Can potential reduce ‘Peter principle’?

Considering, combining performance and potential to find our best leaders
By Francoise Cadigan, Krista Uggerslev, Kasey Martin,
|Canadian HR Reporter|Last Updated: 09/09/2013

Sometimes we wish we could see into the future when it comes to making promotion, training and development decisions.

Which promising employees will perform well at the next level of the organization? Which ones will benefit from training to improve their skills in their current roles, and who should be granted development opportunities to prepare them for more challenging roles?

With training and development budgets averaging two per cent to three per cent of payroll, and the combined direct and indirect costs of failed promotions several times that of base salary, the cost of a poor decision can be staggering.

One of the central criteria typically used for promotion, training and development decisions is an employee’s performance level in their current job — we target the highest performers for promotion and development and the weaker performers for training.

Research suggests savvy decision-makers are beginning to include the ratings of employee potential (which includes personality characteristics, cognitive ability, motivation, interpersonal skills and education/experience) in addition to job performance to improve their decision success.

We designed a study to explore how extensively experienced decision-makers use information about employee performance and potential. In the first part, we asked 179 participants (58 front-line managers and 121 HR professionals) to make promotion, training and development recommendations for a series of employees based on job performance and employee potential scores assigned to the employees.

While job performance and employee potential ratings were both used to make promotion, training and development recommendations, we found HR professionals gave greater weight to potential than front-line managers.

Moreover, the results indicated employee potential had a greater impact on promotion recommendations as job performance ratings increased. That is, performance and potential acted in an additive way where candidates were recommended for promotion increasingly as their performance and potential both went up. In contrast, employee potential had a greater impact on development recommendations as job performance decreased.

In other words, high performers may have been recommended for development even if their potential was not all that high. However, when performance was lower, potential had to be substantial for an investment in development to be recommended. For training to be recommended, either potential or performance had to be at least moderate, and training recommendations went down again as either performance or potential was high. Taken together, this indicates that decision-makers viewed both low-performing, low-potential and high-performing, high-potential employees as poor investments for training.

In the second part of the study, participants made promotion decisions amongst a mix of internal and external candidates. Overwhelmingly, the largest contingent of decision-makers favoured internal candidates who were selected more than 70 per cent of the time. With more known about internal candidates — such as performance and potential and not just how they came across in an interview — perhaps it is not surprising decision-makers preferred the familiar rather than the unknown.

However, when two internal candidates were similar to one another, the edge was granted to the candidate with the higher performance as opposed to potential. While we may be doing well by our high-performing employees, given that employee potential focuses on identifying those individuals who may perform well in different, future positions, are we at risk for perpetuating the “Peter principle” — that is, promoting employees until they reach incompetence?

There was a second, smaller cohort of decision-makers who showed a preference for external candidates. Perhaps they value the injection of new blood or they fear the domino effect of hiring to replace a promoted worker.

A third contingent of decision-makers opted to promote the lowest-scoring internal candidates, suggesting a tendency to hoard their strongest and promote out their weakest employees.

Overall, when making promotion, training and development decisions, we may want to reflect on how we use employee potential and job performance. Chances are an employee without at least moderate levels of either performance or potential is not suited for the organization — training is not the answer.

And neither is training the answer for strong performers. Can development be offered to those folks to enhance their potential for future, more challenging job roles? And to minimize pitfalls in promotion decisions, we may be able to reduce the Peter principle dilemma by considering both how employees perform currently and what skills and abilities need to be developed in order to match the skills and abilities required of a future position.

Considering both performance and potential is imperative as we devise succession plans that ultimately set the stage for the next generation of leaders at organizations. Equally important to consider when making promotion decisions between internal and external candidates is to ensure the merit of the candidates is driving our decisions and is not a bias for one type of applicants versus another.

Francoise Cadigan is a doctoral candidate at the University of Manitoba (U of M) in Winnipeg. Her research focuses on talent management. Krista Uggerslev is applied research chair in leadership and talent at the Northern Alberta Institute of Technology (NAIT) in Edmonton, Alta. Her research focuses on leadership, recruitment, and talent management. Kasey Martin is a research associate at the U of M. Her research focuses on knowledge-sharing. David Kraichy is a doctoral candidate at U of M and his research focuses on recruitment and talent development. Neil Fassina is the provost and vice-president academic at NAIT with a research background in applied decision-making and social exchange. For more information about this study, contact Cadigan at umcadigf@cc.umanitoba.ca.

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