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The Peter Principle is a colloquial principle of hierarchiology, stated as "In a hierarchy every employee tends to rise to his level of incompetence." Formulated by Dr. Laurence J. Peter in his 1968 book The Peter Principle, the principle pertains to the level of competence of the human resources in a hierarchical organization. The principle explains the upward, downward, and lateral movement of personnel within a hierarchically organized system of ranks.

The Peter Principle is a special case of a ubiquitous observation: anything that works will be used in progressively more challenging applications until it causes a disaster. This is "The Generalized Peter Principle." It was observed by Dr. William R. Corcoran in his work on Corrective Action Programs at nuclear power plants. He observed it applied to hardware, e.g., vacuum cleaners as aspirators, and administrative devices such as the "Safety Evaluations" used for managing change. There is much temptation to use what has worked before, even when it may exceed its effective scope. Dr. Peter observed this about humans.

In an organisational structure, the Peter Principle's practical application allows assessment of the potential of an employee for a promotion based on performance in the current job, i.e. members of a hierarchical organization eventually are promoted to their highest level of competence, after which further promotion raises them to incompetence. That level is the employee's "level of incompetence" where the employee has no chance of further promotion, thus reaching his or her career's ceiling in an organization.

The employee's incompetence is not necessarily exposed as a result of the higher-ranking position being more difficult — simply, that job is different from the job in which the employee previously excelled, and thus requires different work skills, which the employee usually does not possess. For example, a factory worker's excellence in his job can earn him promotion to manager, at which point the skills that earned him his promotion no longer apply to his job.

One way that organizations attempt avoiding this effect is to refrain from promoting a worker until he or she shows the skills and work habits needed to succeed to the next higher job. Thus, a worker is not promoted to managing others if he or she does not already display management abilities. The corollary is that employees who are dedicated to their current jobs will not be promoted for their efforts, but might, instead, receive a pay increase.

One complication is that competent employees sometimes pretend to be incompetent. The simplest reasons for this might be avoiding the jealousy of co-workers and to annoy managers. A more complex reason might be avoiding promotion to management, i.e. "Creative Incompetence", which is especially common in businesses such as big box retail store chains where managers' base pay is low and they are exempt employees un-entitled to overtime pay.

It may often happen for cultural reasons, such as a strong identification with the working class leading someone to remain in a working-class job rather than "selling out" or the disdain highly-skilled workers have for management decisions, leading them to avoid management jobs. Companies practicing performance improvement find that employees will deliberately "leave room for improvement" by starting at less than peak effectiveness and reach full productivity later. Employees also deliberately underperform in order to keep quotas and expectations from being set too high.

A second complication is that entry-level jobs that are detail oriented and restrictive favour detail-oriented workers, yet hinder creative and innovative workers. By definition and necessity, entry-level jobs are the assembly line of an organization, and thus the most creative and innovative employees start in positions of incompetence. The detail-oriented persons are thus promoted over the creative employees. Often these creative employees are incapable of showing their work strengths because of the structured and restrictive assembly line environments, and then are tagged as bad employees.

In reality, creative employees may be more suited to management jobs, but, because they are unable to use their strengths in the low-level jobs they hold, they never rise to management, and the innate flexibility and innovation needed for managing is lost to the company. The end result for an organization as a whole is that the organization will collapse when incompetents in the ranks outnumber the competent, resulting in the organization's inability to produce results.

Peter himself suggested that a way of addressing the problem is by means of class, or caste (social stratification). Let us say that we declare an essentially random selection of people to be of the "boilermaker" caste. In that group, there will certainly be one or two persons who will be excellent boilermakers. Thanks to the lack of social mobility they will reach the top of the boilermaker caste and never be promoted out of it, and so the society in question will always have the services of a few very decent boilermakers — although not necessarily the very best possible. Thus, while social stratification seems dysfunctional, it is actually very functional indeed. In a similar vein, some organisations recognise that technical people may be poor managers, and so provide career paths whereby a good technical person may eventually make as much money as a good manager — a reversal of the notion that a manager must always make more money than his or her subordinates.

Although written in a lighthearted manner, Peter's book contains many real-world examples and thought-provoking explanations of human behavior. Similar observations on incompetence can be found in the Dilbert cartoon series (such as The Dilbert Principle), the movie Office Space, and the television show The Office.

In 1981 Avalon Hill made a board game on the topic titled "The Peter Principle Game." [1]

• The Dilbert Principle
• Management
• Parkinson's law
• Negative selection (politics)
• List of human resource management topics
• Adages named after people
• Software Peter principle
• Systemantics
• Corporate Darwinism

• Dr. Laurence J. Peter; Raymond Hull (1969). The Peter Principle: why things always go wrong. New York: William Morrow & Company, Inc., 179 pages. 
• Dr. Laurence J. Peter; Raymond Hull (1970). The Peter Principle. Pan Books. ISBN 0-330-02519-8. 
• Lazear, E. (2001). The Peter Principle: Promotions and Declining Productivity. Working Paper 8094. NBER.

• The Nartreb Principle
• A Glossary of Incompetence Time Magazine, Friday, Mar. 28, 1969.
• The Peter Principle. Work poems.