Pay for Percentile

We analyze an incentive pay scheme for educators that links educator compensation to the ranks of their students within appropriately defined comparison sets, and we show that under certain conditions this scheme induces teachers to allocate socially optimal levels of effort to all students. Moreover, because this scheme employs only ordinal information, it allows education authorities to employ completely new assessments at each testing date without ever having to equate various assessment forms. This approach removes incentives for teachers to teach to a particular assessment form and eliminates opportunities to influence reward pay by corrupting the equating process or the scales used to report assessment results. Education authorities can use the incentive scheme we describe while employing a separate no-stakes assessment system to track secular trends in scaled measures of student achievement.