Catch One and Lose Another? Executive Compensation Restriction and Corporate Social Responsibility in State-Owned Enterprises

Abstract This study examines how the managerial interpretation of incentive arrangement affects corporate engagement in social areas, as reflected in corporate social performance, from two interrelated perspectives: the political influence view and the normative agency view. Building the theoretical framework on state-owned enterprise (SOE) executives' dual-career tracks perspective, we contend that economic factors (performance decline and relative pay gap) and political factors (socialist imprints and political career horizon) could divergently reshape the interpretation of incentive arrangement on corporate social performance. Using ‘Pay Ceiling Order’ as a quasi-natural experiment context, a secondary analysis, and a controlled experiment reveal that compensation restriction on top executives causes a decrease in corporate social performance. This relationship is weakened when there are stronger socialist imprints inherited by a focal firm and when the executives have a longer political prospect. In contrast, the relationship is strengthened when firms face severe performance declines and when the executives' compensation is relatively lower than peers. The findings show that compensation is an indispensable incentive joining with political and economic factors, enabling SOEs to engage in social areas. We discuss the implications of understanding top executive incentives with incentive arrangements and how the government purpose influences top executive responses to compensation incentive in ways that matter for long-term social value.