"What do they think will happen, some socialist system where all are paid equally?"
Perhaps they'll just be paid based on their seniority within the company, moderated by what the market usually pays for someone of their specialisation. Or is that too socialist for you?
"They made it clear that there are no changes to the overall compensation budget and that managers have to manage salaries within their budgets. How does anyone think this will happen without some kind of ranking going on, explicit or implicit."
That's true, there will be a sort of ranking that goes on in the managers head. He/she will reward his/her team based on their contribution to the team's goals. If everyone does well, they'll share it equally. Of course this means that teams working under different managers will have different rewards. All they have to do is have a system in place whereby action can be taken if they think they're being treated unfairly.