Essay About Perverse Incentive And Creation Of Perverse Incentives.Perverse Incentivesa

IntroductionIn 1981 the University of Southern California (USC)  implemented a new management control system, the revenue centre management system (RCMS), to increase financial transparency, and encourage academic deans to be entrepreneurial and market savvy. However, after the implementation several unintended outcomes arose. Therefore, in this paper the RCMS will be analyzed according to the creation of perverse incentives.Perverse incentivesA perverse incentive is “an incentive that produces an adverse consequence due to the actions undertaken to receive the incentive” BusinessDictionary (2014). Based on this definition, several perverse incentives created by the RCMS as it was initially implemented in 1981 by the USC can be identified.First, as mentioned by Holian and Ross (2010), one of the perverse incentives created by the RCMS was the duplication of education courses to keep revenues in  the school who offered the course. Consequently, many courses, e.g. statistics and communications, where offered by many different schools, so, each school could retain its tuition fees. Also, to increase market appeal to attract undergraduate students, many schools offered general education courses. Furthermore, Kirp (2002) noted that schools were participating in grade inflation and pandering to attract undergraduates. “Full-page ads in the Daily Trojan touted courses such as the drama class that required  no reading: ‘Tired of reading Shakespeare? Kill off your [general education]  requirement, sit back and eat popcorn, and watch it being performed’” (Kirp, 2002). Hence, the RCMS encouraged innapropriate courses and actions to attract undergraduates and so, to increase revenues. Secondly, with the implementation of the RCMS possible innovation projects were assessed mainly on their ability to generate revenue. As mentioned by Desrochers and Koch (2011), “the necessity to charge back has created perverse incentives (…) to give priority to projects that can be charged back.” As the schools are treated as Revenue centres under the RCMS, the financial performance (profitability) of the school has risen in importance and so, the innovation projects/ideas are selected upon their ability to generate revenue. Hence, the RCMS stiffles innovation, which is in contrast with the role and mission of the USC.