These companies believe the emphasis should not be on title, but rather on performance. Performance can be rewarded in other ways, such as with a salary increase, bonuses or other perks. Having fewer levels also can make the impact of a title change more meaningful. When it happens, it truly is warranted and comes with an increased level of responsibility and higher compensation. On the other hand, some companies will promote someone to a higher title, but in reality change nothing about the person's job or salary.
Titles also can become an issue with fast-track employees.
I recently heard a manager complain that she would never be promoted until her boss moved up. Since she had started at a lower level in a relatively small company, she couldn't envision being promoted to the same level as her boss, even though her performance exceeded that of her current peers. Or perhaps the employee is unhappy with his current compensation. When an employee asks to be considered for a promotion, be realistic about whether or not it is warranted. Don't allow an employee to bully you into giving a promotion.