Most compensation managers implicitly assume (or perhaps hope) that high pay levels will maintain and enhance future performance. To date, this assumption has been largely untested. Given the importance of pay level and the large expense that pay represents to most organizations, understanding how and why pay level influences the behaviour of employees in organizations is an important question. The purpose of this study is to examine the motivational effects of pay level on employee performance. To examine these issues, we collected field study data from a variety of sources, at three different times, and assessed the effects of employee pay level on subsequent self-esteem and performance. Specifically, we hypothesized that the effects of pay level on performance would be mediated by pay level effects on organization-based self-esteem. We base this hypothesis on the premise that level of pay within an organization communicates a sense of how much the organization values an employee and thus affects employee organization-based self-esteem which, in turn, enhances job performance. After controlling for organization tenure, and previous pay change, results supported a mediated model that suggests that pay level affects employee self-esteem, which in turn, affects employee performance.