[runeks]

    > At any company (Microsoft included) where performance-based 
    > compensation exists, there is a budget for that line item.

I'd like to point out that it's possible to pay bonuses out of profits, rather than a fixed, yearly pre-allocated pool. If employees are only paid a bonus when they add to company profits, there is no competition for bonus funds between employees. So for example, if you have a great idea that saves the company 30% on something, you get half of that saving/profit, or something similar.

[cesarbs]

The problem is, how do you measure that? There are a bunch of good ideas that most people will agree provide a benefit, but it's really hard to come up with an objective measure of how much money that makes or saves.

[crpatino]

Make the bonus pool a fixed percentage of company yearly profits (not sales). Assign at least half of the bonus pool in an egalitarian way (like based on the number of days worked on that year), assign the remainder on a roughtly "merit" based criteria, and let every team to agree on the criteria, but make it be something objective (it does not matter if it is number of bugs closed, or being at your desk on time in the morning, or whatever, just as long as the measurement is unambiguous and the team agrees on it).

That would be far from perfect, there will be free loaders, and most likely than not it will be slightly unfair to everyone. But at least you have removed the perverse incentive to sabotage coworkers in order to look yourself better.

[runeks]

If there is no measurable difference, then a bonus cannot be paid out according to this scheme. So we're talking about innovative ideas that release an extra reward (in addition to a regular salary), if they result in a measurable saving somewhere.

For example: you write an algorithm in your spare time that more efficiently packs together a good that your company produces, such that shipments take up 10% less volume thus saving ~10% on shipping.