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Worker Incentives in the Banking Industry

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Abstract

This study shows that monetary incentives together with performance disclosures lead to significant increases in effort and productivity in the multi-branch banking industry. Our results are based on an incentivized credit card campaign run by a commercial bank in which employees were paid a piece-rate if they sold a credit card to a customer. Later in the campaign, the head office started to provide daily performance reports for all branches of the bank. The campaign ultimately resulted in a significant 12.5% increase in the average daily productivity of branch staff and productivity changes found were heterogeneous across different branches.

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Notes

  1. Academic literature also presents other forms of incentive problems in banking industry, one being the incentive problem in which the bank directors with negligible ownership in the bank collude with the insider borrowers to the harm of both the regulator and the shareholders, although the information costs are lower in insider loans (Kummer et al. 1989). One other problem relevant in banking industry is mentioned Gomez and Ponce (2019) noting that the impact of introducing different regulatory tools on managers’ incentives basically creates moral hazard problems in the form of traditional effort problems and risk shifting (taking excessive risk).

  2. At the start of the campaign, April 1, 2008, the TL/USD exchange rate was 1.31. Thus a 5 TL piece-rate incentives corresponds to 3.82 USD.

  3. Among the conditions, the bank required that the staff had to hold its type A credit card. The type A credit card refers to a specific, recently introduced type of card that provides a longer term interest-free instalment plan and bonus points. The card was introduced in 2007—one year before the campaign—and the head office wanted to activate the use of this competitive product and started the Credit Card Activation Campaign. The ultimate aim was to increase the use of this card among the customers, but it also wanted extensive use of this card among its employees. So the employees who wanted to join the campaign were encouraged to apply for the credit card (normally five working days were required to obtain the card) or to access the application using the card number of a peer. The latter could have created a peer incentive although the evidence from the first part of the campaign does not indicate this effect was strong. The campaign was valid for both type A and type B cards. Besides the type A cards, the bank also had various types of standard (type B) cards. Standard cards do not provide benefits in the form of interest free instalments or bonus points, so they have a lower annual fee. The annual fees for the banking sector’s lowest fee credit cards charged between 3 TL to 35 TL in 2008. While the annual fee of the bank’s standard card was at minimum level of 3 TL, the type A card entered the market with an annual fee of 15 TL. Additionally, while the interest rate for a cash withdrawal for the bank’s standard card was 2.90%, it was 4% for type A card. The bank also aimed at borrowers who were more sensitive to annual fees or higher interest rates, so the campaign was also valid for standard cards. The bank staff were exempt from paying annual fees for any type of card of the bank. In addition, it should be noted that obtaining a type A card was not related to having better scores or higher income as these only determined the credit limit of the card. Nor did this mean that “bad risks” could obtain the card. Rather, customers who were able to pass the specified controls (regarding repayment behavior, repayment performance, or ability to pay) could obtain the credit card.

  4. When the final date for using the card (September 29, 2008) passed, a separate report was sent to the branches clarifying total entries and total cards that fulfilled the conditions for the piece-rate on staff basis. Exploring this issue is beyond the scope of this research.

  5. The email contained an excel file with three spreadsheets that displayed the absolute and relative performances of regional headquarters, branches, private operation centres, and bureaus as of one day prior to the reporting date (see Appendix, Note 2). The daily reports sent by the head office do not contain any information regarding the piece-rates earned by the branch staff.

  6. The scales of the branches are determined by the head office based on solid and objective criteria such as deposits, credits, securities, profits, and net interest-free revenues / operational expenditure. Once determined, the scales were updated every year. New branches were not scaled for the first six months till their indicators became known.

  7. The bank makes more than 40 million pension payments to retired people every year that corresponds to about an average of 3.5 million payments every month. Thus, on payment days, pension transactions may impede the other banking transactions. In order to reduce the workload of branches, especially in busy locations, private operation centers are formed.

  8. The underlying descriptive statistics are provided in Tables A1 to A5 of the appendix.

  9. The campaign was run during the global financial crises of 2007–2008 where there was a general global tendency to reduce credit supply which might have resulted in contraction in borrowing, reduction in labour productivity and failure of the firms (as mentioned in a recent study of Franklin et al. (2020) which studies the relationship of contractions of credit supply and reductions of labour productivity during global crisis of 2007–2008) resulting in unemployment and need for funding of retail customers. In order to account for the confounding effects of the global financial crisis and other economic conditions that might have affected the sales of credit cards, we controlled nation-wide credit card sales as well as other forms of credits and indicators such as unemployment, GDP per capita, CPI etc.

  10. March was excluded as there was a campaign running designed to promote consumer loans that may have affected the sale of credit cards.

  11. Customer complaints on credit card issuance were typically seen before 2006 when the private banks with very aggressive strategies for credit card sales issued credit cards without the consent of the customers. However, such situations were much less likely to occur during this campaign (especially for a public bank) since the law had been changed (Article 8 of Bank Cards and Credit Cards Law (Act. No. 5464) on February 23, 2006). This change meant banks were no longer able to issue a card to a person who did not file a request or sign a credit card agreement. Article 35 of the same law imposes administrative fines of 2000 TL up to 10,000 TL in cases of breaches of the Article 8 provision. Also, since 2003, in order to deal with the consumer complaints and to settle the disputes arising from the Consumer Protection Law (Act. No. 4077, 4822 and 6502), a dual dispute settlement mechanism (both Consumer Arbitration Boards and Consumer Courts) was introduced in Turkey. According to the Screening Report on Turkey by the European Union in 2006, about 79% of the 68,855 complaints handled by the arbitration boards were in favor of the consumers.

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Authors and Affiliations

  1. Central Bank of the Republic of Turkey, 34768, Istanbul, Turkey

    Selay Sahan

  2. University of Stellenbosch Business School, University of Stellenbosch, Cape Town, South Africa

    Euan Phimister

  3. University of Aberdeen Business School, Aberdeen, AB24 3FX, UK

    Euan Phimister

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  1. Selay Sahan
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  2. Euan Phimister
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Correspondence to Selay Sahan.

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Sahan, S., Phimister, E. Worker Incentives in the Banking Industry. J Financ Serv Res 61, 259–284 (2022). https://doi.org/10.1007/s10693-021-00361-0

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