If it wins federal government backing next month, the $39 million (Pounds 21.6m) five-year plan will be hailed as a landmark in applying merit pay to school principals.
Principals in the 500,000-population city will be eligible for pay rises hitched to students' test results and other indicators, including performance on university-track "advanced placement" courses, student attendance, and parent-student satisfaction. They will also get credit for taking on tough assignments in chronically-underperforming schools.
Denver primary heads earn on average $84,500 (pound;46,945) a year, while secondary principals earn $100,600.
Brad Jupp, Denver schools' senior academic policy adviser, said: "It's groundbreaking. We don't think there are a whole lot of sophisticated incentive schemes for principals."
Tony Milanowski, assistant scientist at the University of Wisconsin's centre for policy research in education, said the Denver scheme will lead the field because its merit pay will be "calibrated to school-wide functions rather than classroom functions".
Denver's ProComp system for teachers is held up as a US-wide model for how to implement performance-based pay - something many baulk at as divisive and prone to being unduly tied to test scores - in a teacher-friendly way.
Under the voluntary scheme, teachers sit down with heads to set individual performance goals for their classes. How they deliver these targets, plus written evaluations by their heads and the amount of professional development they undertake, determine their eligibility for $1,300 (pound;720) annual bonuses. They are also rewarded with salary increments of up to $5,000 for working in challenging schools and understaffed fields like maths and science, and for earning post-graduate qualifications, said Jeff Buck, of ProComp.
Since its introduction in January, 1,250 of Denver's 3,800 teachers have signed up for ProComp, which was co-developed by union officials. "We have more than one-quarter of our workforce volunteering for what most teachers think of as a highly risky proposition," said Mr Jupp.
Although there's growing momentum behind merit pay as a tool for raising performance, little attention has been paid to extending the idea to heads, despite research finding that strong leadership is a key characteristic of effective schools - especially in those with pupils from poor and minority backgrounds, or who do not speak the dominant language.