Incentives? Do they work?

Recently a number of areas of life have been discussing the application of incentives to drive performance.
This discussion continues to fascinate me and I personally swing from (what it feels like) one extreme to the other, maybe it's the blonde in me :)

Looking at North America based organisations they tend to offer options and share plans as a standard part of the package with staff picking up extremely attractive deals along the way, in fact I understand that some even make a career out of 'jumping' from one start up to the next with the hope of striking it big along the way. Almost like playing lotto in my mind, though with hopefully a much better shot at getting something out of it.
There is a book "The Great Game of Business" by Jack Stack which I picked up for the first time around 10 years ago and over the years keep going back too and re reading. Very briefly it's about open book management within a struggling machine shop that is at the point of closing down. Jacks approach was to give everyone a slice of the action, open the books, make them accountable for individual line items within the corporate accounts and meet every morning to go through the numbers. As you'd expected people started thinking bigger than just their individual roles and in fact roles become a label with people working and assisting in areas that had the most need as they all had a stake in the game. Great book, great story but does it really work in practice?

I have a lot of people who say it doesn't work at all and people will do as they please. Those that work hard have it in their DNA those that don't just don't and nothing will change it.
To jump a little, every Saturday I take my eldest son (5) to his rugby game, for you non fanatical New Zealander's think Gridiron with no pads or helmets, you only pass the ball backwards and a single team plays both offence and defence. Now I recently had my son run up to me and ask what I'll give him if he scores a try, my response was "nothing you do it because you enjoy playing the game". It was only after that did I find out that others in the team were getting ice creams, or toys if they scored try's or met certain try & tackle goals. Now has my blunt "you get nothing" response dented his enjoyment for the game? It doesn't appear to have, he's excited to go each Saturday getting up at 5:30am each morning and has scored at least one try a game so far... but could he have done better with an incentive scheme? or is the only thing that really matters if others get an incentive and you don't? Did business build a rod for its back by offering incentives so now everyone has to? It feels almost like that standard economics example they give you when you attend one of your first lectures: Two suspects get arrested by the police. The police split them up and question them. If both say nothing then they both get 6 months, if both tell on the other then both go to jail for five years and if only one talks that person goes free while the other gets ten years. Probability shows that they both talk getting the worst result for both more often than not. Now I'm not saying that offering incentives is bad, in fact it drives innovation around the world, look at the space challenges, professional sport, and businesses across the globe. I just wonder if it's the best way, or if there is another way to do this instead.

Really a moot point at five years old but still interesting to mull over.

The other extreme would I suppose be to offer a disincentive, though this doesn't sound great to me, you know something like "If you don't get the sale then you're fired" , or in my sons case "If you don't score a try you walk home..." yeah, I can't see this working and it's not part of my DNA but is there any other way?
Could it be an aligned vision as in Principle centered leadership by Stephen R. Covey so everyone strives for the same thing and the shear momentum excites them to the point that the experience and satisfaction of achieving the goal out ways all else?
I assume also that the person or people setting the incentive / disincentive scheme up need to be able to sleep at night which I'd guess would also have a bearing on its final makeup.

Not sure of the answer, but it's interesting to see different models and their creators at work around the place.
Let me know what side of the fence you sit.
Bryce