Kids become less intrinsically motivated to do something when they expect a reward — grades, gold stars, special privileges — for doing them. In fact, when you take away the reward they’ll stop doing things they were previously interested in doing on their own. It’s called the overjustification effect (Lepper et al., 1973; summary here).
There’s been a lot of research demonstrating the effect. An overview of the research in 1995 (Tang and Hall, 1995) found that the effect extends across all age groups.
The primary theory that explains the effect is called Cognitive Evaluation Theory, and is very well summarized here. This theory suggests, however, that extrinsic motivation may not be bad in all situations, because praise and rewards can also server as a useful indicator to a student of their competence.