Merit Pay for Teachers Has Economic Flaws

Published October 6, 2011

Proponents of pay-for-performance in K-12 education argue good teachers should receive higher pay than mediocre ones, and poor teachers should be dismissed. Opponents argue that test scores do a poor job of measuring teacher quality and that the incentive to “teach to the test” will have adverse consequences.

I agree with both of these points of view. I believe good teachers should be rewarded, and I also believe test scores are not the right metric for evaluating teachers.

Using test scores as the determinant of teacher pay misses what economist Friedrich Hayek called “tacit knowledge” and “local knowledge.” Many factors affect student test scores, meaning scores are a noisy indicator of teacher performance. People closest to the teacher, including peers, principals, and parents, have more information about teacher quality than what can be obtained by remote administrators relying on test scores.

Drawing from Private Sector
Managers in the private sector understand that simple, objective measures of employee performance are flawed. Software companies do not pay computer programmers by the number of lines of code they write. Accounting firms do not pay auditors according to strict formulas.

In the private sector, there is less objectivity but more accountability. Ultimately, a firm can only be generous with pay if it is satisfying customers. Pay is usually, however, based on subjective as well as objective measures. Within boundaries, your immediate supervisor has discretion in allocating bonuses and setting compensation. This allows the supervisor to use his or her tacit knowledge of all the ways in which the employee affects organizational performance.

Yes, it allows corporate politics and favoritism to creep in, but the advantages of using supervisory discretion usually offset this weakness.

Simple formulas can be “gamed.” That is, employees learn to achieve the objectives in the formula while failing to work toward the longer-term goals of the firm. On Wall Street, we have seen how bonus formulas proved dysfunctional. The older, partnership form of organization appears to have provided better incentives.

A government-run system of teacher compensation, based on test scores, would in some ways be the worst of all worlds. It would create incentives for teachers to “game” the system. It would give too much weight to a noisy indicator of performance. As a result, it would do little or nothing to improve accountability or reward better teachers.

A Wiser Alternative
A better system of teacher compensation would have the following elements.

1. Teacher compensation should be determined by their supervisors, the principals. An important factor should be customer satisfaction, as measured by parent evaluations.

2. “Customer satisfaction” should not be purchased by lenient grading. Accordingly, third-party evaluation of students would check the teacher’s own evaluations. That is, third parties should create and grade at least some tests. However, those tests should be tailored to the teacher’s curriculum and course objectives, rather than the other way around.

3. Parent satisfaction should be measured by their decisions regarding teachers. The ultimate sign that parents value a teacher is when parents try to have their children placed with that teacher. Conversely, when parents seek to avoid a teacher, it indicates customer dissatisfaction.

The best way to introduce accountability and pay-for-performance would be through a school voucher system. Such a system would enhance the power of parents. It would force principals to focus on teacher quality and to implement compensation methods aligned with that objective.

Anti-Empowerment System
Our current public education system is designed to take authority away from parents. Rather than give power to the people with the highest stake in results and the most immediate knowledge of how classrooms are functioning, we act as if teachers’ unions and remote administrators know more than parents, teachers, and principals about what is in the best interest of students.

In this context, test scores become just one more tool to keep power in the hands of bureaucrats. Test scores are a top-down method of control, when what is needed in education is more bottom-up empowerment.

Image by Evan Jackson.