I absolutely agree that food should be for nutrition only. There are many other rewards, stars, extra time at a favorite toy or video, special dress up rooms etc. Punishment might mean having to sit for 3-5 minutes while the other kids are already out playing. Or not getting to play on a certain toy. The punishment needs to be directly related to the action requiring it. So if a child hits another child, they may need to say "sorry" and give the toy to the offended child. If they are acting out perhaps a few minutes in time out (1 minute per year of age maximum) will help them to calm down, especially if everyone else is doing something really fun.
Food is for nutrition, since when does m&m's belong in a 3 year olds food groups?
K. @ The Nestingplace