The mental state of the workers in any given group working toward a common goal (such as increasing sales or customer satisfaction) often measured by happiness, willingness to work, confidence in themselves and administration.

Morale can be improved with positive reinforcement such as a raise, time away from the office, or free stuff like toys, food or beer. The effects of negative reinforcement can have an undetermined effect.

Just for the record, improving morale is a Good Thing.