I was re-reading parts of Daniel Pink's Drive in preparation for one of the presentations I am giving next week at Projects to the Point in Cairo. My talk is on what makes a good leader for agile projects and his book fits in good with his thoughts on motivation.
In the book, Pink sites why the "carrot and stick" approach to motivation doesn't work. You can read the book for the details, but in summary, this approach tends to drive the wrong behavior, only works in the short term, and kills creativity.
So what do you do to motivate people? There are three things people need to be intrinsically motivated; autonomy, mastery, and purpose. Autonomy is letting people decide how they accomplish their goals, or even what some of their goals are. Mastery is becoming an expert at what you do. Purpose is knowing that what you do has some higher purpose than just adding to the bottom line of a corporation.
One example that brings this home is the battle between Microsoft's Encarta and Wikipedia. Microsoft used money to motivate people to build their encyclopedia while Wikipedia was build by a bunch of volunteers. Encarta failed while Wikipedia is extremely successful. So if you have a team to motivate, money isn't the answer, nor is a autocratic leadership style. Providing them the tools they need to succeed, giving them the freedom to use those tools how they want, and providing a vision for what is needed are going to get you closer to your goal.