At huge traditional Japanese companies, even terrible, negative productivity employees aren't fired (the kid with the bad grades). Part of this is because of regulation, part of this is because they really behave as if they are a family. (Kyocera's maniacal devotion to its company-wide athletics tournament is a famous example)
The company provides you with pay, shelter (corporate dorms), a wife (there are women hired in administrative roles who are of a different category of employee than the full knowledge worker who are expected to marry a male employee and leave the company within some handful of years), commuting expenses, a pension, etc. In return, you are expected to be loyal to the company. And it pays to be loyal, because (1) the upper levels of the companies are all "propers": i.e. people who joined as new grads rather than mid-career transfers, and (2) because pay is backloaded.
Do I think this is a good system? Well, in industries where the development, retention, and continuity of incremental knowledge was important, this seemed to work quite advantageously. When the economy was reliably expanding YoY, seniority based pay and lockstep promotion was feasible since more and more seats could be added in the pyramid structure.
But when the economy stagnates and the backloaded, highly compensated "kids with bad grades" fill the ranks? The youth suffers, and something's gotta give.
Where can I read more about this? How wide-spread is this practice?
The more oldschool the company culture and the farther away from major cities (esp. Tokyo/Osaka) you get, the more common it will be. It is very common throughout the Toyota Group where I used to work (which is coincidentally the same geographic area as where patio11 worked).
It's actually a fairly effective social arrangement, though it is understandably very odd from a Western perspective (I was initially appalled, having grown up in SV).