Succession Planning and Identifying High Potential Talent

Succession Planning and Identifying High Potential Talent By: Sharon Koay, Graduate Research Assistant for CAHRS

With an oncoming shortage of skilled workers and the creation of a more complex and diverse employment profile, companies are trying to insulate themselves from the war for talent by identifying and developing their next generation of leaders. As the war for talent heats up, companies need to pay closer attention to how they develop key individuals in their organizations. High-potential employees are scarce in most organizations and misidentifying them can have costly repercussions. A Corporate Leadership Council (CLC) talent management survey shows that a deep, potential-rich organization s average employee currently performs 22 percent better than the average employee at an organization that does not focus on employee potential (CLC, 2005a). This can translate into a substantial advantage for a company over its competitors. Development Dimensions International (DDI), (Bernthal & Wellins, 2005) found that strong leadership can increase the successful implementation of business strategies by 22 percent. In addition, organizations that do a good job of developing their leaders and of conducting succession planning have higher returns on equity and profit margins (Pomeroy, 2006). As a result, companies are not only more aware of their talent development as a protective retention measure but may also capitalize on human capital as a competitive advantage. This paper will outline and discuss three major areas that are integral in maximizing the potential of internal talent: Fostering a talent management culture with a commitment to development from the senior executive level down through the organization Identifying a high potential (HIPO) talent pool with improved efficiency and accuracy when selecting employees from all areas of the company Defining a succession planning system to incorporate best practices and avoid common pitfalls that involves employees from all levels of leadership Talent Development Culture Building a culture of development is essential to fully leverage talent management in an organization. In global companies with strong, respected cultures, motivation and a sense of belonging are nurtured so that employees are not motivated primarily by financial reward, which can be easily emulated by another organization resulting in easy attraction and retention of employees (Jacobs, 2005). The CLC study on succession management proposes that culture increases the likelihood of an organization being a top-tier leadership organization by an average of 66.5 percent (2003). Common traits of companies with strong talent development cultures are the senior executives commitment to development initiatives and their actions that signal to the employees the organization s appreciation for the internal talent. Senior executives can and must get involved in the talent management process in a variety of ways. In the case of PepsiCo and IBM, talent management is taken seriously and CEO involvement is visible. At least once a year, each respective CEO meets with 40 or more HIPO employees to get to know them better. They also participate in meetings where succession planning is discussed (Morton, 2004). As a result, both managers and HIPO employees believe in the credibility of the program s lasting power. Thus, employees are more motivated to believe that the succession planning will be effective and therefore work toward the organization s future success (Jacobs, 2005). Procter and Gamble s (P&G) culture and historical record of hiring for entry level positions and promoting from within have helped shape the way career development takes place. Moheet Nagrath, VP, HR Global Operations, says that it is automatic, instinctive and compulsive to search internally to fill important jobs before looking outside. The P&G method provides a manager who has lost a valuable contributor a wide pool of candidates from which to select, as well as requires an overseas assignment for all candidates for president of a business (Kramer, 2005). These actions help an organization signal to its employees that it aims to groom its people for leadership positions. The High Potential (HIPO) and Succession Planning Partnership 2

The identification of talent in the HIPO program is typically conducted by management within an operating group or business unit to collect data on the employees who are high performers. HIPO employees have the ability and potential to be promoted two levels within a three to five year timeframe. In contrast, the succession planning and management (SPM) program looks at the bigger picture by considering the entire organization as a whole with a longer time horizon. SPM is a deliberate and systematic effort by an organization to ensure leadership continuity in key positions, retain and develop intellectual and knowledge capital for the future, and encourage individual advancement (Rothwell, 2005). A crucial component of this work is the need to plan, develop and target employees to assume key leadership positions on a temporary or permanent basis. Frequently, HIPO employees are identified as successors for senior executive positions. Therefore employees in the succession management process are identified from the HIPO feeder pools. This is important to note because the two programs cannot be successful without establishing a partnership in which both are striving toward the same talent management and overall business strategy using an aligned set of competencies (Bernthal & Wellins, 2005). An organization needs to embark on a leadership gap analysis before implementing a successful HIPO or SPM program. The first step is to identify which leadership competencies are most vital to executing the future strategy the company has targeted. Once the leadership competencies are identified, the second step is to assess the capabilities of the organization. This exercise will expose the disparity between what the talent is and what it needs to be and allows the company to focus resources in the most effective areas. The next step is to match the capability gaps and narrow the field by deciding which are the most relevant leadership competencies. The fourth and final step is to incorporate those competencies into the appropriate development plans (Conger & Fulmer, 2003). DDI has conducted extensive research in leadership competencies resulting in the Leadership Potential Indicators (Bernthal & Wellins, 2005): leadership promise (motivation/propensity to lead, authenticity, brings out the best in people), personal development orientation (learning agility, receptivity to feedback), mastery of complexity (adaptability, conceptual thinking navigates ambiguity) and balance of values and results (culture fit, passion for results). Of those competencies, the most frequently emphasized are the ability to motivate and engage others (T+D, 2006) and learning agility (Kramer, 2005). However, the focus for the two programs can differ. For example, in terms of the group size and aspirations of the employees, the HIPO talent pool encompasses a larger group of employees and includes individuals who may be technically savvy but are not interested in leadership positions. SPM deals with a small subset of the HIPO pool who are targeted for individuals to get the right experiences and tools needed to excel at the senior management level such as an international assignment or exposure to all lines of business within the company (Garrett, 2005). Identifying High Potential (HIPO) Talent In the realm of high potential talent, companies express a number of concerns over how to improve efficiency and accuracy when identifying employees at all levels of leadership. Currently, only 49 percent of HR professionals surveyed by the Society for Human Resource Management (SHRM) agree that their organization effectively identifies high-potential employees (Kaplan-Leiserson, 2005). Quite often the struggle revolves around the criteria used to accurately identify high potentials, how to make comparisons of individuals across lines of business or functional positions, how to increase the visibility of those identified from non-core and non-home country businesses and whether or not to inform the individual of their status. The main points discussed in this section discuss how to define a good HIPO program, determine the desired HIPO traits, decide who belongs in the HIPO pool, and discover the potential deterrents to the program s success. 3

Define: HIPO Identification Program A program for identifying HIPO would need both a planning and selection component. The planning phase would involve all senior leadership in formulating the new direction and strategy for the organization, build consensus on the essential leadership core competencies needed and have the SPM account for staffing needs several levels below the CEO. Best practices in selection include the early identification of talent, heavy involvement of frontline managers in ratings and selecting HIPOs, and the establishment of a strong pool of HIPO employees with particular attention given to the subsection of candidates considered for promotion to the executive leadership (CLC, 2005a). Most organizations have not set a formal policy on whether or not HIPO status should be communicated because there is no clear answer. According to Jennie Shaw, AstraZeneca s talent consultant, there are three potential pitfalls that could lower morale: the perception that high-caliber development is only available to the elite groups, lack of transparency regarding selection processes and a failure to communicate to the organization. Corporate success depends on the 65 percent or so core of the organization, not just the cream of the crop (Stern, 2005). As a result, companies are working on how they should approach the non-hipo population. For example, Kraft prides itself on finding important roles for talented individuals who are not cut out to be leaders. Therefore the skills of good people who are not in line for leadership positions are not lost to competitors and time is not wasted trying to develop unsuitable candidates for managerial jobs (Vishwanath & Blenko, 2006). For example, Boeing decided to switch from a secret succession plan to open communications and acknowledge the 3 percent of the employees considered HIPO. Although there was initial skepticism, this new, open style of succession planning reaped increased respect for the leadership development process by employees and senior executives and a more rigorous succession planning process that can withstand scrutiny (Cope, 1998). However, there are also instances where it did not work. Harrah's Entertainment, the casino and hotel company, has been identifying and developing high-performing supervisors since 2002, nominating them through a combination of job performance, assessment-center testing, and "level up" surveys where subordinates rate them in areas such as integrity, fairness, employee engagement, feedback skills, and more. After the company communicated HIPO status there was an unusual amount of turnover experienced early in the program because the employees felt they did not have to develop their own careers but that the company would manage it for them. To address the problem, Harrah's developed a new "management prep" program highlighted by creation of an internal headhunter position to help high-potential supervisors pursue next-level leadership jobs in the company (Zielinkski, 2006). Determine: Desired HIPO Traits Most processes currently used to identify high potential talent are inadequate predictors of future performance. The company is partially at fault for focusing more on attracting employees into an organization instead of developing those that are already present. A Deloitte study (2004) found that the typical U.S. company spends nearly 50 times more to recruit a $100,000 professional than it invests in his annual training after he comes aboard. Also when identifying HIPO talent, companies will often use the same indicators of future potential as they have used in the past. Companies miss out on opportunities for a strong return on investment because of flawed nomination practices in their HIPO programs, one of which is a belief that past or current performance is the best predictor of high potential for other jobs (Zielinski, 2006). Other relatively inaccurate indicators are tenure, years of experience, and leadership competencies. However, top companies realize that the historical indicators are only the starting point of identification. For example, performance is best used as an initial qualifier for HIPO consideration but never as the only criteria. This is due to the differences between a high performing employees and a high potential employee which often results in a talent gap chasm. 4

Taking into account both performance and potential, CLC s model of employee potential (2005a) uses three characteristics as requirements for a high potential employee: (in decreasing order of importance) ability, engagement, and aspiration for success in roles of increased responsibility. Each of these three behaviors is needed in significant amounts for an employee to continually be successful at the next job level (Refer to Exhibit A). CLC (2005b) also proposes that HIPO identification strategies should be customized dependent on the employee level. For example, weighting aspiration more heavily for lower level employees and engagement and ability for senior staff is needed. An organization needs to analyze and prioritize the drivers that are most effective to their success by evaluating whether the driver contributes to an employee s potential. In the CLC study on rising talent (2005a), identified drivers cluster into three main areas: leveraging employee relationships, ensuring credible organizational commitment to development, and structuring challenges within job experiences (Refer to Exhibit B). Potential deterrents include frequent business unit and/or manager changes, working without clear goals and objectives, managing organizational politics, and working with team members you dislike. Decide: Who Belongs in the HIPO Pool The management of the HIPO pipeline can be accomplished by calibrating information on HIPOs and aligning the company s needs with the quantity and quality of talent available. To ensure consistency across lines of business and functional positions, leadership reviews based on performance competencies should be used to level the playing field. Many companies use a nomination and validation process where the business unit manager nominates HIPOs and top management validates the nominees in a meeting. General Electric (GE) holds an annual CEO-led event named Session C where talent is evaluated according to GE s leadership competency framework to identify individuals from across the firm with the potential to lead the organization in the future (CLC, 2001). The process uses various data points such as the individual s resume and self-assessment, an in-depth interview, a performance appraisal, and the latest career potential assessment to generate a scorecard for each individual. When identifying HIPO employees, another consideration is the ratio of HIPO employees compared to the total employee population. Published research suggests that HIPO ratios are a good indication of the effectiveness of a HIPO program and talent management processes. Additionally, a high number of HIPO nominations could signal management s engagement in and knowledge of the program. On the flip side, it might also indicate that the HIPO criteria was poorly communicated or vague (CLC, 2005b). Discover: Counteract the Deterrents Companies on the leading edge of talent management are dealing with the concern around equal treatment for employees external to the home country. Companies struggle with considering global employees on the basis of merit when conducting HIPO identification. HR professionals feel that noncore businesses and those outside of the home country are held at a disadvantage during the HIPO process. Addressing this issue requires outreach beyond a company s main employee hubs to include all countries around the world where there are a relatively small number of employees (Morton, 2005). Driven by major business developments, Bayer North America felt the company in the future would need managers with more of a global perspective than U.S.-centric or Euro-centric viewpoints. (Schein & Kramer, 2005). The process at Bayer included a database for job performance profiles but also continued onto Development Center interviews, reality-based simulations, and a career development plan inclusive of job rotations. The Development or Assessment Center model was a structured, in-depth, two- to threehour behavior-based interview conducted by a member in the director s staff and an external psychologist. The external expert, who conducted similar evaluations for other companies, then used the results of the psychological testing to compare the Bayer candidate to the competition at a similar job 5

level. This exercise interjects an element of consistency not only between the business units but also across the country borders. Achieving a program with a diversity profile that is representative of the diversity found in the HIPO talent pool or the company as a whole, can also be used as a measure of success. For example, Colgate- Palmolive Company measures success by 75 percent of general managers who are not American, by at least two to three different ethnic backgrounds on every management team in the company, and by extensive rotational experience (Schein & Kramer, 2005). To ensure accurate calibration of talent across diverse business units, organizations are developing standard definitions of performance and potential within a nine-box matrix model to access the employee s leadership potential. Various companies such as Exelon Corporation, General Electric and Bose use this method. Although companies define the boxes differently, employees are typically categorized on a scale of high, medium and low performance/potential. The criteria for assessment includes an employee s business impact and performance, corporate values, and leadership potential. For example, at Exelon, standard leadership performance and potential definitions facilitate apples-toapples comparisons throughout the organization. Once the performance and potential is determined, then the employee is placed in the appropriate matrix box (The Conference Board, 2005). Companies are also trying to build equality into the process with the use of IT systems to assist in identifying HIPOs. This encourages visibility from far reaching areas of the company and would be comparatively more equitable because the implemented system would track all employees within the company and be an impartial database of available talent (Robb, 2006). For example, at Medtronic, Inc., substantial and rapid growth has changed the company s culture which prompted a need for a more formalized talent management system with a comprehensive inventory of employees knowledge, skills and abilities. Historically, key players knew each other personally but with a dispersed workforce, this was no longer viable. Additionally, Medtronic wanted to find a strategy to manage talent for their matrix structure with silos. Since it could no longer be run solely from the corporate HR offices, there was interest from both geographic and shared services staff along with different business units to share ownership and responsibility (Morton, 2004). 6

Succession Planning Succession planning has often been considered important to an organization s success by managers but the reality is that many do not have the time or resources to complete the exercise. In a 2003 study of succession management involving more than 270 organizations worldwide, CLC found that nearly 90 percent of the participants ranked succession management as a top corporate priority for 2003 whereas only 6 percent said they were confident the systems they have in place will do the job to build top-flight executive teams (Frauenheim, 2006). Other impediments include a lack of clear approach to succession management and a dearth of available talent within the organization (HR Magazine, 2004). In this section the topics discussed are cultivating leadership, implementing a SPM program, using best practices, and determining the risks involved. Cultivating Leaders For companies who have successfully cleared the initial hurdle of implementing basic succession planning for their senior executives, the next challenge is expanding succession planning activities beyond the top 25 to 50 employees (Robb, 2006). As this activity permeates throughout all levels of an organization, the succession process shifts from a temporary measure to a long-term talent development solution that addresses the root cause of the problem. Organization-wide leadership development processes must be closely linked to strategic priorities and communicated with a clear vision. HR should create developmental tools and facilitate their use, but the business units should take responsibility for development activities (Bernthal & Wellins, 2003). Implementing a Systematic Succession Planning & Management (SPM) Program According to William Rothwell (2005), starting up a systematic SPM program usually requires an organization's decision-makers to assess current problems, practices, and future needs to demonstrate the need for SPM before determining organizational requirements to link SPM activities to organizational strategy and human resource strategy. Next, the organization should benchmark SPM practices in other organizations and build management commitment to systematic SPM. Once accomplished, the roles are clarified for each level of management and a program mission statement, policy, and philosophy are formulated. The program priorities are set to begin identifying the target groups. The next steps are communication and training for the SPM including conducting program kickoff meetings, and briefing counseling sessions. In situations where SPM have failed, the common reasons are a lack of follow through in implementation, lack of executive-level support, and an over-designed process. Execution errors actually account for 70 percent of succession plans failures (Wells, 2003). Commitment from the upper levels of management encourages more employees to participate in the process. However, even with executive buy-in, a cumbersome and over-designed process (such as extensive forms and too many criteria for selection) can negatively impact the success of the SPM because managers will perceive it as additional bureaucracy rather than beneficial. Best Practices Organizations must identify high-potential candidates early in their careers before looking outside for talent. Global companies must look closely at all the countries where they operate before determining their current talent is not sufficient for their needs. Given the culture and employee population, the appropriate hiring mix will ensure continuity of vision and purpose with the internal hires yet counterbalance that with the infusion of fresh perspectives for the external hires. A Right Management Consultants survey found that companies are hiring less from the outside and growing talent in-house because of lower cost and better culture fit (T+D, 2006). Best practices for succession planning fall into two major categories: planning and preparation. 7

During the planning process, there are certain succession management process characteristics which are most highly positively correlated to perceptions of succession management effectiveness (Bernthal & Wellins, 2003). These highly valued traits including a timeframe for achieving planned actions, changes in response to changing strategic business plans (i.e. agile), openly shares information (e.g. nomination, performance, standings) with candidates involved in succession management, visibly supported by senior management, and involves line management to identify and/or develop candidates. In the preparation phase, candidates enter the development pipeline and managers must constantly align their employees education and on-the-job experience with the emerging landscape. Charan (2005) proposes that the best preparation for a leader is progression through positions with responsibility for steadily larger and more complex profit & loss centers: such as managing a single product, a customer segment, a country, several product lines, a business unit, and a division. Kramer (2005) links the planning and the preparation by suggesting that best practice organizations should also formally identify key positions to be targeted and required competencies; designate the people with the potential to fill these positions and offers developmental activities to help these individuals meet the core competencies; actively employ mentoring and coaching; and make use of the post-promotion assessments to ensure that future promotions to these positions lead to success. Succession Planning Risks During succession planning, organizations must take action to limit problems in four fundamental succession risks: vacancy risk, readiness risk, transition risk, and portfolio risk. (CLC website, 2006) i) Vacancy Risk: Organizations should safeguard critical business capabilities by focusing on the most vulnerable portions of the business with accurately translating business strategy into talent strategy and effectively planning for key talent departures. ii) Readiness Risk: Executive talent development systems must accurately and efficiently match executives with needed development experiences, balance the short-term risks of stretch assignments with their long-term benefits, and enable organization-wide talent mobility. iii) Transition Risk: Systems must be in place to identify needed behavioral changes for executives and to thoroughly onboard new executives to ensure organizational fit to facilitate their success in new roles. iv) Portfolio Risk: Organizations should consider the entire structure of their talent demand (e.g., jobs, processes, structures) to ensure that the organization is getting maximum return on talent. Conclusion To keep abreast of the ever-changing demographics of the workforce and the varying needs of the organizations, talent management has to be a process of continuous improvement. Within this constantly evolving field, a strong talent development culture can help a company engage and motivate their employees. The upcoming challenge for many organizations is how to effectively address the issues of high potential employees and succession management while performing in those areas on par with or better than their competitors. HR can provide the processes, training, and tools to support the workforce, but the real power of creating a retention culture that attracts and keeps top talent lies in the hands of leadership and the current workforce. In order to address the remaining skills gaps, HR must recognize the changing demands of a new generation of employees. To ensure that organizations have the talent to maximize their performance potential, HR should focus their efforts on the identification and development of HIPO employees early in their careers and reevaluate the processes often. 8

Exhibit A:

Exhibit B: (CLC, 2005a) 0

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