Promotion Decisions and the Adoption of Explicit Potential Assessment

Isabella Grabner (), Judith Künneke () and Frank Moers ()
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Isabella Grabner: Institute for Strategy and Managerial Accounting, WU Vienna, 1020 Vienna, Austria
Judith Künneke: Department of Accounting, Tilburg School of Economics and Management, Tilburg University, 5037 AB Tilburg, Netherlands
Frank Moers: Department of Accounting and Information Management, School of Business and Economics, Maastricht University, 6211 LM Maastricht, Netherlands

Management Science, 2025, vol. 71, issue 11, 9233-9255

Abstract: 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. Although 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 toward 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 evidence on the consequences of implementing a performance management system that adopted the explicit assessment of potential. We find that, on average, the performance of promoted employees is lower after implementation, suggesting that the potential assessment system is less effective in identifying candidates suitable for promotion. Additional analyses lead us to conclude that the difficulty of evaluating employee potential reduces performance upon promotion because of inaccurate recommendations of supervisors who do not sufficiently differentiate in their ratings. We thus identify variation in supervisors’ evaluation quality as an important source of the Peter Principle.

Keywords: performance management; potential assessment; Peter Principle; promotion decisions (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:71:y:2025:i:11:p:9233-9255

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