I don't like whiteboard exercises either, but I definitely have to agree with this. Three interview questions that I've found do a great job of determining how effective an engineer will be:

1. Describe the principles of a linked list. What properties does it have that are useful, and in what situations will using one cause a problem?

2. What's the difference between this and a doubly-linked list? What are the benefits and downsides of using the latter?

3. How would you represent a tree in a SQL database? What are the properties of your representation?

(I especially like the last one, because it's totally open-ended. Engineers come up with everything from naïve adjacency lists through to nested intervals and closure tables, and their ability to describe the tradeoffs is a really strong indicator of their programming ability. Of course, it's not a suitable question for all positions.)