Peter Principle

Updated on April 12, 2024
Article bySusmita Pathak
Edited bySusmita Pathak
Reviewed byDheeraj Vaidya, CFA, FRM

Peter Principle Meaning

Peter Principle is a management concept in which a corporation promotes individuals until they become incompetent. In doing so, the company evaluates employees primarily based on their current or previous job performance rather than their ability to handle a higher-level job profile. As a result, they fail to perform in their new roles due to a lack of required skills.

According to the Peter Principle theory, employees moving up in the hierarchy may start to feel incapable of handling their responsibilities at some point. The absence of competence negatively affects their productivity and hinders any further promotion. Though this promotion process seems misaligned, skill development training can solve incompetency issues.

Peter-Principle

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Peter Principle (wallstreetmojo.com)

Key Takeaways

  • The Peter Principle is a management principle in which a company promotes employees until they are rendered incompetent, thus hindering any further promotion.
  • The incompetence in performing their new responsibilities does not signify employees’ failure but the lack of skills essential to carry out the expected functions.
  • It warns businesses of the repercussions of promoting ineffective employees, such as reduced productivity, inefficient team handling, and poor business decisions.
  • Demotion, better pay, lateral arabesque, and skill development training are some of the most effective approaches to mitigate the negative consequences of poor promotion decisions.

Peter Principle Theory

Canadian educator Laurence J. Peter was the first to define the Peter Principle in his book “The Peter Principle,” co-authored with Canadian playwright Raymond Hull in 1969. He explained how people who are promoted up the corporate ladder reach a point where they can no longer hold the position.

Peter stated that it is not due to employees’ incompetence or signifies their failure, but rather to a lack of skills required to administer the expected functions. However, companies do not terminate such employees based on this only, causing them to remain stuck in the same job profile.

–>> If you want to learn Financial Modeling & Valuation professionally , then do check this ​Financial Modeling & Valuation Course Bundle​ (25+ hours of video tutorials with step by step McDonald’s Financial Model). Unlock the art of financial modeling and valuation with a comprehensive course covering McDonald’s forecast methodologies, advanced valuation techniques, and financial statements.

How Does Peter Principle Theory Work?

The Peter Principle describes situations in which people are promoted based on their current performance rather than the skills needed for the higher job. As a result, most promoted employees feel unhappy when they assume a higher position. It causes frustration in them, thereby affecting their productivity and the company’s profitabilityProfitabilityProfitability refers to a company's ability to generate revenue and maximize profit above its expenditure and operational costs. It is measured using specific ratios such as gross profit margin, EBITDA, and net profit margin. It aids investors in analyzing the company's performance.read more and preventing them from getting promoted again. In addition, employees’ incompetence after attaining higher positions makes companies evaluate them based on input factors rather than their performance.

In short, the Principle detects the loophole in the corporate structure caused due to the promotion of unskilled employees to positions that require advanced leadership and managerial skills. Therefore, the firm must ensure that the Principle’s warnings are appropriately addressed to remain productive.

For example, a sales representative performing well today and becoming a sales manager in the later stage would not necessarily do justice to the role. Likewise, a person could be a good salesman but not necessarily a good manager. And, therefore, the company might regret promoting them to a managerial position.

Companies can address these challenges by organizing skill development training sessions before and after promotions. As a result, they will know their firm’s expectations in their new position. They will also learn how to carry out their roles. They will study and try to shape themselves in accordance with their new tasks and responsibilities in this manner.

Peter Principle Examples

Let us consider the following Peter Principle examples to get an insight into the concept:

Example #1

An automobile firm decided to promote sales representatives Sam and Tracy to managers based on the tremendous sales figures they helped the company achieve.

Tracy managed a team of salespeople with ease since she was a natural leader. On the other hand, Sam struggled to meet the company’s expectations. His incapability was noticed by upper management. Furthermore, his subordinates never respected him or his decisions because of this.

Tracy continued to perform well and was promoted to sales manager once more. But she was dissatisfied since she was inefficient and lacked the leadership abilities required for the role.

Here, Sam reached the level of incompetency earlier, while Tracy felt incompetent later on. But they both reached that level at one point in their careers.

Example #2

study conducted in 2018 by three professors – Kelly Shue of Yale, Danielle Li of MIT, and Alan Benson of the University of Minnesota evaluated 53,035 sales employees at 214 American companies from 2005-2011. This research revealed how organizations promoted 1,531 sales executives to sales managers. 

The researchers discovered that the most efficient salespeople were more likely to be promoted to management positions, where they would have performed poorly. They demonstrated how the Principle was applicable in most business situations.

How To Prevent?

The Peter Principle warns corporate leaders of the consequences of promoting inefficient employees, although there are a few strategies to avoid the bad effects:

How-to-Prevent

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Peter Principle (wallstreetmojo.com)

1. Demotion

The first option is to demote employees who cannot execute their jobs after promotion. But, according to Peter, companies should use this strategy without condemning employees for failure. Instead, the firm must acknowledge that it made a mistake by elevating the wrong person to a higher position.

2. Offer Higher Pay Instead Of Promotion

Promotion usually comes with a hike in income. As a result, most employees are more inclined to get a better package than acquire a better designation. Another strategy to avoid the Principle is rewarding employees who do well with increased compensation rather than a promotion if they lack the required skills.

3. Lateral Arabesque

Instead of terminating promoted incompetent employees, firms can assign them to a role with a lower-level but better job title with fewer responsibilities. Employees would never know about the companies’ doubts about their efficiency this way. In a nutshell, it is the most harmonious way of coping with bad promotion decisions.

4. Skill Development Training

One of the most effective methods is to provide skill development training to employees to do their jobs effectively after being promoted. However, holding the sessions necessitates a significant investment of human and financial resources. As a result, businesses must plan training sessions, invest adequate time, and assist employees in acquiring skills. The individual will excel once the training is completed effectively.

Frequently Asked Questions (FAQs)

What is Peter Principle?

Peter Principle is a management philosophy based on the fact that organizations keep promoting people until they become incompetent. In this case, employees are evaluated mostly based on their current or previous job performance rather than their potential to handle a higher-level job profile. The concept was first proposed by Canadian educator Laurence J. Peter and Canadian playwright Raymond Hull in their book “The Peter Principle” in 1969.

How accurate is the Peter Principle?

In 2018, a research of salespeople in American organizations from 2005 to 2011 found that the most effective salespeople were more likely to be promoted to management positions and perform poorly in their new responsibilities. It demonstrated how the Peter Principle holds true in most business situations.

How to avoid the impact of the Peter Principle?

Laurence J. Peter, who proposed the concept, has suggested a few ways to mitigate the negative consequences of the Peter Principle:

Demotion
Higher Pay Instead Of Promotion
Lateral Arabesque
Skill Development Training

Recommended Articles

This has been a guide to Peter Principle and its meaning. Here we discuss how does peter principle works, how to prevent it, along with examples. You may refer to the following articles to learn more about finance.