Unpacking the Local Pay Gap: New Insights Into CSR and Employee Relations

We examine the relationship between CEO local tournament incentives and corporate social responsibility (CSR) activities. Larger local pay gaps are linked to lower CSR engagement, driven exclusively by weaker performance in the employee relations dimension, characterized by fewer strengths and more concerns. Decomposing the local pay gap, we attribute this negative effect to its externality component, which is unexplained by firm performance, firm‐CEO characteristics, or governance measures. Cross‐sectional tests suggest that the negative association between local tournament incentives and CSR performance reflects managerial actions aligned with shareholder interests, rather than purely driven by personal career concerns.