In some sense players are always paid for performance. An in form player should expect to play more matches than an out-of-form player; so he gets more match fees. Similarly, international players are paid tour fees and the team that wins a tournament collects prize money. Players that make a name for themselves get better sponsorship deals as their value increases.
Beyond this is what we're really talking about, the retainer. Pretty much any team, international or domestic, that pays a retainer has paid more to the players it deems to be of the most worth. Cricket Australia uses a ratings system based on the past year's performance. Each contracted player is ranked and paid accordingly, with the lowest player receiving a nominal base payment. Note that players are paid not on current form, but on past form.
In the IPL, a number of players were auctioned, thus their value is influenced greatly by market demand, something that doesn't really affect international cricketers. Nevertheless, that market demand is based at least in part on past performance and projected output. A lot of players weren't auctioned, mind you. Most of the Indian players and some late selections such as Marsh and Pomersbach were picked up differently. There are also a few who were called in only as fill-ins. How these contracts work, I can't say. Mohali might yet have to recontract Marsh for 500k.
Retainers are what is enticing. Noone likes an uncertain income more than a steady one. You can't offer a retainer and then give the fine print saying you intend to dock pay for every duck and dropped catch; that defeats the purpose and really isn't a retainer. By all means give a performance bonus, but in a domestic league, market demand can be expected to reward players come re-signing time, where outside interest will again influence what a player is paid.
