There's a subtlety to (1), in that people can be incompetent at things that don't matter, but competent at things that do, and people often latch on to the wrong incompetence.

For example, a software engineer might be fairly mediocre at programming, understanding systems, debugging, etc, but might have really good people skills and be great at effecting change in the organisation, and that person might be worth promoting into management.

A learning experience for me was working with people nearly twice my age with decades of experience yet who were at my level, or much less experienced people who were at my level. Promotion and level are not a judgement of skill as an engineer in an abstract sense, they're a judgement of value to the company – you can be great, but if you're not using that in your current role your level may not reflect that.