THE MOST EFFECTIVE AND SCIENTIFIC WAY TO ...stradaeducation.gallup.com/file/services/179273/A...By Randall Beck and Barry Conchie THE MOST EFFECTIVE AND SCIENTIFIC WAY TO SELECT AND

By Randall Beck and Barry Conchie

THE MOST EFFECTIVE AND SCIENTIFIC WAY TO SELECT AND DEVELOP YOUR COMPANY’S FUTURE LEADERS

A SUCCESSION PLAN THAT WORKS

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Copyright © 2012 Gallup, Inc. All rights reserved. Gallup® and Gallup Business JournalTM are trademarks of Gallup, Inc.

THE MOST EFFECTIVE AND SCIENTIFIC WAY TO SELECT AND DEVELOP YOUR COMPANY’S FUTURE LEADERS

A SUCCESSION PLAN THAT WORKSRandall Beck and Barry Conchie

One of the biggest problems companies face in hiring and developing future leaders is that senior executives, buoyed by their belief in their own success, often select people who are a lot like themselves.

The effect is pervasive and damaging. In one case, we discovered a company removing key future strategic leaders who were still several levels down in the organization. Why? Because those up-and-coming executives failed to mirror the company’s top leaders and take the short-term, reactive posture demanded of them. In such examples, leaders clearly were unaware of their bias toward hiring and promoting people like themselves, with severe consequences on leadership selection, succession, and development.

The fact is that succession planning remains an enduring business leadership challenge, particularly during this period of economic volatility, global uncertainty, and retrenchment.

WHAT IS SUCCESSION PLANNING,

AND WHY IT IS IMPORTANT?

Succession planning is the process by which companies identify internal candidates who have the potential to fill leadership roles at a level of performance exceeding that of the incumbents. It is a process that includes elements of selection and development.

An American Management Association Enterprise survey in 2011 found that 71% of senior and mid-level leaders in the U.S. and Canada believed “the global economy, with its hyper-competition and ever-changing business

environment, has rendered leadership succession more important than ever before.” However, only 14% of respondents said they were “well prepared to deal with a sudden loss of a key member of the senior management team.” Nearly one-quarter (22%) admitted they were not at all prepared to deal with such a loss.

A Booz & Company study of CEO succession released in 2012 found that CEO turnover rates had returned to “historical levels” with a sharp uptick in departures in 2011. The report found CEOs facing much higher expectations and challenges, in addition to boards looking for new leaders who can drive growth in the recovering global economy. It also found turnover the highest in larger companies and recognized a trend in boards looking for external CEOs to move companies forward (22%, up from 14% in 2007), despite the evidence that internal CEOs produced the best performance and had longer tenure. According to Ram Charam, writing in the Harvard Business Review in 2005, “The problem isn’t just that more CEOs are being replaced. The problem is that, in many cases, CEOs are being replaced badly.” The concern doesn’t only apply to hiring CEOs; it permeates selection at the senior levels of all organizations.

There is a better way to select leaders, and it doesn’t involve hedging bets in favor of internal candidates who resemble their company’s current executives or wagering on the future of a mature, experienced CEO. It involves following a research-based process that will result in selecting the person who will make the company stronger. Bluntly, it involves building a succession plan that actually works.

Copyright © 2012 Gallup, Inc. All rights reserved.

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The succession planning process doesn’t just apply to the top job; it is replicable across the entire company and is an essential part of building a “Talent Machine.” This paper identifies what works in succession planning and what doesn’t, based on Gallup’s findings from more than 40 years of research on successful leaders and organizations. (For a full overview and description of a Talent Machine, of which effective succession planning is a key element, see the article “Building a Talent Machine” in the Gallup Business Journal: http://businessjournal.gallup.com/content/153683/Building-Talent-Machine.aspx)

CURRENT PRACTICES

There are four fundamental questions you must ask before creating a succession plan that works:

• How many leaders does your company need?

• How many leaders does your company have?

• Where are they in the company?

• What does your company do with them?

How many leaders does your company need?

Without enough key leaders, your company’s future is at risk. Leadership is the key to any company’s success, so — like any other valuable resource — businesses should take careful inventory and be cognizant of how many future leaders they have at all times.

A simple method starts with a look at your company’s organizational chart. Begin with the top three levels: the CEO, the CEO’s direct reports, and the direct reports of this group. In most companies, these top levels usually number around 100 people. Then, multiply this number by three. This is the number of leaders your company needs, because when a hiring manager needs to fill a high-level executive position, it takes about three equally qualified candidates to find one who is deemed a good fit.

How many leaders does your company have, and where are they?

The problem with much of performance measurement is that it is subjectively based. In most companies we studied,

succession planning is based on judgments regarding employees’ current performance in their existing role balanced against their perceived potential performance in a promoted role. A typical matrix deployed to assist in this task is shown below.

Per

form

ance

Potential

“Performance” is intended to reflect performance in the employee’s current role. The inclusion of performance as a factor in succession planning is based on the belief that individuals who perform well in their current roles will likely perform well in their subsequent roles. The evidence of this is patchy, however.

We could delve into the issue of performance measurement much more deeply, but for our purposes here, our studies of exceptional executive leaders show that their performance in earlier career roles was neither linear nor consistently good — indeed, a number report spectacular failures. “Performance,” however, is an understandably valid criterion, as few companies would consider elevating individuals who are failing in their current roles. Performance is a threshold criterion, a factor to use in weeding out the bottom 25% from consideration. However, when individuals move between highly compatible roles — where there is just a slightly larger span of control but the job is very much the same — then there is more evidence that performance in the lower roles predicts success in the

A SucceSSion PlAn ThAT WorkS


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http://businessjournal.gallup.com/content/153683/Building-Talent-Machine.aspx

http://businessjournal.gallup.com/content/153683/Building-Talent-Machine.aspx

higher roles. Unfortunately, this tends to not apply at the transition point from senior management to executive levels, where the growth in role span is extremely significant.

What does your company do with leaders?

We observed that companies use three broad approaches to accelerate the growth of future leaders, none of which appeared to be particularly adequate or effective to us:

1. Job, role, or task development. This approach aims to provide more challenging experiences and assignments that will test the candidate and enhance his or her leadership skills in key areas. This investment tends to provide a relatively poor return, primarily because efforts are focused too broadly. Often, attempts at role and task development are built around well-intentioned job rotation schemes where individuals must pass through completely different functional roles. This is based on the untested assumption that they will acquire the necessary knowledge and skills to lead during these rotations.

However, job rotation is a poor answer to the very good question of what key experiences most contribute to executive success. Many seem to believe that job rotation is inherently “good” and therefore works. But our experience suggests that it is, at best, a scattershot approach with a high risk of failure — one exposing otherwise talented leaders to roles that simply don’t fit their capabilities. Our experience in working with companies suggests that narrowing the focus to the acquisition of specific, targeted experiences proves more successful in rapidly developing effective future leaders.

2. Formalized learning and development. The objective is to introduce leaders to essential areas of knowledge as a means to enhance their capacity to lead. This can play a huge role in helping leaders succeed. Many companies do a good job in this area, but further improvements must be targeted at learning that is specific to the company’s business needs and context, as well as the effective application of

learning to execute and to improve performance. Our partnership with many successful companies suggests that “plug and play” programs are wasteful and ineffective in growing leadership capability; a more holistic approach focused on individuals’ specific needs and company requirements delivers a much better return on investment. We found that most companies fall short when measuring the effectiveness of their learning programs for leaders.

3. Individualized guidance. The aim is to address areas that might accelerate or limit individual leadership effectiveness. Whether through coaching or mentoring, formal or informal, many approaches we observe are well-intentioned but unrealistic. Their dominant focus seems to be correcting deficiencies. There is no doubt that personality traits and behaviors that can derail an individual require some attention, but many competency schemes require these areas to become strengths. This is unrealistic and runs counter to what research and our own experience tell us about the capacity of individuals to change significantly over time. People have the greatest capacity for growth in their areas of strength, but very few coaching and guidance projects build on that premise.

WHAT SHOULD COMPANIES DO?

We recommend the following steps.

1. Introduce broad-based objective performance measures.

While it might be difficult and time-consuming to measure every part of every person’s work, it should be possible to objectively measure some of the more critical elements. Sales, productivity, accuracy, and timeliness are all measurable on a scale that enables comparison.

For those in roles that don’t readily include these elements, it is possible to develop effective proxy measures, such as internal customer scores. Beyond task and role performance measurement, it is crucial to include employee and customer engagement metrics as points of performance accountability.



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Typically we recommend about 70% of the performance weighting be based on measurement of role, about 15% based on employee engagement metrics, and 15% on customer engagement metrics. The aim is to provide evidence that automatically populates the “performance axis” of the succession matrix. The objectivity of performance metrics is key. One company we worked with had difficulty explaining the significance of two key metrics they captured. Only by careful statistical analysis were we able to show that one had four times the predictive effect of the other in terms of company growth.

2. Develop an effective talent prediction tool.

The lessons of behavioral economics teach us not to trust our own judgment — not because we are always wrong, but because we are often wrong when we think we are right. The prevalence of bias afflicts many complex decisions, particularly selection decisions. We have an exaggerated tendency to regard certain characteristics in others favorably — often characteristics where we also excel — and to discount less favorable characteristics. This affects our overall assessment of a person’s true capabilities and potential. It explains why we have “favorites” and spend disproportionate amounts of our time with some individuals and not others.

Using a predictive talent tool removes many variables in forecasting someone’s potential. Although experience and development are important, we believe they account for about 30% of leadership success. The rest we attribute to talent — and the assessment of predictive talent is where so many companies fall short.

The Gallup Executive Leadership Interview (ELI) is one such assessment that enables a more accurate prediction of leadership performance. It also counteracts the tendency of leaders to pick people who closely resemble themselves. Further, the assessment helps measure any team imbalance

in leadership attributes, enabling a more targeted selection of these attributes in new personnel.

When we look at the extent to which leadership talent — revealed through a combination of personality, characteristics, and behavior — self-replicates, we consistently find remarkably less variation in leadership talent within an organization’s leaders than might be expected or hoped for. Furthermore, we find that the “shape” of talent at executive levels is replicated in the levels beneath them. This finding is consistent with other research that established attitudinal biases inherent in face-to-face interviewing, and, more generally, it may explain the relative lack of demographic diversity (numerical strength of women and minorities at the executive level) in many leadership teams. This is compounded by a narrowing of leadership talent diversity inherent in the use of 360s and prescriptive competencies.

We have yet to find a company that is immune from these influences, yet most operate ignorant of the factors that might cause them. Although many companies attempt to address diversity shortcomings through targets or by requiring candidate short lists to include at least one diverse candidate, the real route to leadership talent diversity comes through using predictive assessments that are demographically “blind” and deploy methodology that eliminates the bias evident in face-to-face interviewing. When Gallup used the ELI assessment to assist in a global merger between companies in 69 competitive international markets, we discovered far more highly talented diverse leaders than either of the merging companies realized they possessed. This assessment rigor, essential in meeting Equal Employment Opportunity Commission (EEOC) requirements, delivers superior leadership candidates. Companies do the cause of diversity no good by appointing candidates to these positions who lack the necessary leadership talent, and our research and methodology show that they don’t have to.



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We also find much more “operational” than “strategic” leadership talent in many organizations. Another dominant trend is the under-representation of strategic leaders in the populations below the executive level. While current leadership teams might think they enjoy good talent balance, it is less clear that future leadership teams will be drawing from a sufficiently diverse talent pool. This has significant implications for succession planning. We measured this pattern in many companies and in different industries from retail to manufacturing, pharmaceutical to healthcare. It appears to be a consistent and enduring problem.

In some cases this imbalance was already causing problems, particularly in the weak identification of strategic priorities and in setting longer-term strategic direction. In one case, it led directly to a company’s inability to exploit a key strategic advantage, resulting in lost lead market share. Rarely were those leading the company aware of the extent of replication or of its significance to current and future performance.

Many companies use a non-scientific approach to predict future leaders, which causes significant problems:

a. They lack the ability to distinguish “predictive” from “desirable” leadership talent. For example, companies with rigid competency definitions operate selection systems assuming that the competencies they identify as desirable will be predictive of future leadership performance. One illustration is the desirable behavioral characteristic of “humility” — this is often a critical factor in selection, but lacks any predictive validity in terms of future leadership performance.

b. They assume that all leaders need to be competent in the same characteristics. Again, a rigid competence model is built on the desire for leaders to exhibit prescribed leadership

characteristics and behavior. We found no research that defines successful leadership in this way. Consequently, companies are placing behavioral expectations on some highly effective leaders that require them to develop and exhibit characteristics that are distracting, energy intensive, and time-consuming, without any evidence that any behavioral change they might achieve would result in performance improvement.

c. The evidence they consider at most succession planning meetings is largely subjective. Well-intended professionals, themselves not experts in executive selection, often rely on their judgment of observed behavior as their best means of evaluating variance among candidates. They do their best to extrapolate from existing behavior to future behavior. While they sometimes use data points, the approach doesn’t add up to an effective prediction. Furthermore, the absence of evidence that enables meaningful comparisons leaves the door open for succession planning meetings to become exercises in lobbying. It is remarkable to observe how many high potential candidates identified by this methodology are drawn equally from different parts of the business — every executive leader, it seems, gets his or her favorite candidates on the final list. Consequently, attempts at effective calibration are futile.

d. They make remarkably few attempts to verify the effectiveness of succession decisions over time. We see little evidence of effective validation or any attempts to link data points with individuals and their subsequent performance.

Gallup’s ELI attempts to address scientifically these shortcomings in succession planning and provide an objective, predictive analysis of an individual’s potential. It also aims to better calibrate talent diversity across a team.



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The interview reflects that no one set of characteristics captures the entirety of leadership effectiveness. It describes an individual’s leadership talent in five domains and 17 specific talent themes. Rather than measure every aspect of leadership, the interview concentrates on the elements that most predict effectiveness. It is blind to the influences and biases that afflict well-intentioned, but subjective judgments and opens a window to the real potential in leaders.

3. Research breakthrough experiences for success.

A potential future leader performing well in his or her current role with strong predictive leadership talent but few breakthrough experiences is not an ideal candidate. Rather than having high-potential

DIRECTION

• Communicate vision for organization’s future• Intensely focused on goal attainment, self-aware• Big-picture concept from multiple vantage points• Strategic and creative preparation for future• Purposeful, client-centered leadership

RELATIONSHIP

• Build trusting relationships, grow others• Expect integrity from self and organization• Deliberately build morale and camaraderie• Sort to people’s talents and contributions• Supportive resource to other leaders

INFLUENCE

• Comfortable and authoritative at the helm• Instigate activity, rally groups to perform• Catalysts for creating opportunity, turnarounds• Decisive and directive when necessary• Encourage debate toward best alternatives

DRIVE

• Driven at both personal and organizational levels• Intense desire to perform and win at top echelons• Performance numbers drive decision-making• Believe organization growth is mandatory• Set relentless pace for others to emulate

EXECUTION

• Self-disciplined toward goals, outcomes• Systems-thinkers around people needs• Think, plan, execute on multiple levels• Work long, intense hours toward success• Organized but also accommodate changes• Operationally astute

Candidate id: 2150157044

Executive Leadership: Theme Intensity

Name: John SmithAddress: 1234 Main StreetCity: Anytown State/province: NebraskaCountry: Postal code: 12345 E-mail:Home phone: 123-456-7890 Work phone: Mobile phone:

Interview completion date: 11/30/2009 Analyst: Jennifer ClarkLocation: Corporate Requested by: Jane Jones

Increasing Theme Intensity

Talent dimensions and themes are defined behaviorally on the following pages. Dimensions are indicators of talent measured byindividuals' responses to questions, and each question is associated with a theme. The theme intensity page is designed to show howparticular themes contribute to the talent in each dimension. The more bars following the theme label, the stronger the theme and themore likely the individual will display related behaviors. Each dimension and theme helps predict and explain the individual's potentialsuccess in this role.

Concept 1

Focus 1 2 3

Vision 1 2

Strategic Thinking 1 2 3

Direction

Intensity 1

Competitor 1 2

Ego 1 2 3

Growth 1 2 3 4

Performance 1 2

Drive

Catalyst 1 2 3

Courage 1

Influence

Investment 1 2 3 4

IndividualizedPerception

1 2 3 4

Stimulator 1 2

Accountability 1

Relationship

Orchestration 1 2 3 4

Structure 1

Execution

[Client] Company

Copyright © 2003, 2006 Gallup, Inc. All rights reserved. Privileged and Confidential Page 3



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candidates rotate through different roles that might not fit them, it is better to establish the specific experiences that make a difference to success in executive leadership and to then plan a development program for those experiences. This may or may not lead to future leaders moving into new positions.

Researching breakthrough experiences of current successful executives and considering the context of future company needs will result in a clearer definition of the experiences that actually matter. Some of these experiences will be threshold items — such as profit and loss responsibility, for instance, or evidence of higher level applied learning (such as an MBA) — but others will need to be developed as a person’s career progresses. Our research of breakthrough experiences in a number of major companies reveals that some experiences seem to have universal importance, so much so that every potential executive really needs to acquire these experiences.

For example, effectively leading a high visibility project by coordinating cross-company resources outside a person’s main area of expertise is a breakthrough experience common to nearly all successful executives. Most acquired this experience relatively early in their careers, and it is an important developmental step. Our research also reveals that some experiences are unique to specific companies. In one example, our research discovered that the most effective executives had successful international experience as expatriate leaders. Conducting experiential research provides a clear description of the key experiences all aspiring executives need to acquire. Uncovering significant experiential gaps in high-potential leaders enables companies to strategically plan for their future developmental needs.

4. Conduct targeted leadership development.

Many companies do a good job of standardizing the content of broad-based leadership development programs. They effectively teach Financial 101, interpersonal skills, and cultural and ethical norms. These are all important contributions to every person’s development. However, attempts to develop and grow key future leaders must be more specific and targeted to the needs of individuals and the company. Off-the-shelf “pick and mix” programs are rarely the solution they promise to be, and they are an ineffective approach to meeting real development needs.

One of the most critical elements of future leaders is self-awareness — an accurate understanding and awareness of one’s strengths and limitations. It is remarkable how few leaders are truly grounded in the reality of who they really are or who they have the potential to become. The excesses and limitations of our egos can downplay key attributes in one moment, yet cause us to unwisely put ourselves forward in another. Helping leaders decide what to do and what not to do is a key component of targeted leadership development. Companies may well discover that some key experiences require a “taught” component.

For example, supply chain logistics may be an essential part of learning with respect to an out-of-area experience, and it may be beneficial for all future leaders to learn together. Understanding the key emotional and behavioral drivers of employee and customer engagement could be critical elements in dealing with hostile or negative environments. Thus the definition of key experiences, along with self-awareness, encompasses the components of effective leadership development.



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EFFECTIVE SUCCESSION PLANNING IN ACTION

All the elements of the Talent Machine inform our succession matrix. Objectively quantifying each axis enables companies to avoid the subjective calibration that makes so many of their assessments ineffective. Leaders frequently complain that emerging leaders are not yet ready to assume a more senior leadership position. When questioned, those leaders are hard-pressed to explain their reluctance. It seems that “being ready now” is not based on clear or objective criteria — instead it is merely an expression of a feeling that might have a valid foundation, but that might also be the product of inherent biases.

The Talent Machine provides a better answer to the question of readiness as it establishes measurable criteria to influence judgment. A potential leader with great

current performance, a track record of increasing employee and customer engagement over time, strong leadership talent prediction, evidence of high self-awareness, and the acquisition of six out of eight defined breakthrough experiences is clearly more “ready” than another potential leader with exactly the same profile, but with only two out of eight breakthrough experiences.

One successful company we worked with used all of our strongest recommendations to establish a smaller number of more effective and objective role measures. They researched and identified breakthrough experiences and used these to inform a carefully crafted developmental sequence that focused on personal and experiential growth. They embarked on an eight-year journey and saw remarkable financial return — after 23 years of relatively

Leadership Succession Matrix

CustomerEngagement

EmployeeEngagement

BusinessMetrics

LeadershipDevelopment

ExperientialReview

Executive LeadershipAssessment

Potential

Per

form

ance



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flat operating profit, this new approach delivered a whole series of leaders who drove significant financial growth, as the graphs above show. Ultimately, this company was able to measurably improve the quality of its leadership pool — not just high-potential leaders, but all individuals holding leadership positions.

CONCLUSION

If one characteristic bias that affects leaders’ judgment is the tendency to more favorably view the people who remind them of themselves, another is for current leaders to view emerging leaders as less capable than themselves. When we asked leaders in a variety of companies to describe their biggest leadership challenge, their dominant response related to concerns about the quality of emerging leaders. In truth, when they were younger, still-emerging leaders, they probably weren’t viewed as ready yet by their predecessors either. The challenge in identifying who should emerge as leaders and when is to provide accurate predictions that reduce the margin for error. Building data sources that challenge our innate prejudices and biases should be the

focus of boards of directors and executive teams in every company. That so few of them realize their limitations is why so few have made effective progress.

We are all good at remembering and building a narrative about our own successes. All executive leaders have a story describing how they plucked a “diamond in the rough” and turned that candidate into a superior leader. These are real examples that must never be minimized — but they are exceptions. For every successful leader these executives picked, they are oblivious to the nine who failed. When raising the bar from “solid” leader to “top-quartile” leader, the failure rate in selection is even more alarming.

CEOs and executives who make one or two selection decisions a year have no problem seeing themselves as experts in the task and often rationalize their poor track record as the product of external factors beyond their control. Implementing the recommendations in this paper provides a much stronger scientific basis for increasing talent quality in an organization and reducing the variance in selection decision making.

Executive Leadership Assessment — Client Validation Study

Relationship Between Operating Profit, Leadership Talent, and Employee Engagement

Engaged% of Employees

Not Engaged

Actively Disengaged

0

20

40

60

80

100

120

140

160

180

200820072006200520042003200220012000

0

20

40

60

80

100

20082007200620052004

22

54

24

34

48

18

37

47

16

41

45

14

44

43

13

Ope

ratin

g P

rofit

($m

)EngagementGrandMean

Leadership Metric 38

3.63

4044

4748

3.713.79

3.853.91



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REFERENCES

American Management Association Enterprise (2011). Organizational bench strength and succession plans. Found at: http://www.shrm.org/Publications/hrmagazine/EditorialContent/2011/0611/Documents/06_Succession_Plan_Survey.PDF. Retrieved June 8, 2012.

Charam, R. (2005). Ending the CEO succession crisis. Harvard Business Review. Found at: http://hbr.org/2005/02/ending-the-ceo-succession-crisis/ar/1). Retrieved June 8, 2012.

Favaro, K., Karlsson, P., & Neilson, G. (2009). CEO succession report: 12th Annual global CEO succession study. Booz & Company. Found at http://www.booz.com/media/uploads/BoozCo_CEO-Succession-Study-2011_Extended-Study-Report.pdf. Retrieved June 8, 2012.



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http://www.shrm.org/Publications/hrmagazine/EditorialContent/2011/0611/Documents/06_Succession_Plan_Survey.PDF

http://www.shrm.org/Publications/hrmagazine/EditorialContent/2011/0611/Documents/06_Succession_Plan_Survey.PDF

http://hbr.org/2005/02/ending-the-ceo-succession-crisis/ar/1

http://hbr.org/2005/02/ending-the-ceo-succession-crisis/ar/1