Propelling the Transition to Circular Economy: Exploring the Role of Corporate Circular Economy Performance‐Based Incentive Policy

ABSTRACT This study examines the impact of executive compensation (EC) and corporate circular economy performance incentives (CCEPI) on corporate circular economy initiatives (CCEI) and corporate circular economy performance (CCEP) by integrating legitimacy theory and the resource‐based view. Despite increasing attention to sustainability, there is limited understanding of how governance mechanisms, such as EC and CCEPI, drive circular economy practices. Addressing this gap, we analyse 41,370 firm‐year observations from 50 countries over the period 2002–2022. The findings reveal four key insights: (1) higher EC significantly enhances CCEI, demonstrating greater corporate commitment to circular economy practices; (2) CCEPI positively influences the effectiveness of CE efforts; (3) CCEPI does not directly improve CCEP but strengthens CCEI as a long‐term strategic investment; (4) these relationships vary by country, sector and over time. The study offers crucial implications for policymakers and practitioners, emphasising the role of targeted incentives in promoting sustainable business practices and recognising the contextual factors that affect their effectiveness.