Individuals with schizophrenia face significant challenges in daily functioning, and although social cognition predicts how well patients respond to these challenges, associated physiological mechanisms remain unspecified. The present study draws from polyvagal theory and tested the hypothesis that respiratory sinus arrhythmia (RSA), an established indicator of the capacity to self-regulate and adapt to environmental demands, combines with social cognition to predict functional outcome. Using data from 41 schizophrenia patients and 36 healthy comparison subjects, we replicated group differences in RSA and social cognition and also demonstrated that RSA and social cognition interact to predict how effectively patients manage work and independent living activities. Specifically, RSA did not enhance functional outcomes when social cognition was already strong, but higher levels of RSA enabled effective role functioning when social-cognitive performance was impaired. Jointly, RSA and social cognition accounted for 40% of the variance in outcome success, compared with 21% when evaluating social cognition alone. As polyvagal theory suggests, physiological flexibility and self-regulatory capacity may compensate for poorer social-cognitive skills among schizophrenia patients.