It's not a bad system, but it runs into two problems inversely proportional to the size of the classroom. First, it's very easy for students to start exercising social pressure against excellent performance, which "ruins" everybody else's grades; I've witnessed this happening first-hand, when one teacher at my high school decided to try this method. Secondly, statistical anomalies will happen where almost all students are diligent (or negligent), and it would be scandalous to have to fail a previously-determined percentage of them.

This is definitely something that you should not do within one classroom. Within one course is the absolute minimum I would want to accept.