It says: "in a hierarchy every employee tends to rise to his level of incompetence"
In other words - employees tend to be promoted until they reach a position at which they cannot work competently.
In real world you may have many examples. Managers will promote certain people considering their excellent work in past positions. Managers will promote them with the feeling they will excel in their promoted designation (Halo effect) also. In really due to expertize problems employee will perform poorly and same management will start blame games . When (usually) this employee will learn things (or fired out from this position) and goes on with the voyage.