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Journal Issue: Excellence in the Classroom Volume 17 Number 1 Spring 2007

Using Performance-Based Pay to Improve the Quality of Teachers
Victor Lavy


Interest in improving public education is growing not only in the United States but worldwide. One reason for the heightened public attention is the key role played by education in determining both individual earnings and broader economic growth. Another is widespread dissatisfaction with the education sector’s performance of late: substantial increases in spending on public schools have failed to bring corresponding increases in student achievement.1

The quest to improve public education has led policymakers and researchers to focus on how to increase teachers’ effectiveness. One obvious means is compensation. According to many observers, the traditional basis for teacher pay—years of service and education— provides little incentive for excellence. To make teachers more effective, these critics argue, pay should be tied to performance. And some school districts, here and abroad, are undertaking reforms to test those ideas. In November 2005, for example, Denver voters approved a $25 million tax increase to fund a form of “merit pay” to reward elementary and secondary school teachers along a variety of dimensions, including their own demonstrated knowledge and skills and student academic growth. Whether Denver’s new merit pay system will improve student achievement remains uncertain; an earlier pilot study in Denver found mixed results.2

In this article I examine academic and policy analysis of performance-based reward programs for primary and secondary school teachers. I stress, in particular, several questions. What are the pros and cons of implementing teachers’ pay incentives in schools? What criteria are to be applied in designing optimal teacher incentives? How much is performance affected by incentives offered to practicing teachers? How will incentives affect the composition of applicants to teacher-training institutions and to teaching positions in the schools? What policy measures can remedy existing distortions in teachers’ compensation? My intent is not to review exhaustively what is known about performance- based pay in education, but rather to summarize selected key findings, highlight some guidelines for designing effective teacher incentives schemes, and identify areas requiring additional evidence. My objectives are to present the theoretical benefits of performance-based pay as well as some of the practical obstacles to its effective implementation, to review critically the empirical evidence, and to draw policy conclusions.