Playing the succession game

The future of Xerox rests with Doug Pelino.

And with the oldest baby boomers nearing retirement, Xerox and other major U.S. firms are now preparing a new generation of managers to take over.

By Stephanie Armour, USA TODAY

For executives such as Pelino, it’s a delicate and critical task. Employers must pick future leaders without causing resentment among those who aren’t chosen. They must invest in their successors by giving them training, leadership experience and mentorship — creating just the sort of employees that competitors would like to steal. And they must create room for advancement despite a stagnant job market that’s left little opportunity for promotions.

At Xerox, Pelino keeps a list of about 100 next-generation leaders now in middle management and at vice president levels. The employees know who they are (they’re told in one-on-one hour-long meetings that Pelino says leaves many feeling flattered) but are not informed of who else has made the cut.

"It’s not a clandestine list, but we don’t put it on the bulletin board," Pelino says. "You have to be sensitive to the people who are not on that list. … We want to make sure we put our arms around them and make them know how much we love them."

Looming brain drain

Succession planning is becoming such a business necessity because today’s leaders are a vanishing breed. A brain drain is looming as boomers (who will be ages 46 to 64 by 2010) begin to leave the labor force. The baby boomers’ share of the labor market will decrease from 49% in 2000 to 38% in 2010, according to Department of Labor projections. About 24 million workers are expected to leave the labor force in the next decade.

There are more immediate concerns, too. As the job market improves and hiring picks up, employees are expected to resume job-hopping, which will leave companies with leadership gaps to fill.

Today, 80% of executives say it’s very valuable for a manager to identify and groom a successor, according to a poll by consulting firm Robert Half Management Resources.

"It’s important, but few companies do it or do it well," says Michael Kelly, CEO of executive search firm Highland Partners. "If you don’t do it, the downside is that people will go somewhere else to build their career."

For the most part, employees tapped for future leadership roles are in their 30s or 40s and are workers with a proven record at the company — often 10 to 15 years, unless they’ve gotten experience elsewhere. They often work a traditional schedule: Because of travel and other demands, there is little opportunity at many companies for leaders-in-training to work part time or shorter workweeks).

Employees are selected based on their behavior as well as their performance. In fact, some employers say behavior traits, such as natural leadership and an ability to work with others, can be critical.

"I’ve seen more people fail for behavioral issues than from performance," Pelino says.

Not everyone tapped to become a future leader will rise to that position. At Xerox, performance issues can topple employees from the list.

At Deloitte & Touche, future leaders who are groomed from within the company may have as much as 20 years of experience with the firm. When a top position becomes vacant, a group of top national leaders looks at the short list of candidates to determine who will be promoted — reversing traditional practices in which the departing manager picks his or her successor. The goal: to ensure that more top executives are women and minorities.

"(Succession planning) is important because we feel strongly that we need to have diversity in leadership," says Sue Molina, a partner and national director for the advancement of women.

At Deloitte, 17% of partners and directors are women, up from 6.5% in 1993. Women hold 163 senior leadership positions (such as regional managing partners, tax function leaders), up from 14 a decade ago.

At Wal-Mart, succession planning is critical. Twice a year, key leaders meet to discuss the business and identify potential successors. A development plan is then put together for individuals who don’t already have one.

"Succession planning is a big deal for us. It’s very important with the growth path we’re on," says Coleman Peterson, an executive vice president at Wal-Mart Stores.

Culture, leadership, people skills, good judgment and the ability to get things done are all traits Wal-Mart looks for among employees on the succession path.

Planning challenges

There are challenges. Succession planning can also create grudges between workers selected for future leadership programs and those who are not. And there’s a danger that managers will put too much emphasis on future leaders at the expense of other employees.

"It ends up looking like winners vs. losers. The losers feel demoralized," says Tom McKinnon, an executive consultant at Novations/J.Howard Associates, a Boston-based professional services firm. "The process has been kept so quiet that the criteria are relatively not well known. It’s often quite secretive."

Only 40% of executives know when they’re included as candidates on the succession plan, according to a 2003 survey of 210 human resource officials by Novations/J. Howard & Associates. The top reason for secrecy is to avoid making an implied promise, followed by concerns about hurting the morale of those who aren’t selected.

When the information is public, those chosen to be future leaders of the company may feel as if they’ve failed if they don’t reach their potential. Says McKinnon: "It sets a level of expectation which may or may not be realistic in the end."

Many firms have a two-tiered system. They look at short-term succession planning for openings that may come around now or in a few years, while at the same time grooming employees for top positions that will be available years later.

For succession planning to work, management experts say, companies must also find out what their potential leaders want in terms of career.

"You have to get to know them so you know what their wants and desires are," says Paul McDonald in Menlo Park, Calif., executive director of Robert Half Management Resources.

Succession planning is also important for a company’s survival. Despite the risks involved with grooming future leaders, failing to plan can create a leadership chasm that shakes client confidence.

Harry Clark, CEO of Clark Capital Management Group, an investment adviser in Philadelphia, has four of his children in the business. He’s planning on creating a joint CEO position for two of them to share.

"This will be their firm someday," Clark says. "If something happened to me, the firm would go on, and that’s very important to our clients."

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