The Queen's Speech, outlining the government's legislative programme, signalled that the forthcoming Green Paper on reforming the teaching profession will link pay to performance.

The re-structuring of teachers' pay, the Queen's Speech said, "will enhance the status of teachers and reward high performance to secure the delivery of high standards".

"Education remains my government's top priority. To raise standards in our schools, we must raise standards in teaching."

David Blunkett has indicated support for rewards for best teachers

Although the Green Paper - expected early next month - will present a series of options for change, ministers have already indicated their intentions.

Rewards seem likely to be targeted at what the government sees as the "best" teachers, in the form of performance-related bonuses. Teachers whose pupils show the greatest improvements will be the main winners under such a system.

The government's broad hints that it is moving in this direction have met with anger from the teaching unions, which argue that teachers deserve an across-the-board pay increase to bring them in line with other graduate professions.

But the latter option has already been rejected because of its cost and its failure to meet a key government spending demand - that extra money must be spent in ways which maximise the likely improvement in public services.

Teachers' unions will oppose proposals for payment by results

Last week, Mr Blunkett told a Fabian Society conference in London that reform of teachers' pay was essential to raise standards in education and to attract the best graduates into teaching.

Schools could no longer remain "worlds apart" from other areas of employment where it was accepted that excellence should be rewarded, he said.

"Outside the teaching profession, what we are saying would not be considered desperately radical. People say it's difficult to make judgements about whether there are good teachers. That's nonsense.

"Everyone who has been through school knows perfectly well who is a good teacher. What we have to do is to refine the method for defining them, so that it is transparent and fair."

However more radical proposals to give teachers a substantial pay rise in exchange for a sharp reduction in their 13-week holiday allowance appear to have been rejected.

The "modernisation" package for teaching is also likely to include measures to improve the leadership of headteachers, an increase in investment in teachers' professional development and the recruitment of extra classroom assistants.

Another key issue to be addressed by the shake-up on pay in the Green Paper is the shortage of graduates prepared to enter teaching.

Low status and unattractive prospects for pay have been indentified as causes of a deepening recruitment crisis. The average salary for a classroom teacher is around £23,000 - below the earnings on offer in many other graduate professions.