Abstract: As the core vehicle of the third distribution, charity organizations can potentially achieve the goal of common prosperity while balancing equality and efficiency through their incentive and allocation effects. This paper takes the differential adjustment of the management expense ratio of non-public-fundraising foundations by the Charity Law in 2016 as the policy background. Based on the unbalanced panel data of 5, 140 charity foundations in China from 2012 to 2021, a difference-in-differences model is constructed to systematically examine the impact mechanism of compensation incentives on the efficiency (donation income) and equality (public welfare expenditure) of charity organizations. The research findings are as follows: (1) The Charity Law significantly increased the management expense ratio of non-public-fundraising foundations, driving a 0. 5% increase in the staff salary and welfare expenditure ratio, which verifies the transmission mechanism of compensation incentives. (2) After the implementation of the policy, the donation income and public welfare expenditure of non-public-fundraising foundations increased by approximately 15% , reflecting the compatibility of this institutional adjustment with the equality goal while achieving the efficiency goal. (3) The heterogeneity analysis shows that the compatibility of the above-mentioned equality and efficiency goals is evident in environments with high social trust and high competition intensity. However, in environments with low social trust and low competition intensity, there is no significant increase in donation income, and it is only reflected in a significant increase in public welfare expenditure. This study provides strong empirical evidence for the compatibility of “equality-efficiency” in the charity field, confirming that a moderately market-oriented incentive mechanism helps to achieve the dual optimization of equality and efficiency of charity organizations, and thus provides theoretical support and policy references for improving the third-distribution system.