(FORTUNE Small Business) – Finding a fancy Audi in Beverly Hills is a little like looking for hay in a haystack. Splashy cars are the rule, not the exception, in this notoriously glitzy part of the world. But one of the Audi TTs on the road here today is notable for at least one reason: Its owner received it without paying a cent, simply for working at Motek, a tiny software company that, for this and many other reasons, may very well be the best place in the world to work.

The benefits package at Motek, which makes software that tracks the movement of goods in warehouses, doesn't stop there. Everyone at the 11-year-old company gets five weeks of vacation, plus ten paid holidays. No one is permitted to work past 5 p.m. or on weekends. Ann Price, Motek's founder, believes that everyone should be able to walk to work, so she subsidizes employees' Beverly Hills neighborhood addresses. And after ten years with the company, workers are given a leased TT, Lexus IS300, or whatever car they choose within a $6,000 annual limit.

This is corporate life in the third year of a grinding economic slowdown? Yep, and there's more. The benefits, it turns out, are just blinking neon. Motek's most remarkable attribute is actually the way it operates. Price, who calls her creation a "capitalist kibbutz," has blended cutting-edge business practices, some idiosyncratic personal beliefs, and a renegade's delight in nonconformity into a company unlike any other in today's corporate lexicon. Motek's 21 employees vote on everything from the size of their bonuses to office furnishings. They also choose their own assignments. "We don't really have bosses here," says Dawn Stramer, a project manager and one of Price's first hires.

The company's mission, says Price, a relaxed, talkative 41-year-old, is not to make money for shareholders or to repay investors handsomely but to improve the life of its employees and its customers. "We know we're revolutionizing the warehouse-automation industry," she says. "We know we'll get there. But instead of doing it in five years, we'll do it in ten and have a life along the way."

The question isn't whether this utopian formula can work; the firm says that it is already profitable and growing fast. Rather it is how Price is successfully conducting this by-the-people, for-the-people experiment in management--and whether it will continue to work as Motek grows. After all, office harmony is more easily accomplished with a couple dozen employees; the real challenge comes when the number of workers doubles, triples, or quadruples. Young companies regularly overcome that obstacle, but Price's egalitarian philosophy requires an uncommon degree of mutual commitment from Motek employees. How nice can a growing company really afford to be to its employees? Is being the most worker-friendly company in the world really a good thing?

Price didn't set out to create the best company in the world to work for. The path to Motek ("sweetheart" in Hebrew) started after she graduated from high school in 1977. Adrift, she secured a three-month job as a camp counselor in Israel and then spent the next four years backpacking through Europe, waitressing in the U.S., and finally enlisting in the Israeli army. During her two years of military service she worked for six months in Naan, a kibbutz that had invented a computerized drip-irrigation system, making it one of the country's largest and wealthiest communal groups. She immediately recognized that Naan wasn't a viable business model--it was subsidized by the government--but she was smitten with the fairness of the concept.

By 1982 she had moved to Beverly Hills, where she was living with her new husband's parents. Fed up with her dead-end job at a Jewish community center, Price walked into a job fair, told an interviewer that she thought she could fly a jet if she had the manual for it, and, with no previous business background, landed a $35,000-a-year position with General Electric Consulting. Her first assignment: installing a computer system at Southern California Edison. Even though she had no college degree and no computer training, she was promoted and asked to manage the project within six months.

Despite the rapid elevation, she never felt she fit into GE's culture. Her supervisor was flabbergasted when she asked to take three weeks off, one or two of them without pay, for vacation. She hated the sense that some things just "weren't done" and that the company could dictate aspects of her life she felt should be her business. Gradually, however, she recognized at GE a talent in herself that would later play a big role in shaping Motek's culture. "I knew how to collaborate with these really bright, talented people," she explains. "We all have a need to be recognized. I give people room to be who they want to be. The work is auxiliary."

Want a hint that Motek doesn't operate like an ordinary software company? It's calm. You can hear your footsteps as you walk down the 50 yards of polished concrete floor that bisects the company's two rows of glass-walled offices. You'd never know that the company has installed Priya, its complicated software system, at more than 39 warehouses for more than 30 customers. Where are the calamities, the army of service technicians rushing to the aid of distraught warehouse managers?

Well, according to Motek's clients, they aren't needed; the software is that reliable. "Implementation was very smooth," says Johnny Armstrong, a systems manager for Georgia Power's plant in Forrest Park, Ga. "We shut down our old system and server within two days of going live with Priya."

But Motek's secret isn't just that its software works--it's why it works. Price has turned top-down management on its head. On Monday morning at 10:30 the company's six technical consultants gather around a table in a small office. Anyone at Motek can join this weekly meeting, but on a recent Monday only the technicians--five young men and one woman--stroll in with notepads in hand. Tom Martineau, a conspicuously clean-cut 40-year-old recently hired by the team to manage them, is the only one wearing a tie. The seven members of his department (one is on maternity leave), ranging in age from 25 to 40, form the guts of the company. They're responsible for creating new versions of Priya, addressing technical needs within the company, and generating the small but endless modifications requested by customers.

At a conventional software company, a manager would distribute jobs to programmers and designers, who would jockey for plum assignments. At Motek, after some desultory talk about the morning traffic and the Lakers' championship prospects, the team pores over a to-do list of 257 chores, fixes, and requests, many part of larger, longer projects. As they move down the list, individual consultants volunteer for tasks, estimating the number of billable hours they will book. No one is supposed to take on more than they can accomplish by the end of the week, so most of the tasks will have to wait until next week. Explains Ran Ever-Hadani, one of Motek's technical staff: "We decide what happens. Things are rarely decreed from above."

Price's other management innovation comes at the end of the week, when it often turns out that some of the projects can't be finished. In a conventional company, not completing such jobs is cause for finger-pointing and all nighters. At Motek a consultant who gets the work done or communicates on Thursday that it won't be completed by Friday receives a reward at the following Monday's meeting: $100 in "travel dollars," to be used during vacations for hotels or transportation. The Thursday-afternoon alert is early enough for the team to either lend extra support so that the job can be completed by Friday or to move the task to the following week and inform the customer. At Motek this process has a motto: "Fail sooner; succeed more often"--meaning that early knowledge of glitches in the work flow can help the team direct its time and energy more effectively. That short-term tactic, in turn, accelerates the pace of a long-term project.

Rewarding employees for failing sounds about as reasonable as firing someone for bringing in extra revenue. Price insists that her employees aren't rewarded for failure but for communicating about failure. It's a subtle distinction, but it lays bare the key operating principle at Motek: Smart employees manage themselves perfectly well if they have complete information.

Despite the cutting-edge business practices at Motek, the atmosphere contains none of the self-consciously hip attitudes that pervaded so many new technology companies in the late 1990s. Though young, the employees exhibit a matter-of-fact gravity about their work, readily voicing opinions about all aspects of the company. But don't expect to hear those opinions during the mandatory lunch hour--shoptalk is forbidden then. It's all part of Price's mission to promote a balanced life. "I think one of my jobs is to teach people how to put the fun back in their lives--how to go home and spend time with their family, how to get their life back," she says.

One of the most fascinating results of Motek's democratic process involves the company's pay rates and bonuses. Everyone except the CIO and the sales manager makes one of three salaries at Motek. All three pay levels are under $70,000, and the highest is only $30,000 more than the lowest. Most of Motek's employees stay at the same pay level for years, even though nearly all of them could make more money at another company. One opportunity to improve compensation, by distributing profits, came at the end of 2000 when Motek moved into the black. But the employees, who review the company's financial statements quarterly, decided they'd rather pay down debt than award themselves a bonus.

Last year employees determined that the amount of profits not being reinvested weren't significant enough to distribute to all staffers. So they voted to give the money solely to the technical team, who had gone for four years without a raise. They also concluded that the company couldn't afford to give everyone an additional week of vacation, as Price was advocating, so the annual vacation benefit stayed at five weeks.

If that seems like strangely selfless behavior from a group of employees, well, it's not entirely altruistic. Price has promised each founding employee 1% of Motek's value when it is sold. The plan grew out of Price's inability to raise venture capital in the company's early days, when she was forced to finance Motek with 18 credit cards, now wrinkled and memorialized in a ten-inch piece of Lucite on her desk. Freed from venture backers' rote prescription--the massive scale-up of employees and relentless pressure to earn a return on investment in five to seven years--Price has plotted an utterly different tack. Instead of trying to dominate a market overrun with small competitors, she plans to make Motek into the most obvious acquisition candidate for Oracle or Microsoft or whichever large company finally decides to enter and rule the warehouse-automation market. (Price predicts the industry shift will begin in about three to five years.)

For now, at least, Price's promise is an oral one. Motek's employees don't actually possess a single share of the company. Price says that giving out stock certificates is unnecessary because her employees trust her. She also knows that if she decides to sell Motek down the line, the company will be far more salable with one owner than with ten or 15. But Motek's employees seem amazingly comfortable with the arrangement. A piece of paper documenting ownership has never been necessary, says Curt Hagenlocher, one of Price's earliest employees, "because we've always felt that we do in fact have a piece of the company."

Motek's employees aren't the only ones who feel connected to the company. Thanks to Motek's aggressive mode of one-to-one marketing, its clients form a deep, mutually beneficial relationship to the firm as well. For instance, Motek literally wants to make heroes of the executives who buy Priya, catapulting their careers forward and their salaries higher. If a customer saves money by switching to Motek, the company underscores her achievement by profiling her on its website under the "Heroes" section. Price also writes a letter to each executive's boss, usually the CEO, praising her achievement and detailing the customer's savings in cost and man-hours.

The gravest threat to Motek's hothouse experiment is growth--which has already started to strain its democratic operation. Where once employees gathered in a room and voted on companywide choices, now Price often floats a suggestion and then informally polls employees for their reaction. Where once Motek was an essentially classless company, now both the technical and sales teams have leaders, creating a new layer between Price and those employees. And while employees adore Motek's unusual benefits and business philosophy, it's hard to imagine that they'll embrace a continuing stream of high-salary hires while their own salaries remain frozen. Both Tom Martineau, the new chief information officer in charge of the technical team, and Dan Waters, who runs sales, earn salaries that are more than double the highest pay level for everyone else at the company. "A good software programmer is easily going to make over $100,000," says Paul Dorf, managing director of Compensation Resources in Upper Saddle River, N.J. "Why would employees want to work in a place where they are limited by compensation and don't get ownership?"

One answer is that Price has devised a strategy that, if all goes according to plan, will shelter her employees from the growth that could ravage Motek's culture and eat up profits that might be distributed to employees. "Price seems incredibly enlightened, and that seems to be what is making the company one of the shining lights among small companies," says Robert Levering, co-founder of the Great Place to Work Institute in San Francisco.

In the end, the management breakthrough that may prove most important for the company's future--and most effective at binding new employees to old--is actually Price's simplest idea: Motek's warts-and-all embrace of the people who come to work every day. It's not a fancy concept with a B-school pedigree--and it's a far more serious gamble on human nature than most entrepreneurs are willing to make. But if Motek becomes a huge success, it will be because Price has recognized that promoting trust and autonomy are more important than even an Audi TT.