I agree strongly. Contract-to-perm hiring seems like a great way to filter out the best candidates, who will tend to have better options.
Since bad hires are one of the worst things that can happen and no one is perfect at hiring, I'm curious what you do about this problem. Do you just work harder at getting closer to perfect?
It seems to me that there's always an implicit trial period anyway—the question is how you encode it. The best people, who have many options, won't want to stick around if they made a mistake either, right?