Monday, July 06, 2009

The origins of corporate mediocrity - promoting the best

It would be easy to mock the results of this computer simulation, but I think they're on to something. When you read the following synopsis consider what I assume were the assumptions of the simulations:
  • Different jobs require different skill sets
  • Different workers have different skill sets
  • The best worker at a job will be the one who's skill sets best match the job demands
If you think through these assumptions, you might be able to predict the results of the simulations ...
Technology Review: Blogs: arXiv blog: Why Incompetence Spreads through Big Organizations - Ref: The Peter Principle Revisited: A Computational Study

Promoting the people most competent at one job does not mean that they'll be better at another, according to a new simulation of hierarchical organizations.
There's a paradox at the heart of most Western organizations. The people who perform best at one level of an organization tend to be promoted on the premise that they will also be competent at another level within the organization...

In 1969, a Canadian psychologist named Laurence Peter encapsulated this behavior in a rule that has since become known as Peter's Principle. Here it is:

"All new members in a hierarchical organization climb the hierarchy until they reach their level of maximum incompetence."

That's not as unfair as it sounds, say Alessandro Pluchino and buddies from Universita di Catania, who have modeled this behavior using an agent-based system for the first time. They say that common sense tells us that a member who is competent at a given level will also be competent at a higher level of the hierarchy. So it may well seem a good idea to promote such an individual to the next level.

The problem is that common sense often fools us. It's not so hard to see that a new position in an organization requires different skills, so the competent performance of one task may not correlate well with the ability to perform another task well.

Peter pointed out that in large organizations where these practices are used, it is inevitable that individuals will be promoted until they reach their level of maximum incompetence. The unavoidable result is the runaway spread of incompetence throughout an organization.

Now Pluchino and co have simulated this practice with an agent-based model for the first time. Sure enough, they find that it leads to a significant reduction in the efficiency of an organization, as incompetency spreads through it....

But is there a better way of choosing individuals for promotion? It turns out that there is, say Pluchino and co. Their model shows that two other strategies outperform the conventional method of promotion.

The first is to alternately promote first the most competent and then the least competent individuals. And the second is to promote individuals at random. Both of these methods improve, or at least do not diminish, the efficiency of an organization.

Of course the assumptions I assume were used in this study do have limitations. Many (most?) corporate superstars are characterized by an insatiable appetite for work and a relative disinterest in sleep, family and friendship. These traits do transfer well between roles. It's also true that senior roles are largely about managing down (reports), laterally (peers), and up (bosses). The political and personal skills that allow people to excel in those roles are reasonably universal.

So the model oversimplifies.

On the other hand, there really does seem to be something amiss with the modern publicly traded corporation. In general, they are less than the sum of their people. If not for the sheer advantages of size, such as the ability to buy or destroy smaller would-be competitors, I suspect most large corporations would not be able to effectively compete. (The CEO? The empiric evidence suggests that CEOs don't have large effects unless the business is very troubled or the CEO is really incompetent. Additionally, CEO selection is particularly perverse, it's no surprise most are ill-suited to the role they fill.)

Maybe the promotion effect does play a role in limiting how well a corporation can do.

PS. I think they should have tested a strategy of random promotion and rapid demotion for those who don't succeed.

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