Employee Rankings: Good or Bad?

I was first introduced to Jack Welch's opinion on employee differentiation, which is what he calls the system of employee rankings, in his book The Real-Life MBA (and wrote about it here). Since I had read bad things about it, especially in how Marissa Mayer rolled it out at Yahoo, I was surprised he was a proponent, but after reading more about it in his book Winning, I'm now thinking twice.

As Jack explains, we're all ranked throughout school—aka, our grades and class placement—and no one calls this cruel. Why then should we stop being ranked once we graduate? 

His system, unlike the "rank and yank" ones, don't have a quota; meaning that it's not that only 10% of the employees can be in the top 20%. It's not about numbers but about performance. Yes, if you break employees down to the top 20%, mid 70%, and bottom 10%, there is generally a standard curve, but you're not forced to keep people out of one of the categories due to a quota. It truly is about performance, encouraging those that can perform, and helping out those that can't. 

The one argument that truly made me think twice was the example of an underperforming employee who's been allowed to stay on too long. My husband told me there's actually a term for this: corporate welfare. As Jack explains, as soon as the company hits a rough patch, these under-performers are the first to go, but they're always taken by surprise since no one has ever been honest with them. And worst, after wasting their lives at a a job that's not a good fit, they are unemployed and older, so have less chance to find a career that will allow them to shine elsewhere. As Jack says, that is the definition of cruel and I have to agree with him.

At the heart of his system of differentiation are the following important tenets:

1. Employees deserve to know how they're doing and what is needed of them to move up, and to get the proper support and training to do so.
2. Since training and resources are limited, companies and managers should allocate them to those that can help everyone along, not those that are truly better off elsewhere.
3. Performance should be rewarded and those that have the potential to move up should be given all the training and support needed to do so.
4. Those that cannot perform should be given ample time to try and then be moved either elsewhere in the company or out, but always with dignity and respect.

Given that the above is truly about helping both the individual and the company, I really can't find any further objections to this differentiation system.

Yes, it is often misused and abused, but as Jack explains, that is the fault of the leadership team and its implementation, not the system itself. 

What do you think? If such a system were slowly introduced and implemented well, would you be happy with it? How would you feel if you were in the top 20%/middle 70%/lower 10%?