Our policy is pretty simple, everytime we sell a pattern on our website or to one of our yarn shops (online or LYS), the designer gets paid half the retail value of the pattern. If you are familiar with the yarn business, that means that when we sell patterns to yarn shops we do not make a profit. We may take 25 or 50 cents per pattern to cover printing costs, but otherwise ALL the money that the LYS gives us for the pattern goes right in to the pocket of the designer. Often small designers do not have the time or connections to get their patterns into LYS on their own, nor would they be paid more by the LYS if they were to do so. Compared to the 10% that magazines often pay, we are pretty proud of our 50-100%. We probably don't pay as much, in total, as others but we do pay as much as we can. And the more a pattern sells, the more we are able to pay our designers. Its as simple as that.
The other big issue, aside from payment, is pattern rights. Sometimes a designer has to sell the rights to her pattern to the publisher which means that she cannot publish the pattern on her own, even if the pattern is no longer available from the publisher (i.e. in a past magazine issue, out of print book or defunct website). Thats not how we work, though. Our designers keep the rights to their patterns. They can sell them on their own websites or through Ravelry. They can even sell them to other yarn shops or online retailers. We only ask that they never give them away for free without talking to us first and that they include a note about our yarn in the materials section.
Though Kelly and I both enjoy designing and have designed a number of patterns for our yarns, we don't have nearly enough time or skill (speaking for myself) to do it all ourselves. And so our designers are invaluable to us. They are a constant source of inspiration to me, and I am so honored to have the chance to work with them. I just hope that once they all become famous 'big name' designers they won't forget about the little yarn company that believed in them before everyone knew their names. :)