ACT leader David Seymour announced a bold, near billion-dollar plan at his party's campaign launch on Saturday that would see the average teacher receive a $20,000 a year pay increase.
Principals and school boards would be able to set pay levels, paying teachers based on performance, but it would require them to opt out of union contracts, he said.
Hipkins told TVNZ's Q&A programme there wouldn't be a politician in New Zealand that thought teachers shouldn't be paid more.
"But I think ACT's policy is completely nuts," he said.
"What's a bad teacher? Because, actually, bad teachers shouldn't be in the system so we should be paying all teachers better because any bad teachers shouldn't be teaching."
National's education spokeswoman, Nikki Kaye, was also vehemently opposed to performance pay.
"I've had a lot of feedback from teachers across the country, they quite like ACT's policy in terms of paying teachers more, but we don't support performance pay," she said.
ACT's proposal hasn't won fans within education unions or industry groups either.
New Zealand Education Institute president Lynda Stuart called it "staggeringly out of touch" with what teachers say matters.
"Mr Seymour seems unaware of the huge work that's underway on developing a career framework for teachers," she said.
"This is what they want, not for some teachers to be singled out for higher pay."