The Unassuming Economist

From a VoxEU post by Alan Benson, Danielle Li, and Kelly Shue:

“The Peter Principle states that organisations promote people who are good at their jobs until they reach their ‘level of incompetence’, implying that all managers are incompetent. This column examines data on worker- and manager-level performance for almost 40,000 sales workers across 131 firms and finds evidence that firms systematically promote the best salespeople, even though these workers end up becoming worse managers, and even though there are other observable dimensions of sales worker performance that better predict managerial quality. 

In 1969, Laurence Peter and Raymond Hull publishedThe Peter Principle, proposing a farcical theory of organisational dysfunction. The Peter Principle, they explain, is that organisations promote people who are good at their jobs until they reach their ‘level of incompetence’. Fifty years later, Peter and Hull may find plenty of examples of people who occupy important managerial positions because of success in some radically different arena.

In principle, there’s nothing wrong with putting successful people into the highest positions. If the best basketball player makes the best coach, then a coaching position may be the best way to magnify that person’s talents. Similarly, if success in movies or real estate translates into success in governing, then the biggest moguls should occupy the highest offices.

The crux of the Peter Principle is that success in one arena doesn’t necessarily translate to the next, though promotion decisions are often based on a worker’s aptitude in their current position, rather than the one he or she is being promoted to perform. It’s no wonder that the Peter Principle is especially well-known in technical fields – from engineering, medicine, and law – where cases of poor managers who were once excellent individual contributors abound.

If it is accurate, then the Peter Principle bodes poorly for organisations, in light of a growing body of research documenting the important role that good managers play in building and sustaining productive organisations. Lazear et al. (2015), for example, find substantial variation in the quality of individual bosses, with the best bosses increasing the output of their subordinates by more than 10% relative to the worst bosses. Similarly, Bloom and Van Reenen (2007) show that variation in management practices can explain much of the overall variation in firm productivity across countries. These papers suggest that firms face potentially large productivity losses when they promote workers who lack managerial ability.”

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