The philosophy, operations, and applications of the Eastern Washington University Department of Education Merit Pay System are described. The system is designed to: eliminate arbitrary assessments, reward desired behaviors, award merit pay to those achieving designated goals, individualize rewards, encourage cooperation, and simplify evaluative procedures. A list of desired teacher behaviors, which can be developed in cooperative meetings between administrators and professors, includes teaching performance and scholarly and professional achievement. Participation in the merit pay system is voluntary. Faculty can contract with the merit pay committee for a certain type and level of achievement. Participants may design a project, such as major research or writing a book. Once selections are made, each professor knows what types of work must be accomplished to receive merit pay. The contract system of merit pay increases self-esteem, emphasizes self-directed learning, allows for individual differences, and overcomes objections to arbitrary evaluative techniques. The application of the merit pay system to public school systems is also briefly addressed. (SW)