The findings of a pilot study of Pennsylvania's School Performance Incentive (SPI) program are presented in this report. School level incentive policies as elements of the entrepreneurial context of educational restructuring and an organizational model for an incentive-based merit system are also discussed. The study examines the effect of SPI on school outcome measures upon which monetary rewards were contingent and on school personnel behavior. Test performance data from 2,584 schools and dropout rates of 1,132 schools that qualified and did not qualify for rewards were analyzed by year. Personal and telephone interviews with teachers, principals, and superintendents in 13 elementary and secondary schools were also conducted. Analysis of performance data found no evidence of an incentive effect on school performance measures and/or on personnel behavior. Interviews indicated that SPI outcomes may be due in part to insufficient information dissemination and communication and to attitudes of disinterest and hostility. It is concluded that two of the three state program goals have been achieved: annual cash rewards for significant educational improvement; and improved collegial participation, but that the third goal, further school performance improvement, has not been achieved. Comprehensive research, organization, and favorable political attitudes are needed for successful reform initiation. An attached article describes an incentive-based merit system model. Tables and a list of 18 references are included. (LMI)