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Updated, 6:37 p.m. | Mayor Michael R. Bloomberg announced this afternoon what he called the biggest program of merit pay for teachers in the nation. Under the program, 200 schools — about 15 percent of all schools in the system — will be eligible this academic year for $20 million in privately financed bonuses if student performance improves by a certain amount. In the 2008-9 school year, 400 schools will be available for the bonuses.

The annual bonus would be equivalent to $3,000 per educator, but a committee at each school would have the power to decide how to distribute the money. So under the system, a teacher whose students showed particular improvements on standardized tests would not necessarily receive a greater individual bonus than another teacher at the same school whose students had not shown as much improvement.

The mayor, flanked by Randi Weingarten, the president of the United Federation of Teachers, and Joel I. Klein, the schools chancellor, called the agreement a watershed in his six-year-old plan for educational reform based on mayoral control. In providing teachers for the first time with compensation based solely on student performance and not on seniority, the new bonuses will encourage the best teachers and create an incentive for others to improve, Mr. Bloomberg and Mr. Klein said.

“In the private sector, cash incentives are proven motivators for improving results,” said Mr. Bloomberg, who built a multibillion-dollar business, Bloomberg L.P., before he was elected in 2001.

The bonuses will be raised from private sources, including philanthropic foundations and the Partnership for New York City, the city’s largest business association.

Participation in the bonus program this year will be voluntary. At each of the 200 eligible schools — schools designated as being “high-need” — the principal will have to agree, as well as at least 55 percent of the teaching staff.

At each participating school, school progress reports will be used to track student performance. Schools will be eligible for cash bonuses of up to $3,000 per educator. A four-member compensation committee at each school — made up of the principal, a principal’s representation and two members of the teachers’ union — will have control over how to allocate the bonus money. The committee may use various criteria in deciding how to distribute the money but may not consider seniority — the traditional basis of prerogatives among teachers.

The mayor has experimented with cash incentives for poor people to engage in certain behaviors, like making sure their children attend school, and he defended the notion of extending economic incentives to public employees.

“I am a capitalist and I am in favor of incentives for individual people, yes,” Mr. Bloomberg said at a City Hall news conference that started around 3:30 p.m. “But it depends on the situation and the organization and what the function is. In some cases it’s very easy to measure whether you do a better job than the person sitting to your left or right. In the schools it is a much more collaborative effort.”

The mayor also announced two other agreements with the powerful teachers’ union.

If union members agree, the number of years of service required for a teacher to earn a full pension would be reduced to 25 from 30. In exchange, current teachers would have to agree to a 1.85 percent increase in their pension contributions. A 1.85 percent increase in contributions will also be required from future teachers, who will have to work at least 27 years — instead of 30 — before being able to retire with a full pension.

The minimum retirement age, 55, would not change. Mr. Bloomberg said the pension change would not consist the city any money in the next five years but would “save in the tens of millions of dollars each of the following years after that.”

Finally, the city and the union announced that they had settled a longstanding legal dispute concerning retirement benefits for about 40,000 current and retired teachers. The dispute concerned whether the city had properly credited interest earned on members’ pension fund contributions. Under the settlement, the city agreed to supplement the retirement benefits for the affected teachers by $160 million over a period of about 10 years. “This settlement saves the city from potentially significant liability that could have been much greater than the settlement amount,” the mayor said.

Ms. Weingarten, who has led the teachers’ union since 1998, supported the 2002 decision by the State Legislature to give the mayor control of the city’s public schools. Since then she has occasionally clashed with Mr. Bloomberg and Mr. Klein. But today, she emphasized the union’s positive relationship with City Hall, saying that the pension improvements, in particular, would reward those who invest their careers teaching. “You’ve all heard me often talk about how we have to attract and recruit and nurture teachers in order to get the best and the brightest not only to come, but to stay,” she said.

The idea of rewarding teachers for student performance is not a new one. At a panel discussion this week and again today, Mr. Klein said that Albert Shanker — who helped found the teachers’ union and led it for decades — endorsed, before his death in 1997, a system of incentives for rewarding teachers.

As a reporter pointed out at the news conference, the new proposal is not the first time that “pay for performance” has been tried in New York City.

In the late 1990s, the city’s Board of Education and the Partnership for New York City began an experimental program, Breakthrough for Learning, in two Brooklyn school districts, one in East New York and the other in Ocean Hill-Brownsville. The program included some merit-based payment incentives, as well as signing bonuses for principals and discounted mortgages and apartment loans for teachers, but the experiment was not continued.

“We learned a lot from Breakthrough for Learning,” Ms. Weingarten said today. “It was schoolwide, but it was very management-dominated — and it was top-down. It was not the kind of program that we’re suggesting here.”

She added, “We thought that was the right kind of approach, but the implementation, meaning making sure there’s real collaboration and partnership at the school-based level, is what was missing.”

The city comptroller, William C. Thompson Jr., who attended the news conference with the mayor, praised the idea of schoolwide bonuses. In a statement released after the news conference, he said:

There is no question that if we are to attract and retain teachers in New York, that we must be able to create an environment where members of this profession have more reason to hope that they can succeed and thrive. Today we are adding one more incentive to help keep experienced, dedicated teachers in New York. I commend Mayor Bloomberg for adopting a wise approach not only to retain teachers but to improve student performance.

Following the news conference, the United Federation of Teachers also issued a statement. Here are Ms. Weingarten’s quotes, excerpted from the statement:

This agreement creates pro-active programs that address two major issues facing our schools, making the profession economically viable and fostering collaborative learning environments where teachers have real voice.

We are delivering on the promise we made to work with the city on a retirement benefit that could serve as an incentive for teachers to work in and stay with the New York City public school system. This pension benefit makes teaching an attractive lifetime career for new teachers. It gives them an incentive to stay for the long haul. Currently, almost half of new teachers leave in their first five years. We need to slow this ‘brain drain’ because experienced career teachers provide much needed quality and stability for our public school system.

The school-wide bonus plan reflects the core belief and principle of the U.F.T.: students achieve when all the educators in a school work together on their behalf. By fostering teamwork and mutual support, the whole school and all its children benefit.

School-wide bonuses properly refocus the misguided debate over individual merit pay. Respecting and understanding the importance of teamwork and collaboration is precisely why the U.F.T. has opposed the idea of individual merit pay for teachers – especially when based solely on student test scores. This school-wide program recognizes and builds upon a core philosophy that says students learn, achieve and benefit most when all educators in a school collaborate to provide the best possible education.

This school-wide plan generates the kind of spirit and partnership within the school community that make a school great.