Financial Rewards can cause a negative impact on overall performance. The traditional approach to motivation is the carrot and stick approach. This worked very well in the 20th century when most tasks were predictable. Today a lot more is required and the traditional model of motivation is no longer enough and in quite a few cases might reduce performance.

Science knows this, but business does not. Daniel Pink in this Ted.com talk makes a wonderful case to change our notions and beliefs on motivation. I personally have been an advocate of the open organisation model for a long time, and I found this talk worth sharing.

The carrot and stick model is based on Extrinsic Motivations, what is required however are Intrinsic Motivators. So people work because it matters to them, it is interesting and they believe they are part of something important. The key drivers says Daniel Pink are

Autonomy:- Urge to direct our own lives.
Mastery:- Desire to get better and better at something that matters.
Purpose:- The yearning to do what we do in the service of something larger than ourselves.

If you want compliance, traditional approaches of management are great, but if you want engagement self direction works better.

He says Pay fair and adequately and take the issue of money out of the table, and then create a
ROW, Result only work environment, where there are, no schedules, employees, show up when they want, all that is required is that they have to get the work done. How they do it, when they do it, is totally up to them. Meetings are optional. The result of this is environment is that Productivity goes up and attrition goes down.

A great example sited is encyclopedia Encarta from Microsoft which used the traditional model of hiring and paying experts had the right incentives etc..few years later another model got started, where there were no incentives and people contributed because it was fun, Wikipedia. The new model won by a mile.

To sum up.
1) Rewards work in a surprisingly narrow band of circumstances.
2) Rewards often destroy creativity.
3) The secret of high performance is not carrots and sticks but the drive to do things for their own sake, the drive to do things because they matter.

More in this very riveting video-

I recently read the book Drive "The Surprising Truth about what Motivates us"  totally recommend this book, reaffirmed a lot of things I believed about Motivation, and layes down a framework for Motivation 3.0. Worth reading here is a link to the book.