Marc Andreessen (whose blog is on fire!) has a rather lengthy but excellent blog post entitled The Pmarca Guide to Big Companies, part 2: Retaining great people which has some good advice on how big companies can retain their best employees. The most interesting aspects of his post were some of the accurate observations he had about obviously bad ideas that big companies implement which are intended to retain their best employees but end up backfiring. I thought these insights were valuable enough that they are worth repeating.

Marc writes

Don't create a new group or organization within your company whose job is "innovation". This takes various forms, but it happens reasonably often when a big company gets into product trouble, and it's hugely damaging.

Here's why:

First, you send the terrible message to the rest of the organization that they're not supposed to innovate.

Second, you send the terrible message to the rest of the organization that you think they're the B team.

That's a one-two punch that will seriously screw things up.

This so true. Every time I've seen some executive or management higher up create an incubation or innovation team within a specific product group, it has lead to demoralization of the people who have been relegated as the "B team" and bad blood between both teams which eventually leads to in-fighting. All of this might be worth it if these efforts are successful but as Clayton Christensen pointed out in his interview in Business Week on the tenth anniversary of "The Innovator's Dilemma"

People come up with lots of new ideas, but nothing happens. They get very disillusioned. Never does an idea pop out of a person's head as a completely fleshed-out business plan. It has to go through a process that will get approved and funded. You're not two weeks into the process until you realize, "gosh, the sales force is not going to sell this thing," and you change the economics. Then two weeks later, marketing says they won't support it because it doesn't fit the brand, so we've got to change the whole concept.

All those forces act to make the idea conform to the company's existing business model, not to the marketplace. And that's the rub. So the senior managers today, thirsty for innovation, stand at the outlet of this pipe, see the dribbling out of me-too innovation after me-too innovation, and they scream up to the back end, "Hey, you guys, get more innovative! We need more and better innovative ideas!" But that's not the problem. The problem is this shaping process that conforms all these innovative ideas to the current business model of the company.

This is something I've seen happen time after time. There are times when incubation/innovation teams produce worthwhile results but they are few and far between especially compared to the number of them that exist. In addition, even in those cases both of Marc's observations were still correct and they led to in-fighting between the teams which damaged the overall health of the product, the people and the organization. 

Marc also wrote

Don't do arbitrary large spot bonuses or restricted stock grants to try to give a small number of people huge financial upside.

An example is the Google Founders' Awards program, which Google has largely stopped, and which didn't work anyway.

It sounds like a great idea at the time, but it causes a severe backlash among both the normal people who don't get it (who feel like they're the B team) and the great people who don't get it (who feel like they've been screwed).

Significantly differentiated financial rewards for your "best employees"  are a seductive idea for executives but they rarely work as planned for several reasons. One reason is based on an observation I first saw in Paul Graham's essay Hiring is Obsolete; big companies don't know how to value the contributions of individual employees. Robert Scoble often used to complain in the comments to his blog that he made less than six figures at Microsoft. I personally think he did more for the company's image than the millions we've spent on high priced public relations and advertising firms. Yet it is incredibly difficult to prove this and even if one could the process wouldn't scale to every single employee. Then there's all the research from various corporations that have used social network analysis to find out that their most valuable employees are rarely the ones that are high up in the org chart (see How Org Charts Lie published by the Harvard Business School). The second reason significantly financially rewarding your "best employees" ends up being problematic is well described in Joel Spolsky's article Incentive Pay Considered Harmful where he points out

Most people think that they do pretty good work (even if they don't). It's just a little trick our minds play on us to keep life bearable. So if everybody thinks they do good work, and the reviews are merely correct (which is not very easy to achieve), then most people will be disappointed by their reviews. 

When you combine the above observation with the act if rewarding does that get good reviews disproportionately from those that just did OK, it can lead to problems. For example, what happens when a company decides that it will give millions of dollars in bonuses to its employees if they "add the most value" to the company? Hey, isn't that what the Google Founder's Awards were supposed to be about...how did that turn out?

The company has continually tinkered with its incentives for people to stay. Early on Page and Brin gave "Founders' Awards" in cash to people who made significant contributions. The handful of employees who pulled off the unusual Dutch auction public offering in August 2004 shared $10 million. The idea was to replicate the windfall rewards of a startup, but it backfired because those who didn't get them felt overlooked. "It ended up pissing way more people off," says one veteran.

Google rarely gives Founders' Awards now, preferring to dole out smaller executive awards, often augmented by in- person visits by Page and Brin. "We are still trying to capture the energy of a startup," says Bock.