Over on Slate David Auerbach writes a first hand account of the kind of effects the concept of stack ranking had at Microsoft. He provided a good one paragraph summary of one of its biggest problems here:
The stack rank was a zero-sum game—one person could only excel by the amount that others were penalized. And it was applied at every level of the organization. Even if you were in a group of three high performers, it was very likely that one of you would be graded Above Average, one Average, and one Below Average. Unless your manager was a prick or an idiot or both, the ordering would reflect your relative skills, but that never came as too much comfort to the hard-working schlub who just wasn’t as good as the other two.
Basically if you had a really talented team you still had to put someone on the bottom of the stack and damage their career. In a field where effective team work and a willingness to take risks to innovate is really necessary for success this kind of personnel management system can’t work all that well for either the employees or the company and in fact many credit the system for Microsoft’s lackluster history of innovation over much of its history.