6. RESOURCE ALLOCATION AND INCENTIVES IN AN ACADEMIC DEPARTMENT

 

J.D. STANFORD
Department of Economics
The University of Queensland

and

L.A. DUHS
Department of Economics
The University of Queensland

INTRODUCTION

Economists are experts in studies of resource allocation - the basic definition of the subject of economics is the allocation of scarce resources which have alternative uses among competing ends - or more correctly in studies of other people's resource allocation because economists rarely look at resource allocation within their own organisations. This paper makes a start on rectifying this position by examining the problem of resource allocation within an academic department. Questions of resource allocation are interwoven with those of incentive systems.

Resource allocation is an important question for an academic department as is shown by a number of observations. For example, committees in academic departments devise rules for allocation, much time is spent in endeavours to use funds for one purpose rather than another, university administrations have complex rules and decision making procedures to allocate funds among departments and activities. Moreover it is common to observe that discussion about these rules and procedures is intense and that the rules and procedures themselves are subject to change. The possession of a key resource allocation role (Pro Vice Chancellor, Dean, Head of School, Head of Department) confers discretionary power and influence through the associated ability to direct funds to particular uses.

Existing resource allocation procedures do not seem to work effectively or efficiently as it can be observed that universities undergo occasional financial crises in which extraordinary measures are implemented - such as a blanket freeze on all appointments, new literary purchases are prohibited and/or penny pinching measures to reduce expenditure on office supplies.

Overlaying this is the chronic underfunding of the university system. The level of funding provided to the new Unifed National System has not grown as fast as the number of students enrolled - leading to declining funding per student. At the same time, the level of centrally provided research funding has failed to grow at the rate of acceptable research projects much less the growth of the new applications for research funding. In earlier years funding constraints were less severe and there was little particular interest in the funding formulae actually in use. In the present circumstances of more stringent financial constraints more and more departments are starting to look with renewed interest at funding arrangements and allocative mechanisms.

What we do in the paper is to examine in a general way the basis of resource allocation and available incentive systems and then to illustrate these fundamental principles with some specific data and responses to a change in resource availability.

ACADEMIC DEPARTMENTS

Academic departments can be conveniently described in terms of some stylized facts:

(a) Academic departments consist of a group of academics in the same discipline forming a decision making unit.

(b) Academic departments have other staff and activities which support the major roles of the departments.

(c) Academic departments are multifaceted units whose role it is to

(i) teach and examine undergraduate students

(ii) teach and examine graduate students

(iii) train research students and determine their accreditation

(iv) conduct and publish research

(v) conduct non credit courses

(vi) provide community services

(vii) undertake commissioned consultancies.

(d) Members of an academic department have a contractual relationship with the University, some influence on resource allocation in the department and considerable discretion as to how and when to carry out their duties. Academic work is typically open ended and self defined.

(e) Academic staff typically have a long term relationship with the department and access to a career structure.

(f) Academic staff conduct research for publication.

BASIC DECISIONS

Given the tasks which an academic department has to carry out, it follows that there are a number of basic decisions to be made. This includes the following:

1. the number of for-credit courses to be given and the level of these courses e.g. undergraduate, graduate;

2. the method of delivery of these courses - lecture, seminar, tutorial, resource based, distance learning, computer assisted, computer managed;

3. the minimum and maximum number of students in each course;

4. the base teaching load;

5. these decisions taken together determine the number and expertise of academic staff required;

6. the salaries of each member of academic staff. Given the existence of university-wide promotion procedures the level of salaries paid is to some extent exogenously determined;

7. what level of support services - staff and material to be provided.

These decisions in total determine the costs the department incurs.

Before we examine how these costs are met, it is helpful to examine in more detail how these basic decisions are made. Two things stand out: that many decisions are made by convention or rule of thumb and many are made in response to other decisions taken outside the department.

Many decisions about the number of courses are determined by existing degree regulations or Faculty Board decisions. Decisions about how to conduct courses are constrained by decisions about the physical plant (number and configuration of teaching rooms) and the decisions about allocation of rooms between academic departments. Decisions about methods of delivery of courses are made by convention or university-wide rules (e.g. Economics 101 is taught by two lectures and one tutorial per week with a given textbook or - a ten credit point course should have two hours of lectures a week). Similarly, conventions determine the base teaching load for individual staff members (e.g. five courses a year, no more than eight hours a week on average).

FINANCE AVAILABLE TO THE DEPARTMENT

The sources of finance available to an academic department comprise:

(a) a per capita grant for students which may be a different rate for different categories e.g. undergraduate, graduate. This basic per capita grant is determined by the Commonwealth Government or higher echelons in the University;

(b) special grants - a recent example has been the provision of places funded by the State Government;

(c) incentive grants based on past performance;

(d) income from fee based courses - from overseas full fee-paying students or from students ineligible for HEC;

(e) income from non credit courses;

(f) funding of individual research

(g) commissioned research or consultancies.

Some of the funds available to the department accrue to the common pool; others directly to individual members although obtaining these funds may involve the department in additional expense. For example the rule of external research funding sources typically excludes certain categories of expenditure from these research grants; university rules about the conduct of commissioned research requires that university support facilities not be used without recompense.

If the revenue and expenditure items are set out in the conventional T accounts the inherent problem of balance in departmental accounts is highlighted.

Generally the departmental account has to be balanced annually to coincide with the major cycle of university funding. Although there are some provisions for carrying surpluses or deficits forward, persistent imbalances cannot be sustained: deficits require funding from another source, surpluses provoke intervention to reduce basic grants.

PROBLEM OF BALANCE

The basic problem of maintaining balance in a department's accounts arise because there is no link between variations in income and expenditure. Expenditure closely resembles fixed costs which have to be met irrespective of variations in the base from which revenue is derived.

Could balance be achieved by other financial and contractual arrangements? Could, for example, academic staff be employed on purely short term contractual relationships extending only over a semester or at the most one year. An intuitive response is such an arrangement would work only in a very static or highly regulated setting; such an arrangement would be tenable only if there is a constant, standardized set of course offerings if changes to the offerings were made in a heavily regulated way. Such an arrangement presupposes a stock of qualified academics who are available for short term employment and embodies no features which would encourage the emergence of new entrants to the academic profession. Such arrangements also presuppose that new courses can be defined and introduced readily whereas, in fact, new courses emerge from a dynamic interaction involving academics, students, existing courses and the community.

While we shall return to the question of whether there are alternative mechanisms which might provide automatically for balance, deferring discussion of these matters until the matter of incentives has been explored, it is possible to make some preliminary comments about aspects of current academic practice.

In the first place, it is not difficult to see why the institution of tenure (defined as continued academic employment subject to termination only for cause after due process) has been adopted. Tenure provides an incentive for people to undertake the training for, and to accept the commitment to, academic tasks including the willingness to criticise powerful institutions such as governments.

Secondly, the basic contradiction of academic life is highlighted. The value of a department lies in its role as a teacher of students (supplemented by its research efforts?) but the individual academic gains income and prestige from carrying out research for publication.

INCENTIVES IN AN ACADEMIC DEPARTMENT

We take it that the goal of academics is to maximize lifetime earnings and influence? at least within their chosen area of academic activity so that within the academic department academics are motivated to seek promotion which gives a contractually based higher income. Seeking promotion entails other activities such as seeking graduate courses rather than undergraduate courses, research students rather than coursework students, pursuing research likely to obtain grants and to be publishable rather than curiosity based research. (Given that it is difficult to obtain resources for unorthodox teaching techniques, that the pay-off is low if not zero, this aspect of the incentive system re-enforces conventionally determined basis of undergraduate teaching.) Academics highly motivated to undertake research as a means to maximize lifetime earnings are highly likely to attempt to reduce time devoted to teaching and to use teaching techniques which minimize involvement with teaching and students e.g. heavy reliance on a textbook, easily marked examinations, use of tutorial assistance.

Academics are likely to follow this path the more open ended is the promotion process i.e. if there are standards for promotions in absolute terms such as x publications in journals indexed by the Journal of Economic Literature. If the standards for promotion are, on the other hand, less objectively determined or if there are quantitative limitations on promotions, the incentive system is weakened and such a weakening may turn academics' attention and activity to other avenues which can increase earnings. The most obvious area is commissioned research.

Such results as these are more obvious in the United States where universities operate under a much wider variety of incentive systems. Milton and Rose Friedman have claimed that, at State Universities, even the most renown, teaching standards and student completion rates are low compared with private universities.

AUTOMATIC MECHANISM FOR ADJUSTMENT

The proximate model for academic departments is the government bureaucracy but it is far from obvious that this is the most appropriate model much less an appropriate model at all. The major differences between an academic department and a bureaucratic department lies in the level of autonomy in determining activity and in the existence of an external reference group so that academic standards cannot be solely determined within the department.

Another model of organisation is that of the professional practice such as a barrister's chambers or a medical practice which combine highly individual activities with collegiality and a common purpose. What distinguishes this model from that of an academic department is the reliance on fee for service as a basis for individual remuneration.

It is interesting to speculate on why other models of academic departments are not extant, for they have existed in the past. Two variants were the older Scottish Universities up to the 19th Century and the collegiate universities of Oxford and Cambridge. In the Scottish Universities, professors were remunerated directly and solely by fees from students (generally university overheads were covered by income from endowments and other non recurrent income). Students paid fees directly to the professor whose class they attended. Professors had a monopoly on lectures in their subject but their income depended, not only on their popularity, but on whether their subject formed part of the compulsory curriculum of the University. Some professors earned nothing from fees. The great problem was the novelty of the income earning arrangements devised by those professors whose income from students was zero.

The University of St Andrews, unlike the other Scottish Universities, had no medical school in which instruction was given but did include in its statutes power to award a degree of Doctor of Medicine. Commissions of Inquiry into the Scottish Universities uncovered the information that a considerable number of degrees of Doctor of Medicine were actually conferred each year. These degrees were conferred on eminent medical practitioners who craved the formal title of "Doctor" and a university degree and were willing to undertake a token examination and pay a substantial fee to obtain it. Most English medical practitioners held the double qualification of the licence of the Apothecaries' Society and the licence of the Surgeons Society. The former licence was necessary as the Society of Apothecaries possessed a legislative monopoly to dispense medicine in England and Wales; this monopoly was rigorously enforced against druggists. Registration of English medical practitioners, introduced by legislation in 1858, recognized qualifications obtained from a number of medical societies and a small number of English universities.

The practice was not scandalous as the potential recipients of the degree of Doctor of Medicine were carefully screened and in any event the cost of the degree, which included a substantial fee and the cost of the trip to St Andrews to receive the degree, ensured only the successful could afford the process.

Somewhat more dubious was the practice of the University of Brussels in conferring the degree of Doctor of Medicine on English medical practitioners after what was a travesty of an examination.

Under the Oxbridge system, dons received their income in two ways: the first as a college dividend being a share of the income of the college from endowments and the second a per capita payment for each student taught. Such a system works for a static institution but provides no mechanism to expand the number of colleges. A modern commentator on this system speculates on the results of varying the proportion of income paid in salary and the per capita amount.

DEPARTMENTAL RESOURCE ALLOCATIONS AND EXTANT INCENTIVE SYSTEMS

Doing more with less is a task which has both departmental and individual dimensions. Increasing financial stringency has accordingly caused many departments to look with reqwakened interest at various funding formulae and allocative procedures. As a case in point, consideration is given to the Social Sciences Group at The University of Queensland, within which there are eleven departments.

Tables 1-4 make clear, for example, that of total funding available to the Department of Economics of approximately $3.5 million annually, the teaching component of the operating grant contributes over $2 million. For 1993 the teaching load component contributes 83% of the total operating grant for this department, while the research component contributes only 12% of that total. Within the Social Sciences Group the research component averages 17.6% of the teaching load component of the operating grant.

Three departmental funding elements - the research component of the operating grant, URG allocation, and the research infrastructure allocation for 1993 - are based on the URG funding formula. This modified 40:40:20 rule results in a set of marginal rewards or incentives for departments to increase their output in designated areas. In terms of the research component of the Social Sciences Group allocation of the operating grant for 1993, an addition of one publication to the 278 produced by the Economics Department would result in extra revenue of $474.48 for the department. Such an incremental publication also earns a reward for the department however

in respect both of the Social Science Group's URG allocation for 1993 ($72.37) and in terms of the Group's Research Infrastructure allocation for 1993 ($29.76).

Accordingly, an extra publication is worth a total of $576.61 to the Department of Economics. The incremental value of an extra publication for the other 10 Social Science departments can be worked out in a similar way from Tables 1-3, and varies from $540 to $640, as shown in Table 5.

Three points should be stressed immediately:

(i) Although these data are available, the marginal revenue value to departments of different types of incremental output appears to be not at all well known, despite its importance. In the case of the Department of Economics the marginal value

of one more publication is $ 576.61
while that of one more full time research student is $1671.59
of one more graduating masters student (x2 for PhD) is $1532.20
and of one more small grant (< $25000) is $1213.99

It is to be noted that the marginal value of one more publication is the smallest of these four incremental values or incentives, albeit there is much rhetoric about the preeminent importance of research.

 

(ii) Exhortation to improve departmental performance under these headings is as common as might be expected, and is channelled to departments through the PVC's office in quest of raising the Group's (and the University's) profile.

(iii) These marginal rewards or incentives are calculated on a ceteris paribus assumption, however - that is to say, they are calculated on the assumption that all other figures in the tables remain unchanged. What must be appreciated is that there is in fact a zero sum game element in the presentation of these marginal incentives such that, if all departments in the Group were to double their publications output simultaneously the proportion of total Group publications output contributed by any one Department would be unchanged, as would that department's funding allocation under the publications component (40%) of the relevant URG 40:40:20 allocation formula. In that event an individual department - say Economics - would have doubled its publication rate without reward to itself since it would now be producing twice as many papers at half their previous value under the applicable funding formula. The incentive to which departments and their individual staff members are exhorted to respond would thus be worth zero in this case since there is a fixed pot of money allocated to this Group for its operating grant and a fixed pot accordingly allocated within the group under the heading of publications.

In another sense, however, this departmental incentive is nonetheless worth something positive and indeed might be deemed to be quite shrewd from the viewpoint of university administration. While departments may indeed get nothing extra for themselves despite significantly upgraded publication performance, they are forced to recognize the need to run faster just to stand on the same spot. It is any one department's relative share of total Group output which will determine its revenue in terms of absolute numbers of dollars. Accordingly, there is the prospect of very real loss for any department which allows itself to be overtaken by others within the Group. A risk averse department, or revenue-conscious department must therefore seek at least to maintain its relative position within the Group. Since there is a fixed Group pot to be allocated in proportion to departmental publications, however, the overall cost to the Group and to the University of putting this incentive in place is zero. Those who seek to do more with less, in the presently straightened circumstances, would do well to note. In effect the real incentive is not to fall behind the Group average. The financial benefits of growth in departmental publications output are otherwise illusory.

In this context it should be noted that departments are funded at the rate of $3000 per effective full time student unit (EFTSU). If a given department suffers a decline in its EFTSU enrolments - as the Department of Economics did in 1993 by 120 EFTSU - a major and immediate impact is felt on departmental revenue. An enrolment drop of 120 EFTSUs implies a revenue loss of $360,000 or the salary equivalent of about three professors. Since departmental costs are largely absorbed by academic salaries - to about an 80% or 85% extent in the case of the Department of Economics - there is little likelihood that costs can be easily and speedily reduced to a comparable extent. How can such a revenue loss be recouped? In the case of Economics an additional 624 publications would be required, ceteris paribus, or an increase of approximately 225% in the department's publication rate. Needless to say this is hardly likely. More particularly, this would entail an increase in this Department's share of the Social Sciences Group's research component of the operating grant from 12.752% to approximately 43%.

Several implications follow from these figures. First, there is obvious importance in attracting and retaining EFTSUs. One implication - particularly in the context of newly competitive university markets - is that departmental financing warrants spending more effort and resources on advertising, on the improvement of teaching quality, on school visits, and on degree structure redesign to keep in step with changes in academic fashions (e.g. as undergraduate students increasingly seek out Business degrees as against Economics degrees).

A second implication is that all the continuing rhetoric exhorting attention to research is potentially harmful to departmental revenue. Given that the importance to a department's finances of a retained EFTSU relative to an extra publication is of the order of $3000: $576.61 (for the Economics Department), the diversion of effort from teaching quality issues to research publication potentially yields a negative return to the Department (if not to the individual). While teaching quality and research effort are of course not necessarily competitive, the extent to which they are in fact traded-off in practice is a determinant of departmental revenue.

A related implication flows from the rule used to fund postgraduate coursework students as against undergraduate students. In the case of the Department of Economics average postgraduate class size is approximately 10 whereas average undergraduate class size is approximately 100-120. In terms of staff time (without making allowance for the usually higher out-of-class time commitments required in supervising postgraduate students) postgraduate courses are therefore more costly than undergraduate courses by a factor of 10:1 or 12:1. Present funding arrangements however reflect an implicit cost ratio of only 2:1. It might therefore be argued that departments are underfunded for postgraduate students (at least in the case of departments with staff:student ratios similar to those of Economics). Alternatively it might be argued that some departments need to rationalise their postgraduate offerings to achieve larger postgraduate classes at the expense of student subject choice.

An additional complication is worthy of note. Given the major reforms in the Australian tertiary sector in the last five years there remains the prospect of continuing change. It is entirely possible that there will be a reversion to a binary system with a select group of universities being designated as teaching and research institutions with the remainder funded just to teach. Those universities - including The University of Queensland - which wish to position themselves to be included in any such future teaching/research elite - must orient themselves to more than one objective. Insofar as this "positioning" tactic is relevant, greater attention will be given to research output and to building up schools of postgraduate studies than would be implied by the present marginal rewards, taken alone.

A final implication is that some departments may need to reconsider their budget and allocative procedures. Since the advent of one-line budgeting, departments have had much greater autonomy and freedom to make their own decisions. If departmental procedures are not broadly based, involving maximum possible circulation of budgetary information and maximum possible discussion of alternative choices, the opportunity cost of the decisions actually taken may be misconceived. Since departmental revenue is subject to significant fluctuations while departmental costs are largely absorbed by academic salaries (which are largely fixed), any attempt to achieve flexibility and manipulate the incentives to which staff might respond is likely to have to be at the expense of some manipulation of the salaries bill. Since the overall departmental salaries bill includes the salaries of teaching assistants (tutors), temporary appointees, and perhaps visitors - along with the salaries of permanent staff - it may be that the present conditions of financial stringency will incline permanent staff in some departments to opt to increase their teaching loads at the expense of tutorial or temporary appointments in order to free additional departmental funds for research and conference purposes. It is accordingly important - for reasons of staff satisfaction and departmental research output - that departmental research committees play a role in determining the size of the cake to be used for these purposes, and not just a role in allocating a predetermined cake. At present there is a lack of uniformity in such matters within the eleven departments of the Social Sciences Group.

CONCLUSIONS

(i) There is presently a lack of awareness amongst staff of the marginal rewards or incentives applying to the production of one more article, the attraction of one more small grant, one more postgraduate research student, or the conferring of one more postgraduate degree.

(ii) There is a need for departments and individuals to be aware of the zero sum game element in present funding formulae used within the University of Queensland. Relative position is more important than absolute output measures.

(iii) Given inertia, tradition and the accepted status and importance of university research, it is likely that some departments have yet to realise fully that a retained EFTSU is probably worth more to a department's finances than an extra research publication. HERDSA and other groups which urge greater attention to issues of teaching quality and student satisfaction should take this fact on board. In short, improved teaching quality is not just a virtue in itself - well appreciated by those who empathise with education as a consumption good as well as a production good (i.e. a job ticket) - but is directly relevant in a highly significant way to departmental financing.

(iv) This departmental incentive to teach well and retain EFTSUs is nonetheless not matched by any incentive for individual staff to teach well. For individual staff members the extant incentive system still rewards research (in terms of status and promotion) in a way which is out of all proportion to any reward which might exist for improved teaching quality. Because of this incompatibility presently institutionalised arrangements and exhortations will be largely ineffective. The extent to which we are presently managing to do more with less will be curtailed accordingly.

(v) Resource constraints matter. Incentives matter. Present incentive systems are non-optimal, however, both in terms of the application of the newly modified 40:40:20 URG rule, and in terms of plausible and defensible alternatives to that rule. Reality and rhetoric diverge both for departments and for individuals in terms of the match between exhortations and extant incentives. Departments are exhorted to lift their research profiles but are paid (mostly) to teach EFTSUs. Individuals are exhorted to teach well but are paid (in terms of promotion prospects) to research.

TABLE 1 SOCIAL SCIENCES GROUP CALCULATION OF RESEARCH INFRASTRUCTURE ALLOCATION FOR 1993

Total for Group 186000.00

KEY TO COLUMNS:

B to D: Based on number of equivalent Full-time (F/T) staff (Lecturer and above PLUS Senior Tutors and Specialist Tutors provided they have a PhD PLUS Research Fellows) and research postgraduate students counted as follows: [F/T research Master (=1) for max. of 2 years; F/T PhD (=1) for max. of 4 years];

[P/T research Masters (=0.5) for max. of 4 years; P/T PhD (=0.5) for max. of 8 years].

Staff and student countrs taken at 31 March in 1992.

[NB: Visiting scholars should always be designated carefully to ensure they are counted as Research Fellows or Lecturers, etc.]

E to G: Based on the total number of publications in the approved categories (with books weighted by a factor of 5) for the three years 1990, 1991 and 1992.

H to J: Based on approved grants received with grants of $1,000 and up to $25,000 given a weight of (=1) and grants > $25,000 given a weight of (=2) in 1990, 1991 and 1992 plus 1989/90, 1990/91 and 1991/92. Grants of < $1,000 are accumulated by departments until $1,000 is reached and then given a weight (=1).

K to M: New category based on research Masters and PhDs (1989-1991) Research Masters = 1; PhD = 2.

N: Equals [(0.3 x C) + (0.4 x F) + (0.2 x I) + (0.1 x L)].

O: Equals (D + G + J + M).

P to S: These columns give the 'marginal incentive' or reward for a department which increased the departmental count by one more F/T resarch student, or one more publication, or one more small grant, or one more research postgraduate award under the 30/40/20/10 formula. For example, consider the first figure in column Q. If Anthropology and Sociology had published one more paper and nothing else had changed (i.e. everything else in the table except the first figure in column E, which increases by one, remained the same), then Anthropology and Sociology would have had their RIF allocation increased by the amount shown in column Q.

NOTE: That, while the marginal amounts shown in columns P to S are modest, they need to be ADDED to the benefits accruing to the relevant departments via the URG and the 15% Research Component in the Group funding formula used to distribute the Operating Grant.

TABLE 2 SOCIAL SCIENCES GROUP CALCULATION OF URG ALLOCATION FOR 1993

$452263.00

TABLE 3 SOCIAL SCIENCES GROUP ALLOCATION OF RESEARCH COMPONENT OF OPERATING GRANT FOR 1993

TABLE 4 SOCIAL SCIENCES GROUP ALLOCATION OF OPERATING GRANT FOR 1993

Key to Columns:

Column 2 is taken from Final Research Component in Table 3

Column 4 = Column 1 + Column 2 + Column 3

Column 5 = Column 3 x 0.10

Column 6 = Column 4 - Column 5

Note: Grand total University funds available to a department also include Special Project and New Staff Research Grants, Salary Supplementation for Salary Increases and a Fiscal Allowance held in reserve.

Total for Group 186,000.00

Notes:

Column 1 Based on number of equivalent Full-time (F/T) staff (Lecturer and above PLUS Senior Tutors and Specialist Tutors provided they have a PhD PLUS Research Fellows) and research postgraduate students counted as follows:

[F/T research Masters (=1) for max. of 2 years; F/T PhD (=1) for max. of 4 years] [P/T research Masters (=0.5) for max. of 4 years; P/T PhD (=0.5) for max. of 8 years]. Staff and student counts taken at 31 March in 1992.

[NB. Visiting scholars should always be designated carefully to ensure they are counted as Research Fellows or Lecturers, etc.]

* These columns give the 'marginal incentive' or reward for a department which increased the departmental count by one more F/T research student, or one more publication, or one more small grant, or one more research postgraduate award under the 30/40/20/10 formula. For example, consider the first figure in column Q. If Anthropology and Sociology had published one more paper and nothing else had changed (i.e. everything else in the table except the first figure in column E, which increases by one, remained the same), then Anthropology and Sociology would have had their RIF allocation increased by the amount shown in column Q.

NOTE: That, while the marginal amounts shown in columns P to S are modest, they need to be ADDED to the benefits accruing to the relevant departments via the URG and the 15% Research Component in the Group funding formula used to distribute the Operating Grant.

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