Performance-Based Incentives in Multi-Layered Organizations

Policy Context

Organizations need to decide on their use of various tools of personnel policy, such as performance incentives and promotion rules, and studying the optimal design of these tools has long been a central question in economic research. These questions are especially important in the context of the organization the researchers collaborated with for this project, namely the Community Health Worker (CHW) program that had been launched by the government of Sierra Leone in 2017. Sierra Leone’s health system has suffered enormously from an 11-year-long civil war that ended in 2002, the most widespread outbreak of Ebola virus disease in history during the 2014 – 2016 period, and a general shortage of qualified health workers. These problems are reflected in some of the country’s key health indicators such as maternal mortality and child mortality, in which Sierra Leone ranks among the worst-performing countries in the world. The goal of the CHW program has been to expand access to primary health services across the country. It is centered around CHWs, who provide a package of basic health services in the villages they live, and their supervisors, who are based at the local health unit and whose role is to enable CHWs through advising, training, monitoring.

Study Context

While the use of performance incentives has been shown to be effective in raising worker effort, the existing literature has studied incentives within a single organizational layer, ignoring the hierarchical structure of organizations and the possibility that incentivizing one layer of the organization might impact effort across other layers, e.g. through effort complementarities. In their first study, researchers partnered with the government CHW program to randomly assign health units to the introduction of a new incentive scheme that pays a fixed amount of money per household visit provided by a CHW either (i) only to CHWs, (ii) only to their supervisors, or (iii) in equal shares to both. The researchers then compare the three treatment arms to a control group without performance incentives in terms of a set of outcome variables collected through a household survey.

Results and Policy Lessons

Results show that incentivizing both community health workers and their supervisors had the largest effect on the number of household visits (+63% compared to the control) and resulted in better health outcomes. While both the CHW-only and supervisor-only incentive schemes also led to an increase in the number of household visits compared to the control group, the magnitude of the increase was significantly lower. The analysis shows that the shared incentives scheme outperforms one-sided incentives mainly through the presence of complementarities between workers in the two layers of the organization, and the presence of large contractual frictions that prevent the redistribution of incentives across layers. These results have important implications for the way in which organizations with multiple layers design performance-based incentive schemes.

In a second study, the researchers show that organizations that wish to motivate lower-tier workers should also carefully pay attention to the interaction of the meritocracy of their promotion system and pay progression across the hierarchy. Through a separate experiment, the authors created exogenous variation at the health unit level in (i) meritocracy, by linking promotions to the supervisor position to the performance of the CHW and (ii) in perceived pay progression by revealing to the CHWs the salary of the supervisor. The researchers found that meritocratic promotions increased the productivity of CHWs who perceived pay progression to be higher and of the best-performing CHWs at baseline (i.e., those who have a higher chance to be promoted in the meritocratic system). Importantly, high (perceived) pay progression was detrimental to CHW productivity under the non-meritocratic promotion rule. These results suggest that what motivates lower-tier workers is really the combination of meritocratic promotions and an associated steep increase in pay whereas large pay differences are viewed as unfair and have a demotivating effect when promotions are non-meritocratic. This can explain the poor performance of many developing country bureaucracies, which often combine steep pay progression with a non-meritocratic promotion system. The design of promotion schemes should consider not only the independent effects of meritocratic promotion systems, but also the interaction with pay progression in the organization.

Read the working paper about multi-layered incentives here, and meritocratic promotion here.