Though it does sound somewhat similar to the concept of "stack ranking", which a few companies (such as MS) are notable for having used as part of their annual review process in the past.
Stack ranking has always sounded to me like an absolutely poisonous thing to implement in an otherwise healthy office. But if the organization knows that it needs to implement a reduction in force regardless, then I guess it might make sense if management does not have a feel for who their best engineers are.
If you fire anyone below "market average", you can reasonably expect to sustain an above-average workforce as long as you compensate well enough to retain decent employees.
If you fire anyone below "corporate average", the results are more interesting. You'll bring up the average quality of current employees, but have to backfill the missing employees.
If your hiring is just a normal distribution on average skill, the result is that you quickly reach diminishing returns. You fire the vast majority of your new hires every year, while slowly turning over a few of the old ones in favor of new superstars. If your hiring is better than average, though, you can reach far high equilibrium points. In effect, it makes sense to fire all the employees up to your hiring midpoint, trusting that you can efficiently raise your average quality by doing so. After that, you'll have to cycle through too many employees per position to see speedy improvement.
Of course, all of this is crippled by training delays and the problems you'll face when "we fired half the employees last year" gets around. Interesting theoretical model, though.