Machine Elf, thanks for those links. I now know that I need never offer to pick up my brother-in-law’s dinner tab again.
Robert Sapolsky has written extensively (and exceedingly well) about social rank and the physiological cost of maintaining or improving it. A Primate’s Memoir is the one you want:
http://movies2.nytimes.com/books/01/04/01/reviews/010401.01nixont.html
From the link above:
So Nick is a petty, backstabbing jerk who achieved a Pyrrhic victory, unseating someone ranked higher but revealing himself to be an asshole in the process. I’m no musician, but surely every orchestra has a Nick or three.
Every year I got a statutory raise based on inflation plus, usually, a merit increase based on the chair’s estimate. Sounds ripe for corruption and abuse, right? Well, all the chairs I had took the job seriously and really really tried to be fair. Certainly, there were no complaints. The one time I got screwed with no merit increase was when two of the department’s stars had outside offers and the chair divided all the merit pay between them hoping to convince them to stay. The both left (predictably) and that money was permanently lost to the department. And of course, this meant my salary was permanently depressed by that amount (somewhere between $500 and $1000 a year) for the rest of my career.
That said, the possibility of a continual challenge does not seem healthy. Perhaps a challenge should be allowed once a year. I just don’t know.
Everything’s bigger in Texas - even the databases. 
Because we are social animals, and we have an innate sense of fairness. This is true whether it involves someone else receiving more pay for the same work, or the same pay for less work; it is, quite literally, natural for us to become angry at those responsible for implementing such unfairness.
We are not the only species that exhibits this trait. You will likely find this capuchin monkey experiment to be enlightening (and hilarious).
Good article on the problems with meritocracy in higher education.
I favor a meritocracy, but am cognizant that a huge incentive is working toward making things a little easier for your kids. It’s not fair, but I do it too. I think there should be limits to what “a little easier” means in the interest of society.
Nobody should be born without enough money to accomplish anything, and nobody should be born with so much money that they don’t have to do anything.
I do not believe that strict meritocracies are socially stable.
Yes, you want the social structure to conform generally to a meritocracy so that the group members are motivated to contribute to the group effort. But within the social framework, if some members are mostly “winning” and others are mostly “losing” due to various disparities, the “losers” will stop engaging. This may result in a breakdown of the social structure.
For example, if you have very young children, you sometimes play games with them. If the game has any element of skill at all, as the adult, you will typically win. But despite this, sometimes you let the child win anyway because losing is no fun, and if they lose all the time, they’ll stop playing.
Gambling can be thought of in this context as well. Even in games of skill such as poker, most people lose at gambling. But the losers don’t lose all the time; the outcome variance is high enough that the overall losers do win occasionally. This variance from a strict meritocracy of skill sustains the games.
In the context of the workplace example, I don’t think a strict meritocracy is necessarily desirable. You want people to feel like they are being rewarded for their output, true. But as was alluded, you may also want a feeling of stability and reliability of employment. Or maybe you want to be free to pursue calculated risks at times without fear that any immediate failure will result in your dismissal. And certainly, you want to acknowledge that people are inherently fallible and can make mistakes at any time.
It’s debatable whether allowing some members of the group to occasionally coast on their prior accomplishments is beneficial or not; I assume it would be highly dependent on the situation at hand and exactly how much coasting is being done. But I don’t think you can assume that deviations from a strict meritocracy are necessarily bad; such deviations could have a positive social benefit.