Just a very thin coat. You only need to cover the core, so you don't need much. Just enough to cover the core is plenty.
If you happen to be using a compound with a conductive material in it (like Arctic Silver), it could potentially short out any surface mount components on the processor packaging---but this is most critical when doing it on an Athlon or Duron CPU.
The other down side is you waste a lot of compound---which gets expensive with Arctic Silver and similar stuff.