This would become a morale nightmare if employees were ever aware this was taking place, unfortunately. Pretty hard to pull off with consistency/as a standard because of this.
Jack Welch strongly advocates for this approach, and it's how GE operated when he was CEO (I don't know if they still do or not). NetFlix also does something similar.
Why do you think it would be a morale nightmare? If you're doing well at your job, wouldn't you take comfort in knowing the person down the line who isn't pulling his weight will be cut out of the company at some point? High expectations are motivating.
Well you could be pushing people to only be about themselves and their team and not the company as a whole. Why would I want to work with and help another team if it means I may move them above the 10% line and me below?
So while you're right that it would push people to do their job well it could also push them to submarine others.
The point is that companies shouldn't waste a lot of time trying to salvage or put up with people who aren't helping them succeed. If a person is hovering around the bottom 10% and they think the solution is to screw someone else over, they probably should go. I know I wouldn't want to work with them.
It wouldn't be a morale nightmare for me, but for those people who aren't as motivated and are just sitting at the poverty line in terms of their progression in the workplace, knowing about stuff like this can loom over their head and create a plague of gossip and backtalk in the workplace.
If I recall correctly, Netflix does this: cutting n percent of the workforce on a yearly basis ("adequate performance gets you a generous severance package").
It's countered by paying above market salaries and ensuring that these salaries _remain as such_ (even going to the point of where employees aren't discouraged from interviewing elsewhere to "sample the market").
Microsoft, I believe, does something similar. Whether it's the right approach is another matter.
It would only be a morale nightmare if the decisions were made randomly (or for political reasons), and not based on performance/job fit. My experience is that people tend to view letting underperformers go as a positive. It's far more damaging to morale to keep the underperformers around.
Why do you think it would be a morale nightmare? If you're doing well at your job, wouldn't you take comfort in knowing the person down the line who isn't pulling his weight will be cut out of the company at some point? High expectations are motivating.