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The Peter Principle

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Some have observed that individuals perform worse after being promoted. The Peter Principle, which states that people are promoted to their level of incompetence, suggests that something is fundamentally misaligned in the promotion process. This view is unnecessary and inconsistent with the data. Below, it is argued that ability appears lower after promotion purely as a statistical matter. Being promoted is evidence that a standard has been met. Regression to the mean implies that future ability will be lower, on average. Firms optimally account for the regression bias in making promotion decisions, but the effect is never eliminated. Rather than evidence of a mistake, the Peter Principle is a necessary consequence of any promotion rule. Furthermore, firms that take it into account appropriately adopt an optimal strategy. Usually, firms inflate the promotion criterion to offset the Peter Principle effect, and the more important is the transitory component relative to total variation in ability, the larger the amount that the standard is inflated. The same logic applies to other situations. For example, it explains why movie sequels are worse than the original film on which they are based and why second visits to restaurants are less rewarding than the first.

Edward Lazear, Stanford University
in
The Peter Principle: A Theory of Decline

 

 

The Peter Principle

by Laurence J. Peter, Raymond Hull (Contributor)
Library Binding (October 1996)
Buccaneer Books; ISBN: 1568491611

Along with Parkinson's Law by C. Northcote Parkinson this is a "satirical sociology" masterpiece. And despite being written before programmers became a mass profession it is perfectly applicable to programming. It's a rather short and easy-to-read  book that consists of fictional stories about results of promotions in a typical administrative and business hierarchies. Must read for any programmer or system administrator with more than two year experience :-). Originally published in 1969 it coined the famous "The Peter Principle"

In a Hierarchy Every Employee Tends to Rise to His Level of Incompetence.

The concept is pretty universal and is related to the regression to the mean. As authors aptly states "Competence, like truth, beauty and contact lenses, is in the eye of the beholder. " In reality the performace always has a transitional (random) component.

The end result is that stable companies are more likely to have incompetent managers at many levels of the organizational structure whereas fast growing companies may avert some implication of this principle at least temporary.  "Employees", as the author points out, "do not want to be incompetent", but when management offers promotions that put the employees closer to their level of incompetence, the employees have no way of knowing that ahead of time. After all, if the offer is made it is because management "knows" the employee can do the job competently on his/her present level. But the interesting side effect observable in large and old organizations is that such decision might be made by  managers who are already at their level of incompetence (Dilbert's PHB).

Another related phenomenon is called Negative selection - Wikipedia, the free encyclopedia

In politics, negative selection is a process that occurs in rigid hierarchies, most notably dictatorships.

The person on the top of the hierarchy, wishing to remain in power forever, chooses his associates with the prime criterion of incompetence - they must not be competent enough to remove him from power. The associates do the same with those below them in the hierarchy, and the hierarchy is progressively filled with more and more incompetent people.

If the dictator sees that he is threathened nonetheless, he will remove those that threaten him from their positions - "purge" the hierarchy. Emptied positions in the hierarchy are normally filled with people from below - those who were less competent than their previous masters. So, over the course of time, the hierarchy becomes less and less effective. As this happens relatively often, once the dictator dies, or is removed by some external influence, what remains is a grossly ineffective hierarchy.

The Politburo of CPSU of the USSR was the impressive example of negative selection.  If Khrushchev was just marginally incompetent, inaptness of Gorbachyov was legendary and his inability to master Russian language rivaled Bush II.  Like Bushisms, "Gorbachvisms" make his a laughing stock for most of the population. 

Some of the short stories are not only funny, they might well be based on true events. Actually the message of some stories is dead serious: pyramid climbing is a dangerous sport and that's is exactly true in computer programming. Incompetent IS managers is too serious problem to ignore. This book also served as a cornerstone for Dilbert series which is a cartoon classic.

The book  helps you to withstand the pressure and the absurd of the software development and IS in general.

4 of 5 stars Finally understand the roots of incompetence in higher ranks, February 10, 2000
Reviewer: A reader from USA

The author hit the nail on the head when he discovered this principle! After years of pondering whether it's just me or if there really is such a thing as companies with huge percentages of incompetent managers, I finally feel relieved to know that I was not 'just imagining' things. The book made me take a hard look at myself and question whether I had reached my own level of incompetence, and based on the case studies in the book I started analyzing what WOULD make me reach my level. One thing I would have like to read more about is how those of us who have not yet reached their level of incompetence, can better manage the struggle with those who have reached their level and make our work days miserable.

4 of 5 stars Understanding why we as a nation fail so much, January 22, 2000
Reviewer: Jimmy P Ledbetter (see more about me) from Ridgecrest USA

I read the Peter Principle years ago and have read through it frequently ever since. My first time was while still in the military and it explained to me, a great deal of the things I saw go wrong. It left an impression upon me that lasted throughout my career and which still helps me today. It explained clearly why I was so frustrated with the way things had begun to deteriorate so badly once I was into the second half of my career. And it helped me to make certain career choices that I still believe to day were the most beneficial decision I could have made at the time, and I was glad I had that knowledge to consider.

Dr. Laurence and his associates hit the nail right on the head in describing the failing principles, due to the Peter Principle of our Political system, our Judicial System, and much more. On the whole we do promote to incompetence and it is our number one failing.

From the military point of view there are quite a few additional contributing factors, all Peter Principle related, which resulted in a decline in the American Military. Which include the radical feminist movement, promoting for gender rather than merit, the radical quota promotions, promoting by race, rather than merit, and our leader's failure to stand firm for core values.

The up or out policy is the epitome of the Peter Principle, as is the guaranteed promotion policy, and the reenlistment bonus program which has been a great failure. Of course this book applies to all walks of life and even applies to our Present White House occupant and many of our congressional members. And will apply to many of those running for political office today.

The Peter Principle is a must read for the student of our American social, political and judicial decline and what horror is in store for us in the twenty first century if we do not recognize the beast and kill it before it becomes unstoppable, which it may already be. A great read.

 

 

Old News

[May 19, 2003] Talking Shop What the management-level job requires in skills

In his bestseller, The Peter Principle, Dr. Lawrence J. Peter theorized that in a hierarchy, employees tend to rise to their level of incompetence. His view is that you will advance to your highest level of competence and consequently get promoted to a position where you will be hopelessly inept.

If you're a proficient and effective tech support pro, you're most likely demonstrating peak competence in your job right now. Very soon, your boss may commend you for your excellence and valuable contribution to your organization, and, to reward you for your efforts, favorably endorse your promotion to an executive position. But is the managerial level right for you? Or are you getting set up to be a statistic supporting the Peter Principle?

Before you deliberate on which company car will go well with your new upper management title, consider the career shift tips and insights we gathered from three former-techs-turned-managers. Here are the realities you need to consider, along with steps you need to take, to ensure that your promotion from tech to manager doesn't raise you to your level of incompetence.
 

The Peter Principle Proven

In case you've ever wondered why ignorance rises to the executive level, here is a simple explanation that is also a mathematical proof:

Knowledge is Power.

Time is Money.

And, as every actuary (with some physics training) knows:

Work
---------- = Power
Time

So, if
Knowledge = Power
and
Time = Money

then through simple substitutions,

Work
---------- = Knowledge
Money

Solving for Money, we get:

Work
-------------- = Money
Knowledge

Thus, If Work is held constant as a positive number (no matter how small!) Money approaches infinity as Knowledge approaches zero.

What this means is:

All else being equal, the less you know, the more you make

Magellan's Log The Dick Principle by Harold J. Dick, Ph.D.No. 22 in The Idea Man Series.

In 1969, Laurence Peter set the world of management on its ear by announcing a revelation:

"In a hierarchically structured administration, people tend to be promoted up to their level of incompetence. Thus, every position will eventually be occupied by someone who is not quite capable of doing the job."

The Peter Principle quickly entered the curricula of all with-it MBA programs, but also turned out to have such widespread applicability that it became part of corporate folk knowledge. Everybody immediately grasped the principle because everybody recognized that their own boss was an example of the principle in action.

Careers were made and careers were shattered as people reacted, and overreacted, to Dr. Peter's great insight.

Having acknowledged my debt to the past, I now suggest it is time we update the Peter Principle.

The world that Larry Peter occupied and analyzed so cleverly is one that has come to be labeled the "Old Economy," the world of stable companies creating value the old-fashioned way: they worked for it. Such was the stability in that world that employees could actually expect to spend their careers with one company. It is a world that is still studied as the norm in the degree programs of economics departments and business schools.

That old working world still has applicability, but the time has come to question its pertinence in the brave new world of dot-coms.

For, the Old Economy continues to exist side-by-side with the New Economy, just as various cottage industries hummed along in their quaint medieval ways through much of the 19th century as the Industrial Revolution was rapidly rendering the old ways useless.

Brick-and-mortar we shall not always have with us, but probably for a while yet they will continue, including their legions of careers capped off by the unpleasant reality reflected in the Peter Principle.

The New Economy of the cyberworld requires a new theory of mismanagement, a new statement of the dizzying reality behind the glitzy career life in the dot-coms, the awfulness of careers spent surfing wave after tumultuous wave of IPO's. The New Economy is a world not of slow accretion, of gradual promotions, but of incessant and rapid job-jumping.

I give you, then, the Dick Principle:

In a cyber-economy,
people tend to be RE-hired
at their level of incompetence.

I hasten to explain:

Example No. 1 of the Dick Principle in Action:
Joe makes a software breakthrough at Company A, cashes in as the stock skyrockets. Joe is hot. Company B headhunts and hires Joe to oversee their software development team. Joe is brilliant at writing code but has no talent at nurturing others to write brilliant code. In other words, Joe is a lousy manager. Joe has been hired at the level of his incompetence. Joe has been dicked by the Dick Principle.

Example No. 2 of the Dick Principle in Action:
Jack has a conceptual brainstorm for Company C. The resultant dot-com becomes the overnight darling of NASDAQ. Jack cashes in and is hot. Company D lures Jack to be its CEO. Jack is a solitary, maverick thinker and has no talent at management. Jack has been dicked by the Dick Principle.

Example No. 3 of the Dick Principle in Action:
Mary is a brilliant manager with Company E. She is excellent at nurturing people and rises quickly to V-P for personnel and human resources. Company F makes her a huge offer: Come be our CEO and do for our talented team what you did with Company E. Mary quickly discovers that at Company F she has no time to nurture. The company is under tremendous investor pressure and can think only about what the price of the stock will be five minutes from now. Mary has been dicked by the Dick Principle.

Of course, the difference today is that Joe, Jack, and Mary have no financial worries. By the time they are hired at their level of incompetence, they all come equipped with golden parachutes. Thus, they have no personal need to maintain the pretense of competence in their new jobs any longer than they want to.

They have gained a world of wealth and financial security. All they've lost is meaning in their lives. They're no longer doing what they're good at and what they really enjoy.

The more things change, the more they stay the same. In its effect on people, the New Economy then turns out to be only the Old Economy in dot-com clothing. In moving from the Peter Principle to the Dick Principle, we have exchanged one career dead-end for another, one management foundering in incompetence for another also foundering in incompetence.

On the macro side, the Dick Principle means this: We already know that one price of cyber-technology is instability and rapid change (Moore's Law, etc.). Through the Dick Principle, we can see that the instability and rapid change also include the very people who are supposedly guiding and shaping the brave new world. Structurally, we have traded mid-level, stagnant incompetence for top-level, volatile incompetence.

Steve Jobs, with his successful return to Apple, is the exception that proves the principle. For every Steve Jobs, you have a thousand... Well, I don't want to get into naming names. If you are involved in, employed by, or invested in the cyber-world, you can easily supply your own examples of the Dick Principle at work.

Peter's Principle and Education

In 1994 I applied for and obtained an Excellence in Teaching award. Looking back I don't know how I even had the cheek to apply. In fact I no longer believe in the concept of a Excellence in Teaching award - perhaps a "Facilitator of Learning" award - or a "He was Lucky to have Good Students" award are worth consideration. (No one teaches people, what happens is that under some circumstances people learn - do you believe that you could write a book that "teaches" someone how to ride a bike?)

The education process is a formal application of the Peter's Principle - "People are promoted to the level of their incompetence". In the worst mode the education system just keeps moving a student up the ladder until he fails. There are a number of possible exits from the education system. A good exit occurs when a student achieves a level and chooses not to proceed to the next level. A poor exit occurs when a student fails between levels, at the second year of a four year course, for example. It does not follow that a student who can achieve a pass in first year subjects will be able to achieve a pass in higher year subjects. I know a bloke who with moderate training ran a marathon in 3 hours 18 minutes. The following year with more intensive training he ran it in 2 hours 56 minutes. Had he trained intensely in an attempt to achieve 2 hours 45 minutes on his third run, he would, most likely, have failed and done himself an injury in the process. It does not follow that a person's capabilities are indefinitely extendible with training. Coping with Pascal in first year does not imply the capacity to cope with C++ and Object Oriented Programming in year 3.

Now that students are encouraged to do double degrees, the failure exit is more likely, the hurdles have been raised, there are more of them and they are of greater diversity. This really is Peter's Principle land!

Recommended Links


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Peter Principle - Wikipedia, the free encyclopedia

The Peter Pyramid - Wikipedia, the free encyclopedia

Laurence J. Peter - Wikipedia, the free encyclopedia

Parkinson's law - Wikipedia, the free encyclopedia

The generalized Peter Principle in evolution systems tend to develop up to the limit of their adaptive competence


The Peter Principle was first introduced by L. Peter in a humoristic book (of the same title) describing the pitfalls of bureaucratic organization. The original principle states that in a hierarchically structured administration, people tend to be promoted up to their "level of incompetence". The principle is based on the observation that in such an organization new employees typically start in the lower ranks, but when they prove to be competent in the task to which they are assigned, they get promoted to a higher rank. This process of climbing up the hierarchical ladder can go on indefinitely, until the employee reaches a position where he or she is no longer competent. At that moment the process typically stops, since the established rules of bureacracies make that it is very difficult to "demote" someone to a lower rank, even if that person would be much better fitted and more happy in that lower position. The net result is that most of the higher levels of a bureaucracy will be filled by incompetent people, who got there because they were quite good at doing a different (and usually, but not always, easier) task than the one they are expected to do.
[PDF] The Peter Principle: A Theory of Decline File Format: PDF/Adobe Acrobat - View as HTML

Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-64, October. [Downloadable!]
Other versions:

Fairburn, J.A. & Malcomson, J.M., 2000. "Performance, Promotion, and the Peter Principle," Economics Series Working Papers 9926, University of Oxford, Department of Economics.
Other versions:

Baker, George & Gibbs, Michael & Holmstrom, Bengt, 1994. "The Internal Economics of the Firm: Evidence from Personnel Data," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 881-919, November. [Downloadable!]

Joao Ricardo Faria, 2000. "An Economic Analysis of the Peter and Dilbert Principles," Working Paper Series 101, School of Finance and Economics, University of Technology, Sydney. [Downloadable!]

Anderson, Ralph E. & Dubinsky, Alan J. & Mehta, Rajiv, 1999. "Sales managers: Marketing's best example of the peter principle?," Business Horizons, Elsevier, vol. 42(1), pages 19-26. [Downloadable!]


Reviews

Book Review - Peter Principle

Peter Principle

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Just a Bump in the Beltway The Peter Principle

Big Bonuses Still Flow, Even if Bosses Miss Goals
By GRETCHEN MORGENSON

It was the kind of mistake that wage slaves can only dream of. Because of what the company called an "improper interpretation" of his employment contract, Sheldon G. Adelson, chairman, chief executive and treasurer of the Las Vegas Sands Corporation, received $3.6 million in salary and bonus last year, almost $1 million more than prescribed under the company's performance plan.

Four more top executives of the Las Vegas Sands, which owns the Venetian Resort Hotel and Casino, received more than they should have. The total in excess bonus payments for the five men was $2.8 million.

The compensation committee of the board conceded that it had made an error. But it said that "the outstanding performance of the company in 2005" justified the extra money, and it allowed the executives to keep it.

Shareholders of Las Vegas Sands did not fare as well. The value of their holdings fell 18 percent last year.

As executive pay packages have rocketed in recent years, their defenders have contended that because most are tied to company performance, they are both earned and deserved. But as the Las Vegas Sands example shows, investors who plow through company filings often find that executive compensation exceeds the amounts allowed under the performance targets set by the directors.

Executives of companies as varied as Halliburton, the military contractor and oil services concern; Assurant, an insurance company; and Big Lots, a discount retailer, all received bonuses and other pay outside the performance parameters set by the boards of those companies.

It is the equivalent of moving the goalposts to shorten the field, compensation experts say.

"Lowering the hurdles is especially disconcerting because very often the goals are not set all that high to begin with," said Lucian Bebchuk, professor at Harvard Law School and author with Jesse Fried of "Pay Without Performance." Mr. Bebchuk said shareholders should be especially alert to increases in bonuses because more companies were shifting away from stock options and into cash incentives.

Some employment agreements actually stipulate that they will provide bonuses even if company performance declines. The agreement struck in 2004 by Peter Chernin, president and chief operating officer of the News Corporation, entitles him to a bonus even if earnings per share fall at the company. If earnings rise by 15 percent in any given year, Mr. Chernin's bonus is $12.5 million. But if they fall 6.25 percent, Mr. Chernin's bonus is $4.5 million, and an earnings decline of 14 percent translates to a $3.52 million bonus.

Last year, Mr. Chernin received $8.3 million in salary and $18.9 million in bonus pay. A company spokesman declined to comment on the bonus structure. He confirmed that the company's chief executive, Rupert Murdoch, has a similar bonus arrangement. Company filings show that Mr. Murdoch received a bonus of $18.9 million last year.

The rich really are different than you and me. The culture of the extremely affluent has no accountability. This sort of flies in the face of the American myth that you do well by working hard and doing a good job. Above a certain level, that's a crock. The very wealthy protect each other and create a culture of incompetence that's insulated by money. Our very own W is the product of this culture.

The Peter Principle and the Neocon Coup by Robert Scheer

I'm not referring to the latest attempt to reconquer Iraq, but rather the wholesale political revenge campaign being waged by the hard-liners in the Bush administration against anybody and everybody inside the government who challenged the way the second Persian Gulf war in a decade was marketed and run.

Out: Secretary of State Colin Powell, whose political epitaph should now read, "You break it, you own it" for his prescient but unwanted warning to the president on the danger of imperial overreach in Iraq.

Out: Top CIA officials who dared challenge, behind the scenes, the White House's unprecedented exploitation of raw intelligence data in order to sell a war to a Congress and a public hungry for revenge after 9/11.

Out: Veteran CIA counterterrorism expert and Osama bin Laden hunter Michael Scheuer, better known as the best-selling author "Anonymous," whose balanced and devastating critiques of the Iraq war, the CIA and the way President Bush is handling the war on terror have been a welcome counterpoint to the "it's true if we say it's true" idiocy of the White House PR machine.

Meanwhile, incompetence begat by ideological blindness has been rewarded. The neoconservatives who created the ongoing Iraq mess have more than survived the failure of their impossibly rosy scenarios for a peaceful and democratic Iraq under U.S. rule. In fact, despite calls for their resignations — from the former head of the U.S. Central Command, Gen. Anthony Zinni, among others — the neocon gang is thriving. They have not been held responsible for the "16 words" about yellowcake, the rise and fall of Ahmad Chalabi, the Abu Ghraib scandal, the post-invasion looting of Iraq's munitions stores and the disastrous elimination of the Iraqi armed forces.

BELLACIAO - The Peter Principle and the Bush Administration - villy - Collective Bellaciao

Last night on Frontline they broadcast a biting documentary entitled "The Dark Side", which revealed the truth about how the CIA and the Pentagon were at odds about evidence for going to war in Iraq,etc. These guys emerged as the "Gang that couldn’t shoot staight", and reminded me of Lawrence Peters, who created the "principle" IN ANY HEIRARCHY, PEOPLE RISE TO THE LEVELY OF THEIR INCOMPETENCY AND REMAIN THERE.

Nowhere can I find better examples of this rule than in the Bush administration. To wit:

CONDOLEEZZA RICE: She was a talented pianist, an Oil Executive, a Russian studies expert,etc....but when she was made National Security Chief, she was suddenly clueless. Ditto when she "sidestepped" into her current position as Sec. of State.

COLIN POWELL: Despite having committed criminal acts (Iran-Contra Pentagon arms arrangements), Powell was highly respected worldwide until he buckled under and agreed to make the preposterous UN presentation of "evidence" of WMDs. Now he’s in disgrace and tyring to find someone to blame for HIS inadequacy.

DONALD RUMSFELD: A highly successful businessman and experienced government "servant" in past administrations, when he joined the Bush gang he suddenly "lost it", and made a series of absurd errors which fouled things up in Iraq beyond belief.....and he’s still at it. He refuses to resign.

DICK CHENEY: A long time politician and businessman, he was successful (if not popular) in most undertakings until he became VP (at his own request). He then got caught rigging energy contracts, feeding Halliburton good deals, and making endless false statements about WMDs and Husseins’ "connections" to al Qaeda..despite loads of evidence to the contrary. Now he’s among the most despised people in the entire world!

PAUL WOLFOWITZ: The neocon with offices in the Pentagon, Asst. Sec. of Defense, and professional liar once in the administration. He "knew" that Iraq’s prodigious oil output would "pay for the war", and predicted that we’d be welcomed in Iraq "with flowers and chocolate", and that the war would be a "cakewalk"...NOT!

GEORGE W. BUSH: I must say that Dubya just doesn’t fit here, but had to be mentioned, of course.
Bush was never really successful in his own right, having failed with a sports team (although bailed out), an oil company (bailed out) and as governor of Texas (popular, but what did he actully accomplish?). No, he was just a clown who was a part time drunk and alleged drug user who saw the light and straightened up enough to get "selected" as President...twice. Lawrence Peter would be lost when trying to figure out how one of the dumbest and most ignorant of all candidates could ever have achieved what he did.

What does HE know, anyway?

Bushisms "We are ready for any unforseen event which may or may not happen." ...


 

Last modified: November 08, 2008