Incentives, learning, task difficulty, and the Peter Principle: Interpreting individual output changes in an Organisational Hierarchy

This paper examines the way in which individuals' output changes as they are promoted within an hierarchical organisation. We suggest a decomposition of the change in output which allows us to see that changes in tournament incentive may in fact disguise part of the observed fall in output. We discuss the role which may be played by learning on the part of line managers, and changes due to the change in grade which a promotion entails. We are unable to distinguish whether the effect of grade itself is due to increased task difficulty or other changes which a higher grade entails such as increased span of control but we show how to work out the contribution which can be attributed directly to the Peter Principle.

► We undertake empirical analysis of tournament theory using firm data.
► We develop a Oaxaca decomposition of output changes at the individual worker level.
► The output changes are interpreted in terms of the Peter Principle effect.
► We quantify the contribution of the Peter Principle to output change to be 11%.