Alan Benson, Danielle Li, and Kelly Shue write,
Using detailed microdata on sales workers in US firms, we provide the fi rst large-scale empirical evidence showing that fi rms prioritize current performance in promotion decisions at the expense of promoting the best potential managers. Our fi ndings are consistent with the “Peter Principle,” which, in its extreme form, states that fi rms promote competent workers until they become incompetent managers (Peter and Hull 1969). In particular, we show that high-performing sales workers are more likely to be promoted, but that prior sales performance negatively predicts managerial performance, even after accounting for selection into the sample of promoted workers. These results suggest either that fi rms make mistakes in their promotion decisions or that the incentive befine ts of promoting based on sales performance justify the costs of promoting workers with lower managerial potential. We provide supportive evidence for the latter possibility by showing that fi rms appear to actively manage the trade-off between providing incentives and promoting the best potential managers: fi rms place less emphasis on sales performance in promotions where managerial roles entail greater responsibility and where sales performance is also rewarded by relatively strong pay-for-performance.
The latter paragraph suggests that there is a sort of a Peter Antidote. That is, give meaningless promotions as a reward for performance, but not when you are really counting on someone to be a good manager.
Keep in mind that putting people into positions where they will fail is going to hurt profits. Sooner or later, firms that put the right people into management positions will out-compete those that don’t.
Thanks to a reader for the pointer.
I certainly agree with you that competition will favor firms with better promotion practices. I am less convinced that there is money on the table, however; it seems very unlikely to me that the economists can predict performance better than can those with a vested interest.
If we take the results at face value, then the question is: Why don’t the firms promote the better-in-expectation managers? There may be a legal reason. Perhaps in order to justify decisions against charges of bias, one must rely on objective data. (Hypothesis: Large firms will invoke rigid promotion guidelines; Mom-and-pop stores will simply promote the best.) In addition to the law, those in charge of the promotions may need to justify their choices to their bosses or to investors. In this case, objective criteria prevent the moral hazard problem of simply promoting one’s friends or favorites. Additionally, objective measures may better justify promotions to other workers. Moral considerations may dictate performance-based promotion lest those passed up turn rogue. Yet another possibility is that workers see the promotion as the promised reward for winning a tournament. We commit ex-ante to hire the winner to encourage performance even though we know that we may learn additional information that makes this winner non-optimal. This view would favor companies that adopt your approach with sideways promotions.
Many promotions can be structured to upgrade “seniority”, “client-facing status”, bestow perks (that often increase productivity), etc. All of this would enhance both the status and productivity of the high-producer-but-mediocre-manager-to-be. Better managers-to-be can be promoted to people management/bureaucracy management positions, often paying less that producer positions. In my experience, those promoted to these positions are often able to manage higher paid-lower ranking staff staff without frictions and jealousies. Win-win.
One of the good things about teaching is that we can refuse to be promoted by refusing to get the administrator’s credential. There’s no correlation between teaching quality and promotion to administration.
Whoda thunk it? The Peter Principle doesn’t apply to teaching.
You must not forget Drissel’s Exception (to the Peter Principle): There are no Incompetent Sky Divers.
Wherever the consequences of failure are dire enough, everyone is competent.
Regards,
Bill Drissel
Frisco, TX
I think that’s what Stigler would call the survivor principle.