> Posted by Julie Shea
Loan officers have a tremendous effect on the productivity and income of the MFIs that employ them, and their compensation often comprises over half of the MFI’s costs. Most MFIs are double-bottom-line organizations dedicated to the social mission for which they were founded as well as to achieving financial health. So it’s no wonder that management has an interest in tools that encourage and promote superior loan officer performance, in relation to social as well as financial goals. One such tool is a staff incentive scheme.
A recent visit to a Nicaraguan MFI provided me with firsthand insight into a mission-driven organization that uses a monetary incentive scheme to motivate and reward its loan officers. I approached the project with the assumption that some degree of tradeoff exists when an organization is balancing social and financial objectives. But how much of a tradeoff is there really? Focusing on the social mission can have financial payoffs in the form of loyal clients willing and able to pay back their loans. On the other side, by ensuring strong financial performance, the MFI is also increasing the likelihood that it will reach sustainability, scale, and scope and thereby continue to be able to provide necessary services to the world’s poor. So if the two goals are not mutually exclusive, how can an incentive scheme be designed to promote both?
Within the organization’s staff incentive scheme, loan officers are able to earn 50 percent of their total income in bonuses (effectively doubling their salary). As the cornerstone of my master’s thesis research, I set out to answer the important question: how does this MFI’s incentive scheme influence loan officer behavior, and more importantly do monetary incentives introduce a risk that loan officers will drift from the organization’s social mission?
The staff incentive scheme I observed targets five indicators, representing a mix of social and financial goals. These include loan portfolio and number of clients, both of which contribute to the overall productivity of the MFI. Striving for growth in the loan portfolio and expanding the target client base can have both positive social and financial impacts, in the form of greater outreach to clients (social) and helping the MFI reach scale (financial). The incentive scheme rewards loan officers for referring clients to the healthcare services offered by the organization, which is closely aligned with its social mission to support the health of its clients. Maintaining low rate of delinquency is the main focus of the system– not only is this indicator given most weight (25 percent), but failure to meet the target results in disqualification from all other incentive bonuses. Similar to productivity, the target of low delinquency can be characterized as both socially and financially motivated.
While this particular incentive scheme is designed with financial targets as the primary objective, it is important to note the mission-focused organizational culture in which it is embedded. Interviews with management revealed the emphasis they place on fostering a strong culture focused on the social aspect of the organization’s work, via staff training, workshops, and goal-setting. A survey of loan officers confirmed that management prioritizes this culture, and that it has an effect on loan officer behavior. For example, one loan officer commented that “management provides training to staff. They are concerned with knowing what each loan officer is doing. They ensure that staff is doing quality work and providing good service to clients.” While a monetary staff incentive scheme aimed at financial indicators might introduce the risk that loan officers lose sight of the social focus, this is less likely to occur in a financial institution where every loan officer can recite the mission statement and understands the social significance of the organization’s work.
What have I learned so far? That the indicators can’t neatly be divided into social and financial groups, and that an understanding of the incentives goes hand-in-hand with an understanding of the organizational culture into which they are introduced. In the coming months, I’ll be delving into loan officers’ survey responses to find out more about how the incentive system impacts their behavior – stay tuned!
1 Rashmi Ekka (2010): Integrating social performance management into microfinance capacity building – staff incentives.
Image credit: microlinks.org