Designing Financial Incentives to Increase Loan Officer Productivity: Handle with Care!
Holtmann, M.
Journal: MicroBanking Bulletin, (6):5-10
Publication Date: Apr 2001
Published by: MicroBanking Standards Project
Document Type: Journal Article (PDF)
Why focus on loan officer productivity?
This article looks at the contribution that loan officer incentive schemes can make to improving productivity and makes some suggestions for the design and implementation of such schemes. The paper sees that loan officers:
- Are responsible for creating and safeguarding the quality of assets;
- Generate income for the institution;
- Have an impact on outreach;
- Possess more detailed and accurate information about the local environment and the clients than do central management and the owners;
- Make the vast amount of operational decisions;
- Account for a significant share of staff costs.
The paper also states that despite the limitations of monetary incentive schemes, they have practical values. It shows an illustrative incentive scheme and distinguishes between schemes, for example:
- Simple piece rate systems with a set bonus per output;
- Complex systems which allow management to set targets related to specific variables;
- Staged systems where loan officers adjust their performance to remain close to a particular "stage" or limit;
- Linear systems which provide a reward or penalty for any change in the output or quality variables.
The paper concludes that loan officers are normally "rational" in the economic sense and financial incentives provide an important stimulus.
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