The imposition of board independence requirements improves the link between executive pay and performance in firms that weren’t previously very independent, a new working paper published by the Bank of Canada.

“In this paper, I find that the independence requirement imposed on boards of directors by the Sarbanes-Oxley Act of 2002, together with the governance regulations subsequently introduced by stock exchanges, affects CEO pay structure,” explains the paper’s author Teodora Paligorova, in its abstract.

“In firms whose corporate boards were originally less independent, and thus more affected by these provisions, CEO pay for performance strengthened while pay for luck decreased after adopting SOX,” it finds. “In contrast, those firms that exhibited strong board independence prior to SOX showed little evidence of pay for luck and little change in pay for performance following the adoption of SOX.”

The results are consistent with the rent-extraction hypothesis — which suggests that weak corporate governance allows entrenched CEOs to capture the pay-setting process — it adds. The results also stand up to alternative explanations, it maintains.