The importance of teacher quality along with the historic $4.3 billion investment of Race to the Top has spurred a dramatic transformation in the way public school teachers are evaluated and compensated. Policy advocates and system designers aim to use these evaluation results to identify and cull out weak performers, reward top achievers, make tenure decisions, and enhance the quality of the teacher workforce. Ten states are considering either a salary adjustment or bonus when a teacher receives a high rating. For example, the District of Columbia Public School Systems awards a bonus of up to $25,000 to teachers classified as highly effective. These policies are a stark contrast with the way teachers are compensated today, where more than 95 percent of public school teachers face a uniform salary schedule. Under such contract, a teacher's salary does not depend on performance, and is determined exclusively by education level and years of experience.

Many critics of the uniform salary schedule argue that it has several limitations and that an effective way to improve the quality of the teaching workforce would be to change the approach to compensation. However, this idea continues to be controversial. Opponents of such pay systems argue that they would increase negative competition, neglect low-performing students, and adversely affect the school environment. The accumulation of these disadvantages could result in poor instruction and declining student achievement.

The theory of merit pay claims that rewarding teachers on the basis of their students’ outcomes will both motivate teachers to work harder, as well as change the composition of the teaching force (Lazear, 2003). Most of the research to date has been focused on the “motivational effects” of merit pay. However, it has been argued that in the context of education, the most important effect of merit pay is the change it would create in the composition of the teacher workforce. In order for merit pay to increase teaching effectiveness, it would need to successfully attract and retain teachers who are good at increasing student outcomes. This theory rest on some assumptions about how highly effective teachers’ preferences towards risk, competition, and inequality, influence their career choices.

In this paper I use a behavioral economic experiment to shed light on how the preferences of highly effective prospective teachers differ from non-teachers. I find that prospective female teachers and lawyers did not differ in their risk aversion; they were equally likely to select a competitive payment scheme when choosing the incentive scheme to apply to their own performance. However, female teachers’ aversion to inequity greatly outweighed the aversion shown by female prospective lawyers that were planning a law career in private practice. Interestingly, there were no statistical differences in inequity aversion between prospective female teachers and prospective female lawyers who planned careers in public practice.