Incentivizing Higher Education Outcomes – The Next Frontier of Pay-for-Performance (WP-25-14)
Burton Weisbrod
Colleges and universities—both state institutions and private institutions—depend on revenue from students and their families (tuition), donors, public agencies, and grant sponsors for their economic health and existence. They compete for those funds based in large part on information concerning their performance, in education, research, sports, postgraduation employment, and alumni support—with expectations that have dramatically shifted and changed over time. Today, colleges and universities compete for rankings among a variety of published performance measures, and therein lies a significant problem. For strong financial rewards for measured performance encourages colleges to devote more resources to those forms of performance that are easily observed, measured, and highly rewarded, while other dimensions of performance are largely neglected. Even worse, it incentivizes “gaming” of those measures to enable the appearance of better outcomes. This paper examines the history of higher education institutions, their performance goals and expectations. It provides case studies of how performance measures tied to strong financial incentives have led in many ways to unintended and undesirable outcomes over time, and explains the underlying economic concept of why measurement itself leads to behavior changes. Finally, it makes a case for more nuanced and multi-dimensional measures of higher education performance, tied to weak rather than strong financial incentives, to better balance the goals and finances of educational institutions, their customers (students), and the public.