I get what you're saying, but I really don't think it's fair to ask people to do work on their own time -- for free -- in order to be considered for a job.
Most recently I asked a candidate to work a few hours on a real project for a fair hourly rate. I think this is much better for all involved. As a bonus, you get to see how they perform on a real project, rather than a contrived puzzle and they get to see what sort of work they might be doing if hired.
This is something we've struggled with. The final phase of our interviewing process is a few hours of pair programming. If folks worked on production code, we wanted to pay them.
Paying people for a few hours of work is difficult: if we pay them as an employee then we have to do employee paperwork and deal with the payroll company. If we pay them as a contractor then they have to sign a lot of contractor paperwork, including a confidentiality and intellectual property assignment agreement. It's the kind of thing I wouldn't sign without my lawyer's advice. It just seems like too much trouble.
Instead, we'll either work on a throwaway toy project or an open-source project. Both of those are working well so far, and people seem happy to actually ship some open-source code at the end of the interview.
"I get what you're saying, but I really don't think it's fair to ask people to do work on their own time -- for free -- in order to be considered for a job."
Bravo.
I can't stand when companies do this. Whether it's design or development, it's basically spec work. It's one thing if it's a general question, but if they ask you to do work related to their service, why not just pay them for a few hours or a few days?
Most recently I asked a candidate to work a few hours on a real project for a fair hourly rate. I think this is much better for all involved. As a bonus, you get to see how they perform on a real project, rather than a contrived puzzle and they get to see what sort of work they might be doing if hired.