Joel says you shouldn't do [Econ 101 management], I agree.
I believe that they should feel like they are part of something big, something good, something is going to be awesome. If they feel it, they'll be like partner of the company. Because they want to stand by the product and say "I'm part of this awesome thing!"
This is not easy to do and maybe not even possible for some employees. After all maybe they shouldn't be part of your company either, since they are not sharing your vision and I'm sure there are other guys out there who will.
When it comes to reward, I don't think rewarding directly because they've done X or Y is great thing but rewarding with little luxuries of life now and then is a good idea.
Depends on the money you are willing to spend and interest of the employee, an XBox, [Optimus Keyboard], a ticket to some footbal game sounds like a good choice.
Also it's always great to get them something useful such big monitors, 3G Kits which you pay the monthly fixed fee, upgrading their mouses to something really cool, giving them a big dropbox account or Safari Bookself account etc.
Also giving them "time" is an awesome reward, let them have a free half day or a day per week for research, maybe reading time or just for office Quake tournament.