I think the problem with this strategy is that it causes the wrong people to leave. That's a possibility, but there's also a good chance that very good perform

I think the problem with this strategy is that it causes the wrong people to leave. That's a possibility, but there's also a good chance that very good performers who value stability will stay, particularly with senior management taking larger cuts. Will you keep that 1-in-1000-and-knows-it person? Perhaps not. Do you want to? Perhaps not (see the whole "fire the indispensable person" philosophy). If you still get rid of bad performers but keep good to excellent ones because of good management, even if you lose the occasional rockstar your overall team quality will still rise.