally, there’s the option of agreeing the variable remuneration in a side letter as a contractual side agreement.
  There’s room for flexibility in this, particularly with regard to the scope. For example, the entire global policy with its conditions or just the promise to grant a bonus can be part of the letter. The requirement for effectiveness depends on the provisions. So it’s also crucial to draft the corresponding agreements skilfully and in a legally secure manner.

 

Drafting options for references to global remuneration policies

The relevant case of references in the employment contract involves great uncertainty and risks for the effectiveness of these clauses. In particular, the reference clauses could constitute general terms and conditions (GTC), which would trigger a review of the content of the provision in accordance with Sections 307 et seq. German Civil Code (Bürgerliches Gesetzbuch – BGB).

The focus here is on the transparency requirement pursuant to Section 307 (1) sentence 2 BGB. The object of reference, in this case the Global Remuneration Policy, must be sufficiently defined. So if general reference is made to this, there’s a risk the transparency requirement isn’t met. There’s a breach of the transparency requirement if there’s a risk that the employee will be prevented from enforcing existing rights against the user due to the possible lack of transparency. To avoid this, a specific policy should be named instead.

Variable remuneration systems are regularly (often annually) adjusted. To respond to this, reference is often made to the current version. In particular, a conflict arises with regard to the question of whether "dynamic" reference clauses are permitted under Section 308 No. 4 BGB and are therefore effective.

The decisive factor is whether the employer, as the user of the GTC, has a significant influence on changes to the global policy referred to. Overall, companies need to be careful when drafting a reference to Global Remuneration Policies so they withstand a GTC review pursuant to Sections 305 et seq. BGB.

But according to case law, it’s at least not a surprising clause within the meaning of Section 305 c (1) BGB if a clause within a bonus plan stipulates that paying a bonus also depends on hitting company targets, even if the employee has no influence on this. This type of provision isn’t unusual and doesn’t have the effect of duping the employee.

This provision is a price agreement. But the provision isn’t analysed by the content review but is only reviewed in the context of the transparency requirement. This is because they’re based on circumstances that the employee can’t influence. This means the employee doesn’t get a fixed benefit, but rather an uncertain benefit and a mere chance of winning.

 

GTC review for global remuneration policies?

If there has been an effective reference to the respective Global Remuneration Policy, it’s questionable which legal review this should be subjected to. The question arises whether the policy itself should be subject to a GTC review. Although this hasn’t yet been decided by case law, there’s a tendency that the policy referred to is unlikely to be subject to a GTC review. Instead, a review according to the standards of Section 319 BGB could be considered. Overall, further case law could show that there’s no need to review the terms and conditions regarding the policy referred to in view of the prohibition of circumvention pursuant to Section 306 a BGB.

We await further case law. But companies should take care implementing global remuneration policies in Germany. And they should pay close attention to ensuring that there are no unintentional enforceable claims and that the clauses can withstand a general terms and conditions review.