Pardon the political rant... this is an issue near and dear to me. Please join me in openly opposing merit-based pay for teachers. This is the dumbest idea in education reform since Bush's No Child Left Behind (or educated or funded). That Obama has proposed such a plan makes me even more annoyed with the president I helped elect (this is not change I can believe in!). For more on his push, see here and here.
So, to keep this short and to the point... the problem with merit-based pay is that there's no reasonable, rational, consistent way to measure performance... teaching is more art than science. Every student is different, with a unique perspective, background, learning style, and, more importantly, pace of development. To penalize a teacher for having a group of students who develop more slowly than others is absurd. No matter how good the teacher is, there's no way to force a child to develope faster than they're capable of doing.
One might then respond by pointing at standardized tests. Surely those could be used, right? The problem, of course, is that when you put all the emphasis on standardized tests (as has been done the last several years thanks to Bush and NCLB), then the teacher is only incentivized to teach to the test. Instead of education and learning, you get rote memorization. Rote memorization is NOT education. Teaching to the test, and the resultant rote memorization technique, means that students are graduating without the ability to think for themselves (no critical thinking skills). Regurgitating facts is an almost completely useless ability if you don't know what to do with the facts. Just because you can recall constants and equations does not mean you know when and how to use them. This is a major problem.
And before you get off on the tangent about how our poor US students just don't compare with students in China or India, let's bear in mind some basic statistics... if you look at the top 10% of China and India (total populations of 1.3B and 1B), you're looking at 130m and 100m people, respectively. According to the US Census Bureau, the current US population is only 305,979,379. So, let's compare, then... the top 10% of China and India is approximately 230 million people, which is about 75% of the total US population... now consider that the best and the brightest are the ones who typically get to take standardized tests in those countries... while all students in the US take those tests... this is not, then, an apples to apples comparison, right? So, don't get off on those misleading reports about how the US is lagging behind... if you want to know the real cause of the US decline in education, it's the combination of requiring a focus on standardized tests (rote memorization instead of critical thinking) and the development of an entitlement generation that thinks everything should come easily to them with little or no effort (since mommy and daddy have always provided).