This presentation examines the history of merit pay and analyzes studies and research on merit pay to discover directions for developing effective procedures. Reasons for failure of merit pay plans include administrative problems, personnel problems, collective bargaining, financial problems, unsatisfactory evaluation, staff dissension, insufficient financial incentive, and lack of teacher support. Successful merit pay plans are identified as including effective evaluation procedures, administrative workability, board and management commitment, staff involvement, financial support, and the promotion of increased learning. The author points out that the approaches with the best chance of success are based on educational productivity and are objectively measurable and visibly fair. The report concludes that merit pay plans are no cure for the ills for which they are often proposed: as a substitute for adequate salary scale, as financial penalty for incompetent teachers, and as substitutes for effective and adequately staffed evaluation programs for teacher improvement. In summary the author states that successful plans must include a sound evaluation structure based on superior performance, must be adequately financed, and must be open to all who qualify. (MD)