A target agreement is a mutual agreement between a manager and an employee regarding performance goals to be achieved within a defined period. It serves as a management tool for motivation, guidance, and often as the basis for variable compensation. For effective goals, the SMART formula applies: specific, measurable, achievable, relevant, and time-bound.

Definition: What Is a Target Agreement?

A target agreement is a central instrument of modern employee management. In this process, manager and employee agree on specific performance goals to be achieved within a set timeframe. After this period—usually a year or a quarter—they jointly review whether and to what extent the goals were met.

The concept is based on the management principle "Management by Objectives" (MBO), introduced by American economist Peter F. Drucker in 1954 in his work "The Practice of Management." The core idea: overarching company objectives are gradually broken down to departments, teams, and individual employees. This way, each person contributes to the overall success.

Target Agreement vs. Target Setting

An important distinction that's often overlooked: a target agreement is negotiated jointly, while target setting (or goal assignment) is determined unilaterally by the employer.

This difference isn't merely semantic—it has legal implications. In Germany, the Federal Labour Court ruled in 2024 that employers cannot simply switch to unilateral target setting when a target agreement is contractually stipulated. Those who do risk compensation claims.

The advantage of genuine target agreements: employees who participate in goal-setting identify more strongly with the objectives and are more motivated to achieve them.

Management by Objectives and OKRs

Alongside the classic MBO approach, the OKR method (Objectives and Key Results) has gained prominence in recent years. OKR was developed at Intel in the 1980s and became widely known through Google.

The key differences:

• MBO: Annual cycles, goals cascaded top-down, goal achievement often linked to bonuses
• OKR: Quarterly cycles, greater transparency and collaboration, ambitious goals ("moonshots"), no direct bonus linkage

Both methods have their merits. MBO works well for established processes and clear hierarchies, while OKR suits dynamic environments requiring rapid adaptation.

The SMART Formula: How to Set Goals Correctly

For target agreements to be effective, goals must be clear and comprehensible. The SMART formula, attributed to management consultant George T. Doran (1981), provides practical guidance.

The Five SMART Criteria

S – Specific: The goal is clearly and concretely formulated. Instead of "improve customer satisfaction," better: "increase customer satisfaction in the after-sales department."

M – Measurable: A clear metric (KPI) makes goal achievement verifiable. Example: "increase customer satisfaction from the current 7.2 to 8.0 points."

A – Achievable: The goal should motivate while remaining attainable. Unrealistic goals lead to frustration; goals set too low provide no incentive.

R – Relevant: Goal achievement must be feasible with available resources, competencies, and timeframe.

T – Time-bound: A clear deadline creates accountability. Example: "by December 31, 2026."

Examples of SMART Goals

Sales: "Increase quarterly revenue in the North region by 15% by March 31, 2026."

Marketing: "Grow organic website visitors from 50,000 to 65,000 per month by end of Q2."

HR: "Reduce average time-to-hire from 45 to 35 days by year-end."

Development: "Complete Scrum Master certification by June 30, 2026."

Types of Goals

Quantitative vs. Qualitative Goals

Quantitative goals can be measured directly—such as revenue, unit quantities, conversion rates, or error rates. They offer clear orientation but don't capture all relevant performance dimensions.

Qualitative goals relate to "soft" factors like team collaboration, customer satisfaction, or leadership quality. They're harder to measure but often equally important. Indirect indicators such as survey results or 360-degree feedback help here.

A balanced mix of both goal types is recommended.

Individual, Team, and Company Goals

Target agreements can be set at various levels:

• Individual goals: Personal performance objectives for a single person
• Team goals: Shared objectives for a department or project group
• Company goals: Overarching strategic objectives for the organization

Ideally, all three levels are interconnected: when employees achieve their individual goals, this contributes to the team goal—and the team goal in turn supports the company objective.

The Target Agreement Process in Practice

Preparation and the Goal-Setting Meeting

A structured process increases effectiveness:

1. Preparation: Both parties reflect beforehand: Which goals align with company strategy? What development aspirations does the employee have?
2. Status quo analysis: The meeting begins by discussing the current situation. What went well? Where is there room for improvement?
3. Joint goal definition: Goals are developed in dialogue—not dictated unilaterally. The SMART formula serves as a guide.
4. Clarify resources: What support, training, or resources are needed for goal achievement?
5. Written documentation: The agreed goals are formally recorded.

Documentation and Follow-up

Written documentation is important for several reasons:

• It creates accountability for both parties
• It serves as a reference for later evaluation
• It's legally relevant for bonus-related goals

At least one interim meeting during the period is recommended. This allows goals to be adjusted when circumstances change, before it's too late.

Legal Aspects of Target Agreements

Variable Compensation and Bonus Payments

Target agreements are frequently linked to variable compensation: when goals are achieved, the employee receives a bonus. According to the Robert Walters Salary Study 2024, 66% of employees view bonus payments as a decisive factor in job selection.

When structuring these legally, consider:

• Target agreement vs. target setting: The method of goal determination must be clearly defined in the employment contract
• Realistic goals: Unrealistically high goals may be deemed invalid
• Works council: For compensation-related target agreements, the works council has co-determination rights under German law (§ 87 Para. 1 No. 10 and 11 BetrVG)

Consequences of Non-Achievement

What happens when goals aren't met?

• No automatic termination: Mere failure to achieve goals typically doesn't justify dismissal
• Bonus reduction or forfeiture: Depending on the agreement, variable compensation may be partially or fully withheld
• Analysis over blame: The performance review should focus on causes and learning opportunities

Important: If the employer fails to offer the contractually stipulated target agreement, the employee may claim compensation—typically equivalent to the bonus at full goal achievement (German Federal Labour Court, Case No. 10 AZR 97/07).

Tips for Effective Target Agreements

1. Develop goals together: Involved employees identify more strongly with goals and are more motivated.
2. Less is more: Three to five focused goals are more effective than ten superficial ones.
3. Ensure measurability: Every goal needs a clear indicator for achievement verification.
4. Conduct interim meetings: Regular exchange enables early course correction.
5. Provide resources: Without necessary means and authority, goals remain unachievable.
6. Consider strengths: Those who know their employees' individual strengths and potential can formulate more suitable goals. Objective diagnostic tools provide a scientifically validated foundation here. The digital platform Aivy enables the creation of strength profiles that can serve as a basis for fair and motivating goal discussions.
7. Emphasize development: Target agreements should not only measure performance but also foster growth.

Frequently Asked Questions About Target Agreements

What is a target agreement?

A target agreement is a mutual agreement between manager and employee regarding performance goals to be achieved within a specific period. It's based on the "Management by Objectives" (MBO) concept developed by Peter Drucker and serves as a foundation for feedback, development, and often variable compensation.

What's the difference between a target agreement and target setting?

In a target agreement, goals are negotiated jointly between employer and employee. Target setting, by contrast, is determined unilaterally by the employer. This distinction has legal significance: if a target agreement is contractually stipulated, the employer cannot simply switch to unilateral target setting.

What does SMART mean in target agreements?

SMART is an acronym for the five criteria of effective goal formulation: Specific (concretely formulated), Measurable (verifiable with metrics), Achievable (motivating and attainable), Relevant (feasible with available resources), and Time-bound (with a deadline). The concept originated with George T. Doran (1981).

How often should target agreement meetings take place?

Traditionally, target agreements are set annually. Modern approaches like OKR use quarterly cycles. Regardless of the main cycle, at least one interim meeting is recommended to make adjustments if needed.

What types of goals are there?

There are quantitative goals (measurable through KPIs like revenue or unit quantities) and qualitative goals (e.g., team collaboration). Additionally, there are task-related, development-related, and behavior-related goals, as well as individual, team, and company goals.

What happens when goals aren't achieved?

Failure to achieve goals doesn't automatically lead to termination. Possible consequences include reduction or forfeiture of bonus payments. The performance review should focus on analyzing causes and identifying learning opportunities.

Are target agreements legally binding?

Yes, when stipulated in the employment contract. For bonus-linked goals, the employer must offer the target agreement. If they fail to do so, the employee may claim compensation. Works councils also have co-determination rights for compensation-related goals under German law (§ 87 BetrVG).

Can I be terminated for not meeting my goals?

Mere failure to achieve goals is typically not sufficient grounds for termination. Target agreements primarily serve as an incentive system, not a disciplinary tool. When in doubt, seek employment law advice.

Conclusion

Target agreements are a proven management tool for aligning individual performance with company objectives. The key to success lies in jointly developing clear, measurable goals using the SMART formula—combined with regular communication and fair implementation.

For HR professionals, the takeaway is: those who understand their employees' strengths and potential can formulate goals that not only challenge but also motivate and develop.

Want to use objective diagnostics to better understand your employees' strengths? Learn more about strengths-based talent development with Aivy.

Sources

• German Works Constitution Act (Betriebsverfassungsgesetz – BetrVG), § 87 Para. 1 No. 10, 11.
  https://www.gesetze-im-internet.de/betrvg/__87.html
• German Federal Labour Court (Bundesarbeitsgericht), Judgment of December 12, 2007, Case No. 10 AZR 97/07 – Compensation for failure to offer target agreement.
• German Federal Labour Court (Bundesarbeitsgericht), Judgment of July 3, 2024 – Obligation to negotiate target agreements.
• Drucker, Peter F. (1954): The Practice of Management. Harper & Row.
• Locke, Edwin A. / Latham, Gary P. (1990): A Theory of Goal Setting and Task Performance. Prentice Hall.
• Doran, George T. (1981): There's a S.M.A.R.T. way to write management's goals and objectives. Management Review, 70(11), 35-36.
• Robert Walters Salary Study 2024.
• Gabler Business Encyclopedia: Management by Objectives.
  https://wirtschaftslexikon.gabler.de/definition/management-objectives-40709