Mr. Anderson’s suit provides a peek inside Yahoo’s controversial quarterly performance review system, which Ms. Mayer adopted on the recommendation of McKinsey & Company, a management consulting company. Similar systems were once widely used in corporate America, and companies like Amazon.com still employ analogous methods.

But others, like General Electric and Microsoft, have dropped such rankings as a tool for routine firings because of their corrosive effect on productivity and employee morale.

At Yahoo, the program, known internally as Q.P.R., has been a sore spot among managers and employees since it began. The court filing said that managers were forced to give poor rankings to a certain percentage of their team, regardless of actual performance. Ratings given by front-line managers were arbitrarily changed by higher-level executives who often had no direct knowledge of the employee’s work. And employees were never told their exact rating and had no effective avenue of appeal.

It does sound like regular rankings-and-firings are bad for productivity and morale. 

A tool can be good or bad - it's how you use it.  And is sounds like to was used to reach a particular goal - reduce headcount.

Are there better ways to reduce headcount without reducing productivity and/or morale?

Probably not. In every company I worked layoffs were affecting morale. But at least they were "honest" layoffs, not firings for "low performance". But I had hated reviews regardless :). See, Netflix does not have them, and they just fire people. So which system is better?

I see your point. Any time a company has to let people go, it hurts morale. 

Forced rankings do seem particularly bad because it fails to reward a group where everyone is doing well.