Identifying and developing high potentials — employees ready to take the leadership reins when someone gets promoted, steps down, or gets fired — is the single greatest talent management challenge organizations face today. The problem is, most organizations are really, really bad at it. Practitioners rate themselves as effective at identifying high potentials only about 50% of the time. That means many high-potential identification systems in place today could achieve the same level of accuracy by flipping a coin.
If your organization is like most, its high-potential identification program focuses — sometimes exclusively — on current performance. A recent survey found 74% of companies identify high-potential employees based on performance appraisals, and 68.5% based on recommendations from management. A separate study by Corporate Research Forum estimated that 73% of organizations currently identifying high potentials using one single data point — a rating or nomination by the individual’s direct supervisor.
“This is problematic for two reasons,” Hogan CEO Tomas Chamorro-Premuzic wrote in a post for Forbes. “First, organizations are not very good at measuring performance (once you eliminate subjective ratings, there are very few reliable metrics left). Second, even when they measure performance well, many top performers will fail to perform well at the next level.”
Performance measures tend to be subjective and biased by politics. Performance appraisals often reflect how much supervisors like their employees, and over-inflate ratings of actual job performance. As a result, individuals designated as high performers are often actually the best politicians, or what we call emergent leaders — the people who are great at building relationships, exerting social influence, and standing out enough to get ahead. The problem is that the qualities it takes to climb the corporate ladder aren’t enough to be effective as a leader.
Second, organizations tend to overestimate current performance as a predictor of future potential. The idea of leaning on performance reviews is that the best predictor of future performance is past performance. But as ClearCompany Co-founder Andre Lavoie points out in an article on Entrepreneur, although all high-potential employees are high performers, not all high-performing employees are high potentials. Research shows that only 30% of current high performers are actually high-potential employees, and most employees (more than 90%) would have trouble at the next level.
“When you transition employees from individual contributors to managers, or from managers to leaders, the pivotal qualities or competencies that drive high performance change,” Chamorro-Premuzic wrote. “Furthermore, many strong individual contributors are not even interested in managing or leading others, preferring instead to focus on independent problem-solving or being a team-player. The result is a paradoxical system that removes people from a job they are rather good at, and re-positions them in a role they are neither able nor willing to do.”
At the very least, wrongly designating a high performer as a high potential means you lose an excellent individual contributor. More than half of high-potential employees drop out of development programs or leave their employer within five years, and studies estimate losing a high-potential employee costs the organization 3.5 times his or her annual compensation.
At worst, promoting the wrong people can cause major engagement problems within your organization. Leadership directly impacts employee engagement. Good leadership creates engaged employees; bad leadership leaves employees alienated and demoralized. Engaged employees are energized, proud, enthusiastic, and have positive attitudes at work. Companies whose employees are engaged show higher returns on assets, are more profitable, and yield nearly twice the value to their shareholders compared to companies characterized by low employee engagement. Disengagement, on the other hand, results in an estimated $550 billion in lost productivity in the U.S. each year.
Put simply, performance is what you do. Potential is what you could do. Until organizations learn to differentiate between the two, it’s unlikely their success identifying high potential individuals will improve.
Want to know more about how to tell potential from performance? Check out our ebook, The Politics of Potential