Correctly identifying high-potentials is critical for ensuring the future leadership of an organization, but few organizations are getting it right.
By Julie Cook Ramirez
Ron Johnson of J.C. Penney. Carol Bartz of Yahoo. Brian Dunn of Best Buy. And, most recently, Chris Viehbacher of French pharmaceutical giant Sanofi.
The past several years have been marked by an inordinate number of high-profile failings and firings of chief executives such as these, many of whom were brought on board to breathe new life into struggling companies.
These leaders are far from the exception. The average CEO tenure is just 7.6 years, according to a 2013 study of 365 U.S. companies by researchers at Temple University and the University of Missouri. Even worse, the Harvard Business Review reports that two out of five chief executives fail in their first 18 months on the job.
While a high percentage of top executives are recruited from outside the organization -- of the aforementioned leaders, only Dunn ascended from within -- many companies hold fast to the belief that homegrown talent is best-positioned to deliver the kind of leadership necessary to rally the troops, drive growth and propel the organization to future greatness. Yet companies struggle when identifying future leaders -- so-called "high-potentials" -- often overestimating some people's potential, while underestimating others.
According to a 2014 study by the Arlington, Va.-based CEB, nearly two-thirds of companies misidentify their high-potential employees, defined as those who are expected to succeed two levels above their current position. Nearly 40 percent of internal job moves made by those individuals end in failure.
"It's a hugely significant problem," says Jean Martin, executive director of the CEB. "High-potentials are the cornerstone of the workforce and, in particular, the future workforce, and companies are consistently getting it wrong."
The consequences of misidentification are substantial -- corporate performance suffers, individual careers flounder and truly great future leaders leave the company because their potential has gone unrecognized. For HR, the order is tall: Establish a more effective means of identifying high-potentials that eliminates favoritism and avoids the trap of over-identification.
Performance vs. Potential
The problem often lies in confusing high performers with high-potentials. While the latter invariably perform at top levels, the opposite is not always the case, according to Michael Lamb, a senior partner in the Dallas/Fort Worth office of Los Angeles-based Korn Ferry. Not every great performer has the potential to lead the organization.
"When asked why someone is considered a high-potential, most organizations will say, 'All of her projects are done on time and under budget, her customers really like her and she has low turnover with her own internal talent.' That says nothing of her potential to lead," says Lamb. "You want to promote people who are doing a good job, but you need to focus your efforts on those who are capable of stretching" into senior leadership roles.
By failing to differentiate between the two groups, Lamb says, organizations frequently end up with an enormous number of workers with an inflated sense of their own potential. He cites a 2007 Business Week survey of 2,000 Americans in middle management and above that found 90 percent of managers think they're among the top 10 percent of performers at their workplaces. Among executives, 97 percent consider themselves shining stars.
When the future fails to deliver the kind of upward trajectory they have come to expect, these misidentified "high-potentials" may suffer wounded egos and leave the company. According to the CEB, 55 percent of those people identified as high-potentials leave the company within five years. While some may not have possessed leadership potential, they were still highly valued employees, which makes their loss a significant blow. Even more disturbing, true high-potentials are likely to resent the fact that everyone seems to be getting the star treatment and there's little, if any, differentiation between those who are obviously C-suite-bound and those who aren't likely to rise above the rank of middle management.
"If I truly am one of those people . . . driving differentiated performance and I see everyone being treated the same way, paid the same way, developed the same way and given the same opportunities for advancement, I will find someplace that will value me differently," says Lamb.
While she concedes "we've all made the mistake" of confusing a high performer with a high-potential, Lisa Bettinger-Buckingham, executive vice president and chief human resources officer with additional responsibility for overseeing brand and enterprise communications with Lincoln Financial Group in Radnor, Pa., is working hard to ensure her organization is taking a more scientific approach to identifying its future leaders.
Recognizing that relying solely on managers to select high-potentials often results in misidentification issues, Lincoln employs a multidisciplinary approach that ensures "calibration" across the organization. At the heart of the process is a six-box "performance and potential matrix" used to assess both new and seasoned Lincoln employees on such characteristics as performance, adaptability and career trajectory. Those who are determined to be high-potentials are then given a "succession readiness classification" of ready now, ready in one to two years, or ready in three to five years.
"It's critical to get managers calibrated on an even evaluation of people, because one person's hi-po might be just a really good domain expert and vice-versa," says Bettinger-Buckingham.
Each year, Lincoln managers complete individual employee assessments, which are then reviewed by a talent representative and HR business partner. Within each business unit, calibration sessions are held, in which members of the corporate leadership group -- those who report directly to the CEO's direct reports -- review employee performance and ratings and solicit peer feedback. Each December, the process culminates in a special senior-management committee meeting, during which development of high-potentials is discussed. The final step is an annual presentation to the board for CEO and senior-management committee succession planning.
That hands-on involvement of the board comes as no surprise to Marc Effron, president of the New York-based Talent Strategy Group and author of One Page Talent Management. Much of the pressure to get high-potential identification right is coming from boards rather than human resources, says Effron. In fact, he says, HR needs to "get out of its own way" and "radically simplify" a process that was made overly complex by consulting firms and worsened at the hands of HR.
"We are the ones who are adding complexity and confusion because we think the more we add, the better it must be when, actually, the opposite is the case," says Effron. "We don't need a massively complex process with 30 criteria. Companies are far more effective when they can say, 'Here are the four things we want to see in someone that's going to tell us they are likely to contribute much more in the future.' "
In the interest of simplicity, Bellevue, Wash.-based T-Mobile USA Inc. recently adopted a new approach to high-potential identification that centers on spotting "clear evidence of motivation," according to Mat Kraetsch, manager of talent programs. Specifically, T-Mobile focuses on a handful of key questions: Do the targeted people have the drive? Have they exhibited dynamic behaviors or successes in their careers? Do they have intellectual potential? Do they demonstrate broad and quick thinking? Do they exhibit behaviors around leadership and people interactions? And, most importantly, do they not only manage change, but help drive it across the organization and the industry?
These questions are incorporated into T-Mobile's talent-review process. Currently, says Kraetsch, the focus is on those already in leadership positions to determine whether they are "somebody we really want to retain and deploy and grow through the company." However, T-Mobile is working to move the identification of high-potentials down lower in the ranks and, in some cases, "very near to the front lines."
According to Kraetsch, the company is currently in the process of moving away from a formal annual review "with ratings and forms and everything" in favor of "frequent conversations about an employee's goals."
"We are trying to make this an ongoing living process, rather than a calendarized check-the-box activity for the year," says Kraetsch. "That allows your defined talent pool to be fluid, as you can have conversations about whether someone is still showing those aspirations and abilities, or if somebody else needs to be considered."
Simplicity is also the name of the game for Oakbrook, Ill.-based McDonald's Corp., where the fast-food giant relies on four "anchors" to determine who has the ability to be a future leader. According to Rich Floersch, executive vice president and chief human resource officer, high-potentials must possess a desire to lead, a learning orientation, agility or adaptability, and clarity of thinking, which translates into clarity of communication. The final piece, an individual's track record, is also considered when validating a high-potential assessment.
Like Lincoln Financial, McDonald's does not rely merely on managers' assessments of their direct reports, but holds calibration meetings to ensure that everyone is in agreement on each individual's high-potential status.
"Each function, each department, all the way up to a functional-leadership level or a market-leadership level, we'll roll up calibration meetings where individuals will be talked about and people will weigh in on whether or not they agree," says Floersch. "When you have multiple people talking consistently about a person's potential, you've got a pretty good fix because you can see if they are showing similar characteristics in different environments."
When a high-potential applies for a different position within the company, McDonald's occasionally brings in an outside psychologist to help determine whether it is the right move for that person -- and for the organization -- at the time.
"They are very good at understanding what might be unique about McDonald's in terms of its culture that would make somebody a stronger potential candidate than maybe a person working at a financial-services organization," says Floersch. "We use these people very carefully, but their input is weighted very heavily."
Regardless of which approach they take to identify their high-potentials, it's critical that organizations recognize the resulting list is not set in stone. According to Martin, people should be "coming off and coming on" the list every year.
At McDonald's, high-potentials constitute approximately 20 to 25 percent of the employee population at any given time. That list is always subject to change, according to Floersch. But while changes in an individual's performance or leadership traits may precipitate his or her removal from the high-potential roster, Floersch stresses that McDonald's is careful not to act hastily when reassessing his or her future prospects with the company.
"Individual year performance should not drive a change in potential because some of the challenges that arise may actually be some of the best learning experiences," says Floersch. "Somebody going through a tough patch might actually come out stronger."
What these three organizations have in common -- and what separates them from the two-thirds that fail to accurately identify their future leaders -- is a "maniacal focus on high-potential talent," says Lamb. Discussions of talent, potential and succession planning are "built into the fabric of how they do business," he says, rather than simply being a "once-a-year static activity." For these HR leaders, high-potential identification ranks high on their list of things that keep them up at night -- and rightly so.
"The ability to reliably assess talent at a very high level and then place those people into jobs that play to their strengths is one of the most important decisions you make around the level of influence HR has within the business," says Floersch. "A keen understanding of peoples' strengths, capabilities and potential heightens your ability to take the function to a new level."