Morning Edition had a segment this morning in which it touted new research from John List, a University of Chicago economist, that found that student test scores rose the most when teachers were given a bonus at the start of the year which they would lose, if their students didn't score at a certain level. The argument is that teachers will more fear losing money they have already received than they value getting a bonus at the end of the year.
While this is an interesting result, there is an important problem with this approach that was not mentioned in the discussion (apart from issues raised about teachers teaching to tests). In general, workers do not like pay systems where their pay can be cut in ways that are unpredictable. (Test results are highly erratic, even the best teachers often have classes that do poorly.)
It is likely that if school systems had pay structures where the pay of teachers who did not meet certain standards was retroactively cut by 5-10 percent at the end of the year, they would have a more difficult time attracting teachers. This means that schools would have to offer higher average pay to attract the same teachers. Whether or not the higher pay offset whatever benefits came from this mechanism for structuring compensation would have to be examined, but it certainly is not obvious that it would.