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Icelandic university teachers, the Ministry of Finance and the University of Iceland have been conducting an interesting experiment by changing the form of remuneration of university teachers in a fundamental way. This paper accounts for the development of university teachers salaries the last 20-30 years and gives the details of the remuneration system as well as its impact on wage development and wage dispersion within the university community. The effect of the changed system of remuneration on scholary productivity is also discussed. JEL-categories: J3, J5, H8 Keywords: Remuneration of university teachers, work incentives, salaries.