Pay-for-Performance Programs: Strategies, Structures, and Funding

Written by Nicholas P. Morgan and Daniel Schiff

Many questions arise when the topic of performance pay is raised. Haven’t we tried this before? Why should we try to differentiate compensation when public educators earn too little as it is? Aren’t teachers motivated primarily by intrinsic factors anyway? Don’t these plans breed a sense of competition rather than cooperation among teachers? Is there any “proof” that this works? Despite ongoing debate on these questions, school districts and policymakers alike are pursuing a variety of differentiated compensation approaches to affect school district operations. In this DMJ Spotlight, we focus on strategies, structures, and funding for performance-based compensation programs – factors critical to designing and implementing a program appropriate to your district.

The Context of Differentiated Compensation

ver the past two decades, the United States has embarked on a broad-based campaign to enhance educational performance through standards-based reform, greater focus on accountability, and a renewed commitment to invest in the American public school system. Recognizing that teacher effectiveness is the most important determinant of student achievement, educational leaders have pursued a broad variety of initiatives to improve the teacher workforce. In this new environment, establishing performance-based teacher compensation systems has been increasingly viewed as a viable strategy to enhance the appeal of teaching careers, retain quality instructors, and boost teacher effectiveness. Accordingly, scores of school districts and states across the nation are now grappling with the development, implementation, and sustainability of such performance pay programs.

Historically, the American public education system has employed a number of different compensation models. In the nineteenth century, the predominant compensation structure was the “position-based” or “graded pay” salary system, under which individual teachers negotiated contracts with principals, teacher pay varied significantly by grade and assignment, and women (mostly relegated to elementary schools) and minority teachers were paid less than non-minority male teachers.¹ Its successor, the “single salary schedule,” a more objective compensation structure whereby classroom teachers were assigned salary classifications based on their teaching experience and educational attainment, arose in the early twentieth century. Today, the single salary schedule remains by far the dominant compensation system in the American public education system, with approximately 93% of all school districts utilizing the system to determine teacher compensation.² Indeed, among districts with over twenty schools, the single salary schedule is virtually universal.³

After a wave of “merit pay” initiatives in the 1980s and early 1990s, which failed, for the most part, due to poor funding, structure, and implementation, the country is again embracing compensation reform.⁴ True performance-based compensation systems, however, remain a relatively rare phenomenon in American education. Recent data is scarce, but according to one study in 2004, less than eight percent of school districts claimed to use pay incentives (including cash bonuses, salary increases, and/or movement on a salary schedule) to reward “teaching excellence” – a category corresponding to performance-, knowledge-, and skill-based compensation.⁵

And, in reality, only a small fraction of these districts actually employ a true performance pay system. In Figure 1, we show a selection of differentiated compensation programs, organized by category. Performance-based systems use some measure of district outcomes – student achievement or some proxy thereof – to allocate incentive rewards. Skill and knowledge-based plans pay teachers extra money for factors like educational attainment or specific certification. In needs-based programs, districts provide monetary incentives to alleviate teacher shortages in selected fields and to attract educators to hard-to-staff schools. In other words, performance-based systems use results to drive compensation, while skill- and knowledge-based systems and needs-based systems use inputs to drive compensation.