"First wave" educational reform has resulted in various state and local incentive and pay-for-performance programs, such as Tennessee's career ladder program offering extended contract opportunities for teachers and administrators achieving a certain performance status. While the intent was to reward excellence, offer supplemental pay through additional employment opportunities, and allow teachers to focus on students' special needs, the present extended contract program did not prove to be an incentive for excellent performance. In response to educator dissatisfaction, the Tennessee General Assembly called for a reexamination of the career ladder program and for development of methods for enhancing extended contract activities. Based on the 1987 study's findings, the 1988 legislation advocated that all future extended contract efforts focus directly on meeting student needs and indirectly on developing appropriate incentives for educators. State directives also charged the study team to explore alternative incentive programs for teachers, schools, and school systems. This report includes the methodology, findings, and recommendations of the 1988 career ladder study as related to extended contracts and alternative incentives; the methodology, findings, and recommendations of the 1988 career study considering alternative options; and the guidelines for alternative incentive programs to be implemented during 1989-90. The 1988 study discloses research on types of incentives (intrinsic and extrinsic) and unit size (individual, group, and organization). The alternative incentive study recommended: (1) expanding the local educational agency's role; (2) developing an integrated approach; (3) capitalizing on intrinsic incentives; and (4) providing a variety of incentives. (43 references) (MLH)