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.
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.
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?