>Transitioning to management or tech lead is not a promotion, but a change in responsibilities (and transitions back are common);
I strongly agree with this idea. "Servant Leadership" is one way to handle this, where management positions are framed entirely around enabling the ICs, catalyzing communication, and moving things forward, rather than "Command & Control" styles based on tracking, scheduling, and assigning work.
>we only promote people based on demonstrated ability, not potential, to avoid the Peter Principle
In my experience, this attitude often can lead to moving the conflict to "what qualifies as 'demonstrated ability?'," rather than "who do we think might do well in this role." I find the former argument far more tiresome and difficult to resolve with good leadership, rather than the latter, which requires more soft skills and conflict resolution abilities. Coupled with the idea of removing the taboo from Management-->IC transitions, I think focusing on good leaders increasing their effectiveness at identifying other good leaders, both picking positively and countering bias, can probably have better outcomes than a system based around somehow proving ahead of time that someone has some defined abilities before allowing them to attempt to grow into a role. I think most people can grow into a role faster than they can figure out how to pull the right political levers to "demonstrate" their abilities for a promotion while still fulfilling their current role.
This can end up somewhat like a "Reverse Peter Principle," if you will. Instead of people stagnating at some "ratcheted" rung on a single ladder due to lack of ability or motivation to excel in their current role, you have people stagnating because they are focused on demonstrating things outside their current role, rather than fulfilling core duties.
Not totally disagreeing with you, overall. It's just a balance to strike.