Therefore, keeping around people who genuinely deserve firing is a drag on delivering. As a result it is always in your interest to get improvements out of your team members, whether by upskilling, role changing, hoping they leave on their own or worst case actually laying them off.

I've worked in financial service tech for nearly 20 years across 6 companies and only 1 I would say did a "5% every year" thing, and even that got paused for years at a time when market conditions pushed that way.

Even if your statement is true, it is a matter of framing. Obviously you keep your best staff, and fire the actively negatively contributing staff. The people in the middle aren't just "for when you need to sacrifice".. they are simply the middle 50%. You obviously want to see them improve as well.