Philip Rosedale, founder of Second Life maker Linden Lab and Coffee & Power, lets his employees decide how to divvy up the quarterly bonus pot. Sound like a recipe for disaster? Well, when put to practice, it actually had some surprisingly positive results, according to Rosedale.

Here's how it worked: Using a simple piece of software built in-house, Linden Lab divided the total bonus money and handed out an equal share to each employee. Employees then anonymously gave it away to anyone in the company they pleased, keeping none for themselves. It could all go to their best buddy, they could spread it evenly around the company's couple hundred employees, or any allocation in between – whatever they decided. Job done.

At Coffee & Power Rosedale uses a slightly tweaked but similar process, using stock options. Why should you do this crazy process, which Rosedale has dubbed 'the Rewarder'? 

"It takes away all the stress and negativity from the evaluation process around management," Rosedale says. "At Linden Lab, you could complain about me and the senior managers in the company, you could complain about our strategic skills but you couldn't complain about what you were getting paid."

Why it works

"It's unbelievably empowering to the culture. The company becomes enormously more productive because it knows it's empowered to make these decisions quarter to quarter. It doesn't actually matter if this process rewards people in a better way," he says.

But the results of the Rewarder process weren't irrational, according to Rosedale. In fact, at Linden Lab, he found the allocation arrived at by the Rewarder process actually closely resembled management's previous evaluations of various employees' performance. "All the superstar performers that managers would have identified in the management-led process will still be in the top ten percent," says Rosedale.

What about office politics?

How is this possible, given the politics and biases that crop up in every office?

"If you have a bunch of people all making different assessments, it's not that they're not biased. They all are," he explains.

"The open source guys give out money to somebody that they think best respects the ideas of open source. But what's incredible cool is, if you let everybody in the company impose their own bias on the situation but you give them all an equal amount of money, all the biases cancel each other out and the only coherent signal that remains is: I want the company to be around."

What you can learn

Another perk: The results that aren't close to the management's tally also provide insight.

"There will be an additional set of people that are somewhat surprising. They're people that would not have been identified in the management-led process, and in almost ever case at Linden what you discover is those people are unsung heroes," he says. Conversely, a few management darlings were revealed not to have equal esteem among their peers. Both sorts of outliers were obviously informative for management.

In addition, Rosedale cites one more benefit of the process – transparency.

"If you know your peers are going to judge you each quarter freely and give money to you, you'll probably work at being more transparent," he says, citing the fact that a randomly selected employee at Linden Lab was generally better able to explain what other randomly selected colleagues' were working on than you'd expect at a similarly sized company. To support the transparency generated by the Rewarder, an internal Twitter-like tool called The Love Machine (which Rosedale says is very similar to Rypple) allowed employees to easily and publicly keep each other up to date and share their appreciation for co-workers' efforts.

Would something similar work at your business?