Promotions and the Peter Principle*

Abstract

The best worker is not always the best candidate for manager. In these cases, do firms promote the best potential manager or the best worker in their current job? Using microdata on the performance of sales workers at 131 firms, we find evidence consistent with the Peter Principle, which proposes that firms prioritize current job performance in promotion decisions at the expense of other observable characteristics that better predict managerial performance. We estimate that the costs of promoting workers with lower managerial potential are high, suggesting either that firms are making inefficient promotion decisions or that the benefits of promotion-based incentives are great enough to justify the costs of managerial mismatch. We find that firms manage the costs of the Peter Principle by placing less weight on sales performance in promotion decisions when managerial roles entail greater responsibility and when frontline workers are incentivized by strong pay for performance.

Policies in Relational Contracts

“…1 Biased promotions arise even though all parties have deep pockets, so this example provides an answer to Baker et al (1988)'s puzzle of why rms use promotions in addition to pay to motivate their employees. It also rationalizes the nding in Benson et al (2017) that some rms systematically promote high-performing employees over peers who are more likely to be good managers based on ex ante observable characteristics.…”

“…And importantly, these decisions are often made on the basis of past performance. Supervisors promote those who have performed well, even if they would not make the best managers (Benson et al (2017)).…”

Strategic shirking in competitive labor markets: A general model of multi‐task promotion tournaments with employer learning

“…These solutions to strategic shirking require that firms can commit to future job assignments, which may be challenging in practice and which is disallowed in the present analysis, though discussed at the end of Section 5. Benson, Li, and Shue (2019) provide empirical evidence from the sales industry suggesting that, in fact, firms can commit to promotion rules that reward sales performance, even though other skills, such as leadership, are more valuable in managerial positions. Such employer behavior can be interpreted as an attempt to mitigate the strategic shirking problem.…”

Human Resource Practices, Failure Management Approaches and Innovations in Serbian Public Administration

“…Promotion as a phenomenon does not have a straightforward relationship with the performance of employees. The Peter Principle states that firms prioritize current job performance in promotion decisions at the expense of other observable characteristics, which can lead to a managerial mismatch (Benson, Li and Shue, 2019).…”