Everything you need to know about potential appraisal. The potential appraisal is a future-oriented appraisal to measure the potentiality of an employee for future higher positions.

The potential appraisal refers to the identification of hidden talents and skills of a person. The person might or might not be aware of them.

To express it in simple words, performance appraisal is an estimation of how an employee did while potential appraisal is an estimation of how well he might do.

Potential appraisal is 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 promotability 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.

Learn about:-

1. Introduction to Potential Appraisal 2. Meaning of Potential Appraisal 3. Concept 4. Objectives 5. Importance 6. Steps 7. Requirements 8. Techniques 9. Methods 10. Advantages.

Potential Appraisal: Meaning, Concept, Objectives, Importance, Techniques and Methods


  1. Introduction to Potential Appraisal
  2. Meaning of Potential Appraisal
  3. Concept of Potential Appraisal
  4. Objectives of Potential Appraisal
  5. Importance of Potential Appraisal
  6. Steps to be Followed while Introducing a Good Potential Appraisal System
  7. Requirements for an Effective Potential Appraisal System
  8. Techniques of Potential Appraisal
  9. Methods of Potential Appraisal
  10. Advantages of Potential Appraisal

Potential Appraisal – Introduction

Under HRD, the appraisal system lays greater emphasis on the development of employees rather than on their evaluation. This objective is better fulfilled by the potential appraisal system, which tells about an employee’s capability to successfully assume a new role in future following his promotion.


It is different from performance appraisal which tells about an employee’s present performance in his existing role. Promotions done on the basis of the employee’s present performance in his existing role are generally unsatisfactory if the nature of roles, responsibilities and functions of the higher post are substantially different from those of the posts held by the promote now.

In such cases performance appraisal is an indicator of an employee’s future success in higher role only to the extent that the duties and responsibilities involved in the two roles are common. If the employee’s would-be role is going to be different from his present role, potential appraisal needs to be done. Potential appraisal is another powerful tool of employee development. Whether managers realise 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.


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 promotability 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 criteria 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 and 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 organisations 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 organisation’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 organisation’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 promotability 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 organisation. We easily conclude that ‘stars’ are ideal people to have in organisations. But retaining these stars could be difficult.

Like the performance appraisal, potential appraisal is also done by the employee’s supervisor who has had the opportunity to observe the employee for some time. Potential appraisal may be done either regularly (annually) or as and when some post falls vacant. It has been found in practice that appraisal is generally more objective under the regular potential appraisal system than under the intermittent system. In the former system, the last part of the appraisal form generally deals with the potential appraisal.

Potential Appraisal – What is Potential Appraisal: Meaning

The potential appraisal is a future-oriented appraisal to measure the potentiality of an employee for future higher positions. The potential appraisal refers to the identification of hidden talents and skills of a person. The person might or might not be aware of them. To express it in simple words, performance appraisal is an estimation of how an employee did while potential appraisal is an estimation of how well he might do.


While the former is based on actual behaviour and results, the latter is inferred from competencies. Performance appraisal is usually linked to incentives and increments while potential appraisal is linked with promotions.

Potential Appraisal is a process of identifying the hidden talents, capabilities and potential talent within the individual with an aim to harness and exploit the same to ensure optimum utilisation of the strategic qualities to the benefit of the individual as well as the organisation.

Dictionary meaning of potential is anything that may or might be possible but doesn’t exist.

Therefore, potential appraisal is an effort to see the woods beyond the trees and assess the inner self of the individuals to see the future employability.


As it is said, “Coming events cast the shadow before.”

One can always see the fire within the individuals and harness the same by providing environment and conditions favourable for the nourishment of those qualities which may help the individual to climb the ladder in his/her field and indirectly provide the organisation with a possible material to hold more responsible assignments in near and distant future.

An exposure is given to the individual in the fields where he/she can show his/ her best. Corrections are applied and all out efforts are made to bring out the best within the subject individual. It has been seen with experience that individuals with high potential for future assignments generally get identified quite early in life and if they get the required, environment, fillip, counselling and appreciation, they tend to live up to the expectations of their superiors.

Potential refers to the ‘latent but unrealized talent’ in any individual. Potential appraisal is a process of identifying the potential or the capability of individuals to assign new tasks which also affects their promotions. Just by viewing the performance, the achievement of quantitative targets, and conformance to qualitative requirement, an appraising manager cannot comment about the potential of an appraisee.


In fact, he/she needs to perform a potential appraisal in a holistic way for studying the wholesome qualities of an employee with a given intellect, personality, and character.

Across industries, the two widely-used approaches for potential appraisal are the ‘helicopter’ approach and the ‘whole person quali­ties’ approach. The helicopter approach tries to measure the potential of a person with respect to broad as well as specific issues. The whole person quality approach, on the other hand, measures the wholesome qualities/potential of a person.

Competencies of an employee to perform well in the current job are not automatic indicators of his potential for promotion or other purposes. An excellent production supervisor may not be able to prove his worth as an assistant production manager as the needs of the latter’s assignment are much broader and, apart from other skills, needs man-management skills.

Likewise, an excellent chief engineer may emerge as a poor or a mediocre engi­neering director. Potential appraisal data is extremely useful for career planning, succession planning, and promotion, as the identified latent abilities of an indi­vidual can be matched with the future roles and responsibilities. In the opening case, the company where Magnolia was employed, never tried to identify her potential.

Similar to the performance appraisal, potential appraisal is also done by the immediate supervisor of the employee who gets the opportunity of closely observ­ing the appraisee. The performance appraisal format comprises some parts such as nature of duties, task achievement, reasons behind failure to achieve the target (if any), whether the target was surpassed for some of the tasks and if this is possible.

Information relating to potential appraisal forms a part of the performance appraisal. Potential appraisal should be treated as an essential organizational need and done seriously; it should never be done inattentively.

Potential Appraisal – Concept

Potential appraisal is an assessment / appraisal of a person’s capability to perform job with higher responsibilities. In other words, ascertainment of a person’s latent / inherent capacity to handle higher job is potential appraisal. So, level of competency, capability of a person to perform higher cadre / grade job is measured through potential appraisal system.


Every company needs officers/executives in different grades/ cadres for its effective functioning in a desired manner. So, when vacancies arise due to superannuation, resignation, dismissal, discharge of employees, diversification expansion of business process reengineering initiation etc. necessity is felt to fill up those vacant posts basically through promotion. Now the questions arise – (a) Who are the people to be promoted? (b) How are the people identified for promotion?

The answer to question number – (a) is those persons having capability to handle higher level jobs are to be promoted and answer for question (b) is those persons having capability of performing higher jobs are to be identified through potential appraisal.

So, potential appraisal is measurement/assessment of persons’ capabilities to work in higher level jobs. People may not have potential of equal degree. Potentiality differs from persons to persons. Some people may have high potential, some may have less. It is the potential appraisal that assesses degree of potential people do have.

In industrial settings performance appraisal mechanism is used to assess past performance of employees and through this system employees’ effectiveness or ineffectiveness in the present job can be assessed. This mechanism can identify employees who are excellent, average and poor in present job.

But, the excellent employees in the present job role may not be effective/successful if, they are promoted to perform the higher level job in different roles. The reason behind this is, that an employee may be effective in the present job role but may not be effective in the different job roles as the latter may need employees with different level of capability/competency.


So, in such case performance appraisal that provides performance rating in the present job may not help organization to take decision in respect of promotion of employees. It needs a mechanism that can provide data, information in respect of employees’ capabilities to handle higher level jobs. This mechanism is potential appraisal.

Indicators of Potential:

There exist some indicators of potential which managers meticulously observe and consider while mak­ing decisions about their potential. Some of the indicators are a sense of reality, imagination, power of analysis, breadth of vision, and persuasiveness.

i. Sense of reality – People usually act based on their thought process. A sense of reality refers to the extent to which a person thinks and acts objectively, controls his emotional pressure, and continues to pursue realistic projects with enthusiasm and achieves business goals.

ii. Imagination – Imagination is the mind’s eye. A man dreams by virtue of his imaginative power. It is the ability to let the mind range over a wide variety of possible causes of actions to achieve specific results. Imagination goes beyond conventional approaches to situations and does not remain confined to, ‘this work is done in only one way’.

iii. Power of analysis – Power of analysis refers to the capacity to reformulate, innovate, break down, and transform an apparently complicated situation into manageable terms. People with power of analysis believe in, ‘innovate or evaporate’.


iv. Breadth of vision – People need visionary skills and their breadth of vision should be wider. Breadth of vision means the ability to examine a problem in the context of a much broader framework of reference. People with breadth of vision can detect relationships with those aspects within a specific situation which could impact the situation.

v. Persuasiveness – Persuasiveness helps one trying as long as it takes to produce results. It is the ability to sell ideas to others and gain a continuing commitment. Using managerial authority may not always produce results. Persuasion refers to using personal influence by way of negotiation.

These five indicators are standard factors that are considered while judging the potential of any individual. These have helped many organizations in taking decisions.

Potential Appraisal – 7 Important Objectives: Identification of Employees, Assessment of General Potential, Identification of Training Needs of Employees & a Few Others

Potential appraisal relates to assessment of employee potential for growth and development of organization and the employee as well. It plays a key role in the development of human resources and also in the achievement of organization goals. Potential appraisal has a lot of objectives.

The important objectives are given below:

Objective # 1. Identification of Employees Having Capabilities to Perform Higher Level Jobs:


It identifies people who have potential to take over higher jobs. This task is difficult to accomplish in industrial settings. It may take the help of assessment centre/development centres to find out suitable/capable employees for promotion.

Objective # 2. Assessment of General Potential:

It assesses whether the employees have abilities to perform some types of work. Employees’ aptitudes, level of competency, skill are appraised for better utilization in the organization activities.

Objective # 3. Identification of Training Needs of Employees:

For growth and development of organization employees’ development of skill, knowledge, abilities is needed. This is possible through training. Potential appraisal identifies the area which requires training for reinforcement/improvement.

Objective # 4. Implementing Succession Planning Activities:


It helps organization to effectively carry out succession planning activities by way of providing data / information in respect of employees who are suitable for filling in vacant posts.

Objective # 5. Assisting Employees in Personal Development Process:

It makes the employees aware of their strengths and weaknesses through feedback / counselling, discussion programmes so that they can prepare their personal development plan effectively.

Objective # 6. Helping Organization to Decide its Strategy:

It makes organization know its competent, effective, potential workforce as also non-achievers, dead woods, non-performers. Looking into strength of human resources, organization can decide its strategy. For example, the organization can decide whether it can go for business process reengineering, diversification of activities, reduction of employees through VRS etc.

Objective # 7. Helping Organization to Survive, Grow and Develop:

In the changing scenario, every organization has to face tough competition against MNCs and other organizations. For confrontation against such challenges and for sustenance, growth, development of organization, it needs dynamic workforce. Potential appraisal helps organization to develop the employees and to create a reservoir of committed, competent workforce who can give befitting challenges through production of quality goods and service at low rate.

Potential Appraisal – Top 6 Importance: Evaluation of Capabilities, Succession Planning, Career Development, Motivate Employees, Identify Training Needs and a Few Others

Importance # 1. Evaluation of Capabilities:

With the help of the potential appraisal form, the employees are judged on various performance and behavioural parameters. Appraising employee’s potential helps to evaluate his capability to take greater challenges, responsibilities and positions in the organisational hierarchy. It helps organization to identify the employees who are capable of taking more challenging roles & responsibilities in future.

Importance # 2. Succession Planning:

Succession planning is a process for identifying and developing new leaders, who can replace old leaders when they leave, retire or die. Such planning increases the availability of experienced and capable employees that are prepared to assume these roles as they become available. Most organisations incorporate potential appraisal in their appraisal processes for identifying and developing suitable employee base for succession planning.

Importance # 3. Career Development:

The potential appraisal results in identification of hidden talents and skills of an employee. The employee himself might not be aware of his certain competencies. The potential appraisal aids in career development of an employee by giving him opportunity to work on his potential capabilities.

Importance # 4. Motivate Employees:

It leads to identification of hidden talents & thereby motivates the employees to further develop their skills and competencies. It also benefits the organization as it results in versatile workforce who can assume greater roles & responsibilities in future.

Importance # 5. Identify Training Needs:

The potential appraisal helps the organization to identify the training needs. Such appraisal throws light on the hidden competencies of employees which could be developed further with the help of appropriate training programmes.

Importance # 6. Organizational Goals:

The potential appraisal concentrates on the future. It helps to create a pool of experienced and capable employees by giving them opportunity to discover their hidden talent. It also helps employees to develop their personal interests in alignment with the organisational goals.

Potential Appraisal – Steps to be Followed while Introducing a Good Appraisal System

The following are some of the steps required to be followed while introducing a Potential Appraisal System:

(a) Role Descriptions:

Organizational roles and functions must be defined clearly. A good potential appraisal system would be based on the clarity of roles and functions associated with different roles in the organization. This requires extensive job descriptions to be made available for each job. These job descriptions should spell out the various functions involved in performing the job effectively.

(b) Qualities Required:

Based on Job Descriptions, the roles to be played by employees should be prepared (i.e. technical, managerial jobs and behavioural dimensions)

(c) Rating Mechanisms:

Besides listing the functions and qualities, the potential appraisal system must list mechanisms of judging the qualities of employees such as- rating by others, Use of various psychological tests and games, technical knowledge and skills and performance appraisal records maintained.

(d) Organizing the System:

Once the functions, the qualities required to perform these functions, indicators of these qualities, and mechanisms for generating these indicators are clear, the organization is in an effective position so as to establish and operate a potential appraisal system.

(e) Feedback:

If the organization believes in the development of human resources it should attempt to generate a climate of openness. Such a climate is required for helping employees to understand their strengths and weaknesses and to create opportunities for development. A good potential appraisal system should provide an opportunity for every employee to know the results of assessment and should also help in order to understand the qualities actually required for performing the role for which the employee thinks he or she has the requisite potential.

Potential Appraisal – Requirements for an Effective Appraisal System

Potential appraisal contributes a lot to the development of organization and employees as well. So, it needs to be effective to help organization achieve its goals.

Effective potential appraisal system can work well in following situations/conditions:

1. Top Management Active Support:

If, the Chairman/Executive Director of organization takes personal interests and gives active support for implementation of the potential appraisal system, this system can work effectively. The senior, middle and junior executives become prompt and serious to make the review process smooth, regular as they know top management keeps records of functioning of this activity, and lapse/neglect of any officer in this regard is communicated to the higher management.

2. Corporate Policy:

Organization should have detailed, clear policy with regard to introducing a system for reviewing potential of employees. Absence of incorporating such system in organization’s policy most executives take it casually and do not attach importance for its effective working.

3. Existence of Congenial and Conducive Work Atmosphere:

If, good working situation exists where mutual understanding, faith and confidence are established between boss and subordinates, potential review may be meaningful and may make assessment proper and accurate. So, this is an essential requisite for effective potential appraisal system.

4. Healthy Organizational Culture:

Effective potential review requires a healthy culture in the organization where climate of openness, collaboration, trust, autonomy, pro-action exists. Such culture promotes values and develops a ‘sense of we-feeling’, ‘togetherness’ and ‘belongingness’. All this helps to make unbiased assessment of employee potential.

5. Detailed Job Descriptions:

Organization should have thorough and detailed job descriptions for each job and the functions involved in performing the jobs. If, each job has clear job descriptions, the functions to be performed can be identified, and through potential appraisal mechanism it can be ascertained whether employees are available to perform.

6. Qualitative Traits for Each Job Role:

For effective potential appraisal system organization should ensure that each job role has clear specification as to the nature, extent and type of qualitative traits required to perform function of such job.

Qualitative traits may be –

i. Managerial skill and abilities

ii. Technical knowledge, skill, capabilities

iii. Human skill

iv. Conceptual skill.

If, it is clearly listed out the type of skill, level of competence etc. required for each function potential appraisal may make accurate assessment.

7. Rational and Effective Methods Used for Ascertaining Qualitative Traits:

For implementing potential review system organization should have rational and effective methods in practice to measure qualitative traits of an employee in a particular job. Such methods may be assessment centres, development centres, performance review records, simulation exercises etc.

8. Existence of Practice to Conduct Feedback Programme:

To make potential appraisal system effective, organization should have a programme for giving feedback to the employees in respect of their strengths and weaknesses and to help them develop weak areas. If, employees can come to know about the level of potential through feedback, they can develop perception about themselves and prepare their career planning and development programme accordingly.

Potential Appraisal – 6 Important Techniques: Self-Appraisals, Peer Appraisals, Superior Appraisals, MBO, Psychological and Psychometric Tests and a Few Others

The techniques of potential appraisal are as follows:

Technique # 1. Self-Appraisals:

A self-appraisal form is prepared, which is required to be filled by the employee.

Technique # 2. Peer Appraisals:

The HR Head may design a form for peer appraisal or ask the peers in confidence in small size companies, to take feedback on the employee

Technique # 3. Superior Appraisals:

The superiors are always required to carry out appraisal in every setup, which may be defined annual appraisals by way of confidential reports or any other method

Technique # 4. MBO:

The use of management objectives was first widely advocated in the 1950s by the noted management theorist Peter Drucker. MBO (management by objectives) methods of performance appraisal are results-oriented. That is, they seek to measure employee performance by examining the extent to which predetermined work objectives have been met.

Usually the objectives are established jointly by the supervisor and subordinate. Once an objective is agreed, the employee is usually expected to self-audit; that is, to identify the skills needed to achieve the objective. Typically they do not rely on others to locate and specify their strengths and weaknesses. They are expected to monitor their own development and progress.

Technique # 5. Psychological and Psychometric Tests:

Since the early 1900’s, psychologists have employed testing in an effort to quantify people’s intelligence, preferences, and behaviors. Today these assessments, called psychometric tests are used in schools, the military, mental health clinics, psychotherapists’ offices, correctional facilities, and in companies. Market analysts commonly use psychometric testing to determine people’s preferences for products, packaging, and branding.

A consumer might be asked, for example, if he or she prefers one product color to another, or which packaging type they are most likely to purchase. Employment specialists use these tests to determine if someone is a good fit for a job. For example, personality, intelligence, and aptitude tests can be used to capture specific preferences and skills for required tasks and responsibilities. Those preferences are then matched by the employer to particular job functions.

Technique # 6. Management Games like Role Playing:

Employee motivation commonly benefits from suitable and well run team building games, exercises, and activities, including puzzles and quizzes. The company can also use team building games and exercises ideas as ice-breakers and energizers to warm up meetings, workshops, training, and conferences. Many of these group activities are also effective in specialized training sessions and seminars.

Team building games and activities are also useful in serious business project meetings, as games and activities help delegates to see things differently and use different thinking styles. Games, exercises and quizzes help to stimulate the brain, improving retention of ideas, learning, and increasing fun and enjoyment.

Technique # 7. Leadership Exercises:

Team coaching programs have a lot of merit; one-on-one leadership coaching can be a very fulfilling process. Having some insight into the life of someone who has walked a similar path can often be encouraging management/HR Head can give the employee, specific leadership development activities where employees learn to lead by leading.

Potential Appraisal – Popular Methods Used in Big Organisations: Philips’ Hi-Lo Matrix, Philips NV Holland Model, Psychometric Tests and Review Appraisal Methods

Some of the popular methods/models of potential appraisal being used by big organisations are as follows:

Method # 1. Philips’ Hi-Lo Matrix:

In it, a 2 x 2 matrix is used to evaluate performance and potential in a single process as depicted in Figure 8.3.

It is evident from Figure 8.3 that the low potential-low performance employees are considered ques­tion marks. If they fail to bring about the desired improvements in their performance, the organisation moves towards a planned separation of such employees. In the next quadrant of high potential-low performance come the problem children.

Such employees require close monitoring and need a new scenario for work as a strategy so as to tap their full potential. The third quadrant of high potential-high performance pertains to ‘star performers’ who need to be engaged with complex assignments and groomed for top positions in the organisation.

The fourth quadrant of low potential-high performance relates to employees called ‘solid citizens’. Such employees have high skills but low potential to go beyond their current jobs.

Method # 2. Philips NV Holland Model:

This system includes a five-point scale, ranging from excellent to insufficient, and provides for evalua­tion of employees on the following four qualities –

i. Conceptual effectiveness

ii. Operational effectiveness

iii. Interpersonal effectiveness

iv. Achievement motivation.

The employee is also assessed by the management development team. Efforts are also made to identify star track career development, indicating the highest level they can reach, and then forecasts are made for 5-10 years or even beyond that.

Method # 3. Psychometric Tests:

Through such tests, which have been developed mostly abroad, we try to capture the abilities of the employee on several fronts such as aptitude, logic, deduction and inference. These tests, for example, are conducted at Glaxo where potential appraisals is a prerequisite to succession planning.

At Glaxo, there is also a provision in the performance appraisal form for assessment of an individual’s potential vis-a-vis attributes such as initiative, attitude, commitment, accountability, ethics, leadership, judgement and drive by the superior of the employees. In addition to these, some other exercises are also carried out to identify the true potential of the employee.

Method # 4. Review Appraisal Method:

Through such appraisal, which is carried out by the immediate supervisors and departmental heads, insights are obtained into the potential of the employee. This method, for example, is being used at Cadbury since 1993. The review process evaluates potential for growth and also determines the action plans for career development.

Then, efforts are made to rate the employee on six generic competencies, namely job knowledge, thinking clarity, goal setting and planning, relationships, leadership and innova­tion. These competencies are rated at a five-point scale.

There are also some other methods of potential appraisal, which are generally modified by the user companies to suit their requirements.

Best Practices of Potential Appraisal:

The following are the best practices of potential appraisal being used by some organisations:

1. Ensuring to distinguish reward for potential from reward for past performance.

2. Incorporating the appraisal and reward of potential in the assessment system.

3. Communicating potential appraisal to all the employees regularly.

4. Explaining to all employees the attributes used for evaluating potential.

Thus, we find that potential appraisal, if used scientifically, can serve a very useful purpose in developing employees for their future assignments. The organisation also gets benefited from the efforts of so devel­oped employees.

Potential Appraisal Advantages for the Organisation and Individuals

i. Advantages for the Organisation:

1. It enables the organisation to identify the future leaders at various levels.

2. Organisation gets a pool of recognised persons for future vacancies.

3. Corrective actions can be initiated well in time to steer and guide the individuals.

4. Motivates others to perform equally well as the identified potential leaders who set standards.

5. Company can get rid of employees with below average potential.

ii. Advantages for the Individuals:

1. Motivates individuals to perform still better.

2. Helps in dealing with weaknesses to achieve desired results.

3. Forces individuals to ensure maintaining of their performance level to a high degree of proficiency.

4. Helps career planning.

5. Those with low potential in a particular job can plan for a career where there are better chances.