Match quality and contractual sorting

•We present evidence that the quality of a worker-job match influences the choice of contractual arrangements offered by employers.•Employers have an incentive to offer performance-based contracts when match-specific productivity is high.•By affecting pay arrangements, better match quality also influences employment durations and wage cyclicality. In particular, a 1% increase in the unemployment rate is associated with a 3% decrease in average wages for performance-pay jobs (PPJ), and with no significant wage change in non-PPJ.•Direct evidence on the accrual of job offers to workers lends strong empirical support to the hypothesis that employers use performance-related compensation to preserve high-quality matches.