Variable remuneration based on objectives

The importance of fixing objectives when proposing a variable remuneration system in France.

Extra payments can have different natures:
A vacation bonus is to be paid in the IT industry. In other industries, a 13th month salary, independent of the company’s or employee’s performance, is mandatory. Some CBAs even fix a seniority bonus to reward the employee’s loyalty.

However, oftentimes employers seek to link employee’s reward to employee’s performance. Performance-based variable pay will reward hard-working employees.

Oftentimes these variable remunerations are mentioned explicitly as such in the French employment contract. The objectives might be fixed by agreement with the employee, or by a collective company agreement, by custom or even by a unilateral commitment of the employer.

When offering a variable remuneration, employers need to be aware of certain obligations.

Performance based variable remuneration: the importance of fixing objectives

Whether the employer defines unilaterally the objectives, or whether this is subject to an agreement, the objectives and their methods of achievement must be clearly defined. Objectives can be of qualitative, quantitative, or mixed nature. They must be realistic, achievable and based on facts beyond the control of the employer. Thus, the established objectives, in addition to being fixed in French language, must take into account the circumstances. They must be notified and explained to the employee at the start of each reference period.

Risks of not setting objectives

Fixing the objectives late, or a lack of fixing them at all, can have severe consequences. The employee might claim a full payment of the variable remuneration, or he may request a judicial termination of the employment relationship at the fault of the employer.

Claim for payment

If the employer fails to clearly define realistic objectives in a timely manner, the employee may seek legal action to obtain the payment of the variable remuneration. The judges will take into consideration the amount of the variable part paid in previous years. If it is impossible to refer to previous years, the judge may grant the payment of the maximum amount.

Judicial termination of the employment relationship at the employer’s fault

The failure to set objectives constitutes a breach that, in some cases, may justify the judicial termination of the employment contract at the fault of the employer.
The reasons invoked must be serious enough to lead to the impossibility to continue the contractual relationship. To assess the seriousness, the judge will consider the amount of the variable part at dispute. The consequence would be the judicial termination of the employment contract for failure of the employer.

Our recommendation: Clearly define realistic objectives for the variable remuneration at the beginning of each reference period, in French language.