To make merit-pay plans work, a district's teacher-evaluation system must be both summative and formative--evaluating both for teacher outcomes and for progressive improvement. Only peer-mediated self-appraisal systems seem able to meet such a challenge. Fairly rewarded merit-pay plans depend on accurate teacher evaluations. However, teacher evaluation systems suffer from a confusion of purpose, split between those that only reward or punish teachers (summative) and those designed to improve teachers' performances as they teach (formative). There is a need for a unified system. Research shows that attempting to improve teacher performance through a reward-punishment system alone is nearly always unsuccessful. Furthermore, after falsely labeled merit-pay plans are disregarded, there are clearly few real merit plans, and those most often fail because of inadequate evaluation systems. Often, other problems are also evident in such plans; notably, teacher perception of evaluation plans as aversive control, turnover of administrative staff and school board members, and subjectivity in indexing the qualities of good teaching. Peer-mediated self-appraisal is both summative and formative, avoiding the other pitfalls of evaluation: it is summative for beginning teachers, providing a standard competency level based on peer review; it includes formative features at the probationary level; and it provides a formative professional review on a regular basis for senior teachers. (JW)