When your next generation of leaders is ready to step into the breach when new management positions are created or existing ones are vacated, you can avoid the hiring and training expenses attached to external recruits and maintain business momentum. Even more important in today’s tight labour market, grooming members or your rank and file for bigger things shows them they have real opportunities for advancement — a key driver of employee retention.

So why do so few companies look for management potential among their employees until the need is urgent? Perhaps because it’s a tricky, time-consuming process for which no silver bullet exists.

“It’s a tough thing — it’s a bit of an art and a science,” says Dan McCarthy, a Rochester, NY-based leadership specialist and author of the Great Leadership blog (www.greatleadershipbydan.com). While there are some universal traits of a good leader, like ambition, drive, high intellect and good communications skills, what makes someone a true “high-potential” will vary from company to company.

Richard Davis, a Toronto-based psychologist and consultant at executive development firm RHR International, suggests outlining a clear profile of what an ideal leader for your company looks like. Make a list of desired traits. If your company is sales-driven, you’ll likely want a future leader to be a likeable people person with strong social skills. If it’s an innovation-driven tech company, on the other hand, you’ll want someone who is creative, tech-savvy and detail-oriented.

Davis and McCarthy offer these tips on how to spot leadership potential among your rank and file:

• Give employees a psychological test to see who has the most promising leadership traits. But make sure the test is aligned with your own business objectives. “The key element of success is tying it to the needs of the company,” says Davis. Look at the results closely, and recognize which traits are most important to your company’s growth and development.

• Have a discussion with a prospective high-potential employee (HPE) early on to see if he’s even interested in eventually assuming a management position. If he’s not, that may be a red flag. “A clear hallmark of a good leader is ambition and drive,” says Davis. “The term ‘reluctant leader’ is a bit of an oxymoron.” McCarthy, however, says not to give up on a prospect if he seems unenthusiastic at first. “If someone says no, take it as ‘not now,’ and check in with them again in another six months.”

• Throw a business challenge at the HPE and ask her to come up with a solution to evaluate her problem-solving and analytical abilities. “The price of admission [to be an HPE] is the ability to understand complexity,” says Davis. “Throw real problems at them and treat it as a project.”

• Pay attention. Observe how your prospect reacts to everyday business challenges and how he interacts with his peers.

• Get multiple perspectives. Have regular talent discussions with your partners and management team, advises McCarthy. This helps paint a more rounded picture of the prospect’s strengths and weaknesses.

• Beware of a halo effect. Just because someone has a great sense of humour and shares similar interests with you doesn’t mean he’ll be a great leader. “We tend to see one attribute in someone and extend our positive view of that person,” says Davis. “It’s a natural psychological phenomenon that clouds our judgment.” Bring in an objective third party such as an HR consultant to avoid mistaking likeability for potential.

• Let an HPE know she’s well regarded, appreciated and that she has a future at your company, all of which will motivate her to stay with your business. “Succession plans are no good just sitting on an executive’s desk,” says Davis. “It should be a transparent process.” He says the potential ego inflation can be tempered by making sure the prospect’s manager is very hands-on in the development process. The prospect is less likely to begin bossing around peers if her boss is always around.

NEXT WEEK: Be a better entrepreneur by enlisting an executive coach.