Widely endorsed national reports on educational reform have proposed career ladders and merit pay to raise the quality of the teaching force, and hence contribute to educational excellence. This report contends that careful analysis of proposed changes of teacher reward systems has been omitted. The issues requiring attention involve incentive rationale and incentive system design. Chapter 2 considers rationales on which recent proposals for performance-based teacher pay and promotion are founded, including behavioral assumptions, mechanisms to enhance educational quality, and conditions under which mechanisms are likely to work. Chapter 3 focuses on questions concerning the teacher evaluation component of an incentive system, putting forth criteria that evaluation methods must meet, applying them to evaluation approaches, and assessing adequacy of prospective performance measures. Chapter 4 deals with such design issues as structuring of rewards. A final chapter consolidates the report's major findings; recommended are performance-contingent pay increases, universal coverage, differentiation among multiple performance levels, and predetermined reward criteria. (CJH)