Academic journal article The Canadian Journal of Higher Education

Incentive Funding Meets Incentive-Based Budgeting: Can They Coexist?

Academic journal article The Canadian Journal of Higher Education

Incentive Funding Meets Incentive-Based Budgeting: Can They Coexist?

Article excerpt


The last 25 years has seen the introduction and evolution of two practices in the financing of public universities that are based on incentives: performance funding and incentivebased budgeting. Both are known by other names-for example, "incentive funding," "set-aside" funding, "matching" funding, "value-centred management," "responsibility centre budgeting," "value-centered management," and even "every tub on its own bottom." Despite contemporaneous timing and similar nomenclature, the two practices are not usually associated with one another. Performance funding is an instrument of public policy and is exercised "top down" by government. Incentive-based budgeting is a matter of institutional choice and strategy. One is mainly about revenue in the form of public subsidies, while the other is about all revenue and expense, in particular net revenue or expense.

On closer examination, however, we see underlying organizational principles that are shared by both. Both address principal-agent relationships. Both assume that resource dependence determines much institutional behaviour. Both assume certain implicit relationships between patterns of revenue and patterns of expense. Both assume that all institutional cost functions are linear. Few assume that unit costs vary by institutional size, complexity, or mission. The problem is that governments and universities rarely share the same assumptions. This leads to some as yet unexamined questions. How can or should the two practices interact? Are they on a course to collision or a course to mutual benefit?

Canada presents a useful context in which to examine this question. Eight of the 10 provinces employ some form of performance indicators. Some are directly attached to funding and some indirectly attached. Many of these arrangements have been in place for at least a decade, sometimes longer. The arrangements vary in structure and the amounts of funding. Almost all Canadian universities are public. More than a dozen Canadian universities-particularly large, research-intensive ones-have deployed incentive-based budgeting in one variant or another. The combination of performance funding and incentive-based budgeting in Canada is fortuitous. Although performance funding is in use in several American states, and nearly 50 American universities use some version of incentive-based budgeting, the overlap is small: in only a few of the American states that use performance funding are there also public universities that use incentive-based budgeting. The overlap is much larger in Canada.

Performance Funding

Performance funding is not a new idea. Nearly two decades ago, Guy Neave (1988) introduced the phrase "the evaluative state." At that time, Neave was reflecting on a variety of practices and policies that had been installed to assist universities and, more often, the states that supported them, to cut the higher educational suit to fit the public purse cloth by quantitative measurement. A decade later, Einhard Rau (1999) presented a small but important paper that asked: "Performance Funding in Higher Education: Everybody Seems to Love It But Does Anybody Really Know What It Is?" The title of Rau's paper was telling. By the turn of the 20th century, practices that previously had been tolerated on an assumption that they were ephemeral and would go away were not only still in use but were also more popular, at least among governments and other agencies that provided public subsidies to higher education. Moreover, and perhaps more importantly, Rau's research indicated that despite a decade of experience, mainly of the trial-and-error variety, performance funding was poorly understood and, in the views of many, ineffective or flawed. Even the language of performance funding is problematic. Performance funding, performance indicators, benchmarking, best practice, incentive or "set-aside" funding, performance budgeting, performance reporting, performance agreements or contracts- they all seem at once to be different and the same. …

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