Performance-based funding is a resource distribution strategy used in education to reward service providers for the outcomes they achieve. Institutions that produce above-average results earn additional financing, while those that fall short may face funding reductions and may be targeted for technical assistance to address their performance shortcomings. Efforts to introduce performance-based funding in education frequently encounter resistance from program administrators and their staff, who, among other objections, fear the application of competitive funding may unfairly penalize programs serving low-performing students. This paper describes how performance-based funding systems can be incorporated into state education resource distribution formulas to incentivize improvements in educational services, and presents a seven-step process that RTI has developed to build stakeholder support for system adoption. It draws on RTI's years of experience working with state education administrators to create funding formulas that allocate federal and state funds--equitably and objectively--to the most effective service providers.