Captain-K9 - so how do you think companies like ICI, AT&T, BT, Ford, General Motors etc manage it? They all employ considerable numbers of staff, and promote on merit.
Properly managed, it's relatively straightforward to do - and of course another benefit is that it includes more people in the management process, by giving them control over their on destinies rather than being - to quote Danny - "just another number". You do well - you get promoted. You don't - you don't. It applies in every other industry in the free world (apart from the Co-operative movement which also works on the basis of 'muggins turn'/dead mans shoes).
Can anyone come up with any reason why that wouldn't work, rather than just a "well we've never done it that way/we've always used the seniority system" non-argument?