This paper discusses the theoretical background of the pay-for-performance incentive as well as its implication for administrators in higher education institutions. Using pay data of a large state university system in the U.S., the paper finds that presidents in public research universities receive significantly higher pay than their counterparts in comprehensive or liberal arts colleges. Presidential pay in public colleges is also positively related to college ranking, admission selectivity, and student entrant exam scores, and is higher on larger campuses as well. In addition, newly hired presidents earn more than their peers remaining in the post. We conclude the paper by discussing hidden costs of rewarding college administrators based on campus performance as well as policy implications of such a compensation design.