I've personally done this on the one Windows server I was in charge of. I think it's a good idea. As you mentioned, the repetitive plain text in log files compresses VERY well. The overhead involved with compression seemed pretty small. I used it for firewall logs, and easily dumped out 100MB+ per day. (although I had it broken into 20MB files) Unless your CPU is pegged to begin with, I don't think this would be a problem. You'll essentially trade a little bit of CPU power, for a great deal of disk space. Sometimes, that's an extremely good tradeoff. Other times, notsomuch.
Obviously, testing is a good idea. But I didn't run into too many troubles. Just be advised the compression isn't transferrable, like an old fashioned zip file. So if you move this via FTP/CIFS/etc, you're moving the uncompressed amount. If you copy them outside of the compressed folder, you're moving the uncompressed amount. If you use backup software, you're backing up the uncompressed amount. Etc.
Might be worth noting there is the initial compression when you actually flip the flag for this folder. So you might want to compress a subset at a time, so you don't bring your server to it's knees while it compresses your logs for an hour. This may be significant depending on how much log info you have, and how important your application is. But all that being said, you can always reverse the process, and uncompress the directory just as easily. So if you find performance is too crappy, then you can always* flip it back.
As others have mentioned, compressing just the long term archived logs isn't a bad idea. If you wanted to put a bit more effort into the solution, you could always automate a zipping process on those logs, and spare yourself doing it through the OS.
*Nothing "always" works in IT. ;)