It raises kids' self-esteem, and it generates their excitement in learning. It is creating an ethic that if you do your best, you will be rewarded in some way. It doesn't have to be a tangible reward, just being recognized in some way by people who are important to you. I think children should be taught to be responsible rather than be bribed to get good grades. It should be expected of them.
School is their job.
Words of praise are all that is needed. They let children know that you have enough trust in their ability to do something. Praise makes them feel good about themselves and have that inner feeling of independence. They are extremely destructive and destroy the children's interest in learning. What they cause children to do is work specifically to obtain those rewards.