Teachers in Houston, Texas, could earn bonuses of $11,000 (pound;6,000) - more than a quarter of the basic salary of many - depending on their students' test scores.
In what will be the country's largest school merit-pay scheme senior administrators will earn annual incentives of up to $25,000.
Houston's school system is the seventh-largest in the US, with 12,400 teachers and 210,000 students. Its acceptance of merit pay highlights the impetus behind President Bush's school reforms which stress the importance of accountability.
Houston's $14.5 million scheme, which will take effect immediately, is tied into improvements in pupils' performance in standardised tests.
Teachers will qualify for the bonuses according to how the overall progress in their school compares with other schools with similar intakes.
Pupils' progress will be measured by socio-economic status and ethnicity and how teachers' individual class results measure up against those at other schools with comparable proportions of deprived youngsters.
Staff incentives will initially be set at a maximum of $3,000, but officials have outlined plans to raise this to $10,000, with another $1,000 available for perfect attendance "over the next few years".
The initiative was passed by school chiefs with strong support from business leaders, who have been pushing for schools in the US to adopt corporate-style approaches to salaries. But the move to pay by results faces strong opposition from the local teachers' union.
Gayle Fallon, president of the Houston Federation of Teachers, which represents 40 per cent of the city's teaching staff, said she favoured a rise in basic pay - echoing a common refrain from the unions in the country's heated merit-pay debate. Ms Fallon also criticised the lavish payouts on offer for non-teaching administrators and what the union sees as a reductive emphasis on test scores.
"We can live with an incentive plan, but it has to have a good (basic) salary and reward people for a variety of things, including test scores,"
Carolyn Kelley, professor of education at the University of Wisconsin, said that failure to bring the union on board could hamper the Houston scheme's effectiveness.
"These plans work when you develop collaboration between the unions and management," she said.
"What you're doing is creating incentives for particular behaviour. To get that, you have to have a good working relationship with the people who are being affected."