Overcompensating Much? The Impact of Preemption on Emerging Federal and State Efforts to Limit /Executive Compensation

Abstract

Before the passage of the Emergency Economic Stabilization Act of 2008 (“EESA”) and in the months following, the populist rallying cry against high-paid executives dominated a significant part of the public debate regarding the economic crisis. However, the concentrated outrage stemming from the credit collapse had largely the same effect as the scattered criticism before the economic crisis–that is to say, very little effect at all. Despite huge losses, prominent corporate closures, and billions spent on rescue efforts, Wall Street paid out an estimated $18.4 billion in 2008 bonuses, the sixth largest payout on record. More significantly, despite lauded amendments to EESA aimed at targeting executive pay, as of the writing of this Note, minimal action has been taken at the federal level to enforce limitations on the compensation of specific corporations receiving bailout funds. The lack of federal regulation and concerns about the enforceability of EESA’s provisions drove an amendment to EESA implemented by the next Congress in its passage of an additional stimulus package–The American Recovery and Investment Act of 2009 (“ARIA”), which was signed into law by President Barack Obama in February 2009. In the wake of federal inaction, New York State Attorney General Andrew Cuomo has emerged as a champion of the cause of limiting executive pay. Armed with a rather obscure provision of New York state law and a bevy of rolling cameras, Cuomo has publicly threatened several prominent recipients of bailout funds with legal action and official investigation. Cuomo’s high-profile efforts have been largely met with public approval and support from the federal government. In a revealing press statement released by his office on January 27, 2009, Cuomo announced that the New York Attorney General’s Office and the federal Troubled Assets Relief Program (“TARP”) would work collaboratively to regulate the executive compensation practices of recipients of rescue funds. The statement suggested that both parties plan to tackle executive compensation limitations bilaterally, involving both the federal and state governments. Moreover, some commentators have noted that regulators at the federal government may follow Cuomo’s lead by seeking to recover executive pay using state law remedies similar to those invoked by Cuomo. This Note neither addresses the merits of executive compensation nor the debate as to whether restrictions on executive pay are advisable. Rather, this Note considers the government’s recent actions in response to calls for such restrictions, and more specifically, examines the feasibility of the proposed cooperative relationship between state and federal actors to regulate executive pay.

An issue raised but which remains thus far unexplored in regulating executive pay is the possible federal preemption of state regulation. As this Note will explain, Congress’ intent to curb executive pay for corporations receiving rescue funds has been difficult to implement at the federal level. Efforts to draft and amend the compensation provisions of federal legislation have been plagued by policy disagreements and complicated by the intricacies of executive compensation structures themselves. However, the alternative solution of using preexisting state law to regulate compensation caps is more problematic than it might first appear due to the lurking possibility that federal regulation may preempt state regulatory efforts.