Teacher merit-pay plans may be growing in popularity with politicians, but a new report finds that such programs are less widespread in the private sector than might be expected—and that when they are used, it is often with unintended negative consequences.
In his proposed 2010 federal budget, President Barack Obama is seeking $517 million to seed teacher merit-pay programs, which tie teachers’ pay to their students’ standardized test scores, as a way to improve schooling.
Against a backdrop of such proposals, the report, released last week by the Washington-based Economic Policy Institute, estimates that one in seven private-sector employees is covered by a bonus or merit-pay plan, which are most prevalent in the finance, real estate, and insurance fields.
Performance-pay plans may seem popular in the private sector, the report says, due to recent growth in the use of employee bonuses. But many such payments are not tied to individual worker productivity, it says. Workers might receive the awards, for example, if their company has a profitable year, and some employers give them in lieu of health benefits.
Whether tied to productivity or not, the study also finds, performance rewards account for just a small fraction of total compensation.
Part of the problem with performance-pay plans in both the public and private sectors, writes the EPI’s Richard Rothstein, one of the authors, is that they base their judgments on narrow statistical indicators. That approach can result in unintended consequences as workers game the system or because of perverse incentives in the plans themselves, he said. He offers this example: When the former Soviet Union set shoe-production quotas, factories responded by producing larger numbers of smaller shoes. The smaller shoes were useless to consumers, though.
