Promotions and the Peter Principle

44 Pages Posted: 4 Oct 2017 Last revised: 3 Aug 2019

See all articles by Alan Benson

Alan Benson

University of Minnesota - Twin Cities - Carlson School of Management

Danielle Li

Massachusetts Institute of Technology (MIT)

Kelly Shue

Yale School of Management; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: February 12, 2018

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 her 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.

Keywords: Peter Principle, Incentives, Promotions, Managers, Tournament Theory

JEL Classification: J3, M5

Suggested Citation

Benson, Alan and Li, Danielle and Shue, Kelly, Promotions and the Peter Principle (February 12, 2018). Quarterly Journal of Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3047193 or http://dx.doi.org/10.2139/ssrn.3047193

Alan Benson

University of Minnesota - Twin Cities - Carlson School of Management ( email )

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HOME PAGE: http://https://www.alanmbenson.com/

Danielle Li

Massachusetts Institute of Technology (MIT) ( email )

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Kelly Shue (Contact Author)

Yale School of Management ( email )

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National Bureau of Economic Research (NBER) ( email )

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