S'mon said:
IMO their behaviour was inappropriate for D&D Good alignment. It also says something unpleasant about their likely behaviour on a real battlefield. I have to say though that for most of human history it would have been considered normal. I wouldn't have docked XP but I'd have changed all the Good alignments to Neutral. Paladinhood? Fuhgeddaboutit.
If the characters had been evil, and they had decided not to kill the prisoners (lack of interest, perhaps), would you have changed their Evil alignments to Neutral as well? How does one questionable act shatter your alignment enough to change the way that metaphysics itself (ie. your susceptibility to spells) changes with respect to you? We are to understand, then, that the world is predominantly populated by Neutrals, since one non-good (and/or non-evil) act shatters that house of cards known as Good Alignment?
A paladin, I can understand. They've taken vows, and they toe a hard line. But there was no paladin, only a paladin-wannabe. He hasn't taken vows, and isn't in a position to fall.
But, as they say, alignment is not a stick with which to beat your players. It's descriptive, not prescriptive. Which means, if the character consistently behaves in a manner suitable for a specific alignment, and that alignment isn't what's on the sheet, an alignment change is probably in order. If the character every now an again tends toward neutrality, well, maybe he's not as intently Good as Bob the Paladin, but he's still more or less good. Alignment isn't a binary (trinary? nonary?) condition. It's a description of a general tendency to act.
I really don't understand the whole "oh, you did one bad thing, now you're Neutral" attitude. As much as I am fond of the alignment system, it's one of the things I'm always being frustrated by in various gaming groups. If someone's playing Chaotic Good, you can expect them to bleed into Neutral Good and Chaotic Neutral a bit, probably represented by acts such as these, where some specific circumstance causes them to compromise or temporarily forget their principles because something important is happening.
The funny thing is, you don't see this attitude for Law and Chaos. I've never heard a DM say "oh, your Chaotic character decides to work with the local government to protect the farmers from trolls? I'm afraid that's a lawful act, so I'm going to have to rule that your character is Neutral now." It's a double-standard, and it makes no sense.
Good characters are at the mercy of the DM's interpretation of their alignment, but no other characters are. If the DM and the player disagree on what constitutes maintaining a good alignment, it will cause trouble, but no other alignments cause that problem. This kind of behaviour, that is, punishing the players for having characters that aren't two-dimensional, discourages them from playing Good characters. Might as well play Neutral, because they're going to end up that way anyway as soon if they're forced to step out of line just once by an irresolvable moral dilemma.