A few additional thoughts:

1. You're going to lose out on good people. GOOD people will see a toxic environment and run like hell. Who wants to work like that?

2. The people you manage to hire under "the cloud" may not be the ones that you want. I've seen people work in precarious situations, and I was not impressed with their capabilities or integrity. In the top echelon their work and ethics seemed to mirror the screwed-up environment they were in. In the ranks, moral was terrible and there was no loyalty, only fear.

My "cloud" was such that I felt I might be fired any day, for roughly a year. It turned out to be a phantom -- when I talked to our director a few years later she said, "You really took that seriously?"

Years later what I went through is still negatively affecting how I work. Don't get me wrong, things are going fine externally, but I could feel a whole lot better about the politics, the annual review madness, and interactions that involve managers.

It sucks to live in fear. Don't do this to your employees.