This study examines whether financialincentives through pay flexibility can improve theperformance of staff in government bureaucracies. Its mainmessages for pay policy are pay flexibility can improveperformance, pay flexibility works most strikingly inchanging managerial behavior. Improving public sectorperformance does not need to wait for systematic payrationalization or pay simplification throughout government.Pay flexibility can work with rather than instead oflong-term career incentives. The strategy and implementationof pay flexibility reforms must take into account the extentof fragmentation and complexity of the existing publicsector pay structure in the country.