The CBI said ministers should let schools adopt performance management systems and appraisal first, and only later link pay to the reforms.
Margaret Murray, the CBI's head of learning and skills, said: "Experience in business shows that performance management systems need to bed down, and be understood and accepted by staff before the link to pay will work."
The CBI's response to the Government's Green Paper said: "The introduction of a new system of performance management should not be linked to a new system of pay at this time."
John Cridland, director of human resources, said: "Regrettably much of the public debate about the new system has been dominated by the disputes over pay and the nature of appraisal. It is necessary to move away from this type of confrontation and for all parties to engage positively."
He said if teachers believe the new system is about payment for results they will resist it. The CBI suggests the term "appraisal" should be replaced by career development interview or review.
The CBI does believe in strict targets which teachers must hit. "Those who are unwilling or unable to do so within a reasonable time should not remain in the profession."
It recommends teachers should be judged on competencies, but these should include clear outcomes such as pupil progress.
The response says while the performance threshold - which moves teachers onto a performance-related pay scale up to pound;35,000 - is necessary now, it should be removed over time. The long-term aim should be to simplify the system and allow all teachers to move up as their competence and contribution merits.
The Department for Education and Employment is to publish a performance management handbook for schools this summer.
Estelle Morris, Minister of State for Education, met the teachers' employers this week. Graham Lane, chair of the National Employers' Organisation for School Teachers, said: "We want to discuss a competency-based appraisal system and have proposed a number of pilot schemes in different local education authorities."