Especially with the Dunning-Kruger effect: the best (e.g.) programmers tend to underrate their skills, and will not be motivated to apply to a place like that for fear they will be fired.
And they weren't all IT/software/web companies, either. One was the best IT team that I've worked with, period, at a non-IT company no less. Another was a fairly well-known restaurant chain. The third was a small startup-ish design company.
You are absolutely right about the reputation thing. You get that reputation for firing people, especially from the fired. But when you talk with the people that do or did work there for any length of time and see that, when the time comes, leaving will be difficult or was difficult, it all makes sense. The team manager wanted a great team that had great output and nothing less. And there was never any pressure to do the wrong things, illegal things, or base decisions on personal whims. That kinda stuff doesn't happen very easily with a room full of responsible adults, knowing that today may be their last if they screw up.
So I'm not saying there's no drawbacks to the points I listed, but I think they do work out overwhelmingly on the positive side.
There were a few fields of contract work in the 1990s for which a number of companies were always hiring. They clearly didn't have the headcount or growth rate to account for this, and scuttlebutt pretty quickly got around that they were simply chewing through candidates.
Turns out that the base talent pool was rather smaller than they may have presumed, and numerous top talent I was aware of quickly learned to steer clear of them.
Different circumstances might make for different strategies, but in my experience, making an investment in your hires sends a strong positive signal. Yes, firing is occasionally necessary, but IMO it represents a failure on both sides.
Or do this openly and call it "contract to hire". Both sides can call it off with no regrets.
After a while the quality of your pool is going to drop. Which is just going to reinforce your belief that most employees don't work out after a few months.