The inequitable distribution of principal effectiveness raises concern among policymakers. Principal sorting likely contributes to wider achievement and opportunity gaps between low- and high-need schools. As a possible policy tool, policymakers proposed performance-based compensation systems (PBCS). Tennessee was one of the states that supported the implementation of PBCS. This study examined the relationship between PBCS and principal job performance in the state, using longitudinal administrative data, principal evaluation data, and unique PBCS data from 2012 to 2019. The study did not find consistently significant, positive relationships between PBCS and principal job performance. However, the relationships were generally more pronounced among high-need schools. The study concludes with detailed discussions about the results, the assumptions behind PBCS, limitations, and implications.