Policymakers and educators are taking a new look at incentives as they work to improve accountability systems. This ERIC Digest examines the role of rewards and sanctions in school reform and identifies key issues in implementing incentive systems. The new accountability is based on five components: carefully designed standards, assessments aligned to these standards, incentives, publicly reported assessment results, and professional development to enhance practitioner skills. Incentives provide the motivational fuel for change. Reward alternatives include competency-based pay and pay for performance. States typically offer rewards to schools rather than individual teachers. Sanctions applied to low-performance schools include replacing the existing management team with state appointees, or reconstituting the schools by transferring practitioners or requiring them to reapply for their positions. At present, no conclusive data show that these sanctions produce any positive motivation toward change. Teachers seem to be motivated more by the small and unmeasurable signs of individual student progress than by monetary rewards. Done well, incentives can play a useful supporting role; done carelessly, they can create dissension among teachers when schools are encouraging them to collaborate. (Contains 11 references.) (RT)