I love this kind of thing for several reasons. First, it can make sense in certain environments. Second, it helps make the individual employee have 'skin in the game'. Whether it can work long term without modification, I would say probably not. But there are other models to choose from when time comes rather than resorting to the typical Wall Street-ordered deep hierarchical organization.
Personally, I don't know whether the typical Fortune 500 company structure is just a necessary evil or truly evil. Mind you, I am not a closet Marxist. If anything, I am an unabashed capitalist (however an ethical one). But the direction dictated from Wall Street today is ruthless, and getting more so. It will one day collapse under its own bloated weight unless major changes can be addressed. For starters, stop focusing on short-term financial goals at the expense of long-term market penetration. Having an upper management that has a passion for the business rather than a solitary passion for just making as much money as possible wouldn't hurt either.
If start-up firms operated the way your Fortune 500 firms do today, they wouldn't survive for six months. So 'kudos to Zappos'!