Here this is stright off the GT ladder info page:

Ladders
What is a ladder?
Almost everyone is familiar with the concept of a gaming ladder. Each player occupies a rung of the ladder. New players start at the bottom rung. Players on lower rungs challenge those on higher rungs to games, and if they win, they move up to the higher rung. After enough games are played, the ladder will represent, more or less, the relative skill level of the players in the ladder, with the best players at the top of the ladder.

But how does that work on a turn-based gaming site?
While this concept works well for games that may take an evening to play in over the board competition, it isn't extremely well-suited for correspondence gaming, where a game can take several months to play. By having to challenge each player on higher rungs, it could take a great player literally years or dozens of years to climb to the top of a ladder with only a few hundred players in it.

So we've taken the basic ladder concept and tweaked it a bit so that it works well in a turn-based gaming environment by making the following changes:

Instead of one player per rung, there can be many people on the same rung
About once per day, all available players on a single rung are randomly paired up in challenge games
A player who wins a game moves up to the next higher rung
A player who loses a game moves down to the next lower rung, with rung 1 being the lowest possible rung
Players who draw will remain together on the same rung
Three times per year, the rungs are compressed to ensure that good players have an opportunity to climb the ladder