Let me first say that I'm not against the idea of being rewarded for work. I agree that it does seem unfair when the best teachers are earning the same or less than their ineffective counterparts, but that's one of the problems. What I see as ineffective in a teacher may not be that way at all. Amazingly, students often learn very well from teachers I may have labeled inept. Thank goodness I was never in charge of any one else's evaluation.
But administrators do this all the time. In my school they would come in twice a year, watch you teach for 40 minutes, then write up an evaluation. I rarely saw them otherwise. I hate to think that my "merit" pay would be handed out or withheld based on these observations, regardless of how well-trained these evaluators are.
We never know how students are going to learn or what teacher will inspire them. The teacher that is most successful could be the one you once called a "fruitcake." The intellectual with the PhD may be the one who can never make a connection with the students.