Succession Planning is a difficult process. Typically, Chief Human Resources Officers (CHROs) are required to review large lists of employees and determine which individuals would be potential replacements for senior leaders in the case of retirement or attrition. Without a structured methodology, the task becomes manually intensive and subjective.
To improve this situation, HR Business Partners have started utilising the Succession Planning Coverage Ratio. This metric provides insights into the breadth, depth and quality of successors. Furthermore, it helps CHROs prioritise their development activities. Embedded in this process is the acronym “1-2-3 GO”. This tool helps HR leaders quickly calculate the required number of successors, which helps identify opportunities to improve the succession planning process.
Consider the Following Example
A Nepal cellphone provider maintains (3) succession planning roles. This includes the CEO, COO and CFO positions. Currently, every role is occupied by an incumbent who has been in the job for five years.
In terms of successors, the following details have been provided:
- John Smith is an employee that is listed as Ready Now on all plans.
- Jane Doe is an external candidate that is considered Ready 1-2 on all plans.
- Mary Bose is a high potential classified as Ready Now on the COO plan.
As the lead HR Business Partner, the Board has asked you to evaluate the pool of successors and determine if the company has any risks. The answer to this question requires calculating the Succession Planning Coverage Ratio and utilising the 1-2-3 GO methodology. This will help the HR Business Partner quickly spot the risks associated with the succession plan, while providing actionable recommendations.
Before proceeding, let’s review some important definitions. Though this formula may be challenging at first, its process is very intuitive. The important thing is to understand how the ratio is calculated, which employees are included and excluded in the formula, and what actions help drive improvements.
Key Formula Definitions
Ready Now: Employees that are considered ‘Ready’ to assume the target role based on their assessed potential, performance, and readiness. These successors are the most qualified to assume a leadership role if the incumbent were to leave.
Ready 1-2: Employees that need development before being ‘Ready’ to assume the target role. These successors require structured job rotations, leadership training, and mentoring to prepare them for the target role within 1-2 years. Typically, individuals designated as Ready 1-2 are also considered High-Potentials.
High Potentials (HiPo): Employees that have been assessed as having strong indicators of potential, performance and readiness. These individuals are typically listed as Ready Now or Ready 1-2 successors on senior leadership plans. Further, they demonstrate the capacity to be promoted 2x within a five-year period.
Pipeline Investment: Employees that are considered ‘Long-Term’ successors for the target role. However, they need further development, mentoring and learning experiences before being classified as Ready 1-2. These individuals are considered emerging talent that need practical experience and further evaluation.
Unique Successor: An employee can only occupy one role at a time. Therefore, successors are counted once when calculating the coverage ratio. It’s okay to list the same employee on more than one succession plan. However, HR leaders must understand that one person can only occupy a single role.
External Hires: Individuals that are not employees of the organisation. However, they have been identified by the recruiting team as potential hires if an incumbent were to leave as a senior position. These candidates are ‘Not Listed’ on succession plans. The reason is because the cost of recruiting such as time to fill, salary negotiations, and lost productivity limit their ability to be timely successors. Though having an external list of candidates is useful, HR Business Partners should only include active employees in their succession planning coverage ratio.
Succession Planning Coverage Ratio
- Formula: # of unique successors / # of succession planning roles.
Rule of Thumb
A rule of thumb is that leadership succession plans should have a coverage ratio of at least 1. This means that there is at least 1 unique successor for each role that can fill the position if the incumbent were to leave. Ideally, it’s best for organisations to strive for a ratio of 2, which ensures that 2 unique successors are available for each role. This allows boards to pick between two qualified candidates.
1-2-3 GO Methodology
To optimise the succession planning coverage ratio, a useful methodology is called ‘1-2-3 GO’. Specifically, the acronym stipulates that every leadership role should have one Ready Now employee, two Ready 1-2 employees, and three pipeline investments. In total, this means that every position should have six successors. The benefit of this methodology is that HR Business Partners can calculate the total number of successors they need to ensure adequate coverage. For example, an organisation with three senior leadership roles, will need a talent pool of 18 successors (3 roles * 6 successors = 18). Knowing this, makes it easy for HR leaders to provide clear direction to the business about the number of nominees.
Practical Example
Returning to our earlier example, let’s see how calculating the succession planning coverage ratio will help answer the board’s question.
A Nepal cellphone provider maintains (3) succession planning roles. This includes planning for their CEO, COO and CFO positions. Currently, every role is occupied by an incumbent who has been in the job for more than five years.
In terms of successors, the following details have been provided:
- John Smith is an employee that is listed as Ready Now on all plans.
- Jane Doe is an external candidate that is considered Ready 1-2 on all plans.
- Mary Bose is a high potential classified as Ready Now on the COO plan.
Step 1: determine the total number of successors that are needed. According to the 1-2-3 GO methodology, each plan requires a total of 6 successors. In this situation, it means that eighteen successors are needed (3 roles * 6 successors). Since only three candidates have been identified, it’s clear that the organisation maintains a gap in coverage that the HR Business Partner can alert the board about.
Step 2: identify the number of unique successors. Since John Smith is an active employee, he can be counted once in the formula. Though he is listed on all plans, the reality is that he can only occupy one role at a time. Separately, Jane Doe is an external candidate that has not been hired by the cell phone provider. Therefore, she cannot be included in the formula. Mary is an active employee on a single plan. Therefore, the total number of unique successors is John and Mary = 2.
Step 3: calculate the coverage ratio. The number of unique successors is two and the number of succession planning roles is three. The calculation is 2 / 3 = 0.67 with at least one senior leadership role lacking a unique successor. Compared to the rule of thumb of 1 unique successor per role, the ratio suggests there are gaps.
Based on the results, an 0.67 coverage ratio with at least one leadership role lacking an identified successor is not ideal. Using the 1-2-3 methodology, each role should have a total of 6 successors. That is, one employee listed as Ready Now, two employees listed as Ready 1-2, and three employees listed as pipeline investments. Noting this, the HR Business Partner could recommend that 16 additional successors be added to the list. Furthermore, since most of the gap is comprised of junior talent, the company could sponsor High Potential development programme.
Taken together, the succession planning coverage ratio is a key tool for HR Business Partners when managing the talent process. By understanding the breadth, depth, and quality of the talent pool, HR leaders can develop strategies that help optimise development programmes, while ensuring L&D investment is cost efficient. Knowing the required size of the talent pool, alongside the distribution of Ready Now, Ready 1-2, and Pipeline Talent is important in maintaining a strategic HR posture. Though challenging at first, mastering this metric will help CHROs effectively manage this process, while providing insights into areas that need attention.
