As long as a task involves mechanical skills, bonuses work as they would be expected to: the higher the pay, the better the performance. But once the task calls for even rudimentary cognitive skills, a larger reward leads to poorer performance.

Dan Pink makes the case for intrinsic rather than extrinsic rewards for Creatives in this entertaining and informative TED video:

Muhammed Yunus (Nobel Prize winner as well as one of last month's recipients of The Presidential Medal of Freedom) provides a striking and ironical example of this. He recognizes the top performers among his bankers by awarding them gold stars (not million dollar bonuses), and he takes their gold stars back again if their performance drops off.