The Peter Principle: When Managers Do Terrible Things

The Peter Principle argues that people who have success in big hierarchical organizations are promoted and promoted and promoted until they reach their own level of incompetence. After this, they never get promoted again and are often stuck there for life. To understand this better let’s read on for a real life example.

The full story

David and Diana, two graduates, first met at a sales training to become representatives for P Pharma. They were so proud to have gotten a job in which they could actually help people. The company had just invented Oxy Devil, a promising new painkiller, which the company advertised as being non-addictive. Little did they know that they had joined one of the most dangerous organizations in modern America.

Both do a good job of convincing doctors to prescribe Oxy Devil, whenever one of their patients has pain. Over the years they all become friends and often celebrate their achievements together. Both deliver great sales numbers and eventually get promoted to managers. 

Diana and David get promoted

The transition happens without much training and while Diana was a great rep, she is a terrible manager. Colleagues begin disrespecting her and Diana becomes very unhappy at work. As a result, she decides to put less effort into the job and doesn’t realize that something odd is going on. Some members of Diana’s team are selling Oxy Devil by the millions to small unknown clinics.

David is a natural. He knows what to do with his weakest reps and how to celebrate those who perform well. He becomes a rising star in the organization and after a few years gets promoted to the position of Sales Director. 

Now, when Diana sees David in the cafeteria, she avoids him. She’s afraid to expose her inabilities. She is overly focused on herself and doesn’t realize how stressed he looks. David’s new position as a director is highly complex. He lacks the analytical skills to make sense of the numbers. He does not understand why the sales of Oxy Devil have increased so dramatically. He feels insecure. In order to compensate for that feeling, he starts working extra long hours. The night before his first board meeting he doesn’t sleep at all. He’s too afraid others will realize that he’s a complete failure at his job. 

The meeting starts with a science team, they present new research that reveals that Oxy Devil is in fact very addictive and that hundreds of thousands of people could be affected. The room gets completely quiet. Then the lawyer speaks up and confirms that there is nothing to worry about as the product has been approved by the FDA. She adds that sales should now soar until the patent expires. The marketing director is relieved. He can carry on running the same TV commercials. David wants to say something but doesn’t dare speak up. There is only one person who understands that some of the people in the room have reached the so-called Peter’s Plateau or their final level of incompetence. This is Richard Succar, CEO and member of the billionaire P Pharma family. So, how does Peter’s Principle work?

The Peter principle

People advance in their careers because they have high skills in a specific task. Once promoted, these skills are often irrelevant to the new job. The new skills required are above their ability level or they may not have received the required training. Note that their new manager may also be a victim of the Peter Principle and doesn’t realize that training would be a good idea. 

And, there are incentives at play. People often work hard to reach a certain position or salary. Once they achieve that, some get lazy. 

Once people lose their passion they stop learning. They may fail to keep up with new developments, which may eventually lead to poor quality of work. In order to protect their comfort zone they challenge any new idea or person that can make their lives uncomfortable. 

Employees that are incompetent are often unhappy. They left a job at which they were fantastic and well respected by their colleagues, now they watch how their colleagues get promoted or remain equally stuck. This has a negative impact on the company. Frightened to lose their jobs, incompetent managers celebrate obscurity and implement complicated procedures. These procedures only make sense to the manager and leave colleagues feeling confused and uninformed. Some may work very hard to make up for the lack of skills, for this reason their supervisors don’t dare let them go. The results are often complex, incompetent corporations that move too slow to innovate. 

The Peter Principle was first introduced by authors Lawrence Peter and Raymond Hull in 1969. Since its introduction, it has been an often discussed topic in the area of leadership. In 2018, professors Alan Benson, Danielle Lee and Kelly Xu analyzed sales workers’ performance and promotion practices at over 200 American businesses. Consistent with the principle, the researchers found that high-performing sales reps were more likely to be promoted up the corporate ladder regardless of their managerial potential which led to massive costs to the businesses. 

The real story

While our story of David and Diana was fiction, let’s learn how the real story unfolded…

Purdue Pharma introduced an opium-based drug called OxyContin in 1996. It was aggressively marketed as smooth pain control for moderate to severe pain. Sales grew to over $1 billion in the year 2000. 

In 2016, twenty years after its introduction, four Americans were dying each day from overdoses involving prescription opioids. Over 6 million had reportedly consumed OxyContin non-medically. 170,000 people started using heroin for the first time, many of which used OxyContin before. 

The State of Massachusetts sued Richard Sackler, Purdue Pharma, 15 executives and the Sackler family, alleging they misled doctors and patients about the risks of OxyContin in order to boost sales. 

Fictional David might end up in jail. Fictional Diana probably gets away with regrets.

“My father worked all his life for the same company and was happy in his job as a senior design draughtsman. He often used to talk about people being promoted to the level of their incompetence. Now I know the principle behind this. Thank you.”

– Keith Bessant


Dig deeper

Classroom exercise

Imagine you are starting a new business. Ask your class what they would do to overcome the Peter Principle in their own business. Would they offer promotions based on skills or current success? Would they offer comprehensive training for new managers? Let us know some of your students best and most creative ideas in the comments below!

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