However, the problem it was attempting to solve (you got hired at one level, but performed at a lower level, because you managed to fool people in the interview) is a real one and there is no good solution for it.These levels are a convenient fiction. Performance is way too context-dependent to believe that there's some "platonic" level for each engineer. This (http://michaelochurch.wordpress.com/2012/01/26/the-trajector...) is the best model I could come up with for the software engineer trajectory, and even it has a 0.2 to 0.4 point (out of 3.0) swing for most individuals based on technology choices, interpersonal topologies, motivational flux, etc.
What you mean is "some people don't work out". Right. So there are people you "manage out" (that is, try to get them to find another job and fire them after ~6 months if they don't get the hint and you absolutely have to) and there are people you work with to bring them up to speed, or to figure out what's blocking them. Typical management stuff. What doesn't work is to keep people around but at a lower level than they were promised in the hiring process. That just creates a class of miserable, shafted people who hate their jobs and the company they work for.
By the way, a lot of the idiots on this subthread think I'm airing personal gripes. I joined after slotting. I'm just pointing out what kinds of ridiculous results come from an out-of-touch management culture. What drove me insane at Google was being at a company where the engineers were so good at their jobs and yet the people making important decisions were so epically bad. The disconnect was shocking. I was watching an awesome company self-destruct in front of me.
Also, on downslotting: careers are sensitive things and once you make one overt move so directly against an employee's interests, you've essentially lost that person. Loyalty is pretty much binary. Once you make a move like that on someone, you now have someone whose full-time interest is career repair, which usually involves getting the fuck out and lining up the next job. If this is what you want, then fine. (If someone really is a bad fit, for that person to begin full-time job searching is the best thing.) That category doesn't encompass most of the company. Downslotting only makes sense as a mechanism for managing people out, and (1) there are better ways of doing that, and (2) you shouldn't be managing out over 50% of new hires.
The real reason for slotting, I think, was to put a better job title in the offer letter than people were actually expected to get, since the upper title is what was used. This works only because of Google's brand: what keeps it from doing major damage is that downslotted people have the Google name on their resumes and can get the fuck out long before they become "problem employees".