Completely agree. The littering is a no go for me.
But the idea that the bag is some reward and that you can lose some of it if you miss-behave and then maybe earn it back. That's reasonable.
I typically employ a progressive punishment in the form of a timeout. Go to your room for 5 minutes. If they don't respect that, it's 10 minutes up to 15 minutes. Culminating in: no iPad for you today.
Sometimes I ask them what the consequences for breaking the rules should be. And I get very reasonable suggestions.
Here's a 10x better way to do the same basic idea: get a bag of candy for yourself. and every 5 minutes they are well behaved, give them a piece.
I hate that the reward here is candy because I absolutely detest sugar. And in this scenario I'm conditioning my kids to eat candy when they do good.
I try to reward good behavior more so than I punish bad behavior. Things we're definitely simpler when they were younger but now they lie and make up stuff. I never lie or make stuff up. So, where does this behavior come from? And I never punish them for telling the truth.
This is the cardinal mistake many parents make: They assume you can just tell kids how they are supposed to behave, and they will somehow extract the right lesson from your words and learn it.
In reality kids observe and learn from your behavior. That means the lesson here could as well be: "If you are the stronger one, you can make the rules. And the rules don't have to make sense and if you are in the right position you can break them yourself and be mean to others."
Which is ofc the polar opposite of what you sought to teach them. If you reason with your kids even of they are unreasonable, you teach them that reasoning is a good way of dealing with problems. If you explain to them why they are not allowed to do certain things you teach them there are reasons and they should be curious about the reasons behind the rules.