Financial incentives for grant procurement success in the internal allocation models of Dutch universities

The three objectives of Dutch universities are Education, Research and Valorization. Because of this variety of teaching, research and “community service” outputs, universities can be considered as multiproduct firms. This variety of tasks and large sizes of universities makes them difficult to manage. Especially the research domain with different financing streams is complex. This research domain is the focus of this study about financial incentives at Dutch universities. Research activities in Dutch universities are financed with three different resources: 1. The first money stream budget is received directly from the Ministry of Education, Culture and Science. It is based on the allocation of lump-sum over the Dutch universities. 2. The second money stream consists of research grants from the Netherlands organization for scientific research (NWO). 3. The third money stream contains everything not received from the Ministry or from NWO. These are for example grants from profit organizations and grants from the European Union. The second and third money stream are external financing streams and have to be earned in a competing environment. Researchers can submit research proposals which are evaluated by the grant provider, who decides whether the researcher/research group receives a grant for a research project. This process of identifying, applying and complying is called grant procurement. Universities become more dependent on the external financing streams because the declining first money stream is not enough to finance all research ambitions of the universities. Successful grant procurement results in more budget which contributes to the goal of providing high quality research. It gives faculties more financial independency and researchers more credibility and prestige. The three Dutch universities of technology in Twente (UT), Eindhoven (TU/e) and Delft (TUD), will be analyzed to explore how they motivate faculties and research groups to collect external grants. The central research question is: How do Dutch universities make use of their internal allocation model to encourage faculties and their researchers to engage in the procurement of grants for research, what are the underlying reasons and what differences do we observe? Performance management can be useful to motivate researchers and research groups to perform in the desired direction. It provides guidelines for employees about which tasks the organization values and it gives an organization measurement outcomes on which they can react. A good performance management system sets performance indicators that are linked to organizational goals. The financial allocation model of universities can be used as a performance management tool. It divides the first money stream budget partly by the use of performance measurement. Looking at the three Dutch universities of technology it can be stated that they are using their allocation model as a performance management tool. They use financial incentives which are based on performance measures to allocate a major part of the first money stream budget. 6 The three universities use three financial incentives to stimulate successful grant procurement: 1. Faculties can keep all revenues from second and third money stream 2. Premium on promotions and designercertificates 3. Premium on work for third parties The first and second incentives are used comparable in the three universities. The third indicator, premium on work for third parties is used differently in the allocation models. The TUD uses a fixed percentage of 10% bonus on every euro earned in second and third money stream, which makes this budget independent from other indicators in the allocation model. At the UT, the size of this incentive depends on (1) established full time equivalent in second and third money stream, (2) the budget for this indicator and (3) a correction for the relative premiums of a year earlier. At the TU/e, this indicator is a balancing item in the allocation model, which makes the budget highly dependent on the other indicators. It is shown that all three universities use a different allocation model. One level lower in the organization, the faculties have their own allocation model to divide the first money stream over their capacity groups. The faculty allocation models of the faculty of Applied Science at the three universities are based on the central models, but adjust to fit the incentives to the internal and external operational situation of the faculty. In 2007 the minister of Education, Culture and Science, Ronald Plasterk, decided to transfer 100 million euro from the first money stream to the second money stream to stimulate excellent research. From 2008 till 2011 25 million a year is transferred. Universities argue that this ‘Plasterk deduction’ makes it difficult to finance the premium work for third parties. The reason is that second money stream grants only finance a percentage of the total costs; the other part has to be financed with first money stream budget. It is difficult to co-finance a growing second money stream with a declining first money stream. As a result the three universities in this study had to decline the incentive ’work for third parties’. The UT is the first university in this study to replace the premium ‘work for third parties’ with a strategic budget for its institutes. It wants to use future performance indicators which are linked to the strategic plans of the university and to plans of the institute. It is an example of future performance management. All other measures in both university and faculty allocation models are based on past performance. Allocation models change often, depending on the external financial situation and partly on strategic plans. Because faculties and institutes demand a stable budget, universities try to change the allocation model not too often. Because of a changing environment, adjustments have to be made every few years. There are differences in how universities reward successful grant procurement. The TUD uses the most differentiated model while the TU/e uses a simple allocation model with a lot of fixed amounts. How these different models affect the motivation of researchers is not tested. Further research could investigate whether incentives in allocation models affect the motivation of researchers and research groups.