Why the Peter Principle Works

Last Updated Aug 15, 2011 2:40 PM EDT

Why The Peter Principle WorksEveryone's heard of the Peter Principle - that employees tend to rise to their level of incompetence - a concept that walks that all-too-fine line between humor and reality.

We've all seen it in action more times than we'd like. Ironically, some percentage of you will almost certainly be promoted to a position where you're no longer effective. For some of you, that's already happened. Sobering thought.

Well, here's the thing. Not only is the Peter Principle alive and well in corporate America, but contrary to popular wisdom, it's actually necessary for a healthy capitalist system. That's right, you heard it here, folks, incompetence is a good thing. Here's why.

Robert Browning once said, "A man's reach should exceed his grasp." It's a powerful statement that means you should seek to improve your situation, strive to go above and beyond. Not only is that an embodiment of capitalism, but it also leads directly to the Peter Principle because, well, how do you know when to quit?

Now, most of us don't perpetually reach for the stars, but until there's clear evidence that we're not doing ourselves or anyone else any good, we're bound to keep right on reaching. After all, objectivity is notoriously difficult when opportunities for a better life are staring you right in the face.

I mean, who turns down promotions? Who doesn't strive to reach that next rung on the ladder? When you get an email from an executive recruiter about a VP or CEO job, are you likely to respond, "Sorry, I think that may be beyond my competency" when you've got to send two kids to college and you may actually want to retire someday?

Wasn't America founded by people who wanted a better life for themselves and their children? God knows, there were plenty of indications that they shouldn't take the plunge and, if they did, wouldn't succeed. That's called a challenge and, well, do you ever really know if you've reached too far until after the fact?

Perhaps the most interesting embodiment of all this is the way people feel about CEOs. Some think pretty much anyone can do a CEO's job for a fraction of the compensation. Seriously, you hear that sort of thing a lot, especially these days with class warfare being the rage and all.

One The Corner Office reader asked straight out in an email: "Would you agree that, in most cases, the company could fire the CEO and hire someone young, smart, and hungry at 1/10 the salary/perks/bonuses who would achieve the same performance?"

Sure, it's easy: you just set the direction, hire a bunch of really smart executives, then get out of the way and let them do their jobs. Once in a blue moon you swoop in, deal with a problem, then return to your ivory tower. Simple.

Well, not exactly.

You see, I sort of grew up at Texas Instruments in the 80s when the company was nearly run into the ground by Mark Shepherd and J. Fred Bucy - two CEOs who never should have gotten that far in their careers.

But the company's board, in its wisdom, promoted Jerry Junkins and, after his untimely death, Tom Engibous, to the CEO post. Not only were those guys competent, they revived the company and transformed it into what it is today.

I've seen what a strong CEO can do for a company, its customers, its shareholders, and its employees. I've also seen the destruction the Peter Principle can bring to those same stakeholders. But, even now, after 30 years of corporate and consulting experience, the one thing I've never seen is a CEO or executive with an easy job.

That's because there's no such thing. And to think you can eliminate incompetency from the executive ranks when it exists at every organizational level is, to be blunt, childlike or Utopian thinking. It's silly and trite. It doesn't even make sense.

It's not as if TI's board knew ahead of time that Shepherd and Bucy weren't the right guys for the job. They'd both had long, successful careers at the company. But the board did right the ship in time. And that's the mark of a healthy system at work.

The other day I read a truly fantastic story in Fortune about the rise and fall of Jeffrey Kindler as CEO of troubled pharmaceutical giant Pfizer. I remember when he suddenly stepped down amidst all sorts of rumor and conjecture about the underlying causes of the shocking news.

What really happened is the guy had a fabulous career as a litigator, climbed the corporate ladder to general ounsel of McDonald's and then Pfizer, had some limited success in operations, and once he was promoted to CEO, flamed out. Not because he was incompetent - he wasn't. And certainly not because he was a dysfunctional, antagonistic, micromanaging control freak - he was.

He failed because it was a really tough job and he was in over his head. It happens. It happens a lot. After all, this wasn't just some everyday company that's simple to run. This was Pfizer - a pharmaceutical giant with its top products going generic and a dried-up drug pipeline in need of a major overhaul.

The guy couldn't handle it. And when executives with issues get in over their heads, their issues become their undoing. It comes as no surprise that folks at McDonald's were surprised at the way he flamed out at Pfizer. That was a whole different ballgame.

Now, I bet those same people who think a CEO's job is a piece of cake will have a similar response to the Kindler situation at Pfizer. Why take the job if he knew he couldn't handle it? The board should have canned him before it got to that point. Why didn't the guy's executives speak up sooner?

Because, just like at TI, nobody knows ahead of time if people are going to be effective on the next rung of the ladder. Every situation is unique and there are no questions or test that will foretell the future. I mean, it's not as if King Solomon comes along and writes who the right guy for the job is on the wall.

The Peter Principle works because, in a capitalist system, there are top performers, abysmal failures, and everything in between. Expecting anything different when people must reach for the stars to achieve growth and success so our children have a better life than ours isn't how it works in the real world.

The Peter Principle works because it's the yin to Browning's yang, the natural outcome of striving to better our lives. Want to know how to bring down a free market capitalist system? Don't take the promotion because you're afraid to fail.

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