It's not at all largely confined to Silicon Valley - GE and Microsoft were the places that really popularized stack ranking, back in the 80s, and it's all over Wall Street and consulting. It may be largely confined to the United States - I don't have enough international work experience to know whether other countries do it, but just judging by cultural differences, it seems somewhat unlikely.

As for why anyone works for Google - as a recently ex-Googler, I can answer that. Most of us don't think about it at all. The calibration scores are hidden from us, and they only have observable effects once a year when bonuses and raises come out. And most Googlers are paid ridiculously well anyway (don't we have an article on HN about Bay Area gentrification every few days?), and typically would be working in finance if they cared about maximizing financial payout. So people work for Google because they want the other things Google can provide - challenging technical problems, smart coworkers, the chance to impact millions of users even in a tiny way - and it doesn't particularly matter what management thinks of us.

Compensation was a small part of my decision to leave. I left because I felt that I had learned everything I could learn at Google, and the stuff that I did want to explore and learn about could only be done outside of the company.

I don't know about "largely", but it certainly is also highly dependent on the management in place. One place I worked one of the managers basically implemented an unofficial "stack ranking" within his group of 4-6 employees so that he could always have a scapegoat.