Jason, you've summed up the approach I used when my kids were a bit younger (preschool and lower elementary). What I've found, though, is that the expectations and competition really start multiplying quickly when they get a bit older, which changes their whole perspective. When they're younger, all of their peers are just starting out and giving many activities a try. I would love to keep that spirit of open exploration alive, without so many comparisons to the other kids. 

Michael, I love your story about the piano practice timer! Also, that your parents knew something about you that you didn't regarding music—that's very perceptive of them (and of you, now!). Finally, this seems exactly right: "I think the real art in it is knowing how to dish out the tough love in a way that’s effective." It's not tough love for the sake of wielding control, it's tough love with a positive end result in mind.

Daisy, the fear of failure is a huge issue. To make it worse, I think kids have fairly confused definitions of success and failure, and so much of it is based on comparing themselves to whoever happen to be in their little world. I can't imagine where you would begin to break this cycle as a school teacher! (On that note, happy summer to you!)