Recently I made the following comment on a blog post:

I recall watching an interview with Bill Gates. The interviewer asked him what was the biggest mistake he made when he was building Microsoft. Because I admire Bill Gates enormously, I was on the edge of my seat to hear his answer...

His answer: the biggest mistake he made was assuming that their best engineers would also make good managers.

Of course it's intuitive to promote the best tactical performers but given how often this fails I'm amazed at how companies -- big and small -- continue to use this approach.

A few days later, I came across a theory known as the "Peter Principle":

The "Peter Principle" states that in a hierarchy every employee tends to rise to his or her level of incompetence, meaning that employees tend to be promoted until they reach a position at which they cannot work competently.

It's easy to see how management allows this to happen in their organizations. If someone performs well it's only logical that they go onto the next step in their career path. But of course it's extremely dangerous for companies to operate with a bunch of employees that can't do their job well, much less competently.

The solution to this, I believe, it to shake up the old fashioned "career path culture" and build a culture that values the "do'er" and not the manager. To promote this type of culture, companies should setup formal incentive systems that reward the employee without promoting them into management. Incentives can include:

Salary, bonus, equity increases
Allow them to work on the coolest projects or largest accounts
Allow them to work on exploratory or strategic projects
Let them work side by side with senior management and/or the CEO
Give them the best mentorship and training

Most cultures, especially in large companies, value the managers -- employees want to be "in management". It's critical to setup values and formal systems that disrupt this type of culture to avoid mediocrity and the dangers of the Peter Principle.