In the worst case scenario, a large number of people go "up" to the point where they're no longer capable of doing the job they're in and then go "out" after a brief period of doing their job badly.

These people may well have been very competent at their previous level of authority and so the business as a whole loses out.

Additionally companies which state outright this is their policy often have quotas of people who should go "out" which I've seen, in particularly talented groups, lead to an almost random selection of people going out despite the entire group being so close together in ability than no meaningful distinctions can be made.

EDIT: re jonnathanson response below, agree completely that if up can mean a person is performing solidly and achieving good results while improving year on year then such a system can be very beneficial. My criticism is much more focussed on systems where up explicitly means moving through grades, especially where there are attempts to apply quotas to who goes up and who goes out.