Although performance-based financing (PBF) receives increasing attention in the literature, a lot remains unknown about the exact mechanisms triggered by PBF arrangements. This article aims to summarize current knowledge on how PBF works, set out what still needs to be investigated and formulate recommendations for researchers and policymakers from donor and recipient countries alike. Drawing on an extensive systematic literature review of peer-reviewed journals, we analysed 35 relevant articles. To guide us through this variety of studies, point out relevant issues and structure findings, we use a comprehensive analytical framework based on eight dimensions. The review inter alia indicates that PBF is generally welcomed by the main actors (patients, health workers and health managers), yet what PBF actually entails is less straightforward. More research is needed on the exact mechanisms through which not only incentives but also ancillary components operate. This knowledge is essential if we really want to appreciate the effectiveness, desirability and appropriate format of PBF as one of the possible answers to the challenges in the health sector of low-and lower middle-income countries. A clear definition of the research constructs is a primordial starting point for such research.