The energy industry is crucial for economic and social development, but its high pollution and emissions are a growing concern, particularly in China. Achieving China's carbon peak and neutrality goals requires significant efforts from the energy sector. Energy enterprises bear substantial social responsibility in ensuring national energy security and addressing environmental issues. China's significant contribution to global energy consumption and CO2 emissions highlights the urgency of improving the CSR and CER of its energy companies. While previous research on the energy industry has focused on areas like overcapacity, subsidies, and governance, the impact of management compensation incentives on CSR & CER remains relatively under-explored. This study addresses this gap by investigating the causal relationship between management compensation and CSR & CER in Chinese energy enterprises. The research questions focus on the causal effects of management compensation, the differences between salary and equity incentives, the heterogeneity across sub-industries, ownership types, and regions, and the implications for energy enterprises.

Existing literature on CSR generally focuses on influencing factors (political, economic, cultural context, risk management, leadership, strategic planning, green finance) and effects (improved corporate performance, reduced debt cost, enhanced innovation, better reputation, increased customer trust). Regarding executive compensation and CSR, studies have shown mixed results. Some find a positive effect of cash payments on environmental performance but a negative impact from equity ownership. Other studies explore the potential for an inverted U-shaped relationship between executive compensation and CSR. This paper aims to differentiate itself by focusing on the causal effect of management compensation on CSR, especially within the context of the high-emission Chinese energy industry, using a robust methodological approach to account for endogeneity.

This study uses panel data from 2010 to 2021 on Chinese energy enterprises across eight sub-sectors (electric power, power generation equipment, electrical grid, gas, oil and natural gas, coal, energy equipment, and environmental protection). The data for CSR & CER scores comes from Hexun.com, with five sub-indicators: shareholder responsibility, employee responsibility, supplier/customer/consumer responsibility, environmental responsibility, and social responsibility. Management incentives are divided into salary and equity incentives. A panel data fixed-effects model (Eq. 1) serves as the baseline model. To address endogeneity issues (omitted variables and reverse causality), the study employs the instrumental variable (IV) regression method. For salary incentives, the instrumental variable is the interaction of industry-wide total salary and individual firm's initial financial performance (ROA) ranking (Eqs. 2 & 3). For equity incentives, the instrumental variable is the interaction of industry-wide management shareholding ratio and individual firm's initial controlling shareholder ownership ratio (Eqs. 4 & 5). Control variables include total liability ratio, ROE, enterprise age, number of employees, CEO duality, Tobin Q, largest shareholder proportion, and the number of senior managers. Heterogeneity analyses are performed based on industry, enterprise ownership (state-owned vs. non-state-owned), and region (eastern coastal vs. inland). Robustness checks are conducted by adding control variables (proportion of independent directors, cash ratio, growth rate of owner's equity), changing the core explanatory variables (per unit salary and equity incentives), using a subsample (2010-2018), employing balanced panel data, and performing an exogeneity test of instrumental variables.

The fixed-effects model and the instrumental variable estimations both show that management salary incentives positively and significantly affect CSR and CER scores. In contrast, management equity incentives negatively and significantly affect CSR and CER scores. The magnitude of the effects is larger in the IV estimations, suggesting that endogeneity might have underestimated the true effects. Specifically, a 1% increase in total management salary increases the CSR score by approximately 15 and the CER score by 5.645, while a 1% increase in management shareholding reduces the CSR score by 0.774 and the CER score by 0.245. Heterogeneity analysis reveals that the negative effect of equity incentives on CSR and CER is more pronounced in the electricity and environmental industry. Salary incentives have a greater positive effect on CSR for state-owned enterprises. No significant regional differences were found. Robustness checks using additional control variables, adjusted incentive variables, and subsample analysis generally confirm the main findings. The exogeneity test confirms the suitability of the chosen instrumental variables.

The findings support the hypotheses that salary incentives positively impact CSR and CER, while equity incentives negatively affect them. The positive relationship between salary incentives and CSR/CER aligns with agency theory, where higher pay motivates managers to improve firm performance, including CSR activities. The negative effect of equity incentives is likely due to the potential conflict between maximizing shareholder value (short-term focus) and long-term CSR goals. The heterogeneity analysis highlights the importance of considering industry-specific contexts and ownership structures when designing compensation incentives. The significant positive effect of salary incentives on CSR for state-owned enterprises suggests that government oversight and social responsibility mandates play a crucial role. The lack of regional differences could indicate that these incentive mechanisms are prevalent across China's energy sector. These findings have important implications for the design of effective management compensation strategies in the energy sector.

This study provides robust evidence that salary incentives are crucial for driving CSR & CER improvements in Chinese energy enterprises, while equity incentives appear counterproductive. The heterogeneity results underscore the need for tailored incentive structures based on industry, ownership type, and firm-specific characteristics. Future research could explore the mediating role of other variables in the relationship between compensation incentives and CSR/CER, investigate the long-term effects of these incentive mechanisms, and expand the geographical scope to other countries.

The study relies on CSR & CER scores from a single data source (Hexun.com), potentially introducing some biases. The focus is solely on listed Chinese energy firms, limiting the generalizability to private energy firms or those in other countries. Despite efforts to address endogeneity, unobserved confounding factors may still exist, potentially influencing the estimated effects. Future research could address these limitations using alternative data sources and broader sample scopes.