Performance Incentives for Higher Education: You Get What You Pay For

Posted by Nolan Miller on Oct 12, 2011

Filed Under (Other Topics)

The Daily Illini ran a story today about a change to the way public universities will be funded in the future.  This year’s higher education bill, HB 1503, contains provisions instructing the Illinois Board of Higher Education to come up with performance measures that will be used, in part, as a basis for funding public colleges and universities in the state.  Let me begin by saying that, in general, holding government bodies accountable for their performance is a good idea.  The people of the state have a right to know that their money is being well spent.  I encourage the adoption of performance measures in all areas of public expenditure.

Having said that, I encourage (e.g., warn) the Illinois Board of Higher Education to keep in mind that when you pay someone to do something, they’re going to do exactly that.  So, you need to be careful what wish for.  If you increase a school’s funding when they increase their graduation rate, you should expect them to increase their graduation rate, and in many cases they’ll adopt the lowest-cost approach to doing so.  Sure, they may increase advising and keep closer tabs on students as they work their way through their educational careers.  That would be great.  But, they might also be more lenient in counting credits toward graduation, lowering their standards, or they might be more reluctant to admit students who seem unlikely to graduate on time, decreasing access.  While increasing advising effort costs money, relaxing standards and not admitting students who are unlikely to graduate (assuming there is another student waiting to take his place) are relatively costless.  We should not be surprised if, in the face of increased incentive, public universities make use of the latter two tools to increase graduation rates, because we paid them to do it.

To be sure, legislators and the IBHE are aware of these possibilities.  In fact, the bill suggests that there should be both overall performance measures (e.g., graduation rates) as well as measures that look at how well the school serves at-risk students.  However, incentives are complicated, so-much-so that social scientists have a name for what happens when they go awry.  We call it the “Law of Unintended Consequences.”  Further, there is increasing evidence that when you create explicit, monetary incentives to do a thing, you crowd out intrinsic incentives.  So, while you may have student advisors who today go the extra mile to get a student through to graduation out of a sense of altruism or duty, once you put a price on performance, this sense of duty seems to take a back seat.  People start to say “if I go the extra mile to help this student, it isn’t going to affect our overall graduation rate, which is what the state really cares about, so why bother.”  In an environment where people generally do their jobs, and do them well, because it is the right thing to do, putting a price tag on things can significantly reduce their intrinsic motivation.

The next point of concern comes from the funding structure.  It is unclear whether the incentive payments will be “new” money in addition to that already allocated to public colleges and universities, or whether it will be a reallocation of current money.  Much ado is made regarding government funding from the idea that people can do more with less.  We often hear cries to reduce “waste, fraud and abuse.”  But we need to keep in mind that public colleges and universities in Illinois have just been through a years-long belt-tightening process.  The easy cuts have already been cut.  Trying to squeeze the incentive payments within current budgetary allocations encourages “robbing Peter to pay Paul,” pulling resources away from other functions in order to meet performance goals, and the tighter the budget gets the more schools will be tempted to increase their performance scores through the cheapest way possible (i.e., lowering standards) rather than through the “right” way (i.e., increasing learning).

Finally, in setting up the pool of money available for performance bonuses, the IBHE needs to be careful not to exacerbate competition between public schools.  If the bonus pool is fixed and awarded to schools based on how well they meet performance goals, this may increase incentives to compete with other public schools.  Perhaps they will increase marketing expenditures in order to attract better students.  However, if all public schools do this, in the end you might have a lot of money going to marketing firms that would otherwise go to student services, and students more-or-less ending up in the same places they would have gone before.  Or, schools may spend money on improving student services such as the quality of the gym and/or the dorms, which make students happy but do not contribute to educational attainment.  The stronger the incentives offered by the new system, the more temptation there will be to engage in expenditures of this sort.  If competitive incentives are strong enough, forcing public schools in Illinois to compete more intensively over students may actually leave less money available for education and reduce overall attainment.  More unintended consequences.

Let me finish by saying that I’m not necessarily against performance incentives. But, incentives are complicated things, and the unintended consequences of incentive payments are often as important, if not more so, than the intended ones.  Designing incentive schemes that induce the behavior you want without encouraging the behavior you don’t want is a very difficult task.  I hope the IBHE is up to it.