Interpreting others' actions is essential for understanding the intentions and goals in social interactions. Activity in the motor cortex is evoked when we see another person performing actions, which can also be influenced by the intentions and context of the observed action. No study has directly explored the influence of reward and punishment on motor cortex activity when observing others' actions, which is likely to have substantial relevance in different social contexts. In this experiment, EEG was recorded while participants watched (...) movie clips of a person performing actions that led to a monetary reward, loss or no change for the observer. Using the EEG mu rhythm as an index of motor resonance, our results demonstrate that observation of rewarding actions produce significantly greater motor cortex activity than punishing or neutral actions, with punishing actions producing greater activity than neutral ones. In addition, the dynamic change in the mu rhythm over sensorimotor cortex is modulated by reward and punishment, with punishing actions producing a prolonged suppression. These findings demonstrate that the associated reward value of an observed action may be crucial in determining the strength of the representation of the action in the observer's brain. Consequently, reward and punishment is likely to drive observational learning through changes in the action observation network, and may also influence how we interpret, understand, engage in and empathize with others' actions in social interaction. (shrink)