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Financial Incentives and Teacher Performance

Article  in  SSRN Electronic Journal · December 2015

DOI: 10.2139/ssrn.3455676

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 Financial incentives and teacher performance

Alastair Berg

This version 2 December 2015

Abstract: I examine the broader political economy and the impact classical-
liberal ideology has had on education policy decisions in the Western and
wider world. I then explore how incentives influence behaviours in the broader
economy, before finally investigating what the current literature says about the
relationship between financial incentives and teacher performance. This paper
focuses on Australia with a view to evaluating policy choices that may have a
beneficial impact on teacher performance and thus student outcomes in this
country. To facilitate such an analysis I examine a diverse range of
international jurisdictions to see what conclusions can be drawn as to the effect
of teacher incentive pay on performance.

1. Introduction
Teachers play an important role in developing the minds and lives of young people. In
addition to the traditional academic learning that teachers facilitate, effective teachers
help their students realise social and emotional learning (SEL), an all-encompassing
term which includes “self-awareness, self-management, social awareness, relationship
skills and responsible decision making.” (Chung & McBride, 2015 p.193). Thus,
while the economic benefits of good teaching can be measured in a surprisingly
precise way (see Hanushek, 2011a, 2011b), the impacts to society are far broader than
just their contribution to economic growth.

Whatever their social worth, teachers are also a significant source of expenditure for
education systems (OECD, 2009, 2013). In real terms, teacher salaries increased on
average almost six fold in the United States of America since the Great War (NCES,
2013a), while teaching staff salaries are by far the greatest single expenditure item in
state education budgets (IDE, 2012 and USOE, 2015). In Australia, more than 76 per
cent of state, territory and Commonwealth education expenditure in primary and
secondary schools relates to staff salaries (OECD, 2013). Concurrently, recurring
education expenditure in schools by Australian governments, almost 48AUD billion

1

in 2012-13 (Productivity Commission, 2015), contributes a significant line item of
government budgets.

As a result of the significant amounts of expenditure teacher salaries take from

education budgets, and the profound influence teachers have on student outcomes and
education standards (OECD, 2009, Rowe & Rowe, 2002 and Terhart, 2011), the
relationship between teacher performance and student outcomes is one which is
frequently raised in policy discourse in Australia (Buckingham, 2014 and Jensen,
Reichl & Kemp, 2011) and the United States (Levine & Levine, 2012 and Sojourner,
Mykerezi & West, 2014). Concurrently, concerns have been raised in education
policy circles about the impact that higher education reform has had on the quality
and lack of subject area expertise of those graduating from teacher education courses
in Australia (Brennan & Willis, 2008, Harris, Moran & Long, 2010 and Smyth, 2013).
Similar concerns have been raised in the United States, with claims that teachers lack
qualifications for their subject area, while existing teacher standards are either
ineffective or haphazardly applied (Darling-Hammond, 1997 and Dinham, Ingvarson
& Kleinhenz, 2008).

In light of the relationship between teacher performance and student outcomes, as

well as the quality of teacher graduates entering the workforce, this paper asks to what
extent do financial incentives have an impact on teacher performance? To answer
this, I shall examine jurisdictions around the world which have policy experience with
financial incentives, using that experience to evaluate their worth in influencing
teacher performance and hence student outcomes.

I first examine the broader political economy and the impact classical-liberal ideology
has had on education policy decisions in the Western and wider world. I then explore
how incentives influence behaviours in the broader economy, before finally
investigating what the current literature says about the relationship between financial
incentives and teacher performance. This paper focuses on Australia with a view to
evaluating policy choices that may have a beneficial impact on teacher performance
and thus student outcomes in this country. To facilitate such an analysis I examine a
diverse range of international jurisdictions to see what conclusions can be drawn as to
the effect of teacher incentive pay on performance.

2

Throughout this analysis it becomes clear that extrapolating international experience
into an Australian context poses great difficulty, in part due to the diverse range of
systems of financial incentives, each which have subtle, and not so subtle differences
in design and execution. This range of systems also results in inconsistent effects on
teacher performance; evidence of improved teacher performance and hence student
outcomes exist, however contradictory evidence, in both the former and the latter,
raises cause for concern.

2. Methodology
While great teachers contribute far more to their charges than opportunities for
academic success and increased future earning power, in order to avoid complexity,
as well as to acknowledge the economic realities which policy makers face, I
approach this piece from a tradition of economic analysis. In doing so I do not dismiss
the tremendous social benefits that teachers contribute to their communities, instead I
defer that important analysis to fall to others (see Chung & McBride, 2015).

This economic approach allows this analysis to examine how scarce resources are
utilised in producing outputs to satisfy the needs and wants of society (Krueger,
2002). As mooted, teachers comprise the most costly element of education budgets,
and also provide the most easily measurable input in this economic analysis.
Furthermore, while acknowledging the difficulty of measuring the output of
education, as in other creative industries (Grabner, 2014), teacher performance and
student achievements such as test scores provide an easily accessible proxy for the
purposes of this piece.

3. Education and the market

In recent decades, market forces have played an increasingly prominent role in the
formulation and execution of education policy (Bhattacharya, 2013, Desjardins, 2015,
Lubienski, 1999 and Teelken, Driessen & Smit, 2005). This ‘marketisation of
education’ should be seen within the broader structural changes to the economy and
developments in the political economy of the period, when classical-liberalism
became the mainstream economic ideology at the expense of Keynesian economics

3

(İpek, 2013). It has been an assumption of many policy makers that as market-based
orthodoxy has held true in the private sector, public sector industries, including
education, should be subject to the same directives.

Prior to this classical-liberal orthodoxy, and beginning shortly after the period of
financial turmoil in the 1930s since known as The Great Depression, Keynesian
economic thought prevailed, emphasising the role of public sector spending and
regulation to remedy inefficient private sector decisions and market failures (Canova,
2009). Beginning with the period of the Thatcher administration in the United
Kingdom, and that of the Reagan administration in the United States of America
(Peters, 2012, Ling, 2012 and Smyth, 2013), a proliferation of market-based reform
saw the contraction of state influence to the benefit of the private sector, characterised
by “market deregulation, privatization and welfare-state withdrawal” (Venugopal,
2015 p.168). The embrace of this orthodoxy also saw both sides of Australian politics
use the power of the market in their policy decisions from the 1980s (Kelly, 1992).

This post Keynesian political economy, influenced by the works of Friedrich Hayek,
Milton Friedman and George Stigler among others (Jones, 2012), resulted in a
profound shift in the way in which nation states raised taxes and distributed services
and benefits to their citizens (Smyth, 2013 and Sutcliffe-Braithwaite, 2012).
Intellectuals like Hayek promoted the supremacy of dynamic markets in influencing
consumer behaviour (Skarbek, 2008), albeit while acknowledging a role for the state
in maintaining and improving market rules and competitiveness (Rodrigues, 2012).
Classical-liberal concepts, such as the usefulness of market forces, were also applied
to markets such as education. Friedman wrote substantially on the role of government
in education, arguing that by subjecting providers of education to competitive market
forces, student outcomes would be improved, while at the same time reducing the
burden on the taxpayer (Friedman, 1962).

Since these classical-liberal economic arguments of Hayek, Friedman and Stigler

have been made, part of their legacy has been that education has become increasingly
subject to market forces. This marketisation of education has occurred, albeit to
varying degrees, in jurisdictions including England, the United States of America,
parts of continental Europe, Australia and New Zealand (Bhattacharya, 2013, Ling,
4

2012, Lubienski, 1999 and Teelken, Driessen & Smit, 2005), as well as some
developing nations (Figlio & Kenny, 2007 and Glewwe, Ilias & Kremer, 2010).

As a result of the introduction of market forces into the Western and wider world’s
education policy sphere (Desjardins, 2015), a number of trends have become apparent
in policy and policy discourse. These include the introduction of school choice
(Bhattacharya, 2013 and Loeb, Valant, & Kasman, 2011), the introduction of
marketing and other business practices into higher education institutions (Natale &
Doran, 2012), as well as compensation systems which both seek to incentivise
teachers to perform to a higher standard, as well as attract more suitable recruits to the
profession (Leigh, 2012 and Liang & Akiba, 2013).

School choice, whereby students and their guardians are conceptualised as consumers
of education, choosing more desirable schools and leaving less desirable ones
(Bhattacharya, 2013), is argued by its supporters to lead to innovation which would
not otherwise be possible in a publically funded and run model (Loeb, Valant, &
Kasman, 2011). School choice advocates further argue that its proliferation, and the
introduction of market forces into the education sphere, will lead to greater equity of
access to schools; students of a lower socio economic status (SES) will have the same
opportunity of access to high quality schooling as that of higher SES students
(Friedman, 1962 and Loeb, Valant, & Kasman, 2011). Additionally, higher education
institutions have been increasingly subject to pressures to become more corporatised,
whereby these traditionally publically run institutions have adopted marketing and
other business practices, traditionally reserved for private sector institutions, in order
to maintain and increase their revenue streams (Natale & Doran, 2012). Finally, but
certainly not the only example of the trends resulting from the marketisation of
education, has been the role of financial incentives which have been introduced, or at
least tabled, in education policy circles, as a way to influence teacher behaviours and
student outcomes (Gius, 2013, Leigh, 2012 and Liang & Akiba, 2013).

It is this latter impact of the classical-liberal influence on education that shall be

examined throughout this study; to what extent do financial incentives have an impact
on teacher performance?

5

 4. Incentives
Financial incentives are used in a wide range of industries, as a way to increase
worker motivation, and therefore productivity, by linking financial rewards with the
output of the individual worker, the organisation, or both (Lucifora & Origo, 2015).
Incentives are popularly seen as a key mechanism with which to “recruit, retain and
motivate the workforce.” (Haynes, Wragg, Wragg & Chamberlin, 2003 p.75), as well
as enhance employee accountability (Hasnain, Manning & Pierskalla, 2012).

What I term here financial incentives, and shall refer to as hereafter, are in the
literature variously referred to as:
- Performance pay (Gneezy & Rey-Biel, 2014 and Lazear, 2000);
- Performance related pay (Lucifora & Origo, 2015);
- Performance based pay (Grabner, 2014);
- Pay for performance (Belogolovsky & Bamberger, 2014 and Sojourner,
Mykerezi & West, 2014);
- Merit pay (Gius, 2013);
- Incentive programs (Figlio & Kenny, 2007) and;
- Incentive pay (Friis, Hansen & Vámosi, 2014 and Imberman & Lovenheim,
2015).

Although clearly a multitude of terms are used throughout the literature, they all share
a common characteristic in that they seek to make the performance of a worker,
measured by one or more metrics, a partial or whole determinant of that worker’s
future compensation (Grabner, 2014).

How performance for the purpose of these financial incentives is measured, by whom,
and what link there is to compensation can vary considerably across industries and
organisations, and as such the precise nature of the financial incentive scheme differs
to a large degree around the world (Hasnain, Manning & Pierskalla, 2012).
Additionally, financial incentives can be awarded on an individual or a group basis
(Hasnain, Manning & Pierskalla, 2012). The financial aspect of the incentive could
consist of permanent salary increases, bonuses, or any other financial device that aims
to reward some pre-determined objective other than level of education or years of

6

experience in the job (Hasnain, Manning & Pierskalla, 2012 and Liang & Akiba,
2013).

Providing extrinsic, that is external, incentives to workers seeks to capitalise on a

commonly cited economic assumption that people are inherently selfish (Gneezy &
Rey-Biel, 2014), motivated only by that which benefits them directly. Classical-
liberal thinkers like Hayek wrote extensively on the role of pecuniary, that is
financial, incentives in shaping a person’s actions (Rodrigues, 2013). It was this
orthodoxy that influenced market-based policy decisions; human behaviour can be
predicted based on that which will benefit them, therefore these sorts of financial
incentives can be readily used to manipulate human behaviour. Those who work to
earn an income “will normally prefer a larger return from their efforts to a smaller
one, and often that they will increase their efforts in a particular direction if the
prospects of return improve.” (Hayek, 1973 p.45).

In non-teaching industries, financial incentives have regularly been shown to have a

positive motivational effect on workers, increasing productivity both on an individual
as well as at an organisational level (Lazear, 2000 and Lucifora & Origo, 2015). As
such, a majority of professions have been shown to use some form of market-based
system of financial incentives in their worker compensation packages (Podgursky &
Springer, 2007); in one study more than 60 per cent of surveyed firms used such a
compensation system (Hein as cited in Podgursky & Springer, 2007). Even the United
States General Schedule, the system by which white collar Federal civil servants have
their pay calculated (Buckley, 2009), utilises a partially market based approach by
taking into account individual performance in addition to experience and other
metrics (Ballou & Podgursky, 1997).

The apparent effectiveness of financial incentives in increasing motivation is most

noticeable in workers where their output is readily observed and accurately measured;
calculated based on “verifiable measures of performance and effort.” (Gambardella,
Panico & Valentini, 2013 p.38). A well designed system of financial incentives,
where individual effort is clearly linked to pay and reward, can have a positive impact
on both the quality and quantity of individual output as well as overall organisational
productivity (Friis, Hansen & Vámosi, 2014). However less clear are the effects of
7

financial incentives on workers whose output is of a less tangible nature, harder to
measure, based on knowledge or creativity, or a combination of the three (Grabner,
2014 and Kachelmeier, Reichert & Williamson, 2008).

In addition to problems associated with output that is difficult to measure, it should be

noted that financial incentives do not have a homogeneous impact on human
behaviour, with positive and negative effects on motivation and productivity
observable depending on the design and application of the incentive scheme (Gneezy
& Rey-Biel, 2014 and Gneezy & Rustichini, 2000). It should also be noted that there
have been suggestions by psychologists that in some circumstances, the introduction
of an extrinsic motivator such as a financial incentive may have a negative effect on
motivation (see Deci, 1971). Further work by the wider psychology profession also
casts doubt on the absolute ability of financial incentives to be the sole effective
motivating factor in the workforce. Work by American psychologists Abraham
Maslow, Frederick Herzberg and Edwin Locke in particular place a large emphasis on
non financial devices in motivating workers to perform, while at the same time
exploring the individual nature of workers and what motivates them (Berl,
Williamson & Powell, 1984, Locke & Latham, 2004 and Lundberg, Gudmundson &
Andersson, 2009).

5. Teacher incentives
Currently in Australia, public school teacher remuneration is set through unionised
collective bargaining, which in turn translates into a scaled system whereby pay is
largely based on years of experience (Leigh, 2012). This is comparable with the
United States, where the majority of schooling districts - 96 per cent - set teacher pay
based exclusively on years of experience and level of education, calculated according
to a standard scale (Gius, 2013, Hess & Castle, 2008, Hudson, 2010 and Yuan et al.,
2013). However this is by no means uniform throughout OECD nations, the bulk of
which have introduced at least some system of financial incentives as part of their
teacher compensation packages since the new millennium (Hasnain, Manning &
Pierskalla, 2012), including Sweden in 2000 (Lundstrom, 2012).

In the case of the United States, a standard scale of teacher pay has not always been
the case, nor will it necessarily remain so into the future; the current widespread use

8

of a standard scale for teacher compensation is somewhat of an anomaly in its history.
Almost half of school districts used performance based financial incentives for
teachers in the early 20th century, although this dropped to just four per cent in 1953
(Figlio & Kenny, 2007). More recently, this trend has been partially reversed or at
least slowed, with seventeen states in the union having adopted the use of district
level financial incentives in at least one schooling district (Liang & Akiba, 2013).
Additionally, some states have mandated a proportion of education budgets to be
spent on financial incentives for teachers, with Florida assigning five per cent of
teacher salary expenditure to such schemes (Figlio & Kenny, 2007).

Arguments for offering financial incentives to teachers to improve their practice were
expressed clearly in the 2012 State of the Union address, with President Obama
stating that “Teachers matter. So instead of bashing them, or defending the status
quo, let’s offer schools a deal. Give them the resources to keep good teachers on the
job, and reward the best ones.” (Obama, 2012 n.p.). These remarks by President
Obama underscore a sentiment echoed in an earlier U.S. law, which provided Federal
grants to states reforming teacher pay. The 2009 American Recovery and
Reinvestment Act, a response primarily designed to stimulate economic growth
following the Global Financial Crisis (Ingle, Bowers & Davis, 2014), included a
clause which established the 4.35USD billion Race to the Top Fund, which has as one
of it’s mandates the reform of teacher pay, whereby teacher performance and student
outcomes are used in compensation calculations (Liang & Akiba, 2013 and Superfine,
Gottlieb & Smylie, 2012).

A similar sentiment was echoed in Australia, with the announcement of the National
Partnership Agreement on Rewards for Great Teachers. This was a 1.1AUD billion
Council of Australian Governments (COAG) agreement to “improve the quality,
performance and development of all teachers in Australia, in order to improve student
learning outcomes.” (COAG, 2012 p.3). While the program, since cancelled, was
essentially an extension of existing teaching certification arrangements, the inclusion
of a one off bonus payment resonates with contemporary efforts around the world to
incentivise the teaching workforce through financial means.

9

These global policy developments in teacher pay may well be in response to research
that suggests that neither level of education or years of experience predicts teacher
performance or quality (Aaronson, Barrow & Sander, 2007). The correlation between
years of teaching experience and student achievement is non-existent, except in a
graduate teacher’s first two years, while “students of teachers with graduate degrees
perform no better on average than students of teachers without them.” (Hudson, 2010
p.1). This has significant implications for education budgets as in the United States,
pay increases based on acquiring years of experience, or ‘seniority’, make up almost
20 per cent of public school budget expenditures (Ballou & Podgursky, 2002).

Education policy makers chose from two distinct methods to induce their teachers to
perform to a desired standard, although it should be noted that the use of one of the
methods does not necessarily exclude the other, and they regularly work in tandem.
The first is one in which teachers are paid on a standard scale and progress up that
scale based on their level of education and years of experience (Gius, 2013, Hess &
Castle, 2008 and Yuan et al., 2013). Policy makers using this system seek to motivate
their teachers through the use of professional development programs as well as
through the screening process used in the recruitment of new teachers. The second
system is one in which policy makers have more flexibility in the compensation they
pay their teachers, and seek to use financial incentives which motivate teachers to
perform to a higher standard (Neal, 2011). It is the latter system that shall be explored
here; to see what effects these financial incentives have on teacher performance. Both
motivation and selection effects will be examined in order to determine the extent to
which financial incentives have an impact on teacher performance.

Advocates for the use of financial incentives for teachers, as well as critics of a
standard pay scale for teachers, argue that explicitly acknowledging the relationship
between teacher performance and pay will have the dual effect of motivating existing
teachers to improve what they deliver in the classroom, as well as selection effects
which encourage more suitable teachers to join the profession in the first place
(Ashiedu & Scott-Ladd, 2012, Jabbar, 2013 and Leigh, 2012). These motivating
effects consist of exacting greater effort from teachers, attempting to link their
financial compensation to their performance as a teacher (Neal, 2011). Selection
effects relates to the screening process, as well as the attraction of new teacher
10

recruits, and offers a way to regulate the quality and suitability of those who join the
teaching profession in the first place (Ashiedu & Scott-Ladd, 2012 and Leigh, 2012).

6. Motivation effects
A teacher compensation package which uses financial incentives most commonly
comprises a system whereby teachers receive a bonus, salary increase or similar in the
event their performance exceeds some predetermined standard (Neal, 2011). This
predetermined standard takes its heritage from the managerial concept of
‘management by objectives’, a strategy used to achieve organisational effectiveness
through the “definition and pursuit of unambiguous objectives” (Joullié & Spillane,
2014 p.101). These standards, or objectives that teachers must reach in order to be
judged successful generally fall into one of three categories: (i) student test scores; (ii)
evaluations by principals and other managing staff or; (iii) some combination of the
former and the latter (Neal, 2011).

(i) Objective measures - student test scores

The use of test scores has formed a significant part of school accountability in the
United States since the passing of the No Child Left Behind Act 2001. Through the
mechanism created by this legislation, access to a proportion of funding for individual
schools relies on students meeting a pre-determined standard in curriculum
examinations (Figlio & Winicki, 2004). This program introduced a method of school
accountability involving sanctions for schools that do not perform to desired standards
in the prescribed curriculum examinations (Neal, 2011). As opposed to the financial
incentives that I am interested in here, this system involves more of a stick, rather
than a carrot, approach, yet it does provide an interesting contextual background for
the state of school accountability in the United States, whereby test scores are seen as
the arbiter of student and school performance.

An extensive range of educational jurisdictions has used rewards, rather than

punishments to incentivise school wide improvement of teacher performance as
measured by test scores. The following jurisdictions are a selection of those that have
experience with financial incentives on a school wide basis, either permanently or as a

11

trial: Dallas (Ladd, 1999), India (Muralidharan & Sundararaman, 2011), Israel (Lavy,
2002), Kenya (Glewwe, Ilias & Kremer, 2010) and North Carolina (Lauen, 2013).

These systems of financial incentives all involve bonuses awarded equally among
teaching staff upon student performance exceeding some predetermined standard. In
these schemes anywhere from the top performing third (Lavy, 2002), to the top
performing fifth (Ladd, 1999) of schools, as measured primarily through standardised
curriculum examination scores, are eligible for these bonus payments. The design,
and hence sophistication, of these school wide, or what I shall label ‘blanket’
incentive programs, vary widely, as do their apparent effects on teacher performance
and therefore student learning.

The most simple blanket incentive programs award bonuses to all teachers who
worked with tested students, in Kenya distributed in kind rather than cash due to
cultural considerations. The bonuses are based solely on the average absolute scores
of students in particular exams reaching a set minimum level, where the amount
available to teachers in this Kenyan system varied between 21 and 43 per cent of a
teacher’s monthly pay (Glewwe, Ilias & Kremer, 2010).

Less simplistic blanket incentive programs, such as those in North Carolina and India,
involve evaluating the relative improvement of student exam scores within a certain
district or jurisdiction, and providing or withholding bonus payments based on that
improvement achieving a defined quantum (Lauen, 2013 and Muralidharan &
Sundararaman, 2011). The North Carolina system paid up to 1,500USD per teacher in
the event growth targets were met, while the Indian system paid an uncapped bonus
beginning at 2,500INR if an average minimum increase of 5 per cent in test scores
was achieved by students taught by those teachers. These bonuses were around 30 per
cent (Public Schools of North Carolina, 2015) and 25 per cent (Muralidharan &
Sundararaman, 2011) of a teacher’s average monthly wages at the time of each study
in North Carolina and India respectively.

A more sophisticated method of ranking participating and competing schools, as

observed in Dallas and Israel, is also used to determine eligibility for bonus payments
to teachers. In the Dallas and Israel system the top performing fifth (Ladd, 1999) and
12

the top performing third (Lavy, 2002) of schools are awarded these bonus payments
respectively. The Dallas and Israel systems, referred to as ‘tournaments’ in the
literature (Neal, 2011), measure the relative improvement of student exam scores,
while also using statistical methods to consider student body characteristics, by taking
into account socio-economic background. In Dallas, this included such variables as
the proportion of Black, Hispanic, English language proficient, as well as
disadvantaged students at a school (Ladd, 1999). The bonuses awarded in these
‘tournament’ systems were the equivalent of around 3 per cent (Hanushek & Rivkin,
2007) and 5 per cent (Lavy, 2002) of a teacher’s salary in Dallas and Israel
respectively.

Therefore the extent of evaluating relative improvement can be as simple as

measuring a percentage change in test scores from year to year (Muralidharan &
Sundararaman, 2011), to using multiple variable regression analysis to determine the
effect the individual school has had on student learning throughout the year (Ladd,
1999 and Lavy, 2002).

The effects of these blanket incentives on test scores, which for our intents and
purposes, could justifiably be labelled high stakes testing, was mixed in the quantum
of the improvements, although positive changes were generally, but not completely,
seen across the board. To varying degrees, students taking subjects which were the
focus of the high stakes testing improved their test scores year to year in most
literature reviewed compared to control groups. However the limited literature which
examined it, did not indicate an associated improvement in the ‘low stakes’ subjects,
which had not been the focus of the incentive scheme. Additionally, in some cases
those jurisdictions that had been trialling these financial incentive schemes, saw an
immediate return to pre-trial test results at the conclusion (Glewwe, Ilias & Kremer,
2010).

What is clear is that differences in design of an incentive scheme can have a drastic
impact on teacher performance, behaviour and therefore test scores. The use of test
scores as a metric to calculate compensation above base pay is arguably objective in
that it is quantifiable and not subject to bias judgement (Sebald & Walzl, 2014).
However systems that simply set an examination score target can have a distorting
13

effect on teacher behaviour, whereby those subjects that are the subject of the high
stakes testing receive greater classroom attention, with extra classes and revision time
set aside only for those subjects. A narrowing of the curriculum is also evident in such
a system, to the detriment of those subjects that are not examined for the purposes of
awarding bonuses (Glewwe, Ilias & Kremer, 2010). These are common symptoms of
high stakes testing which are well documented, with teaching to the test, the
narrowing of the curriculum as well as more distasteful changes to teacher behaviour
often seen as a result of such testing (Nichols & Berliner, 2005)

While more sophisticated systems, in Israel and India for instance, provided some
evidence of improved teacher performance and behaviours, such as more overtime
and individualised and differentiated instruction (Lavy, 2002 and Muralidharan &
Sundararaman, 2011), these behaviours were largely self-reported. The self-reporting
of data must at all times be viewed with an amount of caution, due to the inherent
subjectivity of self-evaluation and the potential for bias responses (Shi & Tubb et al.,
2013). In addition, it remains debatable as to whether an increased level of overtime
provides evidence of the improvement of teacher performance. Productivity is a
relationship between inputs and outputs, so while output may increase, the
corresponding level of inputs must be examined to establish whether teacher
productivity is actually improving.

Additionally, those nominally more sophisticated ‘tournament’ financial incentive

systems, such as that seen in Dallas and Israel, delivered mixed results across ethnic
groups. The results for the Dallas study indicate that although Hispanic and white
students had significant gains in their test scores; no effect was discernible on the test
scores of black students (Ladd, 1999). This heterogeneity of results across ethnic lines
is of particular concern, especially considering the persistent achievement gap in
black students across every school year level in the United States (McDonough,
2015).

Yet this sort of incentive arrangement is on a school wide level, and does not
necessarily reward the efforts of individual teachers. Literature concerning the effect
of financial incentives on individual teacher performance as measured solely by test
scores is limited (Figlio & Kenny, 2007), however some discussion and conclusions
14

can be drawn. The use of individual teacher financial incentives based predominately
on student test scores has been documented in the following jurisdictions, either
permanently or as a trial: Israel (Lavy, 2009), India (Muralidharan & Sundararaman,
2011) and Little Rock, Arkansas (Winters, Greene, Ritter & Marsh, 2008).

The design of the India and Little Rock programs involve formula based incentive
schemes, whereby relative increases in student test scores in particular subjects
triggers bonus payments correspondent in size to said score increases (Muralidharan
& Sundararaman, 2011 and Winters, Greene, Ritter & Marsh, 2008). The Israeli
scheme ranked teachers within the same school based on improvements in curriculum
examination scores, and gave bonuses to those top ranked teachers; a ‘tournament’
system within schools (Lavy, 2009).

The effects of these individual teacher incentives based on student test scores shows
that improvements were seen across all jurisdictions in subjects where high stakes
testing occurred; student test scores in those high stakes subjects increased at a higher
rate than control schools with no individual financial incentives. In addition, teacher
behaviours such as holding additional classes and differentiating learning activities
were reported, however caution must again be displayed due to the potential for bias
responses in instances of self reporting (Shi & Tubb et al., 2013). Yet again, as with
the literature concerning ‘blanket’ incentive schemes, limited data concerning low
stakes subjects and examinations was available. The few literature that examined it
found a positive gain in low stakes subjects, however the limited time frames of the
studies makes any conclusive finding tenuous.

So if student test scores, at least in ‘high-stakes’ subjects, appear to improve at least

generally through blanket, as well as individual, teacher financial incentives programs
based on these supposedly objective test scores, does this give immediate impetus to
introduce a similar system of teacher compensation in Australia and elsewhere? And
if so, which is more effective, blanket or individual teacher based systems?

Proponents of such objectively calculated incentives argue that long term benefits to
education systems include improved teacher performance through greater effort
(Muralidharan & Sundararaman, 2011), as well as changing pedagogical techniques
15

and differentiating teaching based on ability (Lavy, 2009). Yet the limited time period
in which these studies took place, as well as the limited sample sizes and non-random
nature of the experiments, mean that any attempt to extrapolate their results without
further study would be problematic (Martins, 2010). It may in fact mean that any
results of these natural experiments may be meaningless beyond those participating
schools and jurisdictions (Meyer, 1995). Additionally, any attempt to realistically
analyse the effect of financial incentives on pedagogical techniques using this existing
data would be dubious due to issues of bias surrounding self-reporting (Shi & Tubb et
al., 2013). Self-reporting of data is frequently cited as a limiting and cautioning
variable in research and should be viewed with scepticism (Wyatt, 2014).

The potential of the free rider effect in blanket incentive schemes is also of concern.
This effect may exist when teachers who exert little or no effort in improving their
performance, might still receive a bonus in the case the overall school test score
results reach their relative or absolute target (Neal, 2011). This free rider effect may
be more, or perhaps less, prevalent in schools of varying sizes, due to the varying ease
of monitoring peers in different sized teaching groups. Some research suggests that
the free rider effect is magnified in particularly large groups (Lavy, 2009). Thus,
smaller schools with fewer teachers of the same subject might be able to more easily
monitor their peers, as compared to those larger schools with larger teaching groups.
However the importance of teaching group size is not statistically significant
elsewhere (Muralidharan & Sundararaman, 2011). This free rider effect requires more
research, as it may have a significant impact on the effects of these blanket incentives
on different sized schools, and would hence need to be carefully considered in the
process of evaluating or designing any such scheme.

A similar free rider effect may also be evident in those teachers from subjects that are
not examined through high stakes testing. Some blanket incentive schemes would
provide those teachers with a bonus payment for an improvement in student test
scores unrelated to their subject. Conversely, individual incentive payments for
curriculum examination scores limited to certain subjects would preclude teachers
outside of those learning areas from any bonus, providing a potential source of pay
inequality and animosity amongst staff members.

16

In addition, any high stakes testing regime requires careful consideration of design
due to the associated (negative) behavioural modifications from the status quo that are
often documented in teachers, students and other stakeholders (Brennan, 2015). It is
said that high stakes testing is subject to Campbell’s Law, whereby “The more any
quantitative social indicator is used for social decision making, the more subject it
will be to corruption pressures and the more apt it will be to distort and corrupt the
social processes it is intended to monitor.” (Campbell, 2011 p.34).

Therefore any system seeking to financially reward based on test scores, even when
objectively measured, is subject to manipulation by all stakeholders, including
teachers and school management. Instances involving teachers providing students
with answers, changing student answers, as well as unscrupulously obtaining exams
prior to a test and providing students the exact answers required have all been
uncovered in high stakes testing environments through statistical analysis (Jacob &
Levitt, 2003). Schools have even been documented increasing the sugar content of
meals prior to high stakes testing being administered, “responding to a literature that
links test score performance to glucose level in test takers.” (Neal, 2011 p.21). These
instances of stakeholder manipulation of high stakes testing is not limited by
geography, occurring throughout the United States (Loughran & Comiskey 1999), as
well as the United Kingdom (Jacob & Levitt, 2003) and doubtless in other
jurisdictions where high stakes testing takes place.

Furthermore, the use of the results of high stakes testing to determine a teacher’s pay
may be particularly troublesome, due in no small part to the traditionally segregated
nature of their work, with much of that work not constantly visible to those who
would seek to reward or punish them based on some quantitative measure of
performance (Neal, 2011). As such, any system of financial incentives that seeks to
reward teachers based on test scores, whether individually or through a blanket
mechanism, must in its evaluation and design take into account the context of that
teacher’s work.

Teachers, working with different classes, can teach in radically different contexts,
where student abilities and backgrounds vary extensively. In other words, some
teachers are allocated students more capable of making improvements in their test
17

scores, and vice versa, than others, regardless of their skills are as an educator
(Armour-Garb, 2009). This concern can also be extended to the allocation of students
across schools, whereby the socio-economic status (SES) makeup of schools is a well-
established predictor of student achievement (McConney & Perry, 2010 and Vale et
al., 2012). This is particularly relevant due to the heterogeneous improvement in test
scores seen across different ethnic groups in Dallas students after the implementation
of a scheme of financial incentives (Ladd, 1999). In light of this, the implementation
of schemes, which seek to reward relative increases, as well as absolute test scores,
must be evaluated and designed such that bonuses distributed reflect the work of the
teacher throughout the year, as opposed to that teacher’s, or school’s, allocation of
students. Thus, both ranking of teachers and teaching groups within and across
schools, in order to allocate bonuses, would need to be approached with caution.

Finally, there may be a difficulty in the comparison of teacher financial incentives

across developing, and developed, jurisdictions. In developing countries, teachers
often earn salaries far above the average wage (Neal, 2011 and Vegas, 2007). In the
Indian state of Andhra Pradesh, teachers on average earn five times the average wage
(Muralidharan & Sundararaman, 2011). Thus, using this jurisdiction’s experiences to
inform Australian policy makers would be problematic, considering on average
Australian teachers earn roughly the average wage of tertiary educated workers,
although this has been trending down in recent decades (Leigh & Ryan, 2008).

So while the use of student test scores, as a method to calculate teacher incentive
payments is at least arguably an objective measure, it nonetheless raises challenges
for any jurisdiction wishing to utilise them. I shall now explore more subjective
measures. While these subjective measures still provide a benchmark above which
teachers must perform in order to be compensated over their base pay, they rely less
on quantifiable, objective data and are more holistic in their nature (Sebald & Walzl,
2014).

(ii) Subjective measures - evaluations by principals and other managing staff

The use of subjective measures to evaluate eligibility for financial incentives is

common throughout non-teaching industries (Sebald & Walzl, 2014). Subjective
18

measures of performance are commonly used in industries and professions where
output is difficult to measure, and where creativity and job complexity are typical
(Engellandt & Riphahn, 2011). These subjective evaluations are typically carried out
by management or more qualified peers, and can involve diverse metrics such as
feedback from customers, colleagues, as well as the superior’s own opinion
(Zábojník, 2014). These performance evaluations are often in the form of so-called
‘360-degree’ evaluations, whereby the evaluation of performance is judged from
multiple sources, rather than a single one (van der Heijden & Nijhof, 2004).

The use of teacher evaluations based on a subjective evaluation by principals or

superiors has been documented in jurisdictions including England (Atkinson et al.,
2009 and Wragg, Haynes, Chamberlin & Wragg, 2003) and Portugal (Martins, 2010).

Evaluations of teachers in these jurisdictions use a number of metrics to determine

eligibility for financial incentives. In England, this consists of completing an
application form and demonstrating to their principals “that they had reached
acceptable standards in five areas: knowledge and understanding of teaching; teaching
management and assessment; wider professional effectiveness; professional
characteristics; and pupil progress.” (Atkinson et al., 2009 p.252). Teachers in
Portugal were subject to evaluation via metrics including feedback from parents,
attendance, professional development, and pedagogies employed. The Portuguese
system used teachers on a higher pay scale to perform the evaluations (Martins,
2010).

The financial incentive offered to teachers in both these jurisdictions was access to an
additional, higher salary scale. In England, teachers could be paid an extra 5000GBP
annually if they progressed to the upper rung of this new scale (Atkinson et al., 2009
and Wragg, Haynes, Chamberlin & Wragg, 2003). Similarly in Portugal, the
difference between the highest salary in the lower scale, and the lowest in the higher
scale, was about 25 per cent (Martins, 2010).

The effect of these evaluation based financial incentives was inconsistent and in one
case even negative. The English “scheme did improve test score gains, on average by
about 40% of a grade per pupil.” (Atkinson et al., 2009 p.259), although the results
19

across subjects were far from consistent. Students improved their results in science,
but this occurred at the detriment to other core subjects such as English and
mathematics. In Portugal, as measured by student curriculum examination results,
performance declined significantly (Martins, 2010).

So what then can these jurisdictions tell us about subjective evaluations and their
effect on teacher performance? Although the English scheme purportedly improved
student test scores in some subjects, the implementation of the scheme raises cause
for concern surrounding validity. While almost 80 per cent of eligible teachers applied
to access the higher salary scale, a startling 97 per cent of those who applied were
successful (Atkinson et al., 2009), indicating that principals were particularly lenient
in their judgements in the five evaluated areas. Additionally, the teachers who were
eligible to apply for the higher pay scale were already at the top of the lower, original
pay scale. So therefore this would appear to have the effect of simply increasing the
potential salary of the entire teaching profession, rather than using financial incentives
to reward only those teachers who performed to some predetermined higher standard.
Furthermore, anecdotal evidence from some principals conducting the evaluations
assert that the scheme had no effect on teacher effectiveness or pedagogy, while the
adversarial nature of the process, combined with the lack of transparency and rigor of
the system meant that it was not always equitably and fairly applied (Wragg, Haynes,
Chamberlin & Wragg, 2003). Literature examining the Portuguese scheme, while
ascertaining the negative impact on student test scores, offered no evidence of
changes to teacher behaviour.

The use of these subjective evaluations to calculate financial incentives for teachers is
therefore problematic, in that it places the evaluation in the hands of non-independent
agents who are susceptible to making lenient, inequitable, and hence meaningless
judgements. Similarly, in research into subjective performance evaluations conducted
in private industry, differences in ratings given by management to their workers more
often than not reflected the idiosyncrasies of the person doing the evaluation, rather
than the performance of he or she who is being evaluated (Buckingham & Goodall,
2015). There is no research to suggest that those conducting subjective performance
evaluations in schools would be any less susceptible to such behaviour than those in
other industries. Moreover, using student test scores as a proxy, it cannot be
20

categorically shown that subjective performance evaluations improve teacher
performance, and they may even have a detrimental effect.

Finally, I shall explore what motivating effects financial incentives have on a

teacher’s performance, when compensation is calculated according to a combination
of both objective, and subjective measures.

(iii) Combinations – subjective and objective measures

As previously mooted, in the United States, the overwhelming majority of schooling

districts, 96 per cent, set teacher pay solely based on level of education and years of
experience (Hudson, 2010). Recent programs, including the Teacher Advancement
Program (TAP), a scheme currently in at least one district in 17 states, seeks to help
“schools recruit, train, and retain effective teachers.” (Hudson, 2010 p.3). This broad
based scheme consists of four elements; career paths; professional growth;
instructional accountability and; financial incentives based on performance
(Aaronson, Barrow & Sander, 2007). This scheme is the largest of its kind in the
United States, and the last element of the TAP includes the use of financial incentives
based on student test performance as well as teacher evaluations (Neal, 2011 and
Solman, White, Cohen, & Woo, 2007).

The TAP uses this so called ‘combination’ method of evaluating teacher performance
through both objective and subjective measures, calculates financial incentives based
on the result, and uses three metrics to do so. Teachers are assigned a score between
one and five based on a combination of “instructional evaluations, teacher-level value
added scores, and school-level value added scores.” (Hudson, 2010 p.4). Depending
on their resultant score, teachers are then awarded bonuses, which can be up to
10,000USD, but are more typically between 2,500USD and 3,000USD (Hudson, 2010
and Schacter & Thum, 2005). Even these typical bonus amounts are significant, with
a bonus of 3,000USD representing around 60 per cent of an average teacher’s
monthly wage in some states (Public Schools of North Carolina, 2015).

Examining the TAP is advantageous as it allows for the aggregation of financial

incentive schemes which have been previously looked at in isolation; that calculated
21

solely based on test scores, both on a ‘blanket’ and individual teacher basis; as well as
that calculated based solely on subjective evaluations by principals or other
management. The TAP combines elements of all the aforementioned schemes, and
allows them to be examined in conjunction with each other.

The results from the TAP scheme indicate that 25 per cent of participating teacher’s
had students achieve above the average gain in mathematics and reading, as compared
to only 14 per cent of non-TAP teachers (Hudson, 2010). Similar results are seen by
comparing TAP and non-TAP schools; with TAP schools significantly outperforming
comparable non-TAP schools in mathematics, reading, as well as languages (Schacter
& Thum, 2005).

However comparisons of student achievement between TAP and non-TAP schools

may be troublesome due in no small part to the fact that schools participating in TAP
tend to be predominately low performing schools (Hudson, 2010). This creates a
difficulty in extrapolating the results of the scheme, due to the non-random nature of
the experiment; TAP and non-TAP schools typically begin at a different base level of
student achievement, hence comparisons of student achievement gains may be
inherently flawed.

Additionally, the positive gains in student achievement seen above cannot be

necessarily solely attributable to the use of financial incentives. As previously
mooted, the TAP scheme consists of four elements; career paths; professional growth;
instructional accountability and; financial incentives based on performance
(Aaronson, Barrow & Sander, 2007). Therefore to attribute any improvement in
student achievement to just one of these elements without considering the other three
would be an unsound and tenuous analysis. The literature examined did not conduct
any analysis isolating the financial incentive element from the other three elements;
hence caution must be used applying the results more broadly.

Teacher attitudes to the TAP scheme provide some interesting commentary as to the
effect of the scheme on teacher performance. Teachers participating in TAP were of
the opinion that the professional development they attended was beneficial for their
classroom pedagogy, while TAP teachers spent a substantially larger amount of time
22

learning new pedagogical techniques as did non-TAP teachers (Solman, White,
Cohen, & Woo, 2007). Again, caution must be exhibited due to the self-reported
nature of these claims (Shi & Tubb et al., 2013), yet the fact that teachers thought the
professional development was beneficial, and they were willing to do more if it,
shows a willingness on their behalf to improve their teaching techniques for the
benefit of their students.

Inasmuch the role professional development plays in improving teacher performance

is not the focus of this paper, it does raise an important point in the role which
financial incentives effect teacher performance and hence student achievement.
Financial incentives schemes designed to measure and then reward desired teacher
performance, without any guidance or feedback as to how that desired benchmark
might be achieved, might in fact be inherently flawed.

The role of professional development in the TAP raises the important distinction
between improving future performance, as opposed to measuring past performance in
conjunction with either rewarding or punishing. The professional development
element of the TAP scheme, which encouraged and resulted in its participating
teachers to more frequently access professional development in order to improve their
performance as teachers, may have been just as important as the financial incentives
element in raising student achievement through improved teacher performance. This
is echoed in recent experience in private industry, where emphasis on regular and
frequent professional development, as well as manager feedback, has been seen to be
more effective in increasing worker motivation, productivity and engagement, than
have traditional performance evaluations which focus on past performance
(Buckingham & Goodall, 2015).

So while the TAP indicates that a system of financial incentives calculated using both
objective and subjective measures can be effective in improving teacher performance
and student test scores, limitations in the data and methodology call for caution in any
policy application without further study and analysis.

23

 7. Selection effects
While financial incentives for teachers have a goal to increase teacher performance by
encouraging them to work harder, delivering more effective pedagogies and the such;
advocates for financial incentives also claim that selection effects, encouraging more
suitable candidates to enter the teaching profession, is further justification for their
proliferation. The distinction between motivation and selection effects is thus; while
financial incentives may incentivise a teacher to enhance their students’ test scores
through some increased effort as a result of the former, the latter may attract
individuals to the profession who are more capable of raising test scores, while
discouraging those who are not (Lazear, 2003).

Selection effects due to financial incentives have been widely documented in private
industry, with a notable impact on worker productivity. In one study, workers hired
under a newly implemented scheme of financial incentives were up to 24 per cent
more productive than those workers they replaced, as measured by output. It is
important to note that the quantum of increase in productivity due to selection effects
was on par with that attributed to the effect of motivation on existing workers (Lazear,
2000). This conclusion is consistent with a similar study, where a third of the increase
in worker productivity was attributed to selection effects, with the remainder credited
to that of motivation (Moen & Rosen, 2005). These studies allow for the broad
conclusion, at least in private industry, that compensation schemes, which include
financial incentives based on some metric of output, attract more productive workers
to those jobs.

Similarly, the level of base pay offered to teachers will likely have an effect on the
attraction and retention of workers in that profession. The classic economic model
would suggest that an individual’s pay is linked to their productivity and aptitude
(Hanushek, 2011a). This model would be applied in private industry where a highly
knowledgeable, skilled and productive worker could demand a higher wage, and sell
their labour to the highest bidder. Yet in education, widely seen as a public good,
political forces are an overarching determinant of teacher salaries (Hanushek, 2011a),
while the high rate of union membership in many jurisdictions (Gilpin & Kaganovich,
2012 and Leigh & Ryan, 2008) means salary schedules are aligned to experience and

24

education, not productivity and aptitude. So while the equal impact of motivation and
selection on a worker’s productivity cannot without further review be generalised to
the teaching profession, it provides an interesting context and theoretical background
to explore the selection effect on the performance of teachers. Examining the effect of
base pay and financial incentives on the self-selection of candidates into teaching
must be considered within the discrete context of the profession. Relative pay and pay
compression will both have some effect on which candidates choose to become
teachers.

The level of pay available to newly graduated teachers must be examined relative to
that of other professions in order to properly examine the selection effect on the
performance of teachers. In the United States, the average earnings of teachers
increased relative to that of other university graduates during the second half of the
20th century. However, when the effect of the standard salary scale, which most
teachers are paid according to, is taken into effect, much of the increase in teachers’
relative pay can be attributed to the increased years of experience and higher
qualifications of the teaching workforce, rather than any overall increase in the salary
standard scale (Flyer & Rosen, 1997). This may only allow us to conclude that the
relative age of the teaching workforce in the United States is increasing, and perhaps
staying at university longer.

Similarly in Australia, average teacher pay has not kept pace with that of the wider
labour force. Relative to other tertiary educated workers, teachers’ pay has been
decreasing in recent decades. In the two decades to 2003, the ratio of a female
teacher’s pay to that of similarly educated female non-teachers has decreased from
1.14 to 1.03, while that of male teachers has seen a drop from 1.08 to 0.91 (Leigh &
Ryan, 2008). The fall in the relative pay of teachers has also been observed over the
latter half of the 20th century in nations including Belgium, Denmark, Finland,
France, Ireland, the Netherlands and Sweden, with the notable exception of Japan
(Lakdawalla, 2006). It is important to note however, as previously mooted, that the
relative pay of teachers’ in many developing nations is quite competitive compared to
other professions, earning significantly more than the average wage (Neal, 2011 and
Vegas, 2007). This contrast highlights the disparate contextual framework within
which education policy discourse takes place across nations.
25

Therefore in Australia, as in similarly developed nations, but in contrast to many
developing nations, when compared to alternative professions requiring a university
education, the real pay of teachers has declined in recent years, setting a picture of
declining relative pay for the profession. This has had an effect of increasing the
opportunity cost for new teachers entering the profession in terms of their lost
potential earnings in other industries, and as such will be explored as to its
implications on the selection effect of financial incentives on teacher performance
(Gilpin & Kaganovich, 2012). What then of pay compression, or the extent of the
salary advancements available to new teachers over the course of their careers?

The small degree of salary advancements paid to teachers over the course of their
careers under the standard scale has been attributed to, among other things, the role of
teacher unions’ in the collective bargaining process, as well as the standard scale
compensation systems which rely heavily on years of experience and education,
rather than merit (Gilpin & Kaganovich, 2012 and Leigh & Ryan, 2008). The degree
of pay compression for teachers can be distinctly seen in the United States, where a
newly graduated teacher with a bachelor’s degree can expect to earn on average
35,500USD annually, whereas a teacher with the same bachelor’s degree, and 10
years of experience earns on average 44,900USD (NCES, 2013b), a salary
advancement of less than 10,000USD. This, compared with an average wage of
43,000USD in the same year across all workers in the United States (SSA, 2013),
regardless of level of education, indicates a large degree of pay compression; 10 years
of experience are required for a teacher’s salary to reach the national average wage in
the United States of America.

However the standard of graduate teacher pay in Australia is more positive, with
newly graduated teachers taking home more than their similarly tertiary educated
peers. In 2012, while the median starting salary of all female graduates with a
bachelor’s degree was 50,000AUD and all male graduates with a bachelor’s degree
was 55,000AUD (ABS, 2013), first year public school teachers earned 58,125AUD in
Victoria (DET, 2015) and 59,706 in New South Wales (DEC, 2015). Yet these above
average starting graduate salaries disguise the limited scope for salary increases over
a teacher’s career. In 2010, an Australian teacher could only expect to increase their
26

pay by 49 per cent over the course of their career, compared to the OECD average of
92 per cent over the same time period (OECD, 2012a). This pay compression, similar
to the diminished relative pay of teaching to other professions, creates a sizeable
opportunity cost for those considering becoming teachers.

Thus, in Australia, new graduates face a significant opportunity cost in entering the
profession, in that their salaries are limited over the course of their career as a result
of salary schedules rewarding experience over other determinants. What conclusions
can then be drawn, using data from jurisdictions here and abroad, as to the selection
effects of financial incentives and a teacher’s base pay?

The literature examined concerning financial incentives calculated according to test

scores and objective measures have not been able to shed any light on the selection
effects of said financial incentives. Financial incentive schemes examined were either
implemented over short trials of a period of months or a year, or have only been in
place for a limited time in their respective jurisdictions. As such, due to the length of
time it takes to enrol in, and complete, a teaching qualification – typically three or
four years for the minimum required bachelor’s degree - the selection effects as a
result of financial incentives are so far unobservable. However in its stead a proxy can
be examined; that of a similar selection effect resultant from different levels of base
pay on a teacher’s performance.

8. Base pay and teacher performance

In Australia, the aptitude of teachers entering the profession fell substantially in the
two decades to 2003. One Australian study concluded that in that time period the
“average percentile rank of those entering teacher education fell from 74 to 61, while
the average rank of new teachers fell from 70 to 62.” (Leigh & Ryan, 2008 p.141).
This is echoed in concerns surrounding the quality of new teachers in Australia and
their subject area expertise (Brennan & Willis, 2008, Harris, Moran & Long, 2010
and Smyth, 2013). Public discourse surrounding the academic aptitude of those
entering teacher education has in recent times focused on raising minimum academic
standards of candidates entering the profession; with one proposal in New South
Wales calling for teacher candidates to come from the top 25 per cent of students as

27

measured academically (Tovey, 2013). Similar sentiments have been expressed in the
United States (Darling-Hammond, 1997 and Dinham, Ingvarson & Kleinhenz, 2008).
The impact of teacher aptitude on performance has been explored overseas, with a
positive correlation established between a teacher’s results in exams and student
outcomes (Ehrenberg & Brewer, 1994 and Leigh, 2012).

Concurrently, research suggests that the years of experience, for which teachers are
currently awarded for via the standard salary scale, have no correlation with teacher
quality. Apart from during a graduate teacher’s first two years in the profession, there
exists no positive relationship between a teacher’s ability to raise student test scores
and their years in the classroom (Aaronson, Barrow & Sander, 2007). Similarly, no
relationship exists between the type of degree a teacher has earned and student
outcomes (Hudson, 2010). This is of particular concern from a fiscal perspective, due
to the significant proportion of government education budgets, which are dedicated to
compensating teachers as they climb in seniority and earn new degrees (Ballou &
Podgursky, 2002 and Flyer & Rosen, 1997).

Yet while teacher seniority bears no relationship to teacher quality as measured by

student test scores, a teacher’s aptitude does (Leigh & Ryan, 2008). Similarly, the
positive correlation between a teacher’s pay relative to Gross Domestic Product
(GDP) and results in the Programme for International Student Assessment (PISA)
(OECD, 2012b), indicates that those nations which value teachers and pay them
accordingly, solicit greater effort from their teaching workforce and attract more
suitable recruits to the profession in the first place.

Thus teacher aptitude solicits increases in student test scores, as do more highly paid
teachers relative to a nation’s per capita GDP. Ipso facto it might come as no surprise
that an increase in the average wages paid to teachers results in teachers with a higher
academic aptitude. Using state and territory teacher standard pay scales throughout
Australia, it has been established that for every one per cent increase in the salary of
graduate teachers, a 0.6 per cent increase in the aptitude of those entering teacher
education courses is observed (Leigh, 2012).

28

Therefore the base pay of a teacher can have a profound impact on a teacher’s
performance as measured by student test results. Although teacher base pay has been
used as a proxy in the exploration of the selection effects resulting from financial
incentives on teacher performance, well-founded conclusions, with some caveats, can
still be drawn. While financial incentives, rewarding teachers for some level of
performance over a benchmark, increases the level of pay available to teachers and
attracts more skilled workers to the profession, similarly an increase in the overall
level of pay can be reasonably expected to, and has been shown to, have a similar
effect.

9. Discussion
From the outset this paper has sought to establish any relationship between financial
incentives and teacher performance. It was determined that policy makers have the
choice between two systems in their pursuit of motivating teachers to perform at some
desired standard. The first of which may be seen as the status quo, where policy
makers seek to motivate the teaching workforce through professional development as
well as through the screening process they use to recruit new teachers, paying them
according to a standard scale commensurate to their level of education and years of
experience in the classroom (Gius, 2013, Hess & Castle, 2008 and Yuan et al., 2013).
The second system is one of flexibility and in some ways experimentation, where
policy makers employ variations of financial incentives to motivate the teaching
profession, as well as attract those more suited to teaching (Neal, 2011). These
financial incentives are calculated via some method of measuring performance, and
subsequently rewarding those who reach a pre-determined benchmark. The
introduction of these systems of financial incentives can in no small part be seen as a
result of the profound shift in the political economy since the 1980s, where classical-
liberal orthodoxy has seen market forces shape the interactions of buyers and sellers
of goods, including in education.

What has become clear from sifting through these often disparate systems of financial
incentives offered to teachers and schools around the world, is that the flexibility
available to policy makers, and the inherent nature of such systems, results in a
complex landscape for policy makers to consider. Schemes of financial incentives for

29

teachers come in almost infinite variations, with no two systems’ method of
measuring performance, or the subsequent allocation of rewards, being the same.
Additionally, the dissimilar social and economic settings in which these systems are
situated mean that any extrapolation of results from one jurisdiction into another is
likely to be fraught with complications. As mooted, the relative pay of teachers’ in
different parts of the world can vary drastically, with some developing nations paying
their teachers many times the average wage (Muralidharan & Sundararaman, 2011,
Neal, 2011 and Vegas, 2007), while teachers in developed nations generally receive
pay equivalent to, or least close to, that of the average worker (ABS, 2013, DEC,
2015, DET, 2015, Leigh & Ryan, 2008 and OECD, 2012b).

So then what conclusions can be drawn from such complexity? Firstly, the current
status quo of paying teachers according to a standard scale, rewarding seniority above
all else is ineffective and wasteful in a number of ways. The standard scale rewards
teachers for something that has no bearing on student outcomes, if indeed test scores
are seen as the hallmark of an education system. There lies no clear link between the
years in which a teacher has been in a classroom, their type of degree earned, and
their ability to have a positive impact on their student’s academic achievement
(Hudson, 2010). Secondly, the standard scale is a huge fiscal burden for education
budgets around the world, requiring huge government expenditure just to reward
teachers for their endurance in the profession (Ballou & Podgursky, 2002 and Flyer &
Rosen, 1997).

Even if the status quo is indeed a flawed system, the inconsistency of results as to the
effectiveness of financial incentives on raising teacher performance urges caution in
its implementation, at least until further study is conducted in the Australian context.
What has become clear is that while some positive impacts on student outcomes have
been observed, enough evidence of contrasting negative student outcomes, as well as
undesirable teacher behaviour, should encourage restraint in the implementation of
any policy surrounding financial incentives in education. Raising student test scores
in high stakes subjects, while an admirable outcome taken discretely, should not come
at the expense of stagnant or negative growth in low stakes subjects, nor should it
come at the expense of nefarious teacher or principal behaviour, where those
stakeholders seek to ‘game’ the system for their own benefit. Similarly, any positive
30

outcomes should be distributed equally across a schooling system, neither favouring
nor discriminating against students based on ethnicity nor any other trait.

To truly measure the impact of financial incentives on teacher performance in an

Australian context, detailed further study would need to be conducted. Only then
would any results truly reflect the Australian education context. This may however
prove to be a difficult prospect, in no small part due to the heavily unionised nature of
the public school teacher workforce in Australia, and the peak teacher union’s staunch
opposition to the introduction of market forces into teacher salary calculations (AEU,
2011). The union position on performance pay may well be driven by the motivations
of those who join the teaching workforce, with very few joining due to the wages and
conditions available, and most driven by more selfless and non-financial reasons
(Ashiedu & Scott-Ladd, 2012).

Finally, for any conclusions to be properly drawn about the impact of financial
incentives on teacher performance, the benefits of said incentives would have to be
examined in relation to any costs involved. As teacher salaries make up such a
significant proportion of state and territory education budgets, any deviation upwards
from the status quo would place further strain on budget deficits throughout Australia.
Rigorous cost-benefit analysis of such schemes of financial incentives must examine
whether they are truly the most efficient way to raise teacher performance and hence
student outcomes. Although teachers are one variable over which we have significant
control in any education system, they are by no means the sole manipulative variable
in the education equation.

31

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