Pay-for-Performance in Higher Education?

A recent report published by the Louisiana Public Affairs Research Council (PAR) advocates performance incentive funding for colleges and universities after $15 million earmarked for higher education was recently cut from the pending state budget.

The nonprofit, nonpartisan PAR Council detailed the need to better fund colleges based on success and not just enrollment numbers.

“The current formula does not target funding accurately enough or offer sufficient incentives to spur the state’s economic progress,” the report states.

Joseph Savoie, Commissioner of Higher Education and a member of the state Board of Regents, agrees with the proposal.

“I think it’s a good set of recommendations and the Board of Regents, which is responsible for proposing state [higher education] funding, has been interested in the set of ideas for some time now,” says Savoie. 

According to Savoie, Louisiana has had some experience with performance-based funding in higher education.  The state redesigned its teacher preparation programs in the colleges of education, building in accountability assessments.  The schools receive financial rewards if they reach certain benchmarks, such as the percentage of students passing the licensure exam and a quantity index.  The quantity index helps make sure schools were not meeting the benchmarks by building in tougher admissions standards. 

“There is growing demand for accountability as budgets are stretched,” reflects Savoie, who steps down from his post in June to become a campus President after twelve years serving the state under three governors. “There has to be some demonstration of what the investments [in higher education] are generating for a state.  It’s in our interest to be accountable in order to secure additional investments.”  And it’s worked.  The state higher education budget has increased from $680 million to nearly $1.5 billion in the past five years. 

Dr. Joseph Burke, Director of the Higher Education Program and Senior Fellow at the Nelson A. Rockefeller Institute of Government, and co-author of Achieving Accountability in Higher Education: Balancing Public, Academic, and Market Demands, says basing a small percentage of higher education funding on performance measures is a good idea. 

“I think it makes a great deal of sense and it has been tried in a number of states,” says Burke. “What’s wrong with college funding is that they are funded only on input—paying for the number of students you have—and nothing on output.  At least some portion of the funding should go to outcomes.”

Burke cautions that there are many costs to doing business that are relatively fixed in higher education. Advisors, a range of departments and professors, and maintenance are the lion’s share.  Colleges and universities, unlike most businesses, have 75-80 percent of budgets tied up in personnel.  If too much money is devoted to performance, instability can result.

“I recommend three to five percent” of the total university budget be tied to outcomes, says Burke.   

Burke says Tennessee is one state that has carefully and successfully managed performance-based funding.  Of the total higher education budget, 5.5 percent is based on student improvement and performance.  The Tennessee program began in 1979. Missouri and South Carolina are other states that have attempted the incentives with some success. 

“Our formula is relevance plus accountability will equal confidence,” notes Savoie.  “If we can show progress, it will result in confidence in our efforts. In the last decade that’s what has happened.  We are institutionalizing that a little bit more by building in added value to certain performance goals, and also by providing financial rewards for meeting those goals.” 

Savoie says they are also embedding desired behavior in the schools.  By paying more for sophomores than for freshman, for example, they are incenting the schools to improve retention rates. 

Richard Garrett is Program Director and Senior Analyst for Eduventures, a Boston-based research and consulting company focused on education.  Garrett says there are a handful of other states actively discussing performance-based funding. 

“The trend is to both adjust existing performance-based funding and make it shift from enrollment to completions; or enrollments of certain types of students, such as disadvantaged students,” he says.

Garrett adds, “There is a concern about the U.S. falling behind in terms of proportion of adults with post-secondary credentials.  The U.S. completion rate does seem to be a key part of problem.  The U.S. does a good job in enrolling, but falls down in terms of completions.”

Burke says that when looking at performance incentive models, states cannot create a monolithic system.  States have many types of institutions that they fund, and they are going to have different performance rates and emphases, he says.  For example, community colleges should have much more weight placed on job placements for performance funding. 

Finally, says Burke, implementing performance funding should not be viewed by states as a way to cut budgets to higher education, but to increase them.