Perceptual decision making is the process by which information from sensory systems is combined and used to influence our behavior. In addition to the sensory input, this process can be affected by other factors, such as reward and punishment for correct and incorrect responses. To investigate the temporal dynamics of how monetary punishment influences perceptual decision making in humans, we collected electroencephalography (EEG) data during a perceptual categorization task whereby the punishment level for incorrect responses was parametrically manipulated across blocks of trials. Behaviorally, we observed improved accuracy for high relative to low punishment levels. Using multivariate linear discriminant analysis of the EEG, we identified multiple punishment-induced discriminating components with spatially distinct scalp topographies. Compared with components related to sensory evidence, components discriminating punishment levels appeared later in the trial, suggesting that punishment affects primarily late postsensory, decision-related processing. Crucially, the amplitude of these punishment components across participants was predictive of the size of the behavioral improvements induced by punishment. Finally, trial-by-trial changes in prestimulus oscillatory activity in the alpha and gamma bands were good predictors of the amplitude of these components. We discuss these findings in the context of increased motivation/attention, resulting from increases in punishment, which in turn yields improved decision-related processing.