Despite the recurrent focus on pay as an incentive and the myriad reforms of public sector compensation, researchers have generated surprisingly little evidence of the link between pay level and organizational performance. We propose a theoretical model of how pay leads to improvements in organizational performance by enhancing recruitment, motivation, and retention. Given scarce resources and constraints on the ability to financially reward public officials, we engage the top‐down, bottom‐up debate in policy implementation to theorize about whether pay for elected officials or bureaucrats matters more for performance. Our analysis of panel data from South African municipalities reveals increasing pay for bureaucrats—but not for elected officials—can improve delivery of labor‐intensive public services. However, the results also suggest higher pay may embolden bureaucrats to break rules regarding public spending, thereby weakening accountability.