Collusion
This works well for software which is controlled under a single individual. TeX has used this successfully (Don Knuth), and qmail (Donald J. Bernstein) (Hmm...maybe being named "Don" is also a requirement).
In a company the size of Microsoft, and in particular, with the various emnities Microsoft has managed to engender, you'd have to worry about collusion between programmers and bug reporters. Eg: I'll seed n bugs if you kick back m% of the bounty....
There's also the issue of how costs are allocated internally among development and QA for bugs found or not found. It's a complex problem.
