You get more with the carrot than with the stick, so unless you're employing a group of starving donkeys I suggest cold, hard cash.
While I agree with this sentiment up to a point, it goes far beyond just cold hard cash. I worked in IT for 15 years until I was black-balled by the Powers That Be for public criticism of the Bush regime post-9/11 (don't ask). Cash may be king, but it hardly begins to cover what makes for a productive, energetic IT work-force. I know, because I have been there. Let me elucidate:
Respect: Respect is a 2-way street. Bosses that treat their employees with a modicum of respect for their prior knowledge and insights to problem resolution will get more effort out of their workers.
Variety: Variety of job assignments, particularly time-sharing between multiple assignments, keep workers alert and fresh.
Mentoring: Provide employees with at least quasi-confidential mentoring by more senior staff. Every job is a learning experience to some extent, and public ridicule for minor gaffes can ruin a career.
Education: Employers that offer discounted or free courseware for continuing education will benefit both the employee and the company long-term. HR should invest the time to help employees keep their CVs up-to-date.
Flex-Time: Unless you are running a Chinese Foxconn facility, flex-time provides for accommodating the individual needs of employees who might actually have a life outside the job.
Vacations: Vacations should begin with a 2 week minimum, and increase with the time vested with the company. Not only does it help employees let off steam and recuperate away from the company, but it will also help the company to discover weaknesses in the overlap in employee skills. It will also serve to remind employees that they are not irreplaceable. No one in a corporation, from janitor to CEO is irreplaceable.
Bonuses/Awards: Bonuses should be generous and tied to specific projects and project milestones. Awards, even tacky awards, that acknowledge the efforts of workers are appreciated.
Profit-sharing: If your company isn't offering profit-sharing awarded quarterly, then you are insulating management rewards from those of your employees, which will create unnecessary divisions in team-based corporate goals.
Activities: Outside activities that bring employees and families of employees together build corporate identity and unity. Even a semi-annual catered barbeque held in the corporate parking lot would do -- reservations at a theme park would be even better.
Benefits: Companies that are not stingy with health, family health, and term life insurance will have happier, healthier employees. Companies that subscribe to quality daycare facilities for the young children of employees demonstrate an interest in the well-being of the employees families, and helps build loyalty.
401Ks: Companies must offer employees a decent selection of retirement investments, preferably with vested corporate contributions. A 401K that only invests in company stock isn't a retirement plan -- it's a scam.
Not every company can offer all of the things that I have listed above, particularly smaller companies. But those that do manage to offer many of these items will have a happy, loyal, and energetic workforce that will willingly go above and beyond to help the company when needed. Merely offering top dollar in wages to employees does not build loyalty, only a mercenary attitude that will hurt the company most when the company is vulnerable.
Anyway, that's my $00.02 worth.