People choose their neighborhoods exactly the way they choose their colleges. Young couples moving into a neighborhood will always ask what the school system is like, average SAT scores, etc.
Clara, I would assess them the same way the boss at any company would. Without tenure I'd fire the ones who weren't as good as the ones who were applying for a job. The main reason there is no free market in K-12 is tenure.
If the boss (a principal) is an idiot then his school will eventually suffer and he will be fired in a free market. Just like at any business he/she will be interested in hiring the best. The point is it must be subjective. There is no objective test for merit based pay. So let the free market work.
Durasell,
People do NOT choose their neighborhoods the same way they choose colleges. I was born poor. I was raised in a poor neighborhood. I went to a below average public school. But I worked my tail off and got over 100 scholarship offers. There is a difference between money and merit.
At the K-12 money determines where you can live. At the college level merit comes into play.