Since 1996, the Chilean government has awarded teachers pay bonuses based on school performance using a complex formula that combines absolute average student test scores and inter-cohort gains from test year to test year. In this paper, we compared the bonuses schools actually received on the basis of this formula to how they would have fared under a hypothetical alternative measure of school performance—intra-cohort gains between the 4th and 8th grades in 1996–2000. We show that schools that received monetary premiums for “good performance” under the SNED program were more likely to be schools that had scored higher on the 4th grade 1996 test, but, on average, they were not the schools that made the highest cohort gains as students progressed from 4th grade in 1996 to 8th grade in 2000. Given what we have found, to get more SNED awards, the wise school would do much better to raise 4th grade and 8th grade scores every two years (even years for 4th grade and odd years for 8th grade) and not focus on the more difficult task of helping students make greater progress from 4th to 8th grades. Although we have data on only one cohort's gain scores from 4th to 8th grades, our limited analysis demonstrates the possible constraints of a school-based incentive program when the available student performance data for awarding pay bonuses are inter-cohort rather than intra-cohort test score gains.

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