1. Skill isn't rewarded, just wins/losses. Being AFK is even more rewarded under your system then the current system. Since all honor gained is win/loss rather then a mix of win/loss/HKs then you just turn AV into a bot farm.
No, because a loss means your rating goes down. That's the difference between now and then. When you go afk, you basically have a 50% chance to go up and down, which becomes less than 50% because your team is effectively outnumbered.
To go afk and gain in rating implies you were on a succession of teams that consistantly won, even though they were a man down. That seems improbable, at the very least. If it was an organized team, the leader should recognize that you aren't contributing and boot you.
The reason botting works now is that there is no risk to just sitting and collecting HKs. In the current system, if you spend the entire match fishing, you will end up better than you started. Guaranteed.
2. The stake to the heart you propose world pvp is going to really marginalize the PVP servers. It just makes it into Gank fests that don't end due to diminishing returns.
Perhaps. It won't be a gank fest though. It will return world PvP to the same state as before the honor system (and to be honest, roughly the same state it is now, at least from my latest experiences on a PvP server). As well, each goal would only be achieveable once per week, hopefully minimizing the disruption.
The real gankfest was when we had the Honor system but no BGs. That was a terrible time. I was in the high 40s on a PvP server, within range of the 60s. It was supremely unfun. It's why I have a character on a PvE server now.
My system has no rewards for killing individual players, only for achieving goals, so people will only gank for the old reasons of boredom, opportunity, malice, and fun.
3. You assume that all servers have enough PVP to make seperating out "skill groups" worth while. And what happens to the Grand Marshals? Do they only face each other? Or do you have to wait for 40 of each groups high ranks get together for an AV?
Yeah, to be able to separate in skill implies sufficient numbers. This is probably not possible for most servers at the moment. However, Blizzard is working on cross-server BGs, and it would be a good solution then.
As to high ranks, the players closest in rating play each other. If there were only two teams, they would play each other, even if there was a great difference in average rating. However, the better team would only increase rating by a tiny amount if they won, and the losing team would only lose a tiny amount. However, if the weaker team won, there would be a larger gain/loss.
It's basically the same system--in principle--as the ELO chess rating system, or Microsoft's Trueskill™ system.