I expected this response, thanks for taking the time to write it.

The problem is one of statistics. Your employees will always, no matter how hard you try, fit on a bell curve.

Here's the hilarious way most people think about this bell curve (just imagine this defines the set of employees actually working at a company, not just new hires; because it does): http://www.intellectcorp.com/images/bell-curve-hiring.jpg

Say you have 100 employees. There will always be 4-5 who will be exceptional—the upper quintile. There will always be 4-5 who are at the bottom—the lower quintile. The problem is, this will always be true. If you fire the bottom 5, then there will be a new "bottom 5". People will always be worried about their job, the pressure of not being fired will be a negative-feedback motivator (or that's the idea), and the top people at the company will continue to be rewarded.

Two questions:

1. Do you truly think that the top employees are working harder because you reward them? How much harder?

2. What about the other 90 employees?

Your top employees aren't what you should be worried about. Firstly, if you depend on them and (as you say they have the most options elsewhere) heaven forbid they leave, where does that leave you? Fucked, that's where. Second, even if you think the top employees are doing the work of 2 people each, or even 3 people (which is a lot to expect of anyone), 80-90% of your work output is still being done by the thickest part of that bell curve.

What's the answer?

Improve the system. Making systematic, broad improvements will help everyone do better work. This is the true reason the straight 10k bonus worked so well: it was a systematic reward. But other things work even better: provide free lunch and your employees won't leave the office as much. Provide free dinner and they'll stay late. Bam, systematic across-the-board improvement in working hours and efficiency that no bonus would ever come close to. Allow frequent employee skill-improvement days, make them focus on honing their skill sets for 1 day a month without the stress of real work. Bam, everyone gets better, not just the top 5%. There are countless others.

Figure out how to make the 90% in the middle work the hardest—and trust me, it's not by promising them bonuses if they can make it into the top 5%. That might be motivating for the upper 10% or maybe 15%, but not the rest. Improvements to the system they're in are the only good answer. The antiquated structure of bonuses and rewards and the punishment of firing is a religious myth left over from protestant and catholic beliefs in punishment and shame. They're not based on behavior, they're not based on science, and they're simply not true.

Are monetary rewards entirely bad? No, of course not, people should be rewarded for doing good work. I personally think that this reward should be in the form of simple, understandable fair compensation, with as few barriers to that as possible. Other reward systems may work too. But they should not be the focus—the focus should be on improving the system your employees work in, as it will result in gains an order above what's possible with carrot and stick.

Again, please read http://en.wikipedia.org/wiki/W._Edwards_Deming