Finance & PSD Impact JANUARY 2018 The Lessons from DECFP Impact Evaluations ISSUE 46 Our latest note shows how task specific bonuses in a mission-oriented nonprofit can undermine the organization’s goals and larger mission if task complementarity is important. Designing Wage Contracts in Multi-goal Organizations Xavier Giné, Ghazala Mansuri and Slesh A. Shrestha Economic theory has long suggested the day-to-day interactions with poor use of monetary incentives to motivate communities. workers. In practice, however, public We worked with NRSP to design and bureaucracies and nonprofit organizations implement two pay-for-performance are driven by a broader mission that often schemes for FAs to assess the nature of involves multiple operational goals, not all complementarities across these two of which may translate equally well into organizational goals. The study was measurable indicators. conducted in all 35 branch offices located in In such settings, the impact of rewarding 15 districts across Sindh, Punjab, and a subset of goals will depend on cost Khyber Pakhtunkhwa provinces, where complementarities, that is, how effort NRSP was active. This provided us with a provision affects the disutility cost of effort; sample of 162 FAs, who were randomly and on production complementarities, divided into three groups (two treatment namely, how effort in the different tasks groups, and one control group). To ensure interacts to achieve each goal. Despite a that all FAs under a given management team substantial theoretical literature on worker were provided with the same bonus scheme, incentives in nonprofits and bureaucracies the randomization was done at the branch emphasizing the role of complementarities, level. there is little empirical evidence on how FAs in the treatment group received one such complementarities affect a worker's of two bonus schemes. The “social bonus” performance, and the implications of rewarded effort on tasks related to social incentivizing specific tasks for the empowerment, such as working with organization's broader mission. communities to create and strengthen organizations of the poor, while the “credit The Intervention bonus” incentivized the health of the We worked with the largest partner of a microcredit portfolio, which required prominent development organization in disbursing micro loans to community Pakistan called the Pakistan Poverty members and ensuring their timely Alleviation Fund (PPAF). PPAF and its repayment. Treatment FAs that met their largest partner—National Rural Support monthly target on the incentivized outcomes Program (NRSP)—share the same mission received a bonus added to their base of reducing poverty. In particular, NRSP monthly salary. The monthly bonus was seeks to achieve this mission through two capped at 20 percent of the base salary. operational goals: building and The bonus intervention lasted for 15 strengthening community organizations of months. To discourage any intertemporal the poor and supporting poor households substitution of worker effort, treatment FAs directly through small loans intended for were not informed in advance about whether investment in income generating activities. and when the bonus would end. FAs in All NRSP field staff (Field Assistants or control branches continued to earn the (flat) FAs) support both operational goals in their base salary during this period. Do you have a project you want evaluated? DECRG-FP researchers are always looking for opportunities to work with colleagues in the Bank and IFC. If you would like to ask our experts for advice or to collaborate on an evaluation, contact us care of the Impact editor, David McKenzie (dmckenzie@worldbank.org) • Social bonus undermined intrinsic Results motivation regardless of teamwork, and it • Credit bonus improved the microcredit exacerbated the propensity to free-ride program but it worsened the quality of among FAs working in teams. community organizations (COs): During the 15 months, FAs offered credit bonus The literature on intrinsic motivation performed 0.238 s.d. higher on an index of argues that rewarding mission-related credit outcomes and 0.384 s.d. lower on tasks can undermine intrinsic motivation the social index relative to control FAs. and exacerbate free-riding. In our case, FAs clearly viewed the building and • Social bonus increased CO formation strengthening of COs as part of NRSP's without worsening microcredit outcomes core mission and rewarding such tasks or CO quality, and improved client backfired. In contrast, the credit bonus empowerment: FAs offered social bonus had no impact on intrinsic motivation or formed 0.255 more COs per month than the odds of free-riding in teams. control FAs, and they performed 0.131 s.d. higher on an index of empowerment Policy Recommendations indicators. Among FAs working Our results have the following policy individually, FAs offered social bonus implications: performed 0.297 s.d. higher on the credit 1) A proper understanding of task index, and they were as effective as FAs complementarities in cost and in offered credit bonus on improving the production technologies is important, credit index. especially when incentives can only be provided for a subset of goals (perhaps These results indicate that both production because effort towards unrewarded goals and cost complementarities are empirically is too noisy or too costly to measure). relevant. While cost complementarities 2) Evaluations of microcredit programs alone could explain why the credit bonus have typically found small or negligible improved credit-related outcomes and impacts on empowerment or other worsened social-related outcomes, they social-related outcomes. Our results cannot explain why at the same time the offer one plausible explanation for this bonus that incentivized social outcomes also finding, since incentive structures that improved the health of the credit portfolio. only reward the performance of the credit portfolio undermine social-related • Social bonus was detrimental to team goals. performance on both the credit and social 3) Finally, our results suggest that financial indices: Among FAs working in teams, incentives that crowd out intrinsic FAs with social bonus performed 0.269 motivation can also affect performance s.d. lower in the credit index, and 0.182 by undermining the willingness of s.d. lower in the social index compared to motivated employees to work in teams. their control counterparts. For further reading see: Giné, Xavier, Ghazala Mansuri and Slesh A. Shrestha “Mission and the Bottom Line: Performance Incentives in a Multi-goal Organization”, World Bank Policy Research Working Paper 8270, December 2017. 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