Succession Planning (Encyclopedia of Management)
Succession planning is a critical part of the human resources planning process. Human resources planning (HRP) is the process of having the right number of employees in the right positions in the organization at the time that they are needed. HRP involves forecasting, or predicting, the organization's needs for labor and supply of labor and then taking steps to move people into positions in which they are needed.
Succession planning is the systematic process of defining future management requirements and identifying candidates who best meet those requirements. Succession planning involves using the supply of labor within the organization for future staffing needs. With succession planning, the skills and abilities of current employees are assessed to see which future positions they may take within the organization when other employees leave their positions. Succession planning is typically used in higher-level organizational positions, such as executive-level positions. For instance, if a company predicts that its Chief Executive Officer will retire in the near future, the organization may begin looking months or even years in advance to determine which current employee might be capable of taking over the position of the CEO.
Succession planning is aimed at promoting individuals within the organization and thus makes use of internal selection. Internal selection, as opposed to hiring employees from outside the organization, has a number of benefits and drawbacks. With internal selection, the organization is aware of current employees' skills and abilities, and therefore is often better able to predict future performance than when hiring from the outside. Because of access to annual performance appraisals and the opinions of the employee's current managers, the company can have a fairly accurate assessment of the employee's work capabilities. Additionally, the organization has trained and socialized the employee for a period of time already, so the employee is likely to be better prepared for a position within the organization than someone who does not have that organizational experience. Finally, internal selection is often motivating to others in the organizationpportunities for advancement may encourage employees to perform at a high level.
Despite its many advantages, internal selection can also have some drawbacks. While the opportunities for advancement may be motivating to employees who believe that they can move up within the organization at a future date, those employees who feel that they have been passed over for promotion or are at a career plateau are likely to become discouraged and may choose to leave the organization. Having an employee who has been trained and socialized by the organization may limit the availability of skills, innovation, or creativity that may be found when new employees are brought in from the outside. Finally, internal selection still leaves a position at a lower level that must be staffed from the outside, which may not reduce recruitment and selection costs.
Many companies organize their management training and development efforts around succession planning. However, not all organizations take a formal approach to it, and instead do so very informally, using the opinions of managers as the basis for promotion, with little consideration of the actual requirements of future positions. Informal succession planning is likely to result in managers who are promoted due to criteria that are unrelated to performance, such as networking within and outside of the organization. Organizations would be better served by promoting managers who were able to successfully engage in human resource management activities and communicate with employees. Poor succession planning, such as just described, can have negative organizational consequences. Research indicates that poor preparation for advancement into managerial positions leaves almost one-third of new executives unable to meet company expectations for job performance. This may have negative repercussions for the newly promoted manager, the other employees, and the company's bottom line.
STEPS IN SUCCESSION PLANNING
There are several steps in effective succession planning: human resources planning, assessing needs, developing managers, and developing replacement charts and identifying career paths.
HUMAN RESOURCES PLANNING.
Engaging in human resources planning by forecasting the organization's needs for employees at upper levels is the first step in succession planning. Some staffing needs can be anticipated, such as a known upcoming retirement or transfer. However, staffing needs are often less predictablerganizational members may leave for other companies, retire unexpectedly, or even die, resulting in a need to hire from outside or promote from within. The organization should do its best to have staff available to move up in the organization even when unexpected circumstances arise. Thus, accurate and timely forecasting is critical.
ASSESSING NEEDS AND DEVELOPING REPLACEMENT CHARTS.
The second major step for succession planning is to define and measure individual qualifications needed for each targeted position. Such qualifications should be based on information from a recent job analysis. Once these qualifications are defined, employees must be evaluated on these qualifications to identify those with a high potential for promotion. This may involve assessing both the abilities and the career interests of employees. If a lower-level manager has excellent abilities but little interest in advancement within the organization, then development efforts aimed at promotion will be a poor investment.
To determine the level of abilities of employees within the organization, many of the same selection tools that are used for assessing external candidates can be used, such as general mental ability tests, personality tests, and assessment centers. However, when selecting internally, the company has an advantage in that it has much more data on internal candidates, such as records of an employee's career progress, experience, past performance, and self-reported interests regarding future career steps.
The third step of succession planning, which is actually ongoing throughout the process, is the development of the managers who are identified as having promotion potential. In order to prepare these lower-level managers for higher positions, they need to engage in development activities to improve their skills. Some of these activities may include:
- Job rotation through key executive positions. By working in different executive positions throughout the organization, the manager gains insight into the overall strategic workings of the company. Additionally, the performance of this manager at the executive level can be assessed before further promotions are awarded.
- Overseas assignments. Many multinational companies now include an overseas assignment as a way for managers to both learn more about the company and to test their potential for advancement within the company. Managers who are successful at leading an overseas branch of the company are assumed to be prepared to take an executive position in the home country.
- Education. Formal courses may improve managers' abilities to understand the financial and operational aspects of business management. Many companies will pay for managers to pursue degrees such as Masters in Business Administration (MBAs), which are expected to provide managers with knowledge that they could not otherwise gain from the company's own training and development programs.
- Performance-related training and development for current and future roles. Specific training and development provided by the company may be required for managers to excel in their current positions and to give them skills that they need in higher-level positions.
DEVELOPING REPLACEMENT CHARTS AND IDENTIFYING CAREER PATHS.
In the final step of succession planning, the organization identifies a career path for each high-potential candidatehose who have the interest and ability to move upward in the organization. A career path is the typical set of positions that an employee might hold in the course of his or her career. In succession planning, it is a road map of positions and experiences designed to prepare the individual for an upper-level management position. Along with career paths, the organization should develop replacement charts, which indicate the availability of candidates and their readiness to step into the various management positions. These charts are depicted as organizational charts in which possible candidates to replacement others are listed in rank order for each management position. These rank orders are based on the candidates' potential scores, which are derived on the basis of their past performance, experience, and other relevant qualifications. The charts indicate who is currently ready for promotion and who needs further grooming to be prepared for an upper-level position.
PROBLEMS WITH SUCCESSION PLANNING
Succession planning is typically useful to the organization in its human resource planning, and when done properly, can be beneficial to organizational performance. However, there are potential problems associated with the use of succession planning: the crowned prince syndrome, the talent drain, and difficulties associated with managing large amounts of human resources information.
CROWNED PRINCE SYNDROME.
The first potential problem in succession planning is the crowned prince syndrome, which occurs when upper management only considers for advancement, those employees who have become visible to them. In other words, rather than looking at a wider array of individual employees and their capabilities, upper management focuses only on one personhe "crowned prince." This person is often one who has been involved in high-profile projects, has a powerful and prominent mentor, or has networked well with organizational leaders. There are often employees throughout the organization who are capable of and interested in promotion who may be overlooked because of the more visible and obvious "crowned prince," who is likely to be promoted even if these other employees are available. Not only are performance problems a potential outcome of this syndrome, but also the motivation of current employees may suffer if they feel that their high performance has been overlooked. This may result in turnover of high quality employees who have been overlooked for promotion.
The talent drain is the second potential problem that may occur in succession planning. Because upper management must identify only a small group of managers to receive training and development for promotion, those managers who are not assigned to development activities may feel overlooked and therefore leave the organization. This turnover may reduce the number of talented managers that the organization has at the lower and middle levels of the hierarchy. Exacerbating this problem is that these talented managers may work for a competing firm or start their own business, thus creating increased competition for their former company.
MANAGING HUMAN RESOURCE INFORMATION.
The final problem that can occur in succession planning is the concern with managing large amounts of human resources information. Because succession planning requires retention of a great deal of information, it is typically best to store and manage it on a computer. Attempting to maintain such records by hand may prove daunting. Even on the computer, identifying and evaluating many years' worth of information about employees' performance and experiences may be difficult. Add to that the challenges of comparing distinct records of performance to judge promotion capability, and this information overload is likely to increase the difficulty of successful succession planning.
Succession planning, which is identifying and preparing managers for future promotions within the organization is one element of successful human resource planning. Unfortunately, many organizations do a poor job of succession planning. Even when it is done properly, succession planning has some potential problems that can harm employee motivation and the company's bottom line. Effective succession planning, however, is likely to improve overall firm performance and to reward and motivate employees within the organization.
Dessler, Gary. Human Resource Management. 8th edition. Upper Saddle River, NJ: Prentice Hall, 2000.
Goldstein, Irwin L, and J. Kevin Ford. Training in Organizations: Needs Assessment, Evaluation, and Development. 4th edition. Belmont, CA: Wadsworth/Thomson Learning, 2002.
Gomez-Mejia, Luis R., David B. Balkin, and Robert L. Cardy. Managing Human Resources. 4th ed. Upper Saddle River, NJ: Prentice Hall, 2004.
Noe, Raymond A. Employee Training and Development. Boston, MA: Irwin/McGraw-Hill, 1999.
Noe, Raymond A., John R. Hollenbeck, Barry Gerhart, and Patrick M. Wright. Human Resource Management: Gaining a Competitive Advantage. 5th edition. Boston, MA: McGraw-Hill/Irwin, 2006.
Succession Plans (Encyclopedia of Small Business)
A succession plan is a written document that provides for the continued operation of a business in the event that the ownerr a key member of the management teameaves the company, is terminated, retires, or dies. It details the changes that will take place as leadership is transferred from one generation to the next. In the case of small businesses, succession plans are often known as continuity plans, since without them the businesses may cease to exist. Succession plans can provide a number of important benefits for companies that develop them. For example, a succession plan may help a business retain key employees, reduce its tax burden, and maintain the value of its stock and assets during a management or ownership transition. Succession plans may also prove valuable in allowing a business owner to retire in comfort and continue to provide for family members who may be involved with the company.
Despite the many benefits of having a succession plan in place, many companies neglect to develop one. This oversight may occur because the business owner does not want to confront his or her own mortality, is reluctant to choose a successor, or does not have many interests beyond the business. Although less than one-third of family businesses survive the transition from the first generation to the secondnd only 13 percent remain in the family for more than 60 yearsust 45 to 50 percent of business owners establish a formal succession plan. "Succession and the planning it entails is equivalent to planning one's own wake and funeral," observed one family business consultant in Industrial Distribution. "But the fact is that the transfer of power from the first to the second generation seldom happens while the founder is alive and on the scene." Yet it is one that must be prepared for, if the business owner hopes to avoid having hard-earned assets go to unwanted individuals and institutions. "The economic costs are significant," agreed James Bieneman in Business First-Columbus. "[But] the human costs are even greater in terms of spoiled family relationships, missed career opportunities, and the discomfort of living in a state of misalignment."
PREPARING FOR SUCCESSION
Experts claim that the succession planning process should ideally begin when the business owner is between the ages of 45 and 50 if he or she plans to retire at 65. Since succession can be an emotionally charged issue, sometimes the assistance of outsider advisors and mediators is required. Developing a succession plan can take more than two years, and implementing it can take up to ten years. The plan must be carefully structured to fit the company's specific situation and goals. When completed, the plan should be reviewed by the company's lawyer, accountant, and bank.
"One of the main reasons business owners should take the time to create a successful continuity plan is that they should want to get out of the business alive, with as much money as possible," Joanna R. Turpin noted in Air Conditioning, Heating, and Refrigeration News. To do this, the business owner has a few basic options: sell the company to employees, family members, or an outsider; retain ownership of the company but hire new management; or liquidate the business. An Employee Stock Ownership Plan, or ESOP, can be a useful tool for the owner of a corporation who is nearing retirement age. The owner can sell his or her stake in the company to the ESOP in order to gain tax advantages and provide for the continuation of the business. If, after the stock purchase, the ESOP holds over 30 percent of the company's shares, then the owner can defer capital-gains taxes by investing the proceeds in a Qualified Replacement Property (QRP). QRPs can include stocks, bonds, and certain retirement accounts. The income stream generated by the QRP can help provide the business owner with income during retirement.
In Family Business Succession: The Final Test of Greatness, Craig E. Aronoff and John L. Ward outline a number of steps companies should follow in preparing for succession. These steps include: 1) Establishing a formal policy regarding family participation in the business; 2) Providing solid work experience for all employees, to ensure that succession is based on performance rather than heredity; 3) Creating a family mission statement based on the members' beliefs and goals for the business; 4) Designing a leadership development plan with specific job requirements for the successor; 5) Developing a strategic plan for the business; 6) Making plans for the preceding generation's financial security; 7) Identifying a successor or determining the selection process; 8) Setting up a succession transition team to keep decision-makers informed about their role in the changes; and 9) Completing the transfer of ownership and control.
In the Small Business Administration publication Transferring Management in the Family-Owned Business, Nancy Bowman-Upton also emphasizes that succession should be viewed as a process rather than as an event. She describes four main stages in the succession process: initiation, selection, education, and transition. In the initiation phase, possible successors learn about the family business. It is important for the business owners to speak openly about the business, in a positive but realistic manner, in order to transmit information about the company's values, culture, and future direction to the next generation.
The selection phase involves actually designating a successor among the candidates for the job. Because rivalry often develops between possible successorsho, in the case of a family business, are likely to be siblingshis can be the most difficult stage of the process. For this reason, many business owners either avoid the issue or make the selection on the basis of age, gender, or other factors besides merit. Instead, Bowman-Upton recommends that the business owners develop specific objectives and goals for the next generation of management, including a detailed job description for the successor. Then a candidate can be chosen who best meets the qualifications. This strategy helps remove the emotional aspect from the selection process and also may help the business owners feel more comfortable with their selection. The decision about when to announce the successor and the schedule for succession depends upon the business, but an early announcement can help reassure employees and customers and enable other key employees to make alternative career plans as needed.
Once a potential successor has been selected, the company then enters the training phase. Ideally, a program is developed through which the successor can meet goals and gradually increase his or her level of responsibility. The owner may want to take a number of planned absences so that the successor has a chance to actually run the business for limited periods of time. The training phase also provides the business owner with an opportunity to evaluate the successor's decision-making processes, leadership abilities, interpersonal skills, and performance under pressure. It is also important for the successor to be introduced to the business owner's outside network during this time, including customers, bankers, and business associates.
The final stage in the process occurs when the business owner retires and the successor formally makes the transition to his or her new leadership role. Bowman-Upton stresses that the business owner can make the transition smoother for the company by publicly committing to the succession plan, leaving in a timely manner, and eliminating his or her involvement in the company's daily activities completely. In order to make the transition as painless as possible for himself or herself, the business owner should also be sure to have a sound financial plan for retirement and to engage in relationships and activities outside of the business.
Business owners that fail to adhere to the above steps may end up cobbling together succession plans that do not reflect the best interests of the company or of its stakeholders (valued staffers, family members, partners, etc.). "Why and how often do succession plans fail?" wrote Bieneman. "Succession plans fail when serious conflict (some call it dysfunctional behavior) cannot be overcome, when family members have and cannot abandon unrealistic expectations, or when the family business has run its course and should be sold but isn't. Succession plans are an exercise in compromise, tough love, forthrightness, and making difficult but necessary decisions."
Aronoff, Craig E., and John L. Ward. Family Business Succession: The Final Test of Greatness. Business Owner Resources, 1992.
Bieneman, James N. "Succession Plans Provide Blueprint for Peace of Mind." Business First-Columbus. October 6, 2000.
Bowman-Upton, Nancy. Transferring Management in the Family-Owned Business. U.S. Small Business Administration, 1991.
Frieswick, Kris. "Successful Succession." Industrial Distribution. April 1996.
Shanney-Saborsky, Regina. "Why It Pays to Use an ESOP in a Business Succession Plan." The Practical Accountant. September 1996.
Turpin, Joanna R. "Succession Planning Requires Long-Term Strategy, Implementation." Air Conditioning, Heating, and Refrigeration News. April 28, 1997.
SEE ALSO: Estate Tax; Family-Owned Business