Implement Gainsharing Agreements in Your Academic and Administrative Units

Higher education business leaders can use gainsharing agreements to incentivize more prudent spend and grow central strategic reserves. Under these agreements, units split any budget surpluses with central administration. This mitigates perverse incentives for units to either amass unnecessarily large reserves or squander every remaining budget dollar at year-end.

Changing reserves management policies impacts units and stakeholders across campus, so business leaders must get cabinet-level buy-in before implementing gainsharing agreements. Fortunately, gainsharing creates benefits that both central and unit leaders can rally behind. Business leaders should emphasize these benefits with stakeholders to generate consensus for change.

Gainsharing benefits both units and the institution and combines the advantages of two common, more extreme approaches to surplus management—use-it-or-lose-it and 100% carry-forward.

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 surplus returns to the center, the institution can grow much needed funds for larger strategic priorities.

Leaders can choose between two options to structure their gainsharing agreements:

Setting fixed percentages of unit budgets to be retained by units Establishing unit-specific savings targets that trigger gainsharing funds

The more common option for structuring a gainsharing model is to establish a fixed percentage of budget surplus that units will retain. The most successful gainsharing programs typically allow units to retain between 50% and 80% of surpluses.

Fifty percent is an important psychological marker for most unit leaders, who often need to retain a majority of savings to buy into the process. On the other hand, business leaders report that percentages above 80% leave the center with too little additional funding.

The second option is to establish a unique savings target that each unit must hit before gainsharing begins. This allows the center to dictate the funds it…