Despite ongoing debates over the adequacy of teacher compensation, the design of merit pay systems, and the structure of pension benefits, there is broad agreement that teacher pay should be designed to recruit--and retain--the highest-quality teachers in a cost-effective manner. Policymakers should avoid across-the-board pay increases, and focus instead on performance pay by easing restrictions on entering the teaching profession and basing tenure decisions on performance in the classroom. Value-added models are helpful in identifying the best teachers, but they should be used cautiously in conjunction with other performance-based measures. Retirement benefits should take the form of 401(k)-style plans to avoid the cost overruns and irrational retirement incentives created by traditional pensions. Finally, policymakers should remember that teacher quality is just one of many factors affecting student achievement. (Contains 17 footnotes.)