Performance-Based College Funding

In May 2016, the Century Foundation published a report titled: “Why Performance-Based College Funding Doesn’t Work” by Prof. Nicholas Hillman. It is a good analysis of why performance-based funding is unlikely to function as intended in higher education. You should read it.

However, there is one important misunderstanding contained in the report about the nature of work and, relatedly, incentives. Hillman says:

Assumption 2: There is a clear pathway for achieving results.

Incentive regimes work best when tasks are routine, non-complex, and when there is only one principal and one agent involved in delivering a service. In this environment, a manager is able to design and enforce a performance contract with an employee: if the employee does not perform, they do not get paid. This performance model has been found to work well in some industries, such as the classic example of windshield installation [Safelite], where agents have direct and unambiguous control over the production process.27

Windshield installation, whether in the aftermarket (Safelite) or in automobile manufacturing, is not as simple as the “one principal and one agent” service delivery portrayed in the report. There is a team of people in complex interactions that make it seem as if a task is routine and non-complex.

As a former supply manager in the aerospace industry, I know how industrial procurement and service delivery typically works. For Safelite to install a replacement windshield requires the work of multiple buyers (purchasing agents), each specializing in the procurement of individual items that are required to install a replacement windshield:

  • Windshield glass
  • Rubber gaskets
  • Windshield adhesive
  • Safety items such as gloves, safety glasses, and First-Aid kits
  • Vacuum to clean up broken glass
  • Windshield lift and installation equipment
  • Purchasing or leasing of service vans
  • Hardware and software to monitor service van location
  • Purchasing or leasing mobile payment terminals

And, it requires other people as well:

  • Human resources personnel to hire installers
  • People to train installers
  • Procurement of training materials (print, video, web)

Safelite management will want to minimize inventory carrying costs of the aforementioned materials while at the same time seek to satisfy customer’s needs 100% of the time. This, along with differing incentives for each group – often in conflict with one another – creates a complex situation that is managed using a combination of computer systems and human decision-making. Both are prone to frequent failure, resulting in material and labor shortages that leave customers disappointed and who will seek alternative suppliers of replacement windshields. In addition, material received by Safelite from its suppliers could be nonconforming on occasion, which will be another source of material shortages. Incentives for replacement windshield installers can, therefore, be rendered non-functioning on any given day.

While the installation of a replacement windshield can appear to be routine and non-complex, the effort made by many people that goes into making it happen on a daily basis is anything but routine and non-complex. Installation of replacement windshields is a collaborative task with varying incentives, and the idea that only one person is responsible for completing the task is completely wrong.


Assumption 2: There is a clear pathway for achieving results.

However, in public sector organizations the tasks are rarely routine or non-complex, and there is rarely just one principal and one agent involved in delivering a service. Students interact with any number of administrators, faculty members, and peers on a daily basis, meaning that the production of a college graduate is a collaborative task in which no single person is responsible for achieving a goal on their own. Unlike installing a windshield, the process is neither automated nor under the direct and unambiguous control of a single person. In fact, windshield installers may find the external incentives to motivate their behaviors, while college administrators and faculty members may be more intrinsically motivated to perform. Two decades of research on public sector motivation show that high-stakes external pressure can actually “crowd out” intrinsic motivation, reducing the likelihood of performance.28 In this context, weak financial incentives are preferable to high-stakes incentives.

“However, in public sector organizations the tasks are rarely routine or non-complex…” That is certainly what it looks like to the casual observer and even by the people who do the work. Yet, if an industrial engineer (or any person trained to observe work) were to observe the person doing the work for some period of time, they would find that the great majority of it is routine and mostly non-complex, and that like windshield replacement, it too engages many people and many processes.

“Unlike installing a windshield, the process [production of a college graduate] is neither automated nor under the direct and unambiguous control of a single person.” For each task that each person performs in the production of a college graduate, it is in fact under their direct control – though it may not appear that way to them. There is a process that they perform, whether or not they recognize it as such.

In a nutshell, Hillman analogy is flawed. Installing a replacement windshield and producing a college graduate are more similar than different. I realize that few people in higher education, whether faculty, staff, or administrators, want to think of it that way. But, if they did, they might take the initiative to aggressively improve academic and administrative processes as a means to forestall performance-based college funding – an action that is highly regarded by many politicians and business leaders, but which has a high probability of doing far more harm than good. And it will surely be grossly inferior to simple action of improving academic and administrative processes via kaizen. This would include low-stakes incentives that connect to strong intrinsic motivations and desires to better serve students and other stakeholders.

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