He has a multifaceted approach that would give banks a choice. Under the first option, the government would strictly regulate compensation formulas. Under the second, banks could pay their executives whatever they like  provided the banks set aside more capital. In other words, banks that cling to their free-wheeling ways would have to pay some sort of price.

For Mr. Rajan, this is an either-or proposition. If banks pursue current compensation policies  what might be described as the “no-responsibility” system, given the trouble we’re in  that’s fine.

But if that happens, “the government should levy more capital requirements against the bank,” he said. Requiring banks to have higher capital requirements would reduce the risk that executives will make stupid decisions that imperil the firm and, possibly, the nation’s financial health.

How much extra capital? That depends. If banks spread out executives’ pay over, say, four years, giving their executives an incentive to make smart decisions for the long haul, the banks would be allowed to set aside a bit less additional capital.

Ditto if they included claw-back provisions and required executives to reinvest a substantial portion of their income in their companies so they had some skin in the game.

“We need to make people a little more worried about the future,” Mr. Rajan said. The way things are now, executives are encouraged to take big risks because they get paid based on the immediate fees generated. They have little incentive to worry about what might happen to the balance sheet later.

Mr. Rajan said he was unimpressed by efforts to pay executives partially in stock. Owning shares in the entire company doesn’t tie bankers’ compensation directly to the decisions they make within their own units. “Stock compensation doesn’t do it because it’s too broad,” he said.