From Dean Dad:
In most states or systems with performance funding, the overall level of funding -- the pie to be sliced, if you prefer -- is either flat or declining. Which means that if everyone improves by the same five percent, then everyone gets the same zero percent increase. You may be making progress, but you’re still essentially running in place. Worse, if you improve by three percent but the statewide average is five, you actually lose ground.I find these sort of systems to be extremely tough environments to build motivation and success in, so I am glad that they are being scrutinized. One issue is that it creates some very perverse incentives. Consider this in a human resources context -- you do well at your job, get promoted, and now you are at the bottom of the ranking for the new rile you are in. If the bottom group tends not to survive (long term) it suggests promotion is bad. Or that politics will be played to make a promotion survivable, which can be pretty toxic.
Where I have seen this system thrive is in very high reward environments. Only one actress could be cast to play "Rey" in the new star wars film (no matter how good the second best applicant was), but there are no shortage of volunteers because the pay-off is so great.
But placed into a less highly leveraged environment and it is a recipe for lowering motivation and, occasionally, penalizing the colleges that take on the toughest challenges. We all want to think that we are so awesome that we can do amazing things with tough problems, and sometimes people do, but it can be a thin line between that and being set up to fail.