Educational systems worldwide still continue to rely heavily on public sources of funding. Nearly 80% of the expenditure on higher education comes from public sources in OECD countries; the share is even larger in developing countries. There is a concerted effort in many countries to reduce the reliance on state funding and move towards market-friendly reforms. This involves adjustment in the macro-policy framework to induce change at the institutional level. Institutional changes could be brought about either by relying on "mandates" or on "rewards". Mandates demand a particular form of institutional behaviour that is accompanied by the threat of punishment for a failure to comply. Rewards, on the other hand, provide incentive and motivation to change. Both rewards and incentives become effective when public policy provides a choice in behavioural changes at the institutional level. The motivation for a change of behaviour will depend on the level of performance that conditions a reward on the one hand and on the expectation for obtaining a reward, on completion of the task, on the other. In general, mandates are more easily complied with when institutions are struggling to survive, whereas incentives and rewards are preferable when institutions are striving to revive and grow. Incentives and reward systems are relied upon in many countries to induce changes in higher education. This paper will focus on the potential of effecting institutional changes through incentives.