One of the big issues that I have witnessed and struggled with is how keeping the wrong people on punishes the right ones. This can be obvious, but more typically, it is subtle- adequate performers disrespect good ones by sucking up the energy of an organization and lessening the ability of good performers to do the work that they see needs to be done. It has also been my observation that adequate performers are more concerned with praise and credit than good ones are, which can lead to more recognition for less contribution.
My fiancee works for the Forest Service, which can be the ultimate expression of this dysfunction. So much "dead wood standing", people waiting for retirement, with essentially no ability to discipline and none whatsoever to fire. She is lucky that her crew is generally adequate or better, but in many instances, the only way to get rid of a crappy performer is to help them get promoted out of your organization. Talk about perverse incentives. It is maddening to watch from the outside. Furthermore, hiring is a goat rodeo that rarely if ever gets the right candidates to the hiring committee, and while they are barred from asking about race, they are supposed to be affirmative so there are discussions like "does that name sound Hispanic?". Government HR should be studied in the same way we look at disease.
I think people are generally wired to perceive and understand fairness. That wiring is what the Netflix document relies on, and I think it's brilliant.
For me, the big issue that prevents people and companies from being more fluid in finding the right people for the right role, and the right role for a given person, is healthcare. Hiring and firing are overburdened with the knowledge that the implication of letting someone go can be much greater than a paycheck. If I were king (laughter required), the first thing that would happen is we would decouple health insurance from employment, which would have many other benefits than this one.