For some time now I have expressed disillusionment with merit pay as an ed reform strategy. In a paper Stuart Buck and I produced last spring for a Harvard conference on performance incentives we wrote:
All of this leads us to measured skepticism about the merit of merit pay, unless coupled with other reforms such as competition between schools. After all, merit pay boils down to an attempt to recreate a market system within a tightly controlled state monopoly. This is an objective fraught with peril. Even if wise and benevolent state actors manage to get the incentives right at a particular moment in time in a particular place, their actions can always be undone by immediate successors. Those successors may well be more influenced by the powerful special interests that want to block merit pay, loosen the standards, or even to call a system “merit pay” while rewarding behavior that has no relation to actual achievement.
Now we have additional reasons for skepticism. A well-designed random-assignment experiment led by Vanderbilt’s Matt Springer found:
Keep in mind that this experiment only tests whether financial incentives increase teacher motivation, resulting in higher student achievement. It does not address whether merit pay might change the composition of the teacher labor force, attracting and retaining more effective teachers.
Still, color me even more skeptical about the promise of merit pay as an ed reform strategy. It may well be that the current crop of teachers we have believe that they are doing their best, so offering them money for trying harder doesn’t result in a significant change in effort. And given the political and organizational barriers to merit pay, I hold out little hope that a well-designed program can be sustained long enough to effect the composition of the teacher labor market.
Jay P. Greene's Blog 
Or it could be that teachers are trying to do better, but simply either don’t know how or are incapable of it (because of their own personal limitations or because their students are already working as hard as they are willing to work).
I think we need to step back and rethink our whole approach to incentives and how they work. See here.
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I’d consider Dan Pink’s RSA talk on motivation to be an essential starting point for any discussion of the effectiveness of merit pay in any field: http://www.youtube.com/watch?v=u6XAPnuFjJc The issue should be identifying effective teachers, rewarding them justly and sufficiently to keep them doing what they do, and give them the room to make the kind of differences they got into the business to make.
[…] Buck cites more evidence: As for changes of heart: Jay Greene wrote a recent blog post that explains why he has been changing his mind on issues like value-added modeling (which he used to support): https://jaypgreene.com/2011/01/18/the-dead-end-of-scientific-progressivism/ He also wrote a blog post on why he changed his mind on merit pay (caveat: he mentions there an article co-authored with me): https://jaypgreene.com/2010/09/22/merit-pay-bust/ […]