Companies that try to improve employees' performance by ______ rewards encourage negative kinds of behavior instead of ______ a genuine interest in doing the work well.

Let's first try to make sense of the sentence without the blanks. The sentence is trying to convey that companies that try to boost employee performance through something (blank) instead encourage negative behaviour. That implies that the blank will have a word with a negative implication because the impact described is termed as negative in the sentence.

Withholding is the only word that carries a negative implication, and the pair word fostering would also make sense, which would mean that withholding rewards would have a negative impact rather than fostering genuine interest. 

Therefore, option B is the correct choice.