As I mentioned in another post, I don't think it's that Google sees programming competition success and says "oh boy, we gotta get this one!", but that the experience of those competitions helps the candidates perform better in interviews.
It is very hard to account for that in interviewing. Probably the only effective method would be to ding people with competition experience. Of course, that would be obvious conscious bias and would never happen.
I don't think programming competition wins (PWG) are a negative when selecting candidates out of the potential pool, but Google must have been over-weighting the value of PWG when selecting their candidates. Basically the candidates they hired with PWG must have been weaker overall than the other people they hired. To put it another way PWG might explain 5% of the variations between hires, but if it was given a weighting of 20% then we would see the negative correlation observed.
I also don't think that winning competitions is a negative. I only believe that the experience doing so gives one a bigger advantage in interviewing that in actual work performance.
I also don't believe that the Google hiring committees treat competition winners specially (though of course I could be wrong there). The reason I say that is as a frequent Google interviewer, the interview scores vastly outweigh the value of the resume (to the point of it becoming ignorable). And, I personally don't look at a resume except to see what language a candidate likes to write in, and to see how long they've been out of school (depending on how long, I might ask more a designy question).
Given my anecdotal and inferred evidence, I believe the only way for a competition win to help someone get the job is to make them better at interviews.
Given the stated evidence in the article, combined with my immediately-above belief, the explanation that fits is that competitions help more with interviewing than with job performance.
Since it helps more with selection (passing the interview) than with performance (job review), there is a natural negative correlation with performance for those who were selected.
This is completely consistent with competitions helping people do better with job performance.
It is very hard to account for that in interviewing. Probably the only effective method would be to ding people with competition experience. Of course, that would be obvious conscious bias and would never happen.