I've never seen this happen as a reaction to actual incompetence, where the person is a net negative and a drag on everyone.

I have seen something similar, though: a valued employee doesn't have balanced functional skills at their current position, and yet is a net positive due to other factors. They are good at problem solving but bad at coding; they are great at oncall operations but bad at design; they are good at making others better but not great by themselves.

They can either acquire the skills to be functionally competent alongside their peers, or management can give them responsibilities that allow them to contribute without actually having them be good at their current job.

That's definitely flunking upward but it's not necessarily a bad thing.