Merit pay, merit increase or pay for performance, is performance-related pay, frequently in the context of educational reform or government civil service reform (government jobs). It provides bonuses for workers who perform their jobs effectively, according to easily measurable criteria.
In the United States, policy makers are divided on whether merit pay should be offered to public school teachers, and other public employees, as is commonly the case in the United Kingdom.
History
Already in 1913 the Colorado School of Mines advertised the merit pay system, and in 1918 the American Institute of Mining and Metallurgical Engineers was touting merit pay in the mining industry. Prior to 1948 the system had been introduced to Canada, and by 1994 the system was embedded into the Australian mining industry.
By the 1930s, various industries implemented a merit pay system.
One example of a system that uses merit-pay is the Teacher Advancement Program (TAP) created by the Milken Family Foundation in 1999. TAP is currently in place in more than 180 schools all across the United States. In this program, salary raises are based on some aspects of teacher performance, measured by a combination of observations and student test scores. TAP teachers can advance their career in three ways: (1) remain in the classroom and become a mentor to others, (2) leave the classroom and become a master teacher, or (3) advance to administration through traditional means. This program is focused on helping teachers improve performance by learning from others. Teachers are put into small groups that—for a few hours each week—collaborate about what's working in the classroom. The opportunity allows teachers to build skills that will improve classroom learning.
Since adopting TAP in 2001, Bell Street Middle School has doubled the percent of students with advanced scoring in math and reading. The school has also reduced the number of students scoring "below basic level of math" by 46 percent.Wallis, C., Healy, R., Hylton, H., & Klarreich, K. (2008). How to Make Great Teachers. (Cover story). Time, 171(8), 28–34. Another benefit of the TAP program for the middle school has been a reduction in teacher turnover from 32 percent to 10 percent.
One criticism of TAP is that it is expensive for schools, costing from $250 to $400 per student per year.TAP Frequently Asked Questions Many TAP schools use grants to fund the program cost. An independent study conducted by Vanderbilt University researchers compared TAP schools' test score gains to non-TAP schools. TAP seems to do better at the elementary school level, but in fact does worse than non-TAP schools in grades 6 through 10.
In 2006, the United States Congress created a $600 million federal grant program called the Teacher Incentive Plan (TIF). In 2009, the program was expanded and supported with American Recovery and Reinvestment Act (ARRA) funding. According to the U.S. Department of Education, the TIF "supports efforts to develop and implement performance-based teacher and principal compensation systems in high-need schools." The program's goals include: (1) improving student achievement by increasing teacher and principal effectiveness (2) reforming teacher and principal compensation systems so that teachers and principals are rewarded for increases in student achievement (3) increasing the number of effective teachers teaching poor, minority, and disadvantaged students in hard-to-staff subjects (4) creating sustainable performance-based compensation systems (PBCSs)
A national evaluation of the TIF program has yet to be performed, but preliminary research has provided mixed results. According to an article by the Center for American Progress, an evaluation of programs supported by TIF, such as Denver's ProComp program and the Nashville study (both discussed below), has shown initial evidence that performance-based pay has had a positive effect on student achievement. However, other evaluations, such as a study performed by the Vanderbilt University National Center on Performance Incentives in the metropolitan Nashville School System, have not confirmed the hypothesis that rewarding teachers for improved scores will cause scores to rise.Three-year study finds teacher bonuses fail to improve test scores. By DORIE TURNER, The Associated Press, Southeast Missourian, September 22, 2010Teacher performance pay alone does not raise student test scores, by Melanie Moran, Vanderbilt News, Sep. 21, 2010.
Denver's Professional Compensation System for Teachers was approved by teachers and financially backed by Denver voters in 2004 and 2005, and it later received additional funding from a TIF grant in 2006. In this program, teachers are given nine ways to increase their earnings, such as working in a high-needs schools, exceeding expectations on state exams, meeting professional objectives set at the beginning of the year, receiving a worthy evaluation from a principal, and gaining "distinguished school" status by meeting mixed criteria such as parent satisfaction. In 2010, an evaluation report detailing effects of ProComp was issued. This report highlighted several key findings in both district-wide student achievement trends, as well as in student achievement outcomes relating to teacher hiring effects. On a district-wide level, the 2010 evaluation showed a substantial increase in mathematics and reading achievement from the immediate time period before ProComp's implementation compared to time period subsequent to the implementation. Additionally, teachers hired after the implementation of ProComp showed higher first-year achievement compared to those hired before the program's implementation.
The National Center on Performance Incentives conducted a three-year study in the metropolitan Nashville School System from 2006 through 2009, in which middle school mathematics teachers participated in an experiment to evaluate the effect of financial rewards for teachers whose students showed large gains on standardized tests. As stated in the study's final findings report, "The experiment was intended to test the notion that rewarding teachers for improved scores would cause scores to rise." The results of the study did not confirm this hypothesis. Students of teachers assigned to the treatment group eligible for bonuses did not outperform students whose teachers were assigned to the control group that was not eligible for bonuses.
Effort versus selection Most analyses of merit pay, including the Nashville Study, consider whether or not the existing teachers in a school perform better after being offered pay for performance. Scores might go up if teachers work harder or "work better." This situation, often called "increased effort," implies that teachers were not working as hard as they might before the performance pay was offered, and the lack of achievement results implies that the performance pay does not lead to increased effort. On the other hand, an additional feature of performance pay might be improved "selection" of who enters and who stays in teaching. For example, a different group of teachers might be induced to enter the teacher profession if pay was aligned more with performance. And, the best teachers, the ones who get the added performance pay, may on average be induced to stay in the classroom longer. These larger impacts through changes in selection would not show up on the evaluations previously conducted but can show up on overall comparisons of countries that do and do not employ performance pay systems. Ludger Woessmann finds evidence that performance pay does improve performance when viewed across countries.Ludger Woessmann, "Cross-country evidence on teacher performance pay." Economics of Education Review 30, no. 3 (June 2011): 404-418. Additionally, the analysis of the impact of dismissing ineffective teachers by Eric Hanushek can be interpreted as a special form of performance pay where pay is reduced to zero (or a very low amount) for teachers who do not perform well.Eric Hanushek, "Valuing teachers: How much is a good teacher worth?" Education Next 11, no. 3 (Summer 2011).
Loss aversion and merit pay
Loss aversion was first proposed by Daniel Kahneman and Amos Tversky in 1979. They proposed the notion that individuals assign value to gains and losses rather than to final assets. In other words, individuals have a tendency to prefer avoiding losses rather than accruing gains.
This notion of people hating to lose, more than they like gaining something, even if the potential amount that could be lost is the same as the amount to be gained, has been tested in many arenas.
An experiment conducted by Kahneman et al. 1990 Journal of Political Economy describes testing loss aversion through the concepts of the Endowment effect and the Coase Theorem. The endowment effect reveals the notion that people place a higher value on objects they own relative to objects they do not. The Coase theorem focuses on transaction costs and the importance of who owns a particular commodity.
They found that randomly assigned owners of a mug required significantly more money to part with their possession (around $7) than randomly assigned buyers were willing to pay to acquire it (around $3). Kahneman attributed this result to loss aversion: owners were affected more by the loss of the mug compared to the effect of a buyer purchasing the mug as a gain.
Another experiment conducted in 1998 by Terrance Odean at Berkeley College examined the account of 10,000 investors at a large discount brokerage house. The tendency of investors revealed they held on to losing investments too long and sold winning investments too soon. Their behavior did not appear to be motivated by rational re-balancing of portfolios or to avoid higher trading costs. According to Odean, these investors held on to these losing stocks in order to prolong the feeling of loss from selling them, even though there was no evidence that by holding onto them, they would rise in value. "Winning investments that investors chose to sell continued in subsequent months to outperform the losing stocks investors kept."
Benefits Leads to better educational outcomes. Proponents argue that paying teachers according to their effectiveness would be consistent with management precepts from the private sector and would lead to better educational outcomes. Lewis Solmon, President of the TAP and a control group that merit pay contributes toward student achievement. The RAND study concluded that fifty percent of the schools with these reforms outperformed the control schools in math and forty-seven percent outperformed the control in reading.Solmon, Lewis. The Case for Merit Pay. In: Peterson, Paul. ed. Choice and Competition in American Education. Lanham: Rowman & Littlefield Publishers, Inc. (2006). pg. 110 Helps low-performing schools attract teachers. Schools that use merit pay are better able to attract teachers than schools with no merit pay system. This is especially helpful in enabling schools with lower socioeconomic status attract qualified teachers. For instance, a review of the Teacher Advancement Program in Arizona showed that over a three-year period, 61 teachers started working at the two schools of lowest socioeconomic status in the Madison school district, both of which use the TAP and of these teachers 21% have come from schools in high socioeconomic areas.Solmon, Lewis. The Case for Merit Pay. In: Peterson, Paul. ed. Choice and Competition in American Education. Lanham: Rowman & Littlefield Publishers, Inc. (2006). pg. 106 Higher teacher retention rates.