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A better way to pay CEOs

Smarter incentives could reduce the risks they pursue.

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For Wall Street CEOs, December was the best of times, and it was the worst of times. Goldman Sachs gave Lloyd Blankfein a $68 million . Rival Wall Street firm Morgan Stanley, however, gave John Mack (at his request) zip. As elsewhere, the best compensated are now leaving everybody else far behind, even within the ultraelite club of Wall Street chiefs.

No, I'm not calling for limits on CEO pay. Capitalism thrives on incentives, and compensation ceilings distort those incentives. But there is a better way to pay CEOs, by using incentives to refocus them on building longer-term, sustainable company value.

Mr. Blankfein's pay rewarded him for Goldman's outstanding performance, and for his good judgment in supporting prescient colleagues who sensed the risk of meltdown in the subprime mortgage lending market. Indeed, Blankfein may even have been compensated, given the quality of his decisions relative to those of many of his peers who have taken it on the chin with multiple billion-dollar writedowns. The spectacular industry-wide failure in risk management relating to subprime mortgage securities has thus far taken down the CEOs of Citigroup and Merrill Lynch, and vaporized the bonuses of Bear Stearns' chief, as well as Morgan's Mack.

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