Why is it important to develop high-potential employees and build your leadership talent pipeline?

High turnover can compromise a company’s ability to deliver the results that investors expect – research shows that as leadership turnover increases, IRR decreases. Investment theses often rely on having a strong talent foundation that ensures that the right people are in the right seats.

Continuity gaps can disrupt business operations – without a bench of talent ready to step in as needed, gaps in key positions can jeopardize your ability to operate effectively, service clients, and maintain relationships with partners and suppliers.

Companies whose work environments are in turmoil are less likely to achieve critical goals – the more turnover, leadership changes, and pivots that occur within a 3-to-5-year investment horizon, the less likely you are to achieve challenging goals or create meaningful incremental value. 

Identifying Potential Leaders

What is a high potential employee? What is the difference between a high-potential employee and a high-performing employee?

“Performance” measures what someone is doing today; “potential” predicts whether they’ll be able to meet the requirements of tomorrow – performance and potential are not always aligned because different roles require different skill sets. Using performance to predict potential is one of the most common reasons that the wrong people are chosen (or not chosen) for leadership positions. 

Example of a high-performing, low-potential employee

A top-performing salesperson gets promoted to Sales Manager—but they lack coaching skills and don’t know how to manage a P&L. Not only has the company lost its best salesperson, but they’ve also put the team in the hands of somebody who doesn’t know how to guide them.

Example of a low-performing, high-potential employee

A mediocre controller is “OK” at closing the books—but they are incredibly strategic, very thoughtful about M&A, and have strong FP&A skills. This employee could be an excellent CFO even though they will never be a great controller.

Use 9-box talent calibration to identify the employees who are most likely to meet your future leadership needs – a talent calibration matrix (also known as a 9-box) maps employees based on current performance and future potential. The “High Potential” column comprises most high-potential individuals, but the “Moderate Potential” column might reveal opportunities to unlock employee potential by reassessing career path options or development programs.

9-Box Talent Calibration
HIGH CONTRIBUTION / CHAMPION	Expert Talent Limited capacity to move to a higher or more challenging role, despite exceptional performance. Movement may be limited due to technical capabilities and/or limited leadership skills or desires.	Versatile Talent Exceeds performance goals, delivers hard results, demonstrates solid leadership skills, and shows potential to move to a larger, more challenging role. Adds value in one or more business areas.	Key Talent Exceeds performance goals, demonstrates capacity for within-grade advancement or to a higher leadership role. Delivers hard results, sought after business acumen, and subject matter expertise.
SOLID CONTRIBUTION	Limited Talent Performs solidly and has limited capacity to take on greater challenge or more responsibility.	Valued Talent Performs solidly and meets position requirements. Demonstrates ability to take on greater responsibility and more challenge with some coaching and development.	Rising Talent Performs solidly and meets position’s requirements. Has capacity for advancement within-grade or to move to higher leadership roles. May need to move through a performance curve in a new role or a stretch assignment.
LOW CONTRIBUTION	Mismatched Talent Does not demonstrate aptitude, capability, or dedication required to take on a more challenging role. Consistently not delivering results as expected.	Unconfirmed Talent Has some potential but has not yet fully demonstrated this. Performs solidly and has limited capacity to take on greater challenge or more responsibility.	Untapped Talent Appears to have higher capacity to take on larger and more complex work but performs at a low level in comparison with peers.
	LIMITED (limited capability for role expansion or advancement; significant development and/or skills acquisition needs/ new in role)	MODERATE (capable of 1 level of advancement within 12-24 months; consider role expansion and within-role learning opportunities now)	HIGH (capable of 1-2 levels of advancement within 0-12 months)

POTENTIAL

How do you identify high-potential employees? Are there specific assessments companies should be using?

Align your people strategy with your growth thesis and trajectory – an employee is only high-potential if they can meet your future needs. Because the skills and qualities that grow a company from $0-$10MM won’t necessarily help them grow from $10-$100MM, take the time to understand your growth strategy, the types of leaders needed to support that strategy, and the subsequent skills required. For example, a buy-and-build strategy will have different leadership needs than a land and expand strategy.     

Employ a variety of tools to evaluate talent – a combination of psychometric assessments, 360 assessments, assessment centers, simulations, and in-depth interviews provide a well-rounded way to evaluate candidates on a personal level. However, remember that assessment results should never be considered in a vacuum and that companies can get distracted by measuring the wrong things.

Assessment type		What they help with		Example
Personality assessments – measure the behaviors or reactions of an individual that remain relatively constant throughout their life. They measure an individual’s “DNA” (e.g., underlying nature), not their “blood pressure” (e.g., symptoms or discrete problems).		• Determining whether someone is in the right role • Identifying what someone needs to do to successfully adapt		A CMO is extremely competitive and excels in closing deals in 1:1 meetings but hates trade shows. The company strategy pivoted, and now trade shows are very important. Motivate the CMO by tapping into their competitiveness and strengths (e.g., they can’t go to the bar until they’ve talked to 10 people and gotten their business cards, or they can’t leave the trade show floor until they’ve gotten someone to ask for a proposal).
Cognitive assessments – evaluate general reasoning, problem-solving abilities, and the capacity to manage ambiguity.		• Understanding how somebody makes decisions • Determining whether executives follow a thought process that investors are comfortable with		A new board is established post-acquisition. Investors should know how to “manage” their executives before they decide what governance / controls to put in place. For example, different practices might be useful if you have a CEO prone to analysis paralysis vs. impulsive decision-making under pressure.

What are common behavioral indicators that predict future leadership success?

Look for highly engaged employees – engagement indicates how much somebody cares. Dedicated employees who go above and beyond should be encouraged; help them feel challenged, give them meaningful work, and show them that they can achieve their personal goals through the business.

According to Hogan research, CEOs of PE-backed companies are more likely to be strong leaders if they exhibit 5 key qualities/ behaviors:

• Building and leading high performing teams
• Tough minded
• Sense of urgency
• Resilience
• Willingness to admit problems

Use data-driven indicators to reduce bias – quantifying the process for identifying high-potential individuals helps overcome unconscious bias that can cause employees to be overlooked. For example, a large firm previously had partner-led promotions, which favored employees who socialized with senior partners. By adding objective metrics on utilization, work quality, and client management, the firm saw a 40% increase in female promotions the following year.

Who is in charge of identifying high-potential employees?

Everybody is responsible for identifying high-profile employees – while HR or the executive team might lead the formal talent development process, identification must happen at all levels of the organization. High potentials also often self-identify by expressing interest in growth opportunities.

When possible, use objective processes to mitigate the impact of internal politics on the identification process – one of the biggest problems in cultivating a leadership pipeline is that internal politics can influence who is recognized as high potential. Awareness of this dynamic can help program leaders determine whether the right people have been identified. 

Developing Leadership Potential

Who is responsible for talent development? What is the role for HR/People Leaders vs. Managers?

Leadership owns the strategy and plan – either the executive team, HR, or operating partners at the PE fund are responsible for setting the tone and foundation for the program.

Individuals must own their development – it’s not worth investing in somebody who doesn’t want to grow. Create a culture that encourages high potentials to take initiative, seek opportunities to develop new skills, and be open about their goals.

Managers should be motivated to drive day-to-day development – incentivize frontline leaders and direct managers to develop their teams (instead of hoarding talent). Part of managerial performance reviews should include a KPI that measures how many of their team members were promoted in the last year.

How do you identify unique areas of development need for high-potential individual contributors? What are common areas of development?

360 assessments help identify skill gaps – collect feedback from the direct reports and managers of high-potential employees to identify skill- vs. “marketing”-based areas of improvement. For example, a manager might think their employee struggles to influence others. However, feedback from that employee’s direct reports and peers reveals them to be very persuasive. Instead of developing their influence, the organization would benefit more if the employee developed their “self-marketing” skills and learned to communicate with authority figures without being overly deferential. 

Individual contributors need to learn how to have hard conversations – one of the toughest skills to teach non-confrontational people is how to give constructive feedback. Explain to the employee that when you don’t give someone feedback, you’re actually stunting their development. You can disagree with someone without being disagreeable, just like you can provide hard-to-hear information without being harsh.

Thinking strategically requires “stepping out of the weeds” – high potentials require a shift in thinking from their current day-to-day roles, which are usually detail-oriented. In order to make better decisions in the long term, they must be able to take a step back from the details and see how things are interconnected.

Recognizing transferrable skills is the highest impact tactic – leadership potential depends on your ability to respond to change, and the easiest way to excel in a new area is to leverage skills you already have. Here are examples of how transferrable skills factor into key leadership development areas:

• Expanding role – an exceptional young auditor impressed a CEO so much that he was hired as a CFO with no CFO experience. However, a leadership assessment revealed that the auditor had high cognitive decision-making skills, relationship-building skills, and was good at making strategic decisions that drove efficiency. The company realized that investing in training up the auditor and temporarily supplementing his knowledge with a fractional CFO was better than paying a recruiter to find an external (and more expensive) candidate who wasn’t familiar with the business.
• New leader assimilation – a consultant built a successful practice and sold it to a large firm, where she’s now struggling to establish himself as a leader. By thinking of her new colleagues as an audience that she is selling on her personal leadership abilities, she can leverage her strong selling skills.

What are some of the most effective ways to develop high-potential employees?

Use the 70-20-10 development model:

• 70% is experiential (hands-on projects)
• 20% is mentorship and peer learning
• 10% is classic training/structured learning programs.

Provide meaningful experiential learning opportunities – the majority of development comes from stepping in to help with real-world challenges. Give high potential employees leadership opportunities on projects and exposure to strategic initiatives where they can practice and develop their skills.

Make coaching available to mid-level managers – due to the democratization of executive coaching, there are now programs that provide mid-level managers with coaching opportunities that are more approachable and affordable than traditional C-suite coaching programs. 

How should development strategies differ between early-career, mid-level, and executive potentials?

Scale and tailor your investment based on seniority and potential impact – the fundamental principles of development are consistent across all levels, but executive development is typically more individualized, while mid-level development might include group coaching and opportunities like book clubs that can be offered to multiple people at once.

Give executive potentials opportunities to provide strategic input – they benefit from shadowing and listening in on important conversations and being used as a sounding board for current leaders. Motivate executive potentials by giving them ownership over real (low-risk) strategic initiatives.

How do you factor individual career path preferences into your development program?

Require participants to opt in or opt out – the most important factor in talent development is understanding an employee’s goals and whether their career path aligns with those goals. Skill without will is not enough to create a great leader.

Create alternative development tracks – not all high potentials want to follow traditional advancement paths. Alternative tracks allow employees to expand their impact through deep expertise without necessarily taking on people management roles.  

Enable internal mobility across functions – build systems that allow employees to move between departments without leaving the organization. Have ongoing conversations about career aspirations and create skill taxonomies that show which capabilities are needed for different roles to clarify what development is needed for transitions.

Building a Leadership Pipeline

How should organizations consider the decision to develop leaders internally vs. hire externally? 

Multiple factors influence whether an organization should develop leaders internally.
Factor	Impact on leadership development
Role	Different types of roles might be easier or harder to hire for depending on market factors. For example, hiring an AI expert was affordable several years ago. Today, however, the industry is changing so quickly and talent is so expensive that it might make more sense to train someone with transferable skills in-house.
Investment cycle	A company approaching the end of their hold period might be unable to accommodate the necessary learning curve for high potential executives. For example, an internal candidate with the potential to be an excellent future CEO is more likely to be chosen for the position if they are discovered during due diligence vs. if they are discovered a year before exit and will be coming into a hostile environment.

How do you develop retention strategies for high potential employees? 

Employee engagement drives retention – there is a correlation between retention and the extent to which high potential employees feel challenged, intellectually stimulated, and like they’re making a difference. High potential employees are more likely to leave if they feel they’re stagnating or unchallenged.

Provide transparency on their potential to help build employee commitment – high potential employees should know they’re considered to be high potential and part of the organization’s long-term plans. Upfront communication builds buy-in and investment in the company’s future vision.

How should organizations approach succession planning for key roles? 

Put plans in place for all roles with high impact, not just those with important titles – succession planning should cover all positions with significant business impact. In some cases, regional managers that are responsible for execution and meeting customer expectations can represent a larger threat to business continuity than the CFO or CEO.

Create 3-to-5-year roadmaps for senior role succession – it can be difficult for senior leaders to feel like they are training their replacements. Position the exercise as “Project Legacy”: a long-term development plan that will help them make a difference in steering the company after they leave.

Make succession planning a key business activity – CEOs who bring in a Chief of Staff or consultant to own the succession planning process and support the transition improve business continuity. They also elevate the importance of succession planning and make sure it’s managed effectively.

Overall

How should you evaluate the success of your leadership development program? 

Establish the business problem your program will solve and measure how the gap closes – leadership development programs exist for a specific purpose. Be upfront about that purpose and be objective when considering whether it has been fulfilled.

Leadership development program metrics should align with business objectives – people development KPIs should reflect business goals because a successful people strategy enables your business strategy. EBITDA, profit, and team performance demonstrate whether your talent strategy is working.

Consider the cost of an ineffective program – strong people programs benefit the bottom line. If you have poor retention that requires continuous hiring, recruitment fees will affect profitability. Similarly, problems with business continuity could indicate problems with talent development.

What are the most important things to get right?

 Have the right people in the right seats for your future needs – development programs support growth by giving people the skills they need to support the version of the company that is being created, not the version of the company that exists today. If you have the right people, you can fix anything else.

Develop a clear vision and direction – everyone must understand where you are going and why. Otherwise, people will not be developed according to a single vision of the future, and you will have gaps. 

What are common pitfalls? 

Don’t do team building for the sake of team building – there is no evidence that generic team building activities have any impact on business performance. Instead, prioritize the science of leadership and management that is proven to drive lasting change.