This is a brilliant post by Seth Godin. In it he refers to this post. The following caught my eye:
Reward and punishment are outdated ...
and Natural consequences are the direct result of the child's behavior.
Logical consequences are established by the parents, and are a direct and logical--not arbitrarily imposed -- consequence of the transgression.
Natural consequences are usually effective.
Logical consequences can only be applied if there is no power contest; otherwise they degenerate into punitive retaliation.
The above is a common sense approach for you and your employees too.
Who will you become? What will you do next?