This paper examines whether bonus compensation for managers and workers matter for manufacturing plant productivity. We use a model based on a Cobb-Douglas production function where bonus incentives can increase worker effort and attract more skilled workers leading to increases in plant productivity. The effect of bonus compensation policies on productivity is estimated by using a representative sample of Indian manufacturing plants between 1999 and 2006. We find that conditional on a plant’s observable and unobservable characteristics, allocating a higher proportion of compensation to bonus pay for managers and workers has a significant positive effect on productivity.