Finding Great Developers

Joel has once again published a very interesting article, this time about Finding Great Developers.
The most interesting part, to me, was his description of their internship and how they guide it to result in perfect recruitments.
For my part I have been responsible of recruiting several employees in the past. In the company I worked for, this kind of long-term pipeline was not an option - I usually had only a few weeks or a few months to find the person I needed, and I always needed somebody with experience.
In my experience, and in contrast with Joel's, employee referrals have always proved to be the best source. The most important part, though, is to interview the referring employee thoroughly, before even starting the process with the candidate. I have always seen that when you talk to someone who knows the candidate, if you ask the right questions, you can get a very accurate idea of what to expect. The clue (and it's IMHO the base for everything related to recruiting) is to ask open questions, that will force the referrer to tell the things you want to hear.
I agree that there is a conflict of interest, when you give a bonus to your employee for a recruit, but if you know your employee, trust her, and interview her thoroughly about the referred friend, you should be OK. Also, although non-compete agreements are sometimes used here in Israel as well, as far as I know, the legal situation here makes it very difficult to enforce them (they are usually overruled by a law for free employment).