Promotion decisions and the adoption of explicit potential assessment

In this study, we leverage the transformation of a performance management system that shifts from only providing a performance rating to also providing an explicit assessment of potential. While performance measures enable organizations to evaluate an employee’s past performance, they provide limited information regarding the employee’s potential to perform in a prospective job that requires a different skill set. Consequently, firms are gradually moving towards the incorporation of explicit potential assessments in their annual appraisal process to evaluate the employee’s promotability to a different task environment. Our data access allows us to provide fundamental evidence on the effectiveness of a performance management system that adopted the explicit assessment of potential. We find that, on average, the potential assessment system is less effective in identifying candidates suitable for promotion to roles in a different, more complex task environment, thereby contributing to the occurrence of the Peter Principle. We subsequently identify variation in supervisors’ evaluation quality as an important source of the Peter Principle.