I first heard of the stack ranking system in MBA school, on a case study. I believe it was Jack Welch, famous CEO of GE, that pioneered the system in the 1980s. Every year, he would fire the "bottom" 10% of his staff and reward the "top" 20% of his staff. It worked wonders for GE at the time, because the company was riddled with inefficient bureaucracy and was suffering from management bloat. Imitators all over the country thought this was an excellent idea and started aping it without considering whether it belonged in their environment or not.
To echo previous comments, this might have been effective in one situation with a broad range of competencies, but after you have done it once and weeded out the non-performers, I don't see any value in continuing to do this. I, for one, would immediately start looking for a way out if my company started doing this. It does not accomplish anything, destroys morale, and makes you constantly scared. I would guess it probably also leads to a workplace where you are trying to impress your managers far more than you are trying to get work done (no they are not the same thing), by increasing your visibility etc.
The best work comes from a relaxed mind. By stack ranking, you almost guarantee shoddy work. Nuff said.