There is growing interest in strengthening teacher incentives by tying pay to performance measures based on student achievement. Yet, there is little empirical evidence on how teachers may respond to specific design features of performance pay schemes. Theoretically appealing but relatively complex schemes may not outperform less appealing but simple schemes in practice. In this paper, the authors present the results of a randomized trial designed to test alternative approaches of mapping student achievement into rewards for teachers. Teachers in western China were randomly assigned to participate in rank-order tournaments in which teacher rankings were determined as a function of their students’ scores on standardized exams by one of three different methods of defining teacher performance. They find that teachers offered pay-for-percentile incentives (based on the scheme described in Barlevy and Neal 2012) outperform teachers offered two simpler schemes based on year-end class average achievement levels or average gains over the course of a school year. Achievement gains under pay-for-percentile were mirrored by meaningful changes in the intensity of teaching. Moreover, they find that pay-for-percentile incentives lead to broad based gains, improving outcomes for students across the achievement distribution within the class. Their finding that teachers respond to a relatively intricate feature of an incentive scheme highlights the importance of close attention to performance pay design.
Loyalka, P.; Sylvia, S.; Liu, C.; Chu, J.; Shi, Y. Pay by Design: Teacher Performance Pay Design and the Distribution of Student Achievement. Presented at RISE Launch Event on 18-19 June 2015 in Washington DC. (2015) 40 pp.