There are multiple negative learning outcomes associated with the use of grades as a motivational tool. Perhaps the most problematic of all is that it encourages students to focus on how well they are doing rather than on what they are doing or why what they are learning matters. When this is combined with some form of ranking system, not only are students focussed on their performance instead of learning, but they are also distracted by trying to beat other students. Consequently, we get divided attention, increased pressure and erosion of class teamwork, trust, and cohesion.
Sure, grades are an easy and effective way to generate student obedience, but is it really worth all of that downside?