Retaining top talent for longer is a key objective for most HR teams. But how do you decide which employees qualify? For many organisations, it comes down to not just each employee’s past performance, but their future potential too.
At a glance, this makes sense: why wouldn’t employers want to invest in the people who will bring the most value to the company in the long term? But here’s the problem: who is and isn’t counted as a ‘high-potential’ employee is subjective and open to bias.
In this article, we’ll discuss the many problems with relying on ‘potential’ for decisions about employee pay and progression — especially in the context of the upcoming EU Pay Transparency Directive.
Why (some) employers choose to recognise ‘high-potential’ employees
So, why do employers reward and recognise employees based on their potential rather sticking to more concrete factors like performance data? A few reasons: first, recognising potential can help retain top talent by identifying those employees who are likely to go far and providing them with additional rewards like bonuses and pay increases.
Rewarding employee potential can also help with succession planning, enabling employees to prepare future leaders so they’re ready to take on new responsibilities when the time comes. In general, organisations need to balance their present and future needs — and recognising high-potential employees can be part of that.
6 reasons rewarding potential is a bad idea
Despite the benefits, there are also some big downsides to rewarding employee potential as an employer — here are some of the main ones:
- Potential for bias and favouritism: Assessing potential is inherently subjective, and can be influenced by personal biases, office politics and favouritism. This can lead to unfair and inconsistent evaluations. In particular, affinity bias can result in employees being reviewed more favourably if they resemble those doing the assessment. This negatively impacts women, people of colour and employees from other marginalised groups.
- Demotivation of strong performers: When an employer rewards potential over performance, employees who consistently deliver great results may feel undervalued. Seeing colleagues with less tangible achievements receiving better compensation or opportunities can be frustrating — and could lead to problems with engagement and retention.
- Reduced accountability for actual results: Consistently rewarding potential at the expense of actual achievements could also create an environment where perception matters more than results. This could reduce accountability and even lead to complacency, which could badly impact overall productivity and performance.
- Risk of unrealised expectations: Potential is quite simply a tricky thing to measure — and doing so with 100% accuracy is impossible. If you’re not careful, you could end up investing in employees who don’t end up living up to your expectations. This could result in misallocated resources and unfair compensation structures.
- Increased workplace resentment: Rewarding employees based on perceptions rather than output could create resentment among team members who feel their contributions are being overlooked. This can have a significant negative impact on team dynamics and morale.
- Lack of transparency: As we’ve said, potential is a vague concept that’s difficult to define — which means it’s not easily understood by employees. And without clear, transparent criteria for pay and progression, employees may feel decisions are arbitrary or unfair. This can lead to frustration and disengagement.
Fairness considerations in the pay transparency era
The EU Pay Transparency Directive will be in effect across all 27 member states by June 2026 at the latest and will bring various new obligations related to pay transparency and pay equity. In this context, rewarding employees based on their potential rather than more concrete factors like performance ratings and achievement of goals is a particularly risky strategy. Here are a few of the ways the directive will impact this practice.
Requirement for fair and objective pay criteria
One of the core principles of the EU Pay Transparency Directive is the requirement for companies to develop objective, gender-neutral criteria for pay decisions. Under the new rules, employers will have to justify that pay differences between employees in similar roles are based on clear, measurable factors like their skills, experience and location.
If one employee is paid less than another based on perceived potential vs. their actual achievements, this could constitute indirect discrimination — especially if assessments of ‘potential’ tend to favour employees from certain groups.
Increased pay transparency obligations
The directive will give employees more insights into salary structures and justifications than ever before. First, employees will be able to request certain information on their pay — and employers will have to provide it. Employers will also have to provide salary ranges in job descriptions and transparency on the criteria that go into pay decisions.
Simply put, employees will soon have access to a lot more information about their pay and how it compares to others. If the criteria behind any differences in pay are not documented or transparent, employees may see them as evidence of favouritism or bias.
Mandatory pay audits and joint pay assessments
The pay transparency directive will require companies with 100 or more employees to conduct regular pay audits and report gender pay gap data to national authorities. This means that any discrepancies that arise due to unfair evaluations of employee potential are unlikely to go unnoticed.
If a pay gap of 5% or more is found, employers will have to carry out a joint pay assessment with workers’ representatives. If rewarding employees for supposed potential leads to more pay gaps, this could mean significant extra work for HR teams — and even legal consequences.
Higher risk of pay discrimination claims
Finally, the directive also grants employees stronger rights when it comes to challenging inequitable pay. Specifically, it introduces a reversal of the burden of proof in pay discrimination cases. In other words, employers will be required to prove that any differences in pay are not down to discrimination, rather than the other way around.
The penalties for pay discrimination will vary from one EU country to the next, but they’re likely to include fines, financial penalties and mandatory backpay of compensation for affected employees. And that’s not to mention the reputational damage that such cases will cause in the pay transparency era.
Getting it right: how to balance potential and performance
So, should employers throw out the idea of employee potential altogether? Not necessarily. It is possible to reward employee potential while respecting the demands of the EU Pay Transparency Directive, as long as you keep these best practices in mind:
- Develop measurable criteria to define potential: If you’re going to reward employees for potential, you should be clear about what this actually means to your organisation. For example, some companies assess potential by scoring employees on a list of characteristics including skills growth, leadership readiness and innovation.
- Consider potential alongside performance: While rewarding employee potential may be a legitimate way of retaining and nurturing top talent, it shouldn’t be more important than actual performance. For maximum fairness, ensure your pay decisions take into account both potential and concrete results.
- Increase transparency in pay criteria: Potential is inherently vague and intangible. And if it has too big of an impact on pay decisions, employees may perceive these as arbitrary or unfair. Employers should clearly communicate the criteria for pay and progressions so employees understand how to advance.
- Use fair and structured evaluation systems: While measuring performance may seem easier than assessing potential, the truth is that performance evaluations can still be fairly subjective. You can lessen the impact of manager bias or favouritism by implementing structured systems for objective performance reviews.
- Provide unconscious bias training: Training managers to identify and address their biases can help you ensure fair and consistent pay decisions. Just be careful not to rely too heavily on this approach — unconscious bias is notoriously tricky to solve by training alone, precisely because it’s unconscious.
- Regularly review compensation structures: Employers should regularly audit their compensation practices to ensure they’re fair, equitable and compliant. This includes analysing the impact of compensation decisions to ensure they don’t systematically disadvantage certain groups such as women or people of colour.
- Build accountability and document every decision: Employers will also need to maintain a fully auditable record of all pay decisions, ensuring the reasoning behind each one is clear and justifiable. To increase accountability, consider requiring managers to select from a pre-determined list of reasons when awarding a raise or promotion.
Rethinking reward and recognition for the pay transparency era
The EU Pay Transparency Directive will force employers to rethink how they justify compensation decisions. Specifically, employers will need to transition from subjective, informal assessments to structured evaluations based on concrete, measurable criteria. Once the new rules are in place, those that don’t may face significant legal, financial and reputational consequences.
Want to learn more about how the directive will influence compensation, reward and recognition at your organisation? You’re in the right place. Stick around on this blog for more actionable tips and insights, including removing bias from performance evaluations, eliminating unfair hiring practices and running fair, effective compensation reviews.
