When it comes to motivation, what science knows, and what business does are two different things. The science is pretty clear that for cognitive tasks higher rewards do not produce better results, in fact they produce worse results.
Dan Pink provides a very entertaining presentation at a TEDtalk on how motivation works. The ideas are not new, Abraham Maslow may have been one of the first to study what motivates people to do better, the well known Hawthorne plant studies, the best selling In Search of Excellence book, even the recent publication of the 4 Hour Work Week have all come to the conclusions that external rewards are not enough to truly motivate people
In fact, for cognitive skills that require creative solutions rather than repetitive solutions, external rewards have the negative impact of narrowing focus and degrading the solutions.
Why then, do so many business and government go to a system of competitive bidding based largely on price?Why do firms offer significant financial bonuses to high performers?
Google has found that over 50% of its new products come from the 20% of time they ask their engineers to allocate to personal projects that are not company sanctioned. The Lockheed Skunk Works has produced some of the most innovative aircraft in history in production times that are unmatched.