Structuring and Transitioning to Impactful Gainsharing

Strategies to Incent Better Unit Budget Behavior and Reallocate Meaningful Resources to the Center

Topics: Administration and Finance, Budgeting, Cost Savings, Budget Models and Cost Allocations

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Executive Summary

Current approaches to unit budget surpluses creating resource misalignment

Management of unit budget surpluses represents a significant opportunity to reallocate resources at most colleges and universities. Many institutions utilize a 100% carry-forward policy, where units retain all year-end surpluses. However, this often results in units accumulating massive reserves while the center struggles for funds. Conversely, other institutions manage unit budgets with a use-it-or-lose-it approach that pulls all year-end surpluses to central administration. This policy often creates a perverse incentive for unit leaders to spend down the balance of their budget at the end of the year to avoid losing funds.

Finding the middle ground with gainsharing

The optimal middle ground between use-it-or-lose-it and carry-forward is gainsharing. Under this approach, units split any budget surplus with central administration. This “compromise” method benefits both units and the institution and combines the advantages of the two more extreme approaches. Because units retain a sizable portion of their surplus, they are incented to find cost savings and better steward resources. Likewise, because a portion of any surplus returns to the center, the institution can grow much-needed funds for larger strategic priorities.

Adopting a gainsharing model

Despite its advantages, only 10% of institutions use a form of gainsharing to manage academic unit surpluses. To help business executives better manage unit budget surpluses, this publication details how institutions can successfully adopt a gainsharing model. The first section details how to best structure gainsharing arrangements. The second section offers two potential transition paths to move to gainsharing over time while mitigating campus resistance to change.

The Case for Gainsharing