Unpredictable. Unfocused. Just like life.

Mini-Microsoft has an excellent post about stack ranking in staff reviews and the effect they have on employees:

I am just tired of our busted review model. Stack ranking is just plain wrong. Yes, you need to have a yearly review system. I absolutely believe that. You need to reward the super contributors well. But the amount of angst and anger that goes into the getting the review model done poisons all of us. If my report decides, ">Dang it, I'm getting a 4.0 by any means necessary," well, they are going to find some very easy ways to get that 4.0, and most of those easy ways are going to be self-centric and focused around decreasing / inhibiting the performance of their peers so that they can have better results:

There is also the problem with team members competing with each other on teams. By making team members compete with each other, we weaken teams. On my last team, team members would withhold information from other team members in order to slow them down in their work and make it easier to beat in the stack rankings (as I said, there was a lot of work and any delay in getting things done could impact the deadline).

By all means reward exceptional employees, but also make some provision for cost of living increases for employees who are doing their jobs. You may not want to reward average employees for being average, but if your company is growing, then they are the ones who are helping it to do so - it can't be just the few heroes. When they figure out that the company is reaping a windfall on their backs, they'll leave, taking their valuable knowledge with them. Sometimes they'll even got to work for your customers and competitors. And they'll tell everyone they meet about how the company mistreated them.

You really don't want to be that company. Because reputations are very expensive - to create, and to rebuild.