Variable compensation based on targets and discretionary

For companies, variable compensation is seen as a lever for performance and motivation for their employees, but also as a tool offering the company a certain degree of financial flexibility.

According to the French Administration (DARES), variable compensation elements represent 22.9% of total gross compensation in 2022. If we focus on variable compensation, regardless of its name (variable compensation, premium, bonuses, etc.), it represents an average of 15.1% of the total compensation in 2022.

Bonuses and variable salary are thus paid to most employees in companies with 10 or more employees (87.5% in 2022). This percentage increases with the size of the company, and the higher the salary, the greater the variable component in the overall remuneration.

Absent as such from the Labor Code, variable compensation is the subject of extensive litigation. The objective here is to provide a case law overview of the two types of variable compensation frequently used by companies: variable compensation defined according to targets and discretionary variable compensation.

1. Variable compensation based on targets

Used by many companies, variable compensation based on targets set for employees has the advantage of transparency. Depending on the targets set, whether collective or individual, and the extent to which they are achieved, the employee receives the amount (or part of the amount) of variable compensation contractually agreed upon.

However, given the strict legal framework, variable compensation has the disadvantage of not always varying as much as the employer might wish.

Targets set early enough and achievable

Case law requires that targets be achievable (Cass. soc. January 13, 2009, No. 06-46.208). In the event of a dispute, the employer must be able to produce evidence to establish that the targets set are achievable, provided that the employee claims that they are unachievable (Cass. soc. December 13, 2023, 22-19.426). Otherwise, the employer must pay the full variable compensation (Cass. soc. December 15, 2021, no. 19-20.978).

The targets must be set at the beginning of the financial year (Cass. soc. March 2, 2011, no. 08-44.977), unless special circumstances make it impossible to set these targets at that date (Cass. soc. September 21, 2017, no. 16-20.426).

When targets are set unilaterally by the employer, the latter has considerable latitude in defining them, provided that it complies with the above framework, and may, for example, decide to substitute collective targets for individual targets (Cass. soc. June 12, 2024, No. 22-20.946).

In the absence of targets set, case law differs depending on whether the targets are defined unilaterally by the employer or jointly with the employee.

Penalty for failure to set targets defined unilaterally by the employer

In the event of unilateral setting by the employer within the framework of its managerial authority, if no targets are set, the variable compensation must be paid in full (Cass. soc. July 10, 2013, No. 12-17.921, Cass. soc. June 7, 2023, No. 21-23232; Cass. soc. March 31, 2024, no. 22-22.709). The sanction is the same in the event of late setting or modification (Cass. soc. April 8, 2021, 19-15.432; Cass. Soc, June 12, 2024, no. 22-17.063).

A prudent employer will be sure to define the employee’s targets upon hiring and specify in the contract that if targets are not set for a given fiscal year, the targets from the previous fiscal year will be carried over, in order to protect itself against automatic payment of the entire variable compensation in the event that new targets are not set or are set late.

Failure to set targets jointly

In the case of targets set jointly by the employer and the employee, a case law solution equivalent to that applied in the case of unilateral setting of targets would not make sense. It would suffice for the employee to refuse to approve their targets to receive 100% of the potential variable compensation.

If the parties are unable to reach an agreement, the judge is invited to set the amount of variable compensation based on the criteria specified in the contract, agreements concluded in previous years, and, failing that, in what may resemble a divinatory exercise, the facts and data of the case (Cass. soc. January 13, 2009, No. 06-46208; Cass. soc. May 5, 2010, No. 08-44404; Cass. soc. September 27, 2017, No. 16-13522; Cass. soc. April 3, 2019, no. 17-21.3338; Cass. soc. May 15, 2019, no. 17-20615).

The employer, for its part, cannot hide behind the employee’s refusal to approve his or her targets to exempt itself from any payment (Cass. soc. June 8, 2016, No. 15-10.116) or simply refrain from engaging in discussions. In the latter case, the penalty is severe, as the employer must pay the variable compensation provided for in the contract in full (Cass. soc. November 4, 2021, No. 19-21.005).

Departure of the employee during the financial year

The Court of Cassation accepts the conditions of presence on the reference date of the financial year. However, the conditions of presence on the later payment date are rejected (Cass. soc. July 8, 2020, no. 18-21.945; Cass. soc. September 29, 2021, no. 13-25.549).

Thus, if a bonus is paid for year N, it may be required that the employee be present in the workforce on December 31 of year N but not beyond that date, even if the bonus is not paid until February or March of year N+1.

Conversely, a variable bonus paid to an employee in return for his or her work without any attendance requirement is earned on a pro rata basis according to the time worked.  In the event of departure during the year, it is only due on a pro rata basis, even if the target set is achieved on the day of departure (Cass. soc. February 9, 2022, No. 20-12.611; Cass. soc. June 26, 2024, No. 23-10.634). This case law solution appears questionable in that the French Court of Cassation disconnects the payment of Variable compensation from the extent to which the employee has achieved his or her targets.

Variable compensation and illness

According to case law, the suspension of the employment contract exempts the employer from its obligation to pay the employee. Thus, unless otherwise provided for in a contractual or collective bargaining agreement clause (Cass. soc. September 29, 2021, No. 20-11.66), the employee cannot claim variable compensation, except for clauses or obligations related to the maintenance of salary (Cass. soc. November 20, 2024, No. 23-19.352).

However, it should be noted that the Court of Cassation has ruled that, where the deterioration in the employee’s health and his or her sick leave are linked to the moral harassment suffered, the employee is entitled to back pay in of the variable compensation, including for periods of sick leave (Cass. soc. December 11, 2019, No. 18-10.649). This penalty payment, which was upheld in this isolated Cour de cassation ruling, is nevertheless surprising from a legal point of view, since the Court treats fixed remuneration (which is not, in principle, maintained) and variable compensation differently.

2. Discretionary variable compensation

Faced with the constraints of the case law regime applied to variable compensation based on targets, employers are often tempted to adopt discretionary variable compensation, discretionary bonuses or discretionary incentives, in particular for employees with the highest levels of remuneration.

From the employers’ point of view, this remuneration system has the following advantages:

• no need to justify specific payment criteria. While such criteria may exist, their assessment is at the discretion of the employer, who may also allow itself a certain flexibility depending on the circumstances;
• the ability to drastically reduce the amounts paid when the company is facing adversity. Contrary to variable compensation based on targets, the employer is not obliged to pay a specific amount based on the employee’s performance. However, a lack of payment or the payment of an amount that is too low can quickly lead employees to look elsewhere for greener pastures.

Case law has long recognized the possibility of paying variable compensation or discretionary bonuses on the basis of Article 1134, now 1103, of the Civil Code, and considers that the employment contract may provide, in addition to fixed compensation, for the award of a variable compensation at the employer’s discretion. In fact, such remuneration does not need to be mentioned in the contract from a legal standpoint.

Regardless of the wording of the contract, the key point verified by the judge is that the principle of variable compensation and its amount are left to the discretion of the employer. Thus, the following clauses in employment contracts have been considered to provide for the possibility of a discretionary variable compensation:

• the possibility for the employee to benefit from the bonus system in force in the company, the conditions for awarding which and the amount of which were not specified in the contract (Cass. soc. March 3, 2021, 19-17.981);
• a bonus, the amount of which was left to the discretion of the employer based on the performance of the business sector (Cass. soc. December 7, 2010, No. 09-42.657);
• a bonus based on the group’s criteria, which could be up to six months’ salary (Cass. soc. September 17, 2015, no. 13-22.730);
• a bonus linked to the performance of the unit to which the employee belonged (Cass. soc. December 16, 2015, no. 14-21.904);
• a bonus based on the employee’s performance (Cass. soc. May 16, 2018, no. 16-20640);
• a bonus based on the employee’s performance and the company’s financial results (CA. Paris October 13, 2022, RG no. 19/10508).

However, although discretionary, this method of remuneration is not entirely unregulated. Since 2009, the Court of Cassation has applied the principle of “equal pay for equal work.” Employers cannot use their discretionary power to avoid their obligation to justify differences in remuneration in an objective and relevant manner (Cass. soc. April 30, 2009, no. 07-40527, BC V no. 121).

In practice, legal battles over the amount of variable compensation often begin with employees requesting investigative measures to obtain the amount of variable compensation paid to their colleagues with whom they wish to compare himself or herself.

The employee, who feels aggrieved, then explains that he or she should have received as much as the employee who received the largest bonus or, at the very least, the average of his or her colleagues in the same situation.

However, they must submit to the judge evidence of facts that could characterize unequal treatment compared to the employees with whom they are comparing themselves (Cass. soc. November 12, 2020, 18-24.958; in the same vein, Cass. soc. June 13, 2019, 17-23.892). The burden of proof is therefore greater for the employee than in the case of variable compensation based on targets, where it is primarily up to the employer to produce evidence establishing that the targets set are achievable and to justify the failure to reach them.

In the presence of such factual evidence produced by the employee, the employer will endeavour to demonstrate:

• that the claimant is comparing himself to people who do not hold positions of equal value and that his comparison sample is therefore not relevant (Cass. soc. October 10, 2012, No. 11-15296; Cass. soc. April 10, 2013, No. 10-13614)
• that the claimant’s performance was significantly lower in both quantitative and qualitative terms compared to the sample with which he intended to compare himself: sometimes successfully (CA. Paris, October 13, 2022, RG No. 19/10508); sometimes unsuccessfully (CA Paris, November 5, 2025, No. 23/07184).

3. Variable compensation and paid leave

The Court of Cassation traditionally distinguishes between variable compensation linked to the employee’s personal performance and that based on more general criteria.

Thus, when a bonus rewards the work performed by the employee personally throughout the year to achieve her targets, it must be included in the paid leave base (Cass. soc. September 22, 2011, No. 09-72.463; Cass. soc. September 24, 2014, no. 12-28.965; Cass. soc. November 23, 2016, no. 15-19.475; Cass. soc. May 17, 2023, no. 21-23.247).

Conversely, variable compensation based on overall results does not have to be included in the paid leave base (Cass. soc. February 18, 2015, No. 13-20.920).

The same applies to bonuses and variable compensation that are calculated or paid over the entire year, including periods of work and leave. These do not have to be included in the basis for calculating paid leave (Cass. soc. June 8, 2011, No. 09-71.056 FS-PB; Cass. Soc. March 2, 2016, No. 14-18.057; Cass. soc. November 6, 2019, No. 18-10367). The same logic applies if the reference period for th calculation of the bonus is different and is not affected by the taking of leave (Cass. soc. September 13, 2023, no. 21-23.452).

In terms of discretionary variable compensation, bonuses paid to employees that are non-recurring and contingent on factors such as the employee’s personal performance, and which are therefore discretionary in nature, do not have to be taken into account in the calculation of paid leave (Cass. soc. January 23, 2019, no. 16-20750; similarly, Cass. soc. July 6, 2022, no. 21-11.820).

However, it should be noted that the Court of Cassation recently upheld the reasoning of the Paris Court of Appeal, which had included in the basis for calculating paid leave a bonus which, despite being described as discretionary by the employer, was not exceptional and had been awarded to the employee regularly, every year, for seven years (Cass. soc. July 5, 2023, No. 21-16.694). This solution may seem surprising in its logic, unless one considers that the bonus paid on a recurring basis was in fact linked to the employee’s individual targets and had therefore lost its discretionary nature, a reasoning that would appear highly questionable since it would call into question the provisions of the employment contract regarding the discretionary nature of the bonus.