My best advice is that you read Daniel Pink's book, "Drive." Pink has done extensive research into the area of motivation in the workplace. He says that there are three forms of motivation:

1. Extrinsic or External Motivation -- which is the type you are talking about -- motivation using rewards and punishment.
2. Internal or Creative Motivation, a form of self-motivation driven by an internal desire to create, like an artist.
3. Purpose-Driven Motivation, which Pink says is the most powerful motivation.

If your staff understands and is connected to the purpose of their work they will be motivated and will not need any extrinsic rewards. However, if your staff doesn't feel their work is part of a greater purpose, motivation will always be an issue.