Those "bad" managers are correctly following their incentives:
- More headcount is always better for the manager's prestige and career prospects, as long as those people contribute to project success at least a little bit (and most low performers do, just less than you'd hope). Managing infinitely many people each producing epsilon above breakeven is much better than having 1 rockstar.
- Headcount availability ebbs and flows with the business cycle. It's important to take everything you can while the money is flowing in case you might need it during a contraction. It's important to have nonessential staff on hand during a contraction so you can satisfy your X% cut requirement without compromising effectiveness too badly.
- As a manager of a high-performing division at a growing company, you will be given an integer multiple of your current headcount, and expected to deliver proportional results with it. If your strategy was "employ only high performers" you will fail, someone will be brought in immediately above or immediately below you to "help out," and within six months you'll be "spending more time with your family."
- The hiring process is hard to mess with. Recruiters put your ICs onto the panels directly; systematically leaning on them to change their votes will probably get the ethics hotline involved. But the decision to retain year over year is entirely yours.