Abstract:
Popularized by a 1969 book of the same name, the Peter Principle is the idea that firms prioritize current job performance in promotion decisions at the expense of other observable characteristics that better predict managerial performance. As a result, managers tend to “rise to the level of their incompetence.”
The book was originally written as satire, but this study demonstrates that the Peter Principle is both real and quantifiable. Using 1,500 employees across 214 firms, the researchers calculated the probability that a salesperson would be promoted to a management role based on their past performance, then compared it to their performance as a manager.
Key Points:
- For every 2X increase in sales performance, sales representatives were 15% more likely to be promoted.
- Conversely, every 2X increase in pre-promotion sales performance was associated with a 7.5% decrease in the sales performance of each of the new manager’s subordinates. Interestingly, relatively poor prior sales performance was associated with significant improvements in subordinate performance.
- Many companies seem to be aware of this tradeoff but are willing to accept weaker managers in order to preserve a simple and clear incentive structure.
Takeaway:
High performance in a previous role does not indicate that an employee will be a high performer in a new role with different responsibilities.
