People often speak of “The Peter Principle,” but do not always know what it means. Do you? You should, because it will shape your view of the way you promote employees.

The basis of the Peter Principle, developed by Laurence J. Peter in the 1960s, is that people rise to the level of their own incompetence. What this means is, people continue to advance until their performance is so poor that there is no way to justify further promotion. The problem is, that means they are left in a position where they are incompetent, and that can do a lot of damage to your organization. The last thing you need is a large number of your senior positions being filled by people who are not competent to fill those positions. In addition to the direct damage they can do, you are also wasting a lot of potential…theirs, because they could be making a contribution at a lower level, and also the potential contributions of those below them who could handle these positions but do not get the chance because the upper jobs are filled with people who cannot do them.

So, how do you avoid this?

First, forget about promoting people based on seniority. Just because someone has been around longer does not mean they are better for the job. The basis for using seniority as a promotion tool is that someone who has been in the organization longer is expected to understand the job better and have more skills, but these are assumptions. See if that is actually true, and then promote people based on demonstrated skill, not just on how long they have been in the office.

When you are looking at skills, consider how someone fits the needs of the job into which you are thinking of promoting them, not just the role they are coming from. Just because someone is the best graphic designer you have does not mean they are able to lead other graphic designers. Maybe they are, maybe not, but their technical skills do not tell the whole story. Past performance is a guide to future performance, but it is not a predictor all by itself. Remember that leadership and management require certain skills, too, and ensure your people have them.

Probationary periods are one option, but they can be tricky. If a person is not successful in a probationary position there is also a stigma involved in bringing them back to where they were before. Consider instead the possibility of having them go through whatever training is useful for the next job, and see how they do there. If they have problems in training, maybe you should leave them where they are.

Leaders in Asia are concerned about retention (and rightfully so), and worry that if they do not promote people, those employees will leave for someplace where they see a better chance for promotion. That concern, though, is a bit misguided. Which is more damaging: having an employee leave and needing to look for a replacement, or having someone in a position where they are likely to fail? The expense of hiring a new employee will generally be less than the losses you face putting an unqualified person into a role. If you find yourself using promotions merely as a retention tool, you are taking your organization in the wrong direction.

Obviously, of course, it is better to have a talented employee stay with you in the position where they do well, rather than having them leave. If you have someone who is not ready to be promoted but who is providing good business value where they are, you need to make sure they know how important they are, where they are. Acknowledge their contributions and reward them for the value they provide, not necessarily for the job title on their business card. Open communication is better for you than automatic, seniority-based promotions are.

I saw the Peter Principle at work during my career in the US government, because it is very difficult (though certainly not impossible) to fire someone from a military or civil service position. One reason for the Peter Principle was because the US military had an “up or out” philosophy, meaning that if you were not considered likely to be promoted, there was a point where you would be encouraged to leave. As a result, people would sometimes move up because they were “supposed” to, rather than because they were ready. But it is not just a government problem; you will see this in the private sector, too. Companies are often afraid to remove someone from a position because of fears of a lawsuit. Many leaders try to avoid conflict and so will put up with a bad employee in the wrong position rather than trying to remove them. This being the case, the trick is to find a way to determine if they’re suitable BEFORE they go into that position. If it is going to be difficult to remove someone, you need to be extremely careful about moving someone into a role they cannot handle.

You should not let the Peter Principle be the basis for your company’s leadership. Do not simply continue to promote people until they fail; instead, move them into roles that maximize their value to the organization. Let your competitors be the ones promoting people to positions they cannot handle, while your superior leadership team goes on to rule the world (or at least, increase your market share).