What’s the cornerstone of every successful company?
Did you say “strategy?” Or “product-market fit?” You’re not totally wrong. But those things—along with all the other factors that play into a company’s success—are driven by leadership.
Think of the most successful companies the world has ever seen. You’ll find that many were carried to their great heights by phenomenal leaders. Apple had Steve Jobs. Berkshire Hathaway has Warren Buffet. Walmart had Sam Walton. Henry Ford. Sheryl Sandberg. John Rockefeller. Estée Lauder.
You know these names because these people changed the world as business leaders.
Companies don’t rise to the top of the international marketplace without great leadership. But companies don’t just get lucky and happen upon effective leaders. They create them.
That’s where a strong leadership pipeline comes in. You might think that “leadership pipeline” sounds like a trendy buzzword, but it’s a central idea to success in the modern business world.
Let’s take a look at why. Starting with a company that didn’t have a strong leadership pipeline.
Xerox’s Outside Leadership Problem
Rick Thoman is a good leader. He worked for McKinsey. He had a great track record at IBM, a company that has gone through remarkable change. But he had a terrible run as the president and COO of Xerox.
To make a long story short, Thoman didn’t last long. He held the reins at Xerox for just over a year and then left. While he was there, he struggled to implement change, even among senior leadership. He battled with the board, failed to reorganize the company, and couldn’t realign the sales team.
Why did he have such trouble?
“We haven’t implemented strategies as well as we should have, and I think Rick Thoman’s being an outsider was part of the problem,” said Paul Allaire, a previous CEO and chairman at Xerox.
Xerox brought Rick Thoman in from the outside instead of promoting from within. And that caused serious problems.
(Okay, yes, there were a lot of other problems going on, too. The board and senior management could have done a lot of things differently to better support Thoman’s leadership. It was a complicated situation. But the point still holds. Outside leaders can face big difficulties.)
The Benefits of Promoting Leaders From Within
Not every organization will struggle as much as Xerox if they bring in a leader from outside the company. In fact, it often works well.
But promoting from within is a safer bet.
Let’s look at some interesting numbers: Outside hires get paid about 20% more than internal promotions, but they don’t perform as well in the first two years of their tenure.
That single fact should have you second-guessing your idea that bringing in experienced leaders from outside the company will give you access to better skills.
Now, let’s take a look at the other side of the coin. Here are some benefits of hiring from within:
- Internal promotions get up to speed faster than external hires.
- Current employees have a better handle on company culture.
- Recently promoted leaders understand the problems facing the department and the company.
- It’s good for morale—if people see that they can advance, they’re less likely to leave for another company with better advancement opportunities.
- Company leaders have a better idea of the new leader’s past performance.
- Organizations can tailor training and development to help the leader perform as his or her best before the promotion.
- Internal promotions generally cost less than bringing in an outside hire.
It’s clear that promoting leaders from within is often the right way to bring new leadership into your company. But how do you make sure that the people you promote are good leaders?
The Seven Steps of the Leadership Pipeline
In 2001, Charan, Dotter, and Noel released a book called The Leadership Pipeline. They didn’t invent the principle, but they were the first to organize the entire process into a simple seven-step process.
Here’s how they define it:
- Managing self
- Managing others
- Managing managers
- Managing a function
- Managing a business
- Managing a group
- Managing an enterprise
The leadership pipeline sees employees moving from step one to step seven. In essence, they go from frontline employees to overseeing a large enterprise. Encouraging passage between the steps helps you find the best and brightest employees to promote into leadership positions.
(To get all the details on this version of the leadership pipeline, you’ll need to read the book—or read the short version in the Ivey Business Journal.)
If an employee manages themselves well, they’ll show great performance metrics. Promote them to a managerial position. If they manage others well, move them up to managing an entire function. If they do that well, move them to the top of a business. And so on. There are problems with this idea, but in general, it’s a great strategy.
The seven-step process above is only part of the leadership pipeline. If you look closely, you’ll see that this is only the track for a single employee’s rise through the company. A pipeline actually looks more like a funnel than a straight line.
This means you need to have a wide-ranging evaluation program in place at your company. You might identify 20 people who should be moved from managing themselves to managing others. But only five of them might make good function managers.
You need a lot of people moving through the company ranks so you can find the top performers. And that requires support for your pipeline, which we’ll discuss shortly.
What About the Peter Principle?
So far we’ve laid some theoretical groundwork for promoting leaders from within and creating a pipeline of talent. But there’s a problem. It’s promoting people to the level of their incompetence. It’s also known as the Peter Principle.
The Peter Principle states that people who are good at their jobs get promoted. But the skills that make them good at one job don’t necessarily make them good at the next level in the company hierarchy.
And it’s a real problem. Benson, Li, and Shue found that good salespeople get promoted—but don’t make good sales managers. When salespeople were judged on their sales numbers and got promoted, they actually caused a decrease in the performance of their sales team.
But salespeople who worked on large deals and shared sales credit with team members made much better managers. They showed the ability to collaborate and organize—the skills that would make them good managers.
This is why it’s not just the pipeline that’s important. The structures that support your pipeline are just as crucial.
There are two indispensable supports for your leadership pipeline:
Employee assessments are a necessary fact of life. You need to know how your people are doing. If you have a standout performer, you want to reward them. If they’re lagging behind, you want to provide the support structures that will help them succeed.
But employee assessments often aren’t geared toward whether or not that person will be a good leader. And that’s where you get into trouble with the Peter Principle. Just because someone is a great employee doesn’t mean they’ll be a great manager.
That’s why your assessments need to look at whether a person will be a good leader—regardless of whether they’re currently in a leadership position.
Here’s where organizations can get tripped up. If a person doesn’t seem to be a good fit for leadership, but they’re a top-level employee, reward them anyway. Employees that are good at their jobs should be rewarded to increase satisfaction and retention.
Sometimes that’s a pay increase. Sometimes it’s a dual-career ladder system that promotes people without putting them into management positions. Whatever you decide to use, make sure that you’re rewarding people that don’t want to or aren’t fit for managerial positions. Having great leadership won’t help if all of your other best performers leave the company.
If you aren’t confident in your employee assessment’s ability to identify great leaders independent of their current job performance, it’s time to make a change.
Training and Development
Not everyone gets a chance to show their leadership potential in the course of their regular job. And not everyone who has great potential for leadership already has the skills to show their potential.
So what’s the solution?
Effective training and development. Of course, training should often focus on highly applicable skills specific to certain jobs. But a well-rounded training program also includes leadership training—and not just for leaders.
Some of your employees might not even know that they would be great leaders because they haven’t had the opportunity to lead. Having them go through a leadership-focused training can help both the employees themselves and trainers identify potential candidates for leadership.
And, of course, training helps leaders be better leaders, whether they’re currently in leadership positions or they find themselves taking charge in lower-level positions.
In short, training helps everyone contribute as best they can to your leadership pipeline.
Don’t Leave Leadership Hiring Decisions Until the Last Minute
Leaders come and go at every company. And their exits can be unpredictable. If you don’t have a leadership pipeline established at your company, you’ll be frantically searching for an available replacement—which means you’ll probably be looking outside your company.
With a strong leadership pipeline, you’ll know exactly where to look. Even if you don’t have someone immediately queued up for a senior role, you’ll know who has the talent, drive, and potential to be a great leader.
And outside of emergency situations, you’ll have a group of employees that are consistently improving their leadership knowledge and skills. That’s always a good thing for your company.
Are you confident in your leadership pipeline? If not, give us a call! We’d be happy to chat with you about it, and we’re always available for helping you improve your employee assessments and develop your employees.