Mattias Grammling, an independent microfinance consultant with expertise in staff incentives systems, and Martin Holtmann, head of the Microfinance Unit in the Global Financial Markets Department of IFC, co-authored the MicroSave Staff Incentives Toolkit. Grammling and Holtmann will co-moderate the microLINKS Speaker’s Corner on Staff Incentive Schemes.
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Strong human resources (HR) are essential for successful and sustainable microfinance operations. Four of the five highest risks recently identified by microfinance institutions (MFIs) in the Microfinance Banana Skins Survey 2008 are HR issues:
- Management quality
- Corporate governance
- Cost control (personnel costs are still the largest component of operational costs)
- Staffing
Staff incentive schemes (SIS) are crucial to attract and retain high performers and encourage outstanding achievements. Designing such schemes appropriately is important since they frequently influence an MFI's entire organizational culture. However, many MFIs have questions on how to do this:
- What incentives achieve high productivity levels, encourage savings or sell insurance policies?
- What are their effects on social performance, service quality or staff turnover?
- Can individual SIS undermine team spirit or staff loyalty? How much should MFIs incentivize staff?
- Should powerful SIS be used to encourage staff not directly engaged in lending activities?
- How should these schemes be designed?
The MicroFinance Network (MFN) and CGAP conducted two global surveys among MFI managers in 2004 and 2007. The objective of the surveys was to explore these questions and map the usage, design and perceived effectiveness of staff incentive schemes. The findings are primarily based on responses from the 238 MFI survey participants (147 respondents in 2004; 91 respondents in 2007). The surveys shed light on frequently asked questions about staff incentive schemes:
Who uses staff incentive schemes?
74% of the 238 responding MFIs utilize monetary incentives and widely perceive them as efficient. MFIs with SIS tend to be more advanced than MFIs without SIS. They are more likely to:
- Be regulated
- Have more than 50 employees
- Be profitable
- Have been operating for more than 8 years
- Maintain a high loan portfolio quality
The surveys further reveal regional differences: staff incentives are not as popular in South Asia and Sub-Saharan Africa as in other regions.
What are the perceived effects of staff incentive schemes on loan officers?
In the 2007 survey, MFI managers reported that loan officer incentives have strong positive effects on loan portfolio quality, loan officer productivity and organizational profitability. They also report that incentives can help to enhance staff loyalty, team spirit and the achievement of social goals (i.e. targeting the poor, impact on poverty alleviation), but these effects are weaker, as seen in the table below.
What types of staff incentive schemes are employed?
The two surveys suggest that monetary short-term individual bonus schemes are the most popular type of incentives. The graph below illustrates the percentage of MFIs using various types of SIS. Staff incentive schemes are most frequently used to boost loan officer productivity and healthy portfolio quality, however MFIs use a wide range of schemes, including:
- Bonus systems that reward individual or team performance
- Incentive schemes that accrue bonuses as a function of the entire MFI’s performance (typically annual profit or gain-sharing schemes)
- Annual salary increments (merit-based pay schemes)
- Employee stock ownership plans (ESOPs)
- Non-monetary incentives
What are the best types of incentives for loan officers?
The best type of incentive scheme depends on the organization’s culture. In some organizations, powerful staff incentives may not be the right approach at all. However, the 2007 survey revealed that certain SIS features have stronger effects than others on productivity, loan portfolio quality, team spirit, staff loyalty and staff retention:
Short-term or long-term incentives?
Short-term staff incentives with quarterly or monthly bonus accruals and payouts produce the best effects on loan officer productivity and loan portfolio quality. Incentives designed over a long-term period, with semi-annual or annual payouts, achieve higher team spirit, loyalty and staff retention.
Individual or team incentives?
Most MFIs use individual incentive schemes to enhance loan officer performance. Others use a mixture of individual and team incentives. Very few respondents indicated that they use only team incentives. The survey findings suggest that MFIs that design staff incentives to foster staff productivity or enhance loan portfolio quality should closely link the rewards to individual achievements. Factoring in team components produces greater results in team spirit and higher staff retention – but at the cost of productivity and loan portfolio quality.
Can staff incentive schemes balance social and financial goals?
Only a few organizations have designed special incentives to balance social and financial goals. Incentives work best when applied to loan officers who have little influence over that balance. The products they manage and geographic areas to which they are assigned generally determine the degree to which they are able to reach poor customers. However, pioneers such as PRIZMA in Bosnia and Herzegovina explicitly use achievements in social goals to determine staff bonuses.
When are staff incentives not the right management tool?
Approximately 1/4 of the participating MFIs in both surveys reported they don’t use any incentive schemes - mainly due to financial cost and lack of technical knowledge. Less cited reasons include legal issues and the perception that employees are already highly motivated. Around 75% of the MFIs not yet using SIS intend to in the near future.