A wage incentive plan for branch managers using the DEA methodology

The purpose of this paper is to propose a wage incentive plan for branch managers of multi‐branch firms. The incentive payment is calculated according to each branch's performance and its relative rank, taking into consideration common variables, regional variables and managerial skill variables.

The paper utilizes Andersen and Petersen's super‐efficiency model, which is based on the model of Charnes, Cooper and Rhodes, the most widely used and best known data envelopment analysis model. The regional variables and the managerial skill variables are considered as inputs (resources). The periodic measured efficiencies are then translated into a special wage incentive plan with promotive and contrient interdependence between the branch managers.

The regional variables and the managerial skill variables have a significant impact on the efficiency of each branch and on the ranking of the branches. These variables may increase or decrease the relative efficiency and the incentive payments of the branch managers.

The research provides tools for applying a wage incentive plan for branch managers of multi‐branch firms. The proposed incentive plan is more fair than most other incentive plans because it takes into account regional variables. Furthermore, it can increase the flexibility of the top management to switch branch managers, to send talented managers to problematic branches/regions/countries and to decrease the attractiveness of the profitable branches. The method also enables us to evaluate the performance of each branch over periods of time. The practicability of the proposed plan is demonstrated by a real‐life case study.

Beyond the common input and output variables that measure efficiency, the plan presented in the paper takes into consideration those regional variables which characterize each branch as well as the managerial skills of the branch managers. The total cost for the incentive payment is a given portion of the global corporate net profit.