The state government will spend $20 million on raising the salaries of principals as well as providing mentors for first-year principals while existing school leaders will have to demonstrate how they are improving student results as part of a new leadership strategy.

NSW education minister Adrian Piccoli said a wealth of research showed that strong leadership in schools was critical to lifting student performance.

"We want the best principals in the right schools and there needs to be a financial incentive for these people to apply," Mr Piccoli said.

Mr Piccoli said Claymore Public School in western Sydney, which has a large number of children with intellectual disabilities and is very disadvantaged, was an example of a very challenging school that would qualify for an increased salary package for the principal.

"We have a fantastic principal at Claymore at the moment but when she decides to leave, we need to make sure we attract the best applicants for the job for that school," Mr Piccoli said.

"At the moment the principal receives the same salary as any other principal with the same number of students even though it is a very complex school."

Mr Piccoli said the highest paid principals in NSW were currently on a salary package of $190,000. Principals' salaries are determined by student enrolments and school type.

"We want positions for principals to be hotly contested and we want our best practitioners to be the best leaders," Mr Piccoli said.

"We have changed the way we fund schools to recognise that students and schools need different levels of support, and now principals' salaries will reflect this too."

Mr Piccoli said all new principals would need to complete a new credential to ensure they had the knowledge and skills to lead and manage a school and every new principal will also be coached by an experienced principal during their first year of appointment.

Geoff Scott, president of the NSW Primary Principals' Association, said the changes were a "seismic shift" for principals.

"At the moment, classifications of schools are done on a fairly simplistic basis based on enrolment numbers but that does not take into account the differences in schools that may have the same number of enrolments but have different complex needs," Mr Scott said.

"This follows the Gonski model, based on needs-based funding, and will give schools a complexity rating."

Mr Scott said it was increasingly difficult to fill principal positions in some areas.

"Complexity is not decreasing in the community and our schools are reflecting that."