It's natural to ask what effect this has on incentives. Note that AP courses are taught to prepare students to get high marks on the AP exams, so that the grading scheme for AP exams propagates backward to the grading schemes for courses, which feed into college admissions. Taking many AP courses and performing just above the "5" level looks better than taking few AP courses and performing at the ~90% level.

Oh, so is that why schools use grades rather than percentages - an attempt to disincentive overspecialization and/or reduce pressure to overachieve? I've always wondered about that.

A more sane way to do this would be to give a percentage, but obfuscate it above a certain level. As in, John is at 78%, Wang is at 79%, but Ajeet, Alisha, Antwan are at 80%+ and the exact number shall not be revealed.

This keeps the disadvantage of undue emphasis on cut-off numbers (the 1% point that distinguishes C+ from B-) to a minimum while retaining the desired effect on incentives. There would still be a disadvantage at the single cut-off point (since 79% is significantly worse than 80+%) but at least the harm is contained around just one cut off point instead of several.