The digital transformation of state-owned capital supervision is a key task in the current reform of the state-owned capital supervision system, as well as an important component of the modernization of the national governance system. This paper utilizes the quasi-natural experiment of the phased implementation of the online supervision system by the central State-owned Assets Supervision and Administration Commission (SASAC) and provincial SASACs to examine how the digitalization of state-owned capital supervision affects the effectiveness of executive compensation contracts in state-owned enterprises (SOEs). The study finds that the digitalization of state-owned capital supervision enhances the performance sensitivity of executive compensation in SOEs. The underlying mechanisms are promoting information flow between the SASAC and SOEs, and constraining managerial power. Heterogeneity tests reveal that a good government-market relationship, strong regulatory capacity of SASAC officials, and a high level of local digital economic development are boundary conditions for the digitalization of state-owned capital supervision to improve incentive efficiency. Further tests show that the digitalization of state-owned capital supervision weakens executive compensation stickiness, increases the sensitivity of executive compensation to ability-based outcomes rather than luck-based outcomes. This study supplements the literature on SOE reform, digital transformation, and executive compensation incentives from the perspective of innovating state-owned capital supervision method, and provides empirical evidence for the effectiveness of the digitalization of state-owned capital supervision.