Classroom teachers could earn up to Pounds 40,000 in a radical performance-linked restructuring of the profession’s pay.

The Government is to launch a Green Paper in the late autumn proposing to “modernise” the profession with a new contract and pensions package.

David Blunkett, the Education Secretary, said at least half of all teachers could benefit, but any increases in pay will be linked to targets, including those related to pupil performance.

In today’s TES, Mr Blunkett says: “This does not mean a crude payment by results. We intend to look at much more sophisticated methods of assessment linked to broader performance standards.”

He adds: “It is also about rewarding teachers doing a good job in difficult schools as well as in successful schools.”

The Green Paper is a response to the fear of an impending crisis in teacher recruitment. Mr Blunkett said the need for good candidates made the case for modernisation overwhelming. Currently, he said, most teachers get stuck on Pounds 23,000 at the top of the basic scale.

The Education Secretary will be looking at ways to use the Pounds 19 billion won by his department in last week’s Comprehensive Spending Review to raise the morale and profile of teaching.

Stephen Byers, the school standards minister, said the pay range for the new advanced skills teachers - Pounds 26,000 to Pounds 40,000 - was suitable for excellent teachers. He said: “I want all teachers to be excellent. I know we aren’t going to achieve that. But when the Green Paper comes out we will be making it clear there is no cap on the number of teachers who will benefit. ”

The Green Paper may also explore a new mechanism to pay teachers. Mr Byers said he was looking to increase the percentage of school spending going through the Department for Education and Employment. This could lead to part of teachers’ salaries being paid centrally.

David Hart, general secretary of the National Association of Head Teachers, said there must be a mechanism for ensuring the extra cash for pay went into school budgets. And Graham Lane, chair of the teachers’ employers organisation, admitted that extra money delivered through local authorities would not definitely be spent on performance-related pay.

The teacher unions, after reacting with hostility to the early reports of teachers’ PRP, have now adopted a pragmatic approach. Eamonn O’Kane of the National Association of Schoolmasters Union of Women Teachers, said his union recognised that higher pay should be linked to guarantees on quality. The six unions are putting together a joint submission on salary reform.

But Doug McAvoy, general secretary of the National Union of Teachers, warned a direct link between results and pay could spark industrial action in schools.

Government sources said the Coopers Lybrand report on pay, commissioned by the NUT, could suggest a way forward. One of its options, a professional standards model, has a four-band pay structure which rewards teachers’ professional development. Promotion would be tied to meeting certain criteria. Exceptional classroom teachers will be able to earn more without going into management.

The changes will not take place until after the next pay round. Mr Byers said: “What we will not be doing is introducing changes without consulting and will be allowing teachers to make a contribution to the debate.”

Headteachers would be expected to appraise teachers’ work, but there will also be an external audit, similar to that for advanced skills teachers.