Of course, this plan basically accepts that some teachers are unworthy of real paychecks, and that all classrooms and school administrations are considered equal. Of course, we don't live in Utopia, so those factors come into play.
Chris McCreigt at Beyond the Trestle asks some other interesting questions:
Indeed, how would the relationship between teacher and student be changed when the student realized that his/her performance translated into the teacher's income? ("Come on Timmy, Mrs. Adams wants to eat peanut butter AND jelly this week!!!") Does the teacher become the manager and the children become the employees? Can the students go on strike? Can the teacher fire a student?
This is one thing I can't stand about the education issue as it is dicussed in this country. It has fallen into the underwear gnome theory of "running things like a business."
Step 1: Run schools like a business.
Step 2: ?
Step 3: Higher test scores!
The problem with this, once you dismiss the concept that most businesses fail in their first 5 years, is that school is inherently different from business. Trying to fit the round peg of school management into the square peg of utopian versions of free-market scenarios will not work. Your teachers will encounter obstacles beyond their control. Some administrations are competent where others aren't. Some systems are better funded, structurally, than others. Students cannot be "fired," even if some schools will attempt to do so.
And unlike businesses, where consumers can choose to participate in a market, parents cannot choose to unhave their school aged children. Those kids still have to go to school, whether a "good" school nearby is available or affordable.
That's why it might be a good thing to have "market" and "school choice." (It sure sells well, in theory.) But those choices should be based on school focus, such as choosing a school that focuses on creative arts, science & math, college prep or vocational prep. I can dig that. However, there should not be a market or choice based on basic school competency. And make no mistake, that's what we're selling now.
All schools should be held to standards of excellence and rigor by the governments (read populations) that make decisions for them. And I've got a way to structure a working merit pay system: pay teachers based on education and experience and time-on-the-job, like we do in most fields, and train your administrators in human resources management. That way, the folks in charge can manage their human resources, identify good teachers for promotion, identify moderate teachers for development and identify consistently underperforming teachers for dismissal.