Unjustified dismissal and the Peter Principle

Roger Partridge
Insights Newsletter
25 June, 2021

According to the Peter Principle, people in a hierarchy tend to rise to their "level of incompetence." While intended as satire, many people will have their own story of the Peter Principle in practice. Of a boss not up to the role they have been promoted to fulfil.

And as countless boards and business owners will attest, getting rid of an underperforming manager can be fraught with difficulty. Mediocrity is no longer enough to justify dismissal under the personal grievance provisions of New Zealand’s employment laws.

The problem of poorly performing managers is not just a problem for individual workplaces. In its 2014 report, An International Perspective on New Zealand’s Productivity Paradox, the Productivity Commission singled out the low quality of New Zealand’s managerial capabilities as a cause of our poor record of productivity growth.

The Initiative’s latest report, Nothing costs nothing: Why unjustified dismissal procedures should not apply to the highly paid, makes the case for fixing that problem.

Statutory unjustified dismissal provisions were first introduced in the 1970s. Their aim was to protect vulnerable workers from being unfairly fired. Subsequently, in 1991, the Bolger Government extended unjustified dismissal protections to all employees.

But, by protecting the jobs of poorly performing senior managers, unjustified dismissal laws introduced to protect the jobs of vulnerable workers may be placing those very jobs at risk.

The difference between a C-grade and an A-grade manager may be the difference between business success or failure. And that may be the difference between preserving the jobs of workers or losing them.

Before firing an underperforming manager, employers must jump through a complex series of hoops. The process can take many months - or even longer. And even at the end of the process, mediocre performance may not be enough to justify dismissal.

To address this problem, the Government should follow the Australian approach and exclude “high-income earners” from statutory unjustified dismissal laws.

The Initiative recommends a high-income threshold of $250,000. This is the starting salary for Ministers of the Crown who can be dismissed at will by the Prime Minister. It would capture less than the top 1% of income earners. But it would cover the CEOs and senior managers whose roles have the biggest impact on firm productivity and performance.

By making it easier for employers to dismiss those who have been promoted beyond their level of competence, firms, workers and wellbeing will be the winners.

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