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This sounds like a great way to ruin a business. You have to wonder if these people have ever even heard of the Peter Principle.
To justify up or out a bit:
I've only personally seen it used on junior engineers. If someone is hired fresh out of school and is not progressing to full engineer, then they are a weakling and should be fired. But they don't do this to full engineers. You can spend the rest of your career not making senior engineer and they won't automatically fire you. And it would be an act of insanity to fire a well-performing senior engineer. No one "up or out"s people already in senior positions.
The US military practices some version of this for officers. If an officer isn't being promoted with some regularity then he is stuck at his position and blocking a more promising candidate from holding it and perhaps advancing further. Fail to be promoted in two consecutive promotion cycles, get kicked out regardless of ability at your current level.
But to argue against this justification:
Googling the military version of up or out shows people complaining about how it arbitrarily fires competent effective officers who perform great at their level and simply shouldn't be at higher levels. Should the Wehrmacht have fired Rommel because he'd never make a good general and was instead a great field marshal? How is that not like the insanity of firing a senior engineer for no reason other than he'll never be a director or VP?
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"Up or out" is an answer to the Peter Principle. The idea is the reason people stop being promoted is they've reached their level of incompetence, so it's time to get rid of them.
If I have a perfectly good spanner and I try and use it to recalibrate CERN I'm gonna have a bad time. That doesn't mean I should throw my spanner out, it means I should go back to using it as a spanner. The solution to the Peter Principle is to hit the promotions board with a rolled up newspaper, not to institute rolling firings on everyone that could possibly be promoted.
If it were one organization succumbing to the Peter Principle, you'd have a point. When it's pretty much all of them, doesn't matter how much you remonstrate with the promotions board, you won't solve the problem that way. Probably you can't tell someone has reached their level of incompetence until they do reach it, and since demotions come with far too much stigma, you can't move people back to a previous position. So your best bet is to drop them and start over.
Of course, "up or out" also reinforces the Peter Principle; it rules out people deciding to be comfortably competent in their position and not moving up. But the people at the top probably find that idea utterly foreign and somewhat reprehensible anyway.
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