Faculty motivation tends to function on an intrinsic reward system, even within the externally defined system of tenure and promotion. This can make it difficult for chairs, department heads, and other administrators to establish good day-to-day reward strategies, especially when the one generally valued external motivator, money, is in short supply. However, some general principles stand out:
Give feedback
While academia has a highly developed and formalized system of peer review and critique, more general recognition and feedback systems among faculty tend to be underdeveloped. Improvements in this arena can take multiple forms:
Make time
Academic life functions on the premise that there is never enough time. Any explicit and effective interruption of that premise is both important and welcome. How can you leverage your leadership to create and package time so that it can become more available to faculty? Possibilities here are wide ranging, including:
In all cases, it's important to be explicit about this gift of time so that it is recognized and used consciously.
Faculty respond to good leadership and organizational practices
Consider the example of departmental communication. When faculty are frustrated by a lack of information or a sense that their participation is not welcome or respected, their motivation drops. When times are difficult, it can even be useful to emphasize this by calling an extra faculty meeting explicitly for the purpose of making sure faculty have the information the need and know that you're listening to their ideas and concerns. Doing more outreach to individual faculty can also achieve this effect, and is a practice that could be done by you or by other designated leaders in the department (e.g., the executive committee).
Pay particular attention to basic needs
During tough budgetary times, meeting basic life requirements such as physiological (food and shelter) and family care can become more difficult, or feel threatened. When these needs are unmet, or when our ability to satisfy them becomes less certain, other aspects of our experience and satisfaction become much less significant. Take steps to address work/family life balance issues, difficult relationships with colleagues (which might be seen as threatening one's position), lack of clarity about what it takes to achieve tenure, etc. Policy and structural changes, special attention to individual situations, or even just taking the time to inquire about these aspects of faculty life can have an important effect.
Put great minds to work
Harness the intrinsic motivation of faculty directly by engaging them in questions that are intellectually stimulating and difficult to answer - including the question of how to reward and motivate faculty in tough times. Instead of hunkering down to necessities, continue to push the envelope on what success might look like in the department, asking faculty to take the lead in imagining how this success might be achieved under current constraints.
Other articles on the topic
This satire effectively describes what is frustrating to faculty, with lots of hints at the nuances of faculty motivation.
http://www.academicleadership.org/emprical_research/HOW_TO_DEMORALIZE_TH...
This article directly asks the question (how to motivate faculty in tough times), with some practical ideas.
http://www.facultyfocus.com/articles/academic-leadership/leading-during-...