October 29, 2009
By MICHAEL W. MCCONNELL
Last week's announcement that "Pay Czar" Kenneth Feinberg slashed compensation for executives at seven large financial firms by an average of 50% stunned Wall Street, stoked the fires of populist resentment, and troubled economists. Will this government-mandated pay cut drive the most talented professionals away from these companies, endangering their recovery? Does it augur further politicization of economic decisions?
Lost in the arguments over economics and political theory, however, is a more basic question: Was this action constitutional?
Mr. Feinberg's ukase is the most prominent example (and not just by the Obama administration) of the exercise of power by an individual unilaterally appointed by the executive branch without Senate confirmation—and thus outside the ordinary channels of Congressional oversight. Earlier this month, the Senate Subcommittee on the Constitution conducted hearings into the constitutional basis for this practice, which many see as an end-run around checks and balances. The Obama administration declined Sen. Russ Feingold's (D., Wisc.) invitation to send a witness to the hearing to explain the constitutional basis for its various "czars."
So who is Kenneth Feinberg, and where did he get the power to set pay for executives at private firms?
As part of the hastily enacted and seldom-read legislation establishing the Troubled Asset Relief Program (TARP), Congress authorized the Secretary of the Treasury to "require each TARP recipient to meet appropriate standards for executive compensation." To carry out this task, last June the Treasury promulgated an emergency "Interim Final Rule," waiving ordinary requirements for a public comment period.
As part of this emergency rule, Treasury Secretary Timothy Geithner created the office of "Special Master" for compensation, delegated his TARP authority to set compensation standards to this officer, and appointed Mr. Feinberg (a lawyer and mediator) to this position, without obtaining Senate confirmation.
Therein lies the problem. The Appointments clause of the Constitution, Article II, section 2, provides that all "Officers of the United States" must be appointed by the president "by and with the Advice and Consent of the Senate." This means subject to confirmation, except that "the Congress may by Law vest the Appointment" of "inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments."
There is no doubt that Mr. Feinberg is an "officer" of the United States. The Supreme Court has defined this term (Buckley v. Valeo, 1976) as "any appointee exercising significant authority pursuant to the laws of the United States." Mr. Feinberg signed last week's orders setting pay levels for executives at Bank of America, AIG, Chrysler Financial, Citigroup, GMAC, General Motors and Chrysler. They have the force of law and are surely an exercise of "significant authority" pursuant to an Act of Congress. He is not a mere "employee," acting at the direction of a superior. That means his office is subject to the requirements of the Appointments Clause.
While somewhat more disputable, Mr. Feinberg's is probably an "inferior" officer, defined as one subject to supervision and removal by a member of the cabinet. Although he has substantial discretion and independence, Mr. Feinberg reports to the secretary of the Treasury, who can fire him any time for any reason. This means that Congress could, if it wished, vest the appointment of the pay czar in the secretary, without any need for Senate confirmation.
But Congress has not done so. On the contrary, it vested the authority to implement TARP's compensation provision in the secretary of the Treasury. The secretary may sub-delegate that power to someone else—but that someone must be an "officer" properly appointed "by and with the advice and consent of the Senate."
The Supreme Court observed in Buckley v. Valeo that the provisions governing appointments under the Constitution reflect more than "etiquette or protocol." They embody the Founders' conviction that all power under U.S. laws must be exercised by officers with constitutional authority.
The Founders understood that the president and heads of the executive departments could not single-handedly carry out the law, so they required Senate confirmation as what the Federalist Papers call "an excellent check" on abuse or favoritism by the president. Yes, there are some offices so inferior that this check may be eliminated—but it is for Congress to judge which ones these may be. Congress and Congress alone has power to dispense with the safeguard of the confirmation process.
The power to set compensation at large American businesses is especially subject to potential abuse, favoritism, arbitrariness, or political manipulation. It is no reflection on Kenneth Feinberg, who has a sterling reputation and who appears to have approached these sensitive duties with a spirit of commendable integrity, to say that the checks and balances of the Constitution should be scrupulously observed. They were not. Because he is not a properly appointed officer of the United States, Mr. Feinberg's executive compensation decisions were unconstitutional.
Mr. McConnell is on the faculty of Stanford University Law School, director of its Constitutional Law Center, and a senior fellow at the Hoover Institution. He was a federal judge on the 10th Circuit Court of Appeals from 2002-2009.