There is a "quota" for each level, it's driven by the business need. That has no relationship with merit based promotion.
If promotion is also bound by availability of "slots" at a given level, than by definition you will exclude some folks that are otherwise at that level.
I fully sympathize that inflation of level is a thing. I also fully sympathize that resources to use people at a given level are finite. Such that you will have to do this for practical reasons. Still, the message for that is almost certainly tailored to the individual that you turned down and best left for the specifics. Blasting out this message as generically as it was done just feels wrong.
Now, I'm fully onboard with what I think I read as part of your main point here. Management is a skill and it can be funny how few folks in the non-management world will acknowledge that. You can see similar with coaches. And it seems to be human nature that we love building a hierarchy up to a single point. Even in very distributed organizations.
And you are trying to allude to inflation of role and expectations, I suspect? And that is a thing. But since you don't demote people that fall behind on the inflation, you are back to my first paragraph. That or you are pushing out the folks to make room, but you will regret pushing out some folks from the highest levels.
It's common that there are people who would be more qualified to a position than the person currently holding the position, as long as we view merits in isolation. But the real ability the organization cares about is the ability to advance the goals of the organization when working within the organization. If replacing a person with a "more qualified" one demoralizes other employees enough that the organization's ability to reach its goals is compromised, the replacement is actually less qualified than the original person.
They'll kill or promote entire products because a given product area's position shifted in position on an org chart, or because some set of people involved don't feel they can get promotions or corporate success anymore from it.
The drive is political success. The criterion is openly about ability to promote and politic one's work. ("Demonstrating impact", key emphasis on "demonstrating". Written PRDs and design docs, name prominently placed, recognition from peers. Esp if they're on other teams, etc.)
It's frankly what you get when you have a company founded by academics who never worked in industry (but know all about defending your thesis to a committee, or "publish or perish") combined with unbounded revenue and seemingly infinite growth.
It does not run contrary to the idea of meritocracy to assert that a firm has limit on the number of people that it can hire into a certain position - so long as the people who do fill those are selected are (more or less) the most qualified. Note that I am not saying anything about whether Google actually meets this ideal.
I thought I had just always heard pride from the Google sphere about how they were much closer to the ideal of a meritocracy than other places. This feels... not that. :D
I've got a high performing L5 who is critical to the success of my team. My discretion on their raise was largely undone by my director and nobody acted on my recommendation that they receive discretion on their equity refresh.