Performance-based pay can change teacher performance in a school system. I have direct knowledge of a school that implemented a pay-for-performance system, and things changed.
Here's just one example: a teacher was disappointed in his pay raise and went into the principal to question it. The principal explained that the teacher was not actively participating in professional development. He was checking papers, inattentive, and largely disengaged whenever he was in attendance at school improvement activities. The teacher asked if he would fair better if he changed that. The principal replied positively, and the next year that teacher was a model participant in school improvement and professional development activities. The system worked.
Unfortunately, the system did not directly benefit student achievement as measured by standardized tests. All teachers are generally doing the best job they know how for their students regardless of their pay. They are not holding anything back until they get a bump in salary. Their duty is too important, and they know it.
However, the system that worked with the teacher mentioned above did not work with all. Another teacher asked why her raise was less than others, and it was explained to her that her habit of starting her teaching duties a full week after the students arrived in August was inhibiting her performance. She did not believe it, and she was sure it was unfair bias beyond her control that was holding her down.
And this leads into a big problem with performance-based pay. It is vulnerable to favoritism, cronyism, and politics. Teachers often perceive that some principals may have favorites on staff. Realistically, principals are humans who are receptive to friendships and kind gestures. There is also a valid danger that someone with political power within the school--maybe a relative on the school board--may receive more favorable reviews and better pay than others.
There is a vital key to ensuring that performance-based pay improves teacher performance in a school system. The pay system must be tied closely and specifically to the evaluation system, and the evaluation system must deal with very specific, objective performance standards. The more subjective the criteria, the more the system is open to bias, suspicions of favoritism, and failure.