Using performance ratings as proxy highly problematic
Any successful organization must place a premium on leadership development. Companies are increasingly investing significant sums in cultivating leadership talent. Most are actively seeking to grow future leaders in-house, which involves identifying and developing high-potential employees (HIPOs) — high-achieving employees with the potential to lead an organization into the future.
High-potential employee programs typically identify three per cent to 10 per cent of a company’s most promising employees through an annual nomination process. Those identified as HIPOs are provided with accelerated leadership development opportunities, such as rotating stints in a company’s business divisions, stretch assignments and mentoring. Many companies in the United States and Canada have some form of HIPO program in place.
These kinds of programs make sense for a number of reasons.
First, focusing organizational resources on future leaders can have a huge impact on business results. For example, McKinsey and Company estimated the best managers grew profits at one large manufacturing plant by 130 per cent and in a call centre environment by 80 per cent, while the lowest performing managers in both achieved no improvement.
In addition, internally grown senior leaders (in contrast to external hires) tend to achieve higher long-term corporate performance, given their deep knowledge of the business and established credibility and respect.
Second, HIPO programs can also contribute to the retention of promising employees by providing personal recognition and coveted development and advancement opportunities.
Third, investing in talent can yield impressive results at the organizational level. Companies with formal HIPO programs tend to perform in the 75th percentile or higher in terms of total shareholder return, according to Hewitt Associates.
Despite their potential to create significant value, many HIPO programs fail to meet expectations.
Forty per cent of internal job moves made by people identified as high potentials end in failure, according to research published in the Harvard Business Review.
Further, many HIPOs feel disengaged from their companies and actively seek external job opportunities.
How can so many HIPO programs fail?
So how can so many HIPO programs fail? To answer this question, all aspects of HIPO programs need to be revisited at a deeper level. Based on our examinations to date, the typical key shortcomings of HIPO programs include:
• a relative deficiency of well-validated HIPO predictors
• an overreliance on current performance as a proxy for future potential
• simplistic assumptions about the nature of talent
• measurement bias in identifying high potentials
• unintended side effects of the HIPO identification process.
Let’s briefly explain each of these.
Consider the most basic challenge of HIPO programs: Determining someone’s future potential. Simply trying to define that elusive variable known as “potential” can be daunting. There is no general consensus with respect to the key competencies for identifying HIPOs. The diversity of the proposed HIPO models creates confusion around what competencies are most useful for assessment (see the sidebar for predictors often used by organizations). Unfortunately, companies rarely validate or systematically examine their predictive models.
Consequently, many companies feel more comfortable relying on employee performance ratings as a proxy for high potential. This approach, of course, is highly problematic because an ability to do well on a particular job does not necessarily mean the same ability will automatically translate to high performance at the next level of responsibilities.
Current job performance and potential for promotion are not highly correlated and only a minority of high-performing employees have the critical abilities to excel at the next level in an organization.
Moreover, the HIPO identification process relies on the questionable belief potential is fixed and talented employees are just waiting to be discovered amidst the rank and file. This oversimplified “either-you-have-it-or-you-don’t” view of talent potential needs to be replaced with a fuller understanding of the social dynamics of how high potentials materialize.
There are any number of external factors that can spark the emergence of talent. For example, an employee’s relationship with a supervisor can influence the capability of that employee to exhibit high-potential qualities.
Many executives speak of poorly performing employees blossoming into high potentials when reassigned to a different supervisor. And star employees who switch employers generally experience a sharp decline in their performance for at least five years, according to research by Boris Groysberg, a professor at Harvard Business School in Boston. This contradicts the either-you-have-it-or-you-don’t perspective on talent and has huge implications for HIPO identification programs.
Even if a company does a great job developing the criteria for identifying high potentials, accurately measuring these variables is a whole other matter. Typically, an evaluation of potential is performed by the immediate supervisor as part of an annual appraisal.
Assuming a supervisor has the ability to evaluate the competencies indicative of future potential (though 48 per cent of managers are ineffective at identifying HIPOs, according to a survey by the Corporate Leadership Council), such judgments are still relatively subjective and open to cognitive biases.
For example, when supervisors have a positive personal relationship with subordinates, they tend to inadvertently rate the performance of those employees higher, regardless of actual performance. Vetting nominations by subjecting them to roundtable discussions can help improve the quality of evaluation, but the supervisor bias still has substantial influence.
One other significant consideration for why HIPO programs fail has to do with the effect of the identification itself on the employee. Informing HIPOs of their “high” status can create an unhealthy level of expectations — of special treatment, promotions or coveted leadership positions — and negatively impact attitudes and behaviour. It’s the outsized expectations of emerging stars that lead to increased disappointment with their employers and, consequently, a reduction in effort, engagement and commitment, according to the Harvard Business Review.
Labelling employees as talented can create undesirable behavioural side effects. In one experimental study, we found subjects labelled as high potentials tended to become more touchy compared to their colleagues in response to performance feedback. They expected to receive greater accolades for their performance and reported higher levels of disappointment more readily than peers who received no such label. And labelling employees as high potentials may also influence their decision-making in less than optimal ways, we found in another study.
But make no mistake — it’s important to identify and cultivate rising stars. In a growing war for talent, such programs are a practical necessity. HIPO programs can create substantial value for organizations and boost the odds of long-term success.
However, without a more thorough understanding of the challenges, many such programs are destined to fail. There is an urgent need to develop more effective and accurate processes for identifying high potentials.
Where do we start?
First, companies can undoubtedly benefit from engaging in systematic, data-driven investigations of their identification processes. Often enough, data already exists inside organizations or can be collected to evaluate the quality of the HIPO process. Second, as with any management system, gathering and sharing best practices across organizations is always very valuable. The time is ripe to start the process of generating best practices in the realm of HIPO programs.
Igor Kotlyar is a professor in the faculty of business and information technology at the University of Ontario Institute of Technology in Oshawa, Ont. He can be reached at firstname.lastname@example.org. Len Karakowsky is an associate professor of management at York University in Toronto. He can be reached at email@example.com.
Identifying Top Talent
Most popular predictors
Predictors of high-potential talent typically used by organizations, starting with the most popular (based on work by authors Rob Silzer and Allan Church):
• performance record (performance track record, leadership experiences)
• leadership skills (managing, empowering, inspiring, influencing, developing others, challenging the status quo, change management)
• motivation and engagement (drive, energy, engagement, tenacity, aspiration, drive for advancement, organizational commitment, results orientation, risk-taking)
• learning orientation and ability (adaptability, flexibility, response to feedback, interest in learning, ability to quickly understand and absorb new information)
• cognitive skills (conceptual or strategic thinking, cognitive ability, dealing with complexity and ambiguity, insightfulness, decision-making)
• personality variables (interpersonal skills, sociability, dominance, ambition, emotional self-control and resilience in stressful situations).
• other (mobility, technical or functional skills, business knowledge, cultural fit).
How do you identify high performers?
Canadian HR Reporter has teamed up with researchers from the University of Ontario Institute of Technology and York University to find out how employers are identifying top talent. To take the brief survey visit www.surveymonkey.com/s/KJLDBXF. Results from the survey will be published in Canadian HR Reporter later this fall.