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The potential appraisal refers to the appraisal i.e. identification of the hidden talents and
skills of a person. The person might or might not be aware of them. Potential appraisal is a
future –oriented appraisal whose main objective is to identify and evaluate the potential of
the employees to assume higher positions and responsibilities in the organizational
hierarchy. Many organizations consider and use potential appraisal as a part of the
performance appraisal processes.

Potential appraisal can serve the following purposes:

 To advise employees about their overall career development and future prospects
 Help the organization to chalk out succession plans
 Motivate the employees to further develop their skills and competencies.
 To identify the training needs.

Techniques of potential appraisal:

 Self-appraisals
 Peer appraisals
 Superior appraisals
 Psychological and psychometric tests
 Management games like role playing
 Leadership exercises etc.

Potential appraisal helps to identify what can happen in future so that it can be guided and
directed towards the achievement of individual and organizational growth and goals.
Therefore, potential should be included as a part of the Performance appraisal in

Appraisal of Potential at Philips

More and more number of organizations are trying to assess potential of their employees,
particularly at the managerial level. Cadbury India, Sundoz, Pfizer, Mafatlal, Philips, National
Organic Chemical Industries. Glaxo and P & G are a few of the companies, which seek to tap
managerial potential.
At Philips a two-by-two matrix is used to assess performance and potential to perform. The
vertical axis measures potential while the horizontal, actual performance. Both are further
subdivided into parameters-high and low-resulting in four quadrants of classification.

Low potential-low performance. These employees are categorized as question marks. The company
asks such employees to improve their performance levels. Failure to improve performance would
result in their planned separation.
High potential-low performance. These are the problem children. In order to help them improve
their performance, these employees are shifted to new locations to work and are closely monitored.
If performance levels do not improve, these employees are reclassified as question marks and the
separation process initiated.
Low potential-high performance. These are called solid citizens and constitute 70 to 75 per cent of
the total number of employees in any organization. They have skills but lack the potential to grow
beyond their current job-profile. The organization has to constantly recognize their limitations and
take care of their needs. In order to assess employee potential, Philips has adopted the system that
prevails at Philips N V, Holland. The system at Philips N.V., uses four board attributes-
conceptual effectiveness, operational effectiveness, interpersonal effectiveness and
achievement motivation. Each attribute has a five-point grading scale-excellent very good,
good/adequate, weak and insufficient. While his final grade is based on what Philips calls shared
understanding, the employee is also appraised by the management development review team, which
consists of the functional heads with whom the appraisee has close interaction in the normal course
of his/her job.

Potential Appraisal

In most Indian organizations, people earn promotions on the basis of their past
performance. The past performance is considered a good indicator of future job
success. This could be true, if the job to be played by the promotee are similar.
However, in actual practice, the roles that a role holder played in the past may not be
the same he is expected to play if he assumes a different job after his transfer or
promotion to a new position. Past performance, therefore, may not be a good indicator
of the suitability of an indicator for a higher role.

To overcome this inadequacy, organizations must think of a new system called

potential appraisal. The objective of potential appraisal is to identify the potential of a
given employee to occupy higher positions in the organizational hierarchy and
undertake higher responsibilities.

Potential appraisals are required to:

 inform employees about their future prospects;
 help the organization chalk out of a suitable succession plan;
 update training efforts from time to time;
 advise employees about what they must do to improve their career prospects.

Introducing a Good Potential Appraisal System

Steps to be followed while Introducing a Good Potential Appraisal System:

The following are some of the steps required to be followed while introducing a
potential appraisal system:
 Role Descriptions: Organizational roles and functions must be defined clearly.
To this end, job descriptions must be prepared for each job.
 Qualities needed to perform the roles: Based on job descriptions, the roles
to be played by people must be prepared (i.e., technical, managerial jobs and
behavioral dimensions).
 Rating mechanisms: Besides listing the functions and qualities, the potential
appraisal system must list mechanisms of judging the qualities of employees
such as:
i. i. Rating by others: The potential of a candidate could
be rated by the immediate supervisor who is acquainted with
the candidate’s work in the past, especially his technical
ii. ii. Tests: Managerial and behavioral dimensions can be
measured through a battery of psychological tests.
iii. iii. Games: Simulation games and exercises (assessment
centre, business games, in-basket, role play, etc.) could be
used to uncover the potential of a candidate.
iv. iv. Records: Performance records and ratings of a
candidate on his previous jobs could be examined carefully on
various dimensions such as initiative, creativity, risk taking
ability, etc., which might play a key role in discharging his
duties in a new job.

Organizing the system: After covering the above preliminaries, he must set up a
system that will allow the introduction of the scheme smoothly giving answers to some
puzzling questions:
i. How much weightage to merit in place of seniority in promotions?
ii. How much weightage to each of the performance dimensions – technical,
managerial, behavioral qualities?
iii. What are the mechanisms of assessing the individual on different indicators
of his potential and with what reliability?

Feedback: The system must provide an opportunity for every employee to know the
results of his assessment. “He should be helped to understand the qualities actually
required for performing the role for which he thinks he has the potential, the
mechanisms used by the organizations to appraise his potential and the results of such
an appraisal”.
Potential Appraisal
Potential Appraisal is another powerful tool of employee development.
Whether managers realize it or not, they are accustomed to making
potential assessments. Every time a manager recommends or fails to
recommend an employee for a promotion, a potential assessment has, in
fact, been made. The process of assessing the managerial potential of
employees deals with the question of whether or not they have the ability
to handle positions in the future which involve considerably more
responsibility than what they have right now. As long as individuals are
viewed as being able to handle increased or different responsibilities, they
would be considered to have potential (either latent or visible).
Potential appraisal may thus be defined as a process of determining an
employee’s strengths and weaknesses with a view to use this as a predictor
of his future performance. This would help determine the promotabilty of an
individual to a higher position and help chalk out his career plan. The
fundamental difference between reviewing performance and assessing
potential is in the criteria used. In reviewing performance, the criterion used
is what goals the employee achieved and what skills he or she currently
possesses that could be indicators of his or her ability to assume different
or more advanced responsibilities.
It is this that makes potential appraisal a very crucial & critical area. If an
employee without requisite abilities is promoted to a higher position and
does not perform as per expectations, then it becomes impossible to
demote him.
Thus, he is unable to perform at the higher level and becomes a
‘passenger’ in the system. It is rightfully assumed that every individual has
potential, low or high. Many organizations have people whose potential
being low; performance too is not up to the mark. Whilst the question in our
minds hovers around how such people got into the system, the fact remains
that they do not contribute to the organization’s performance.
A major problem that companies face is tackling the problem children. They
can and have the ability to perform but do not perform and do not
contribute to the organization’s performance. This is mainly seen as an
attitudinal problem. Further, these problem children bask in the glory of
their potential but are unable to contribute to their own jobs. Dealing with
workhorses too could be tricky. They can perform very well on routine tasks
but have limited potential. Hence, their promotabilty is difficult and this
creates frustrations for the employees. If promoted, they are unable to
perform higher-level jobs and this too creates problems both for the
individuals and the organization. We easily conclude that ‘stars’ are ideal
people to have in organizations. But retaining these stars could be difficult.
Summary: Performance appraisals have become an increasingly
important tool for organisation to manage and improve the performance of
employees, to make more valid staffing decisions, and products. The
design, development, and implementation of appraisal systems are not
endeavors that can be effectively handled by following the

Potential Appraisal is the process of tracking unrevealed skills and abilities in a

person which even he/she is unaware of. It is a future oriented appraisal which aims to
track the potential of the employees to rise up in the organisational structure. Potential
Appraisal is a potent device for employee advancement. The term is not known to many;
however, managers of almost every organisation have been making potential assessments
every year.

Managers use the predictors to determine whether the employee has the managerial
potential to execute added responsibilities in the future. Potential Appraisal helps in the
decision making of promoting candidates and making a career plan for them.

To understand it better, we can compare it with the reviewing performance. Review

Performance is assessed on the basis of the targets accomplished and the skills
possessed and utilized by him/her. The results act as indicators on the candidate’s aptitude
to manage extra functions. However, this is not a foolproof way of knowing whether added
responsibilities will be handled successfully in future. This makes potential appraisal

Potential Appraisal cannot be applied to all in the same level. For e.g. there are people
in the organization who have potential but who do not perform (attitudinal problem). Some
people excel in their day to day jobs but when laden with additional tasks, they fail
(workhorses). If they are promoted to higher designations then it becomes a problem for the
employees and the company. Then there are stars who are brilliant in their jobs and have
high potential too; but since they are prized candidates, they are difficult to retain and are
always on the lookout of something better and bigger.

The time for a potential appraisal is not fixed. It is under the discretion of the
manager to hold the assessment activity. Unlike performance review, it does not happen
at a particular period in every organization. The managers generally exercise it when an
employee achieves a certain milestone, or completes a year or is planning to change jobs
for whatever reasons. Usually it is recommended to take place within 6 months.

The procedure of potential appraisal should commence and end with a meeting
between the two parties. In the first meeting the manager can list the abilities required to
deliver additional tasks. He/she can recommend various ways to attain them – in-house
training programmes, external workshops, etc. The latter meeting can be a review (usually
after 6 months) to test whether the skills have been rightly acquired or not. During the
observation time the manager is supposed to note the various abilities adopted and used by
the candidate in work and the improvement areas. The employee should be ready to defend
every action with examples. They can then chalk out a plan to chase the potential and taste
growth in the organization.

It should be noted that a potential appraisal does not guarantee promotion. Normally,
most of the companies do it to facilitate the growth of an individual. The companies can
use the results of such an assessment for -

 Recommending a growth plan and showing a bigger picture to the employees.

 Infusing enthusiasm in the employees to sharpen the abilities.
 Learning about the training requirements of the employees.
 Drawing a succession plan for future.
latest fad or even by copying other organization’s systems. Instead, a new
appraisal system must be pursued in the context of improving the
organization’s competitive advantage. This means, like any such change
effort, there will be vested interests in preserving the status quo that will be
resistant to change, no matter how beneficial it may be for the

Once a well-designed system has been implemented, the work is still not
done. An appraisal system has to be maintained by monitoring its operation
through periodic evaluation. Only by keeping an appraisal system finely
tuned will it enable managers to have a rational basis for making sound
personnel decisions and for making the kinds of gain in productivity that are
so critically needed in today’s times.