"This is not a meritocracy"

Some 10 days after submitting a grievance to my company about the way I've been treated, I had a meeting with my head of department and HR rep yesterday. How enlightening it was too.
While it's difficult to go into the nature of the grievance in detail, suffice to say that following a merger I was assigned a new "level" in the merged company that I felt denigrated my contribution. This is one of many grievances I raised.
My moment of clarity came when my head of department explained that people are assigned a level in the company based on commercial need, so that even if they meet their objectives and the criteria for a level, they may not be promoted (the only way to receive a pay rise).
- Does that mean we're not a meritocracy, I asked.
- Yes, this is not a meritocracy, he replied.
Call me naïve if you want, but I thought the point of setting individual objectives was for people to be recognised and rewarded for meeting them.
Leaving aside any legal implications of his statement, how does it motivate me for my head of department to tell me that my promotion is dependent on plugging a commercial gap rather than on what I do? What are my prospects if no one vacates a more senior position?
These apparently arbitrary levels are used to allocate people to projects, so another point I raised was that I would be allocated to less challenging work than I'm capable of, so my potential value to the company is diminished. My head of department corrected me on this point too: the business director would request me because he knows I'm capable of delivering a project even though I'm not officially ranked at a higher level.
The (quite overt) implication is that the company will keep me on a lower-level rating at a lower salary even though I'm doing higher-level work which, if they needed to recruit someone to do, they'd have to pay a significant amount more to that consultant. So I'm cheap labour doing a skilled job. Thanks very much.
I was also told that the work I've done in management and reporting is irrelevant to any consultancy skills (even though it's a measure on the appraisal form). Not like we sell management and reporting is it? Oh, hang on, we do.
The meeting concluded with the company representatives telling me that I shouldn't feel that I'm being picked on. These kind of problems are an issue across the company: it's just that I've been affected more than others have.