This paper distinguishes between ‘immediate measures of the quality of civil administration’ (IM-QCA), such as ‘corruption,’ ‘red-tape,’ etc. and the ‘final measure of the quality of civil administration’ (FM-QCA), which from an economic point of view is the growth performance of an economy. The paper argues that, instead of being monotonic and linear, the relationship between civil service compensation and economic growth is characterized by the presence of ‘vicious’ and ‘virtuous’ cycles, which are indicative of multiple equilibrium. The paper uses the threshold regression methodology to test the multiple equilibrium hypothesis and finds considerable support for it. The finding has significant policy implications, because developing countries often resort to across-the-board salary reduction of public servants as part of budget balancing austerity measures. The results of this paper questions the appropriateness of such policies and suggests that civil service compensation can be an important policy tool for promoting economic growth, provided the specific non-linear nature of the compensation-performance relationship is properly understood and taken into account.