Variable Remuneration for the Management Board?

Management service agreements can be designed largely freely with regard to the remuneration of the management board member. In particular, comprehensive voluntary reservations can be agreed even if the contract of service is based on general terms and conditions.

Background: Agreement on special benefits in the employment contract for the management board

The plaintiff was initially employed as an employee of a stock corporation. He was later appointed to the management board of the company and a management service agreement was concluded with him for this purpose. Both the original employment contract and the management service agreement provided for the possibility of paying a bonus in addition to a fixed salary. The management service agreement expressly clarified that the bonus, on which the supervisory board had to decide, was in any case voluntary and that there was no legal claim to its payment.

The plaintiff received bonus payments both during his time as an employee of the company and as a member of the management board for several consecutive years. In 2011, however, he terminated his relationship with the defendant and resigned from his position on the management board. He then sued the company for payment of a bonus for the year 2011 and was - initially - successful. However, the company finally took legal action against him by filing an appeal with the German Court of Justice (BGH).

The ruling of the BGH of September 24, 2019 (case no. II ZR 192/18)

The company's appeal was successful: the plaintiff's claim for payment was dismissed in its entirety. The BGH regarded the management service agreement as general terms and conditions. However, even on the basis of the strict standard for the effectiveness of contractual clauses applicable thereafter, it came to the conclusion that the plaintiff was not entitled to the payment of a specific bonus and was not even entitled to a decision by the supervisory board as to whether a bonus should be paid at all. According to the BGH, such claims could not be derived from the payment of bonuses in previous years either.

Note

The management board of a stock corporation is not an employee. Therefore, he is often less protected than an employee with regard to his management service agreement, which is also shown by the decision of the BGH. In contrast to the labor court case law, which regularly classifies voluntary reservations for target-related bonuses in employment contracts as unreasonable discrimination and therefore as invalid, the BGH does not consider such reservations in management service agreements to be objectionable. In the view of the BGH, even a company practice does not justify a claim to bonus payments (as is the case in labor law case law), but at best constitutes an interpretation aid for the management service agreement of a member of the management board. This applies even if the contractual provisions are to be regarded as general terms and conditions and are therefore subject to particularly strict effectiveness control.

This shows: There is still a great deal of freedom in the drafting of management service agreements for management board members, particularly with regard to the remuneration rules. For example, the payment of a bonus for the management board can be left to the discretion of the supervisory board, and in this respect a comprehensive voluntary reservation of the right to make such payments can be effectively agreed. This applies even if the management service agreement is to be used several times and is therefore subject to general terms and conditions. However, despite all the freedom to structure contracts with members of the management boards of stock corporations, it should not be neglected that other points are less flexible (e.g. the provisions on the ordinary termination of the relationship). When drafting management service agreements for executive board members, all parties involved should therefore take some care in the wording of the contract and - in view of the emergence of a company practice which is in any case important for the interpretation of the contract - its actual implementation. If an employment contract already existed prior to the conclusion of the management service agreement for the management board member, this circumstance should also be taken into account when drafting the contract. Otherwise, unintended surprises may arise if the employment contract is revived after the end of the management board activity and suddenly much stricter effectiveness requirements apply to it than to the management service agreement applicable until then. Finally, the formalities must be observed: Pursuant to Section 112 of the German Stock Corporation Act, the Supervisory Board is (solely) responsible for concluding management board employment contracts.