Higher incentive pay is associated with better ﬁrm performance. I introduce a model of CEO-ﬁrm matching to disentangle the two confounding eﬀects that drive this result. On one hand, higher incentive pay directly induces more eﬀort; on the other hand, higher incentive pay indirectly attracts more talented CEOs. I ﬁnd both eﬀects are essential to explain the result, with the selection eﬀect accounting for 12.7% of the total effect. The relative importance of the selection eﬀect is the largest in industries with high talent mobility and in more recent years.