Do Non-Traditional Incentive Structures Hold the Key to Increasing Student Achievement?

Written by: Amy Auletto

Primary Source: Green & Write, April 12, 2016

In recent years, a number of attempts have been made to understand how financial incentives can be used to improve student achievement. Researchers have studied the effects of school wide bonuses, small group incentives, and individual teacher rewards on student achievement, but to date, the research is inconclusive.

Loss Aversion May Motivate Teachers to Produce Higher Student Test Scores

Generally, these programs all offer some sort of financial bonus to teachers at the end of the school year based on student performance on standardized tests. But what if instead of receiving this merit pay at the end of the year, teachers were given bonuses in September, with the understanding that they would have to give the money back in June if their students did not perform as well as expected? This was what the Chicago Heights school district did during the 2010-11 school year as part of a field experiment conducted by Roland G. Fryer, Jr. and colleagues.

Photo Courtesy of Pictures of Money

Photo Courtesy of Pictures of Money

In Fryer’s experiment, a group of Chicago Heights teachers were given $4,000 at the beginning of the school year with the understanding that they would have to return the money at the end of the year if their students did not perform well on a standardized test. The threat of having to potentially pay back the bonuses produced impressive results – student test score increases were equivalent to a one standard deviation increase in teacher quality. In other words, the effect was the same as the difference between a teacher at the 84th percentile and an average teacher at the 50th percentile. To put this in economic terms, Eric Hanushek argues that a teacher at the 84th percentile can produce an increase of over $400,000 in lifetime earnings for a class of 20 students as compared to an average teacher.

Why Not Use This Approach Everywhere?

Fryer’s experiment seems to demonstrate a cost-effective approach to improving student achievement. An upfront cost of only a few thousand dollars has the potential to produce significant test score gains and substantial increases in lifetime earnings for students.

So, why not use this approach everywhere?

When Fryer’s paper came out, there was quite a bit of negative press on the experiment (see here and here). This study was criticized for its economic assumption that financial incentives can solve everything and its failure to track student test scores beyond one year. Furthermore, the risk of “choking”– that individuals facing the threat of loss may perform less effectively due to their fear of failure – was also not adequately addressed in the paper.

A merit pay system based on loss aversion could also be demoralizing for teachers. For a profession that already struggles to be respected and compensated adequately, reducing something as complex as student learning to threatening teachers is a step backward. It’s hard to imagine other professions accepting a similar system where employees are punished for outcomes not entirely in their control.

Alternative Merit Pay Systems for Teachers

It makes sense to reward teachers for excellent teaching. The issue, however, is that we are still struggling with how to effectively implement incentive pay in education. Merit pay systems that pit teachers against each other don’t make sense. Teacher collaboration is critical to student learning. Additionally, while value-added modeling is a step forward in measuring teacher quality, there are still too many other factors that contribute to student test scores. Opponents of value-added modeling equate the method to a coin toss. Until we find a way to accurately and consistently measure teacher quality, incentive pay systems will continue to be problematic.

Nevertheless, Fryer’s loss aversion experiment presents an interesting thought experiment. While this specific method is inappropriate in educational settings for the reasons mentioned above, it does serve as a starting point for thinking about how financial incentives might be an effective way to improve student learning.

Contact Amy: aulettoa@msu.edu

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Amy Auletto
Amy Auletto is a doctoral student in Educational Policy. She is interested in the impact that equitable funding and access to effective teachers have on the educational outcomes of disadvantaged student populations. Prior to beginning her studies at Michigan State University, she taught middle school math in Detroit. Amy earned her bachelor’s degree in psychology, master of Social Work, and MA in educational studies from the University of Michigan.