Why top traders outearn investment bank CEOs 2:1

By contrast, Blankfein is probably stuck in his lousy $50 million job. He can't go to another bank because the next highest payer, Morgan Stanley's (NYSE:MS) CEO, received 20% less -- a mere $40 million.

(This kind of relative pay comparison is a source of real unhappiness. At Goldman, for example, 15% of the employees are unhappy because they got only a 20% increase in their bonus, rather than the 30% to 50% increase the top performers got. If that's not bad enough, employees have to put on a good face because their managers add their reactions to news of their bonuses to their personnel records!)

Measuring a CEO's performance is complex. For example, when setting 2005 compensation for then CEO (and current Treasury Secretary) Hank Paulson, according to its Proxy, Goldman's compensation committee looked at a report of 2004 CEO compensation of Fortune Magazine's list of America's 50 largest corporations. It also considered the improvement in Goldman's revenues, profits, earnings per share, return on equity both common and tangible, market rank in mergers and equity offerings and the revenues of its business units -- Investment Banking, Trading and Principal Investments and Asset Management and Securities Services.

This big pot of measurement stew makes it very hard for a compensation committee to pinpoint the CEO's specific contribution. Why does Goldman's committee care about how its CEO's pay compares to that of companies like Exxon Mobil Corporation (NYSE:XOM) and Wal-Mart Stores, Inc. (NYSE:WMT) which are in completely different businesses? How can it pinpoint the extent to which the CEO contributes to the performance of its business units, which are Goldman's true economic engines?

By contrast, Goldman can look at each trader's account every second and see how much money he or she made or lost. And the well known compensation formula that hedge funds use represents the relevant set of labor market competitors. Hedge funds earn an average of 2% of the assets under management and 20% of the profits. So for example, general partners in a $5 billion hedge fund that earned a 20% return would split up $100 million in fees and $200 million worth of the $1 billion in profits.

In my view, these differences between CEOs and traders in next-best-career-alternatives and performance measurement complexity help explain why Goldman pays top traders like Sze two times more than its CEO Blankfein.

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm, and a Professor of Management at Babson College. He has no financial interest in Exxon, Goldman Sachs, Morgan Stanley, or Wal-Mart.