Lots of talk this week on executive compensation, with fascinating trajectories for American culture, business, society and public policy. I followed the debate so you don’t have to.

As you might expect, much of the conventional wisdom has focused on a potential Wall Street brain drain should comp restrictions be put into place (examples here, here and here).

The week’s best commentaries came from The Economist and compensation expert Frank Glassner.

First, The Economist points to big investment bank bonuses and introduces the concept of “employee capture:”

Such rewards, in the face of public protest, feed the impression that banks are victims of what some call “employee capture”. The top ten investment banks at the start of 2008 made an average return on equity of just 8% between 1999 and 2008. Four made cumulative losses. Staff got four times as much as shareholders did in profits. In 2008 Merrill Lynch paid cash to staff equivalent to over 100% of the capital left by the year-end.

Normally, this would be just a problem for shareholders. But because the public had to get involved, it’s now everyone’s problem. Next, the newspaper debunks the banks’ revisionist protests that, because they’ve repaid public subsidies, their bonuses should revert back to those of 2007. Fact is, they continue to operate on public support:

It is not just that they were saved from destruction. They got public capital (much of it now repaid), short-selling bans on their shares and rescues of counterparties, such as American International Group, which the public otherwise had no interest in saving. Today they enjoy laxer accounting, loose collateral rules at central banks, explicit debt guarantees and asset-purchasing schemes. And, critically, they can borrow cheaply because they are deemed too big to fail. All of them-from comparatively healthy Goldman to the nationalised weaklings-are being subsidised by the rest of us. As a way to keep cash flowing to the wider economy and help banks rebuild their capital, this subsidy made sense; nobody intended it to go to employees.

The heads-I-win-tails-you-lose aspect of all this has got America steamed. But The Economist argues that the answer is not simply to tax the banks’ highest earners:

In the longer term the bonus mess underlines the importance of getting the state out of finance: setting a time limit for the explicit guarantees and finding ways to lessen the implicit promise of support through living wills and the like…. Retrospective taxes are usually bad news. They distort incentives, and scare investors in other industries who fear they may be next. A wholesale cap on pay would lead regulators further into the swamp of micromanagement. And symbolic caps on a few top executives, as the White House is threatening, are too feeble a response.

The resident expert on pay on CNN, Bloomberg, and elsewhere is Frank Glassner, who’s been omnipresent this week on TV, newspapers and across the blogosphere. Frank is CEO of Veritas, the top pay consulting firm to Fortune 1000 companies. Because our firms share clients in common, I’m on his private email list. Frank this week sent his clients a manifesto advising that when it comes to pay, it shouldn’t be a matter of “how much,” but “how.” I sought his permission and bring that note to you here. An excerpt:

[G]overnment regulation will probably have unintended consequences, without curbing excessive pay. For example, if the maximum ratio of CEO pay to worker pay were mandated, companies would likely respond by outsourcing the work of the lowest paid workers, rather than curbing CEO pay.

For the rest of us who are not recipients of public largesse, the lesson we can take away is the delicacy with which we should approach compensation, and how it needs to be situated within a broader human capital strategy. Company directors will be under greater scrutiny than ever. Says Frank:

[C]ompanies should design compensation packages to attract the right people for implementing the company’s strategy. For instance, below market salaries coupled with aggressive incentive pay linked to individual performance is likely to attract self-motivated entrepreneurial individuals, however, that very type of pay strategy may create increased risk taking as well, and would need to be designed with appropriate checks, balances and controls.

Companies also need to assure their executives longer tenure and horizons – without the necessity of pay guarantees. A CEO who is afraid of being fired for not making short-term financials will not focus on the long term. A board that is actively engaged in strategy formulation and implementation and compensates a CEO for strategy implementation milestones, along with monitoring long-term performance, is more likely to understand, appreciate, and encourage a CEO’s efforts, even if they yield short-term financial results that are below expectations. Thus there is an urgent need for boards to evaluate their executives’ performance annually to determine their progress on long-term goals.

What I like most about Frank’s note is the premise that when it comes to compensation, one size does not fit all. When business strategies differ between companies, their compensation strategies ought to differ as well.

Companies should have the fortitude to set their compensation strategies according to their corporate strategies, not simply based on external markets for pay, and not simply based on internal ideals of what’s “fair.” To accomplish this, you’ll need first to identify how pivotal to your company strategy an executive really is.  For my earlier post on how to do that, click  here.

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An article entitled “Managing Your Career as a Business” in today’s New York Times business section discusses my career experiences and what I’m seeing in the job market:

Joy Chen followed her own entrepreneurial career path. Ms. Chen, with a master’s degree in business administration from the Anderson School of Management at the University of California, Los Angeles, had been a deputy mayor of Los Angeles and then went to work for Heidrick & Struggles, the management search firm. She left to start her own recruiting firm, Chen Partners in 2007, just as the economy started to slow. Business was initially scarce, she said. “Many employers were even then hunkering down.”

Then this year, Ms. Chen said, things changed. “Many companies noticed that after all the layoffs and uncertainty, skilled people were available at lower salary demands than in former years. And now business is very active.” The lesson of the economy’s ups and downs, she said, is that workers cannot let hard times or lower pay discourage them. “It’s a change in the market, not a depreciation of who you are as a person.”

The article points out that you need to develop a more entrepreneurial mindset about managing your own career.  The recession has laid to rest the notion that your company will take care of that for you. I’m always meeting people who make the mistake of being highly strategic on behalf of their companies, but not at all strategic for themselves.  Certainly, when a company gives you a set of responsibilities you should identify with your job and try to excel in it. But just as the recession is forcing companies to innovate, people should innovate on their own behalf.

One way to be entrepreneurial, of course, is to go out and create your own company. My very first boss, Yue-Sai Kan (靳羽西), is China’s most famous woman, having built a media and retail conglomerate there over the past 30 years. When I started Chen Partners, I recalled her advice: “Never just work for other people. They could fire you!”

Candidates sometimes ask me what it’s like to own a small business. I never discourage them from exploring it, though if everyone ran off and started a business, I myself would be out of business. Being an entrepreneur is an exhilarating experience, and headhunting is a special joy. It’s exciting to help great people grow their companies.

This recession has turned many of our previously-held assumptions upside down. One lesson we may take away is that now, we’re all working for ourselves. That’s true whether we’re doing so within a larger company or in one that we’ve created ourselves.

The latest unemployment news to get my attention: Not only is unemployment at historic highs, but also the percent of people who have been unemployed more than six months is 50% higher than at any time since the Great Depression. This will have long-term implications for unemployed Americans and the economy at large in terms of damage to psyches, checkbooks, and skills. At the thought of all this pain, my heart aches. I’m sure yours does too.

Some CEOs assume that, with all this bad news, people who are working feel lucky to have a job.  So they’re focused on what they need to do to get through the recession: manage cash and cut expenses.  Employees, as the biggest expense for many companies, are getting short shrift. Companies are lowballing job offers, cutting pay, denying bonuses, and generally putting a lower priority on their people.

The problem with ignoring your people is that your most important assets also are your most tenuous. And having a job does not equal job satisfaction.  Over half of working adults say they are likely to look for a new job after the recession ends.

The numbers are staggering:

• 66% of American workers are currently dissatisfied with their compensation
• 76% are dissatisfied with future career growth opportunities at their company
• 48% are dissatisfied with the relationship they have with their boss
• 77% are dissatisfied with the strategy and vision of the company and its leadership

CEOs looking hopefully toward economic recovery may be shocked by an unprecedented exodus of talent when that time comes.

Better rev up your retention efforts now. And, start with your pivotal talent!

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* Hat tip to HR Chief Bill Budzinski for sending me the worker dissatisfaction data.