While I think you describe the unfortunate common case, my personal experience has not run this way.
Much more often, there has been agreement that there is a need for a new layer of leadership that we did not have before, and then we have to decide whether we promote or hire on top of someone. When we have had to hire on top of someone, they have taken that option gracefully while gracefully also keeping the package of other options that they were handed when they joined.
"Report to the new person" works surprisingly well if you sell it the right way.
Much more often, there has been agreement that there is a need for a new layer of leadership that we did not have before, and then we have to decide whether we promote or hire on top of someone. When we have had to hire on top of someone, they have taken that option gracefully while gracefully also keeping the package of other options that they were handed when they joined.
"Report to the new person" works surprisingly well if you sell it the right way.