The Peter Principle depicts a common situation all senior managers have to deal with sooner or later. It states that "In a Hierarchy Every Employee Tends to Rise to His Level of Incompetence." This problem is especially hard to tackle at young, fast-growing companies. As a company grows from start-up status to established organization, initial employees are forced to grow their managerial and organizational skills. A lot can't make it.
I have gone through this painful process with some of the most well-respected, savvy collaborators I have worked with. While in some organizations people that reach their Peter's level (of incompetence) stay in that position for some time, in companies like mine this is not acceptable. We have to do something about it.
And so did Andy Grove at Intel. Some years ago I have stumbled onto a hand scribbled note that I believe was written by him. Being the great engineer that he is he created this beautiful mental model to depict Peter Principle.
If you assume that the skill requirements to do a certain job keep growing fast there is a point A when the competence level falls short. The continuing pressure and the failure to delivery creates a very unmotivated employee that either freezes or runs around in circles. The productivity drops to B below the real max. capacity of the person.
At this point most people leave. However, recovery is possible. By realigning job and ambition expectations you can manage to raise motivation and match competence with skills.
Letting a trusted collaborator reach a Peter's level is more the fault of the senior manager than the collaborator's own fault. If it happens often it might be that the senior executive has reached his own Peter's level.
Besides my daily job as CEO of 
Nice model. I also think that competence is dependent on situation/role and have found the "Situational Leader" model a great one to help coach people from one state to the next. The book is out of print now (although 2nd hand copies are around) - but I found this website that has a good summary. http://www.chimaeraconsulting.com/sitleader.htm