Florida has enacted a plan to reward teachers based on their classroom performance, as measured on standardized student achievement tests and principal evaluations. This merit pay initiative is designed to provide a financial incentive for teachers to improve student outcomes, to encourage the retention of proficient teachers, and to attract high-skilled individuals to the teaching profession. The design and implementation of merit pay faces several key challenges. First, student outcomes are difficult to define and measure. Second, the contributions of individual teachers to student outcomes are difficult to disentangle from student background and prior achievement. The analysis shows serious deficiencies in several measures of teacher performance. Policy makers should be wary of adapting any measure without careful analysis of its properties and a plan to monitor how it is performing. The key issue is whether the incentive and sorting effects of an admittedly imperfect merit pay system can improve the quality of the teacher workforce.