Is anyone else bothered by the lack of incentive for mediocre players to improve?
There's basically none. If they continue with their mediocrity (really, sub-mediocrity in most cases), they'll eventually be handed the gear they couldn't normally attain, without making an effort to improve themselves.
Further, the developers' stance on 'strategies' like the Turn 2 enrage garbage makes it seem like they have no intention of challenging these players to improve; every turn of Bahamut's Coil, excluding Twintania, can be powered through just by having enough gear, which is handed out for free in Turn 1 and Turn 2.
This degrades the sense of accomplishment for everyone, both the skilled players who worked hard to down the bosses, and the bad players who are just whacking loot pinatas and patting themselves on the back.
I hate to bring in World of Warcraft as a comparison, but I think they did it right, with the three sets of gear (Raid Finder, Normal, and Heroic). If you're a sub-par player who wants to whack a loot pinata, you get sub-par gear for it. Those who want to challenge themselves get regular gear, and those who want to really push the encounters get higher tier gear.
There's no way this is healthy for the game in the long term.