Dalton McGuinty, the Premier of Ontario, has suggested that pay for performance should be the basis for determining the compensation for the CEOs/presidents of all institutions, agencies and other public bodies that receive provincial government funding. An interesting concept that could lead to a dramatic transformation in the mandates of and how the Government of Ontario funds such institutions in the future. However, I suspect that Premier McGuinty does not appreciate the full ramifications of his proposal.

There are at least two problems with his proposal. First, the province does not set compensation packages for the people who run such institutions. Their boards of directors or equivalent have this responsibility. Of course, the provincial government could begin to give them some guidance.

Second, how does one define and measure performance for such institutions? In other words, what are their goals?

Let’s consider three – the Art Gallery of Ontario (AGO), a hospital, and a university.

What exactly is each of these supposed to do? What is or should be the output of the AGO or a hospital or a university? In trying to answer these questions, one immediately runs into the problem of defining and measuring a unit of output for a service industry. While this might not matter for private service companies, where profits and market values are more important for boards of directors than measuring the number of units of service provided by such companies, it does matter for measuring aggregate output and productivity in the economy, and for defining the goals of public and quasi-public institutions.

Since profits and market values are not the goals, it is critical to determine exactly what such institutions are supposed to be doing.

If the goals cannot be objectively defined, then it is very difficult to formulate policies in the areas of culture, health and education, and thus is difficult to decide how much funding should be allocated to each of these areas, let alone how much their leaders should be paid.

What is a university supposed to do? Let’s assume that the objective is to produce X number of degrees per year. At what cost is the first question to ask? Then we should ask if the types of degrees matter? Do the curricula for each degree matter? Does it matter if the graduating students really learn anything of value or can communicate clearly verbally or in writing? Does it matter if the graduating students find jobs in their fields? And so on with our questions.

If the number of degrees produced per year is the primary objective, subject of course to some cost constraint, then do we really need the bricks and mortars and most of the faculty of universities? Why not offer all courses online? This will greatly reduce operating costs and future capital costs. And the “quality” of education may or may not be any worse.

Is a university supposed to do more? What about research? Most research is of little importance and long-term value to society and the economy. Very little research produced at our universities is ever commercialized or impacts government policies. Thus, what type of research should be emphasized and subsidized? Does government really know? Does the board of a university really know? And who would decide what is good or useful research?

Even if research matters, what is its relative importance compared to teaching and producing degrees? Is it as important, 50% more important, 50% less important? Regardless of the answer, do research and teaching have to be combined in the same institution? Why can’t teaching be done online, and research conducted in separate institutions which focus entirely on research? Let’s be realistic, most academics would prefer not to teach as long as they still got paid.

The Government of Ontario has never clearly enunciated the goals for universities, or for that matter, for hospitals, culture institutions and other public bodies. So maybe pay for performance might prove to be a useful starting point for the government to figure out exactly why it is spending tens of billions of dollars annually in these areas, and then figure out what it should be spending and how this money should be spent. Sound and clear objectives and accountability would be a novel way to run a government.

Dalton, I look forward to your suggestions on measuring performance in a meaningful way!

The opinions expressed in this blog are personal and do not reflect the views of either Global Brief or the Glendon School of Public and International Affairs.