This paper looks at the uses and limitations of performance pay, what sorts of decisions need to be made at various points, how decisions in one area are related to decisions in others, and what practical questions need to be answered if policy makers decide to put new or revised pay-for-performance systems in place. Specifically, the paper: (1) places compensation systems in the context of other types of rewards for performance; (2) reminds policy makers to clarify their goals for education improvements at the outset; (3) alerts them to the need for good teacher evaluation programs as well as the technical and procedural difficulties involved; (4) presents research findings about the effects of school organization and leadership on teaching quality; (5) recommends training teachers and administrators to meet new expectations; and (6) describes alternative incentive programs and establishes realistic expectations for them. (JD)