[tech_nofounder]

  Honestly, it sounds more like you're jealous of
  his compensation relative to yours

I know it's hard to sound convincing, but trust me, I'm not: I am well-compensated (and negotiated for such), perhaps even more than he (don't want to get too detailed here).

Where I am upset about compensation is that we've hired an engineer getting orders of magnitude less equity and performing orders of magnitude better work. Even if I can't change comp, I worry about how the "good guy" must feel & how to retain him if I just continue to "shrug off" the cofounder problem.

[keithblaha]

It doesn't seem like there is much you can do about it though. If you don't have enough resources to retain the good employees that you need, that's a valid issue to raise with the CEO. He can either get you those resources, or else there could be staffing problems. I don't think anyone joining as an early engineer expects to get more equity than a co-founder though. And you yourself said that people like him. So morale-wise, it's probably fine as long as he finds somewhere else in the company to contribute more.