of course it does.
and if you have two employees that are of roughly the same skill level, I would of course keep the one with the most seniority.
Performance is judged on a variety of factors.
ability to do the work
speed with which work is performed
personality (a pleasent attitude goes a long way and helps the whole team perform better)
relationships with vendors & Customers
ability to get things accomplished.
My primary point is that if there is a clear differential between the seniority & performance you must go with performance.
If you reward senority over performance you are not doing the employee an favors, if you take this example to the most extreme case you will eventually find youself with a company with many long term employees who do not produce profits for the company.
I have to refer back to an earlier example, the only way a new company can succeed (asuming they are not providing a completely unique product or service) is because they perform better than their competitors.
If everyone took the approach that seniority is preferable, then new businesses would never get off the ground because customers would always stay with their existing suppliers despite the the good or service they provide.
The net result of all of this is mediocrity throughout society, at best.
Plus, the more successful the company is the better off ALL of the employees are, through pay, benefits, job stability etc.