Incentives
Why should you link staff performance to SPM?
Many MFIs use rewards and incentives to recognise staff performance, but these are usually linked to financial performance, especially growth and portfolio quality. For MFIs with a strong commitment to SPM, your social objectives should be reflected in your employee performance reviews, promotions and incentive systems.
Performance standards solely based on financial or operational incentives, while meeting the client’s need to access a financial service, can encourage unintended behaviour by staff (especially field staff) and may have consequences that affect the client’s other needs in a negative way. For example, field staff incentives often address two areas: productivity (eg, number of loans or clients, or portfolio size) and portfolio quality (eg, percentage of delinquencies). These two areas can and do encourage volume (eg, more clients) and lending to low-risk clients, and don’t relate to how clients should be treated. Similarly, MFIs with a performance measure requiring a ‘no tolerance’ delinquency policy may find that its field staff verbally abuse clients who fall into repayment difficulties (or worse).
When designing staff incentive schemes, try to balance financial and operational performance criteria, and be careful to avoid unintended consequences. For example, a low delinquency rate target can be counterbalanced by a low exit rate target or by a high client satisfaction score target. By balancing performance measures, you can improve both financial and operational performance in the long term, as they encourage staff to consider clients’ holistic needs and concerns.
The below offers some useful tips on designing incentives linked to the common objectives of increasing outreach to poor female clients.
Linking staff incentives to poverty and gender objectives
If you want to expand outreach to the poor:
- Have an effective tool for measuring and monitoring clients’ poverty levels. This could be as simple as monitoring annual sales information from loan applications, or a more complex approach, using the Progress out of Poverty Index (PPI) or other measures.
- Identify indicators that can be measured, and that are within the control of the individual or group – for example, branch-level drop-outs of poor clients for branch managers, or branch-level group incentives and portfolio level drop-outs for individual loan officer incentives.
- Have clear baseline data against which you can measure progress, such as number of clients with annual sales below a certain level or with household income below the poverty line.
If you want to focus on empowering women:
- Select proxies of women’s empowerment, such as increased access to loans, increased loan sizes, increased influence over use of savings, reduced time spenton household chores, increased understanding of rights, etc.
- Conduct regular client interviews or focus groups to monitor women clients’ perceived sense of empowerment.
- Create group-level (ie, branch or region) staff incentives linked to improvementsin women’s empowerment, in areas identified through the interviews or focus groups.
Some organisations are beginning to implement balanced incentive systems:
Save the Children is working with its partners to develop employee incentive systems that will reward loan officers in Myanmar (Burma) and Vietnam whose portfolios have a higher mix of poor clients, with bigger bonuses.
Prizmain Bosnia recently revised its performance management system. It uses a combination of individual and group-based incentives, to include depth of outreach, service quality and the financial health of the MFI as a whole. Loan officers are rewarded monthly for performance on a few select indicators, including client
caseload, drop-out rates, portfolio at risk, loans disbursed, and depth of outreach. In addition, all branch staff receive a percentage of Prizma’s annual surplus as a profit- sharing bonus. This is measured with varying weights set by the Board annually and based on the team’s aggregate score across its six core performance areas:
1. Productivity – number of clients per staff
2. Breadth – growth in number of active clients
3. Depth – number of new, very poor clients, as measured by its Poverty Scorecard
4. Efficiency – administrative efficiency ratio
5. Drop-outs – drop-out rate over 90 days
6. Write-offs – annual write-off rate
Prizma’s headquarters staff are also eligible for the annual profit-sharing bonuses, based on average branch performance. This gives them an incentive to ensure the sound functioning of the MFI’s operations as a whole. Some MFIs have found that group-based incentives are more effective in reinforcing social objectives, as they promote teamwork and help to avoid unintended consequences (see below for PRODEM’s experience).
PRODEM’s move from individual to group-based incentives
In the competitive microfinance environment of Bolivia, PRODEM has succeeded in attracting and retaining personnel by using primarily group-based incentives. While it began with a more traditional incentive system, which rewarded individual loan officers based on the number of clients, average loan portfolio and percentage of loans in arrears, it found over time that the incentive system was having several unintended consequences. Negative consequences included higher staff turnover and more staff being fired as a result of loan officers violating the organisation’s policies and procedures. Rather than increasing staff loyalty, the individual incentive system had actually caused loan officers to become more self-focused and to behave less responsibly towards clients.
In 1996, PRODEM converted its incentive programme from a monthly, individual bonus to an annual, branch-level bonus system, which helped staff to take a more long- term approach and be client focused. Nonetheless, some negative consequences remained, including disincentives for cross-branch teamwork and staff resistance to moving to riskier environments where a branch might not be eligible for the annual bonus. As a result, PRODEM converted its incentive system to an annual MFI-wide incentive system, including a pension fund that allows employees to become part- owners of the MFI.
While its incentive system is an important motivator for staff, PRODEM management believes its social mission is the most important motivational tool it has. It reinforces this through new staff orientation, training opportunities and communication channels, including newsletters, emails and its website. It also offers non-financial incentives, including staff development, promotional opportunities, achievement awards and the opportunity to take a sabbatical after ten years’ service.
Source: Eduardo Bazoberry, ‘We Aren’t Selling Vacuum Cleaners: PRODEM’s Experience with Staff Incentives’, MicroBanking Bulletin, April 2001
What non-financial staff incentives can support SPM?
Non-financial incentives can be just as effective as financial ones in reinforcing employees’ social performance. Grameen Bank, for example, uses a star system to acknowledge staff members who exceed performance benchmarks. Three of the five stars are related to financial performance, and two to social performance. Staff display the stars on their name tags, creating healthy competition and pride between branches. Whatever incentives you offer, you should regularly review and monitor their effects, in order to ensure that they are in fact supporting the social mission and not resulting in unintended negative consequences. You should also verify whether staff find the incentive system to be fair and transparent.
Effective non-financial incentives can include:
- verbal acknowledgements
- public recognition
- training certificates
- participation in a conference or information exchange trip.