Transcript Upgrading and Incentivising Staff Dr. Ekkehard Esser Bankakademie International Lahore, 10 May 2005

Upgrading and Incentivising Staff
Dr. Ekkehard Esser
Bankakademie International
Lahore, 10 May 2005
Why are Banks reluctant to
venture into SME Lending?
SME lending is often perceived as risky
SME lending is often perceived as costly
But ...
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Summary of Lessons Learned
Various ways to make it work profitably and with
acceptable risk profile
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Separate SME Lending Unit as independent department
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Decentralized decision-making at branch level
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SME loan officer fully responsible and accountable for the entire loan
cycle
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Performance-based remuneration system for SME loan officers
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Strong MIS and loan tracking system to ensure close monitoring and
speedy follow-up of overdue loans
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Strong internal audit specialized on SME loans
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Importance of Human Factor
 Interaction with clients requires direct human involvement
for tasks like assessing potential clients‘ ability and
willingness to repay loan (credit risks).
 The quality and motivation of staff members has impact
on FI‘s ability to provide best possible service to as many
customers as possible.
 Staff members are the most important „factor of
production“!!
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Best Practise SME Lending
Quality - Motivation of Staff Members
Quality (and Quantity)
Selection of Staff
Training
Experience
Motivation
Provide staff with incentive
to perform well
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Lessons Learned
What staff qualities are we looking for?
Young
Well educated
No banking experience
Communicative
Committed
Interested in how SMEs do business
Interested in economic development
Strong performance orientation
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Lessons Learned
How do we train?
Training on the job
Class room training
Practical and theoretical
Results oriented
People skills
Training is an investment
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How do we motivate staff?
Money is a motivating factor for most humans
 Higher compensation will influence individual behaviour.
 Money is only one motive for employees to do their job
well.
 Prestige, power, status are other motivating factors.
 Type of motivation comes from “within”.
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International Experience
Monetary incentive schemes often have a
significant impact on organisational
performance:
 reducing loan delinquency
 boosting loan officer productivity and increasing
institutional outreach
 improving efficiency and productivity
 retaining excellent staff
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International Experience
If Incentive Schemes are to be effective,
they must be accepted by those they
target
 Fairness – attainable goals
 Transparency – simple enough to be understood
measurable, objective indicators
known as “rules of the game”
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Typology and Form of
Incenticves Schemes
Typology of Staff Incentive Schemes
 Individual and Group
Form of Incentives Schemes
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Bonus schemes
Profit-sharing plans
Gainsharing plans
Merit pay plans
Employee Stock Ownership Plans (ESOP)
Pension plans (deferred income)
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Design Issues
Fundamental question:
How much weight should the incentive component have in
total employee renumeration?
Incentives
• need to be large enough to influence the behaviour
• must be in line with both local and institutional cultures
Guideline for Loan Officers
20-50 % variable, performance related of total compensation
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Design Issues
Fundamental question
What kind of behaviour do we want to encourage?
 Reduce and/or control client delinquency
Short-term incentives
 Boost staff productivity
Short-term and long-term incentives
 Increase staff loyalty
Long-term incentives
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Design Issues
Payout frequency?
 Short-term payment intervals provide direct feedback to
employee, stronger positive effect on productivity
 Frequent - regular incentive payments may develop a
„entitlement mentality“
Avoid „entitlement mentality“ by incentive awards that are
very reactive to changes in performance.
Split between short-term and medium-term payout
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Design Issues
Performance Measurement
 Supervisor Evaluation versus Indicator System that is Transparent –
Objective
Example: Loan (Credit) Officer
 Produce and control as many loans as possible Monthly output (numbers
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of loans approved or disbursed and volume approved or disbursed).
Build up a large portfolio Outstanding loan portfolio, both in terms of the
number of outstanding loans (caseload) and the volume of the outstanding
loan portfolio.
Maintain excellent portfolio quality Quality of loan portfolio. This could be
measured by various indicators such as the repayment rate or non-performing
loans (NPL)
Client retention – New clients/acquisition Repeat borrower rate
Client‘s business activity etc Outreach to target groups, such as traders.
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Design Issues
Bonus Schemes
 Tiered Schemes versus Linear Schemes
 Maximum Performance Levels and Bonus Caps versus
Reference Performance Levels
Reference Performance Levels (= reasonable output of
experienced loan officer)
 reflect the reality of FI operations
 positive incentive for everyone
 easily to adjust upwards with „learning curve“
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Example of Bad Incentive
Schemes
 No base salary, only a commission based on ability to lend and
loan recovery. High turnover rate among loan officers, left
typically after 2 years, „burn out“.
 Heavy use of incentive pay, fat monthly bonuses. Loan officers
earned more than branch managers. Refused to apply for senior
jobs.
 To combat arrears problems very strong disincentives for
allowing client delinquencies were introduced. Loan officers
manipulated statistics or concentrated on recovering funds,
almost stopped granting of new loans.
 Heavy focus on loan officer productivity with minimum numbers
of credits per month to be eligible for bonus. Loan portfolio
quality suffered, some engaged in fraudulent behaviour, „fictitious
clients“.
 Strong emphasis of portfolio quality. Loan officers might become
risk averse and shy away from new customers.
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International Experience
Step by Step Approach to the Design of Staff Incentive Schemes:
Step 1:
Step 2:
Step 3:
Step 4:
Define and Clarify Strategic Goals
Analyse the Culture, Clientele, Products, and Processes
Define the Incentive Scheme’s Objectives
Decide How Much the FI is Willing to Spend – Conduct a Proper CostBenefit Analysis
Step 5: Determine Which Staff Members and Occupational Levels to Target
Step 6: Select the Incentive Mechanism(s)
Step 7: Conduct the Technical Design Work
Step 8: Run a Pilot Test
Step 9: Sell the Scheme to the Staff
Step 10: Monitor the Scheme’s Performance and Adjust it as Necessary
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Performance-based renumeration
• A well-designed system will compensate initially
increased cost by the improved staff productivity and
output quality
• There is no single incentive scheme that can serve as
a „one size fits all“ solution.
Incentive schemes are an integrated and indispensable
factor for success in SME lending
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