Instrinsic and Extrinsic motivators- or how to screw up a good employee

I recently had two nearly identical chats with a couple of engineers I'd worked with in the past, and remember a similar chat with a colleague a year or so ago....

Him: "I had a conversation with my manager about my bonus the other day. It was a bad talk."

Me: "Why?"

Him: "As long as I have enough for food and rent I don't really care as much about how much I make. I just want to work on something I like - But he kept trying to tell me that the bonus was important. I felt awkward."

Substitute "bonus" for "salary" or "promotion" and I've come to realize how often this conversation takes place.

I like the break-up above between "Extrinsic" and "Intrinsic" needs.

Why this happens:

• As a manager or a management team, the direct "extrinsic" reward is the most natural thing to focus on to reward an employee - getting a bonus/promotion/increase takes effort on your part and feels like something really tangible and quantifiable you did.... and sure, to many employees this matters a lot!
• As a management team, that feels like the right way to reward and retain your top performers; (to be clear - sometimes, for some teams it can be, but that's not likely to be a great engineering team or a team that builds great things)
• However:

Why focussing on this is bad in the short-run:

• Most people, especially engineers, don't care so much about extrinsic rewards. Financial rewards - particularly if the numbers doesn't significantly impact the lifestyle you can afford and you come form a culture where money isn't valued as much (which is especially true for younger/single people in tech; not so much Finance or Sales) - just don't mean that much and aren't that memorable, i..e you respond more to "Intrinsic" motivations than "Extrinsic" ones.
• If over time management communicates rewards only through "Extrinsic" motivators (i.e. money, promotions, titles), people start substituting the measure of "Extrinsic" motivators for intrinsic ones - e.g. your self-esteem/social stature becomes much more tied to your title and salary in your own mind.
• This brings relative rewards much more sharply into the picture. If you hand out praise it tends to be handed out relatively equitably and lavished on those who deserve it; no one really minds if someone gets a little more or less than they thought was deserved - but money (or promotions) are ruthless in their specificity and allow very direct comparisons.
• In one particular case, after a surprisingly low amount handed out as a bonus I had a colleague come up to me and say "I thought I did a lot for that project. I thought it was important to do, but this trivializes it. I know they weren't intending this, but I wish they hadn't bothered at all. Now, I'm mad, that I worked that hard."

Why this is even worse in the long-run:

• I have never, ever found myself working really hard or pushed myself because of extrinsic rewards. Its because I've either thought it was something that was so exciting I just had to do it or because it was something that was my responsibility or because of my respect for my colleague or (back when I worked at a startup) because I thought it was just necessary to survive.
• If management starts training employees to value extrinsic rewards over intrinsic ones - over time you are going to kill the motivation which brings great people to work at tech companies. You will lose those employees to companies that seem to appeal to their intrinsic motivations (e.g. independence, control etc.)

What do to about it?:

• I recently told someone at work after a project, "Be generous with praise, be thoughtful and conservative with everything else." I should've added "Err on the side of keeping extrinsic equal rewards within reason (i.e. bands of rewards rather than ranking.)"
• Focus on the value of intrinsic rewards (i.e. tell people they did something amazing; have important people or people with important titles tell people they did something awesome; send out emails; tweet it - whatever is appropriate) over just the extrinsic rewards (do it, but do it much more quietly like it doesn't really matter as much.) Think hard about appealing to all aspects of the Maslov's hierarchy of needs through soft tools available to you.
• 

How well management or a manager can keep this in mind can determine the happiness of a team and a company.