Philip Rosedale is strikingly charasmatic in person—perhaps surprisingly so, considering he's best known as the man behind a virtual world in which humans only interact through flying avatars. 

Second Life, the largest virtual world, was created by the company Rosedale founded in 1999, Linden Labs. It has more than a million active users who create avatars and interact with each other online by buying land, bartering, and socializing with one another.

Four years ago, Rosedale stepped down as CEO of Second Life to start Coffee and Power, an online marketplace where people can buy and sell small jobs. But before he left, Rosedale wasn't afraid to shun convention when it came to employee relations. At the Big Omaha conference in Nebraska, Rosedale shared three ways to make employees happy, and help management lead a decentralized, flat organization.

Step 1: Introduce the LoveMachine.

Rosedale understood that many of his employees worked in their own silos, feeling under-appreciated and misunderstood. That was his idea behind the LoveMachine, an internal software platform where employees could send notes of appreciation or encouragement to fellow employees. Rosedale introduced the tool in 2005 when Linden Labs had about 50 employees. When someone recognized another's hard work, "It made you feel wonderful," he said. Plus, since the messages were public, it gave upper management a clear sense of who was out (and under) performing. "You had the most accurate data of what was going on. The history became an incredibly important piece of the performance review."

Step 2: Let employees decide who gets bonuses.

One year, Rosedale decided to change up how bonuses work. He gave each employee $1,000, and told them to give it to who they thought deserved it. They could give half to their boss, half to their friend—it didn't matter. The only stipulation was that the employee could keep none of it for him or herself. "Two things happen," Rosedale says. " First, a number of people who do heroic work in the trenches, they show up in the top 10—which is empowering. Second and most importantly, think about the culture impact. Management is absolved of performance review and can actually focus on leadership."

Step 3: Let employees rate you anonymously.

Few CEOs have the guts to find out what their employees really think of them. But for a company to succeed, its employees must trust and believe in the direction of the company's leadership. "Normaly a board evaluates a CEO, but if you have enough guts, give the CEO a year, then give a survey." he says. The question he asked his employees was a simple none, with only a Yes or No checkbox: Would you rather get a new CEO or keep the same one? "I'll never forget that one," he says.