Is this a common practice? - NO
Do any other companies do this?
Not that I've met travelling up and down the UK for 8 years on I/B,O/B sales, helpdesk, cust care, complaints handling, crisis management and tech support lines for call centres and contact centres. I've never seen one it although I do know of teams that have highly elitist names e.g.. "Exclusive" team etc since they were the team that required the greatest skill and knowledge set they were deliberately positioned as an aspirational team. (The pay on this team reflected this)
Does it / should it work? - In what respect ?
I guess you are asking about improving performance - in which case what field are you talking about sales/conversions/call length/ no of calls handled/customer satisfaction ....what?
However if you are talking about increasing motivation then according to Elton Mayo it probably will work (for a short time), he conducted the famous Hawthorn Experiment which basically in layman's terms says anything that you do to the workforce will affect their output usually positively usually for a short term.
However Vrooms's Expectancy theory proposes that :- if one values the ultimate reward, and believed that one's effort would enable one to get the ultimate reward, and one continued to value the ultimate reward THEN the motivation will be high (not the same as performance I know).
Your example corresponds greatly with Adam's motivational Equity Theory. Basically individuals compare themselves to others and fairness is an important factor (i.e.. they are motivated if they believe a situation is unfair).
Should it work? According to Adams yes.
Does it work? Probably for a short term but if you look at other motivational theories goal setting, affiliation, power, achievement and valuing the ultimate reward are high. In my experience this is also the case...then there are other influencers company culture, management style etc etc. So you cant really ask the question in isolation of everything else.
For more information on motivation theories try http://www.accel-team.com/human_relations/hrels_01_mayo.html#
For more information on performance measures ask how they are measured in this instance.
Regards
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