A research at the University of Chicago shows that students gained as much as 10 percentile increase in their scores compared to students with similar backgrounds, if their teacher received a bonus at the beginning of the year, but with condition attached.
The condition attached was that part of the money must be returned if student performance fails to improve.
"This is the first experimental study to demonstrate that teacher merit pay can have a significant impact on student performance in the US," economist and study-author John List said.
However, there was no gain for students when teachers were offered the bonus at the end of the school year, the research found.
"The results of our experiment are consistent with over 30 years of psychological and economic research on the power of loss aversion to motivate behaviour: Students whose teachers in the 'loss' treatment of the experiment showed large and significant gains in their math test scores," List said.
"In line with previous studies in the United States, we did not find an impact of teacher incentives that are framed as gains (the reward coming at the end of the year)," he added.
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The researchers devised the "pay for percentile" method of measuring teacher performance by comparing individual students with similar backgrounds and achievement to see what impact a teacher had on their learning.
At the beginning of the school year, the teachers were introduced to the experiment and offered an opportunity to participate. A total of 150 of the 160 teachers agreed to join in the study.
The teachers were randomly assigned to a control group as well as a group given a bonus at the beginning of the year, a group that could receive the bonus at the end of the year, and a group made up of teachers who worked in teams. Money for the bonuses was provided from private sources.
The study published by the National Bureau of Economics Research.