Fun and surprising TED Talk by Dan Pink on Motivation.
Experiments show that extrinsic motivators (carrots and sticks) work great for simple/mechanical-like tasks, probably by providing a narrow focus. But... rewards make performance worse for creative/complex tasks!!!
It's a funny coincidence that today I picked up a free copy of the The Wall Street Journal and it had an article on executive bonuses. Huge expensive carrots that, according to the experiments above, lead to less ability to deal with complexity.