Most companies use a variant of stack ranking. If you agree with the core philosophy that more productivity => better pay, then you need to implement some sort of a differential pay algorithm. Having said that the implementation really sucks. It is not natural and continuous, rather people get pigeonholed into discontinuous buckets.

Let me take a concrete example closely mirroring my experience. There are 4 fixed performance buckets. Top 5%, Next 20%, Next 65%, Bottom 10%. They get hikes of 20%, 8%, 4%, 0% respectively. Again, these are fixed numbers. Let us assume there are 4 people A,B,C,D and out of a hypothetical score of 100, score 95, 90, 87, 85 respectively based on various parameters. You would assume that since D differs in ability with A by 10%, he would get 90% of A's hike. But sorry, due to the stack implementation he gets 0%, while A gets 20% ! Let's say if the scores of A, B, C, D were instead 100, 50, 25, 5, the hikes would have make much more sense.

Summary: Discrete curve of benefits works well only when it closely matches the curve of people productivity. This is rare. So it just ends up being unfair and creates an unhealthy rat race.