Productive managers, productive branches, and the rewards. Evidence from the cooperative banks in Sri Lanka

Abstract

Using branch-manager linked data from the Cooperative Rural Banks (CRBs) of Sri Lanka, we investigate the source of branch performance differences. Despite the significant variation in the local conditions of branches, we found that managerial talent matters significantly. Manager effects explain 35% of the raw variation in the branch profit per worker and 45% of the raw variation in the branch-level non-performing loan ratio (NPLR). Branch effects explain a larger share of the variations in branch profit per worker (69%), but explain a smaller share of variation for NPLR (41%). We did not find evidence that branch managers are rewarded for their real contributions, measured by the estimated manager effects, via salary increase. Rather, they are rewarded merely for the raw performance of their branches. However, managers are rewarded with improved branch assignments when they increase profit-per-worker. A one standard deviation improvement in manager effects would increase the probability of being assigned to the top quartile branches by 8.7%.