The Peter Principle is a concept that was developed by Dr. Laurence Peter in the late 1960s. It is defined as the idea that “In a hierarchy every employee tends to rise to his level of incompetence.” In other words, it is the tendency for employees to be promoted to positions that are beyond their capabilities.
The Peter Principle is based on the idea that employees are rewarded for their successes and thus are promoted to a higher position. However, when they reach a position that is above their capabilities, they cannot continue to be successful. As a result, they are not able to perform their duties and are eventually demoted or forced to resign. The Peter Principle has been widely accepted in the business world and is often cited as an example of why organizations should be careful about who they promote and the positions they create.
It is also used to explain why some organizations are unable to progress and become stagnant. The Peter Principle is a reminder that organizations should be aware of the capabilities of their employees and ensure that they are promoted to positions that are best suited to their skills and abilities. It is also a warning that organizations should not promote employees too quickly, as this can lead to a situation where the employee is unable to perform their duties
Tom was a loan officer in a small bank, but not just any loan officer—he was the top one, and the best by a long shot. He made more loans than anyone else in town and his loans had the lowest default rate. How did he do this? Tom created this amazing outcome by cultivating his relationships with his customers. The personal connection was so strong, they felt personally obligated to him when they took out a loan. People made sure they paid it back out of personal loyalty. Customers and colleagues alike were admiring and appreciative. He had both internal and external payoffs in his job: Good results, good money, good friends and lots of personal satisfaction.
When the bank where he was a loan officer was looking for a bank president, it was only natural to look first to someone who excelled in the industry and had such great relationships with people in the small community. Tom had a sterling reputation, goodwill, and sound banking knowledge. What better choice?
He was selected with great fanfare. After only a year in the position, he quietly whispered to a close friend over coffee, “I hate this job as bank president! I always thought this was what I wanted, but I am miserable.” What Tom found was that a bank president was responsible for duties like managing people, mixing assets (cash, bonds, & loans), doing public relations, running an efficient operation, expanding to new branches, getting new customers, and doing public relations in the community.
Tom said he liked helping people, not “bossing them around” (his words). Now suddenly he was telling people what to do. He felt uncomfortable with anything administrative and detested the complexity of the job and the public relations required.
“Before, Tom said, “people came to me. Now, I had to go to them.” Everything was different when Tom moved up.
So, Tom moved from loving his job and being the Golden Boy to hating his job and struggling with a base level of competence. Tom moved out of his fit.
The Peter Principle
The Peter Principle is a classic business model that says that people advance to their level of incompetence. Put another way, they advance past their “fit.” The Peter Principle states that people tend to increase in promotions until they reach the place where they won’t be promoted anymore and they have reached their level of incompetence. And there they stay, stuck while they and everyone around them suffers: the person, the organization, and the person who promoted them.
Top performing salespeople are promoted into management, in spite of the skills of sales being vastly different from the skills of management. The engineer with great technical skills is promoted to project manager. The great manager is promoted to a top tier isolated analyst position. The Peter Principle can even happen to entrepreneurs.
The Peter Principle and Entrepreneurs
John Hamm, a longtime entrepreneur and venture capitalist, wrote an article called, “Why Entrepreneurs Don’t Scale” (Hamm 2002). Entrepreneurs don’t scale because of the very qualities that serve a person well in starting up a company are the very same qualities that can undermine that person once the company is up and running. Loyalty to comrades, expertise at executing tough tasks, and single-mindedness are all essential components for a start-up, but these assets can backfire when a company is in maintenance mode (Hamm 2002). Once again, “fit” is essential and it’s easy for a company to grow past the skills of the founder.
So, what is the solution?
Lifestyle Fit: Demotion is okay
There are options in today’s workforce that were frowned upon in times past, but can actually be viewed as positive career moves today. Voluntarily taking a demotion in pursuit of less pressure and a more relaxed lifestyle is not always seen negatively today. Instead of upward mobility, people are often pursuing flexed mobility, a choice which allows them even more options to create “fit.”
Sometimes a poor fit is a basic mismatch between who you are and what the job requires. In that case, getting out of a “bad fit job” is simply the best option (like with the loan officer). Sometimes a poor fit is a matter of a poor fit with lifestyle (choosing a demotion may offer better options). Sometimes the poor fit simply requires growth and learning and is doable with focused effort (like with the entrepreneur). Regardless of the reason, seek fit.
Half-Truth: You should always move up.
Full Truth: You should only move up if you can maintain or create fit in doing so.
If you do move up, know that it will require more skills and learning. Don’t think that you can stay the same in your upward mobility.
Hamm, John. 2002. “Why Entrepreneurs Don’t Scale.” Harvard Business Review 80 (12):110-115.