Why Are Managers Bad At Their Jobs? (The Peter Principle)

• Many people wonder why their boss seems incompetent.
• The answer may lie in the Peter Principle, which suggests that good employees can become bad managers.
• Historical and recent studies reveal that technical skills do not guarantee managerial success.
• There are unconventional promotion strategies that could counteract the Peter Principle.
• Consider how your career path aligns with your strengths and aspirations.
• 80,000 Hours offers resources to help you find a fulfilling career.

Hi, welcome to another episode of Cold Fusion.

Why is my boss so incompetent? It's a relatable question that you've probably asked yourself at one point in your life. If you're nodding your head in agreement, then this video is for you. The answer might lie in a concept called the Peter Principle.

The whole thing started off as a bit of a joke, but has now become a global phenomenon, and it's even been studied in top business schools. By the end of this video, you'll know exactly why good employees become the worst managers. You may think your boss is incompetent, but it might not be their fault that they're so bad at their job. It sounds confusing, but it is interesting. Let's get right into it.

You are watching Cold Fusion TV. Before we get started, just some quick housekeeping. This is just to let you know that Cold Fusion episodes are now available on Spotify, so you can watch them there if you like.

I saw competent engineers getting promoted to supervisory positions. They were great at dealing with things and incompetent at dealing with people. And over and over again, I saw this phenomenon and I called it the Peter Principle. In a nutshell, the Peter Principal says that employees climbing the corporate ladder will inevitably become incompetent.

The idea was formulated by Canadian hierarchologist and professor Lawrence J. Peter, and it was first laid out as satire in the 1969 best-selling book, Why Things Always Go Wrong In Action, It Looks Like.

Meet corporate cubicle master, Mr. James Harrison. James is a senior software engineer who works overtime debugging problems in products at a large firm. He goes above and beyond. James has just put a down payment on a house, so he's hustling hard to get a promotion.

So when the company's engineering manager quits, the big bosses call James into an office. External hiring is always risky, they say. So James is offered the job, and he takes it. His hard work is paid off, his salary goes up, and he gets a new title.

But the thing is, now his job is all people, no tech. He's now managing a team for software development. He oversees testing and is in charge of solving production issues as they arise. And he never has to dread performance reviews.

Unfortunately, mastering code is a different skill set from managing people. He finds himself way over his head and also finds it hard to let go of control. He micromanages and misses the mark on communicating critical information to the team effectively. And just like that, James has reached his level of incompetence. But it wasn't his fault. I'll explain later.

The logic is simple enough. Employees are promoted based on current and not future potential performance. And so when that employee moves up the corporate ladder, they take on more managerial roles or responsibilities which require a completely different skill set than the ones that got them there in the first place.

If they can't adapt, they're not going to be promoted again. But if they succeed at that level, they will be promoted again and again until they find themselves in a position where they struggle to perform. The end result is that they get stuck at that level while being incompetent.

The principle isn't confined to people, but technology and innovation too. Consider the cases of Kodak, Blockbuster, and BlackBerry. Companies that plateaued in innovation after failing to recognize and act upon new opportunities.

So is there any legitimate evidence that actually supports the Peter Principle? How true is the Peter Principle? In 2009, Google wanted to foster better bosses within the company. So they launched Project Oxygen, which studied over 10,000 observations.

And they found that out of everything, technical knowledge was the least important thing to be a good boss. A group of professors from MIT, the University of Carlson, and Yale set out to prove the Peter Principle. They studied data from 214 firms to test if top-performing sales reps were likely to be promoted to sales managers. Sure enough, they were.

But here's the twist. The studies also found that the best sales reps turned out to be the worst managers.

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Steve Ballmer was a great salesman but when he was promoted to Microsoft CEO, he dropped the ball on multiple products, and he shipped bad ones and even laughed when the iPhone was released.

Then Steve Jobs goes to Macworld and he pulls out this iPhone. What was your first reaction when you saw that?

$500 fully subsidized with a plan. I said that is the most expensive phone in the world and it doesn't appeal to business customers because it doesn't have a keyboard which makes it not a very good email machine.

Well, take John Scully, the marketing genius behind the Pepsi taste test. Steve Jobs saw the success and put John to work at Apple, and what happened?

John Scully fired Steve Jobs, and this was over them butting heads over the production of the Macintosh, an expensive but forward-looking computer. Scully himself later said that it was "a big mistake that he was ever hired."

There's also Dick Fuld of Lehman Brothers—a great trader but a massively incompetent CEO. He was at the reins when the largest bankruptcy in history became a global symbol of failure.

Dick Fuld is blamed for betting the farm on the way up, then stubbornly refusing to recognize the company's dire straits on the way down. But interestingly, this isn't just a modern issue.

Bosses tending to be incompetent may actually go back hundreds of years. A 1763 play by Gothold Lessing was all about an army sergeant. But there's one line in the play that might actually sound familiar. When refusing the opportunity to rise up the ranks, the lead character says, "I am a good sergeant. I might easily make a bad captain and certainly an even worse general."

One knows from experience. In Psychology of Military Incompetence, psychologist Norman F. Dixon connects some of history's worst military failures to officers being promoted based on success in lower ranks.

The gist is lower rank officers are taught to be authoritative, disciplined, and obedient. But as leaders, these traits are exactly what makes them arrogant, prone to groupthink, and resistant to change. In short, good followers do not become good leaders.

However, while there is some evidence for all of this, humans are complicated beings and there may be other things at play. American economist Edward Lazia disagrees with the Peter Principle. He argues that instead of something being wrong with the corporate promotional structure, employees are prone to regression to the mean and therefore ability appears lower after promotion—purely as a statistical matter.

In simple terms, employees go all in when chasing that promotion. But that increased effort and productivity isn't sustainable. So once promoted, employees revert back to their normal pace. From the outside, it just looks like they're bad at their jobs.

As for corporate James Harrison, our protagonist, now his company has lost a skilled software engineer and gained an incompetent manager.

So why do good employees become bad bosses? There's research to say that when employees become bosses, they feel out of depth, which leads to micromanagement. In an academic paper, Professor Richard D. White Jr. states that many people cannot make the transition from worker to supervisor, and if incapable of doing their new job, they micromanage those doing their old job.

So what is the effect of all that? Do bosses actually get in the way? Do they hamper the effectiveness of how those under them work? Well, as it turns out, having a bad boss makes you a worse employee.

Incompetent bosses directly impact employee engagement, and it causes more stress than anything else. In fact, the worse your boss is, the higher the chances are of you having serious health problems such as anxiety or even a heart attack.

People don’t quit companies, they quit bosses. And believe it or not, this has led to $223 billion in turnover costs in the past five years.

All in all, a meta-analysis of 57 studies found that the damage caused by bad bosses outweighs any good that competent ones can bring. Gallop Chairman Jim Clifton explained that no amount of excellent rewards, well-thought-out career paths, stimulating work environments, EAP programs, health insurance, and other perks will make much difference to the people stuck with bad bosses.

So if only 1 in 10 of us actually have what it takes to be a decent manager and on top of that only 38% even want to take a manager role, are we all just doomed to incompetence?

If we find a way to overcome the Peter Principle, businesses will have happier customers, employees will have fewer sick days and be more productive, and things will be much safer. But what would it take?

The Peter Principle does expose some flaws in meritocracy. But surely the solution isn't to stop promoting people based on skill and competence, right? In the book The Meritocracy Trap, Yale law professor Daniel Markovitz writes that the solution to overwork, inequality, and stress is a compressed meritocracy where more credit is given to the middle-skilled employees.

So what if we promoted people sideways instead of upwards? This study from Samuel Curtis Johnson Graduate School of Management found that lateral career moves should come before any promotion and can help create competent leaders.

Now this is where things get a bit more rogue. When a group of Italian researchers set out to test the Peter Principle, they found that the most successful promotion strategy was one that a business would never dare to try.

They set up an agent-based computer simulation of a typical company hierarchy and then used mathematical models to test the common method of promoting the best employees as well as some new ideas. Here’s what they found.

To overcome the Peter Principle, companies should either promote people randomly or promote the best and worst employees. It's a super unconventional idea that plays into Pundit's Paradox, a game theory where mixing losing strategies can lead to a win.

In short, two wrongs do make a right. Back in 2001, researchers at the University of Texas at Dallas found the same thing. Random promotions were better than the common promotion strategies.

And then there's the up and out system pioneered over a century ago by Paul Kravath. It's used by top firms like McKinsey, BCG, Bain, and other major law firms. Essentially, up and out expects new hires to rise through the ranks to partner within a specific timeframe or be fired.

According to Peter himself, employees can and should avoid reaching their level of incompetence by pretending to be just competent enough not to get fired but too incompetent for a promotion.

So maybe all of Gen Z, who’s quite quitting, might just be onto something. Should we go throughout life being conditioned to keep on accepting that next reward? To keep on running like a squirrel in a cage? To keep on striving for that carrot on the stick?

Or should we use our ability to be rational and think about where am I going? What is the purpose of my life? Is reward through promotion the reward for me? Or are there other rewards through other aspects of living?

This is the question I wanted to cover this topic because it seems like today more than ever, a lot of companies are being led by people that clearly aren't the best fit for the job. So I just wanted to dig into some reasons and why this was.

But I do want to ask you a question. If within your workplace a new promotional system was implemented, which type would you prefer? Random promotions, lateral promotions, or the up and out system? And also, if you're a manager, I hope this episode wasn't too offensive for you.

So if you did like this video, feel free to check out anything else on this channel. The previous episode was a bit slept on, but it was an insane story about how a computer glitch sent thousands of innocent people to prison, and nobody believed those victims for over a decade. It's pretty interesting, so I'll leave a link for it below.

So now that we're clear on why your boss might be incompetent, it might also be worth thinking about your career path. Have you ever thought about how long a career is? On average, it's about 80,000 hours of your life, so it's worth spending some time to plan it.

And this is where the nonprofit 80,000 Hours can help. After 10 years of conducting research with academics at Oxford University, they've come up with some of the most fulfilling career paths to help solve some of the world’s most pressing problems.

80,000 Hours has a job board that's constantly updated with hundreds of active job openings that they think might help you have a higher impact. You can filter the job by location, role type, job requirements, and what problem area they work on.

I just want to highlight that everything that they provide is free. They're a nonprofit. Their only aim is to help you find a fulfilling, high-impact career. For example, I think the career path of information security in high-impact areas is critically important and there'll be more demand as time passes.

And they've got an entire career review on it. Go to 80,000hours.org/coldfusion to be sent a free copy of their in-depth career guide which helps you learn about what makes for a high-impact career. Get new ideas for impactful paths and make a plan based on what you've learned and put it into action.

So that's 80,000hours.org/coldfusion. Okay, so my name is Degogo, and you've been watching Cold Fusion, and I'll catch you again soon for another episode. Cheers guys. Have a good one.

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