One of the reasons for this policy is because people don't seem to understand that you can't pay someone what they are worth. You can only pay them what their job is worth. As a result of this, some people might actually get paid more than their job is worth simply because they have seniority while another person is getting paid less than their job is worth because they are new. That's the sad truth of the matter.
I can tell you that this is excatly the way pay for performance works in the Federal Government. Every branch and division is forced to hit a set average rating. So for every person that scores above that set level someone else has to score below it. One year I had former boss tell me that he was going to simply cycle me and a coworker between the top two ratings over the next couple years. Other times I was told that I did enough to get the high rating but I couldn't get it because of the required average - he had already given the high one to someone else. In that case he at least did the write up like I had been given the higher one. That was I could grieve it and get the higher rating - grievances didn't upset the averages.
"Coffee" is correct. This policy exists. I worked at a very large high-tech company, and not only was this policy in force, it was stated openly and bluntly every performance review period.
And yes, that meant that good people ended up being hounded out of the company. I bailed as soon as I could, and went to work at a company that at least pretends to respect its employees.
To Northern Hick, you are mistaken. I attended meetings where this exact thing was discussed. I frequently got into trouble asking 'Why?' about thing like this, and on this one got the response, 'If everyone gets a high rating they will all want to be promoted.'. That's a real quote. This is why we love Dilbert. Because it is TRUE. Management, in my experience (including a stint in it) was overwhelmingly incompetent. They see the work force as 'them', the enemy. They wanted to hurt employees. To keep them in their place. I found it all very embarrassing.