This study encompasses the history, definition, and implementation of merit pay to identify the variables that affect student achievement and teacher retention. By reviewing 13 studies on American education relevant to the policy, this study aims to determine how merit pay influenced student achievement and teacher retention rates. In the United States of America (USA), merit pay effectively improves student achievement and teacher retention rates under certain circumstances. However, this policy could also be ineffectual. An analysis of a review of 13 studies identified the variables that affected student achievement and teacher retention. These include year, location, policy duration, merit pay type, students' grade level, and participating teachers' ethnicities. The conclusions drawn from this study suggest implementing an institutionalized evaluation system that fosters the individual growth of students and teachers and an American educational administration that considers each school's needs and situations to increase the merit pay policy's effectiveness and fairness.