A Problematic Truth: When Someone Is Too Valuable
If Fred is indeed too valuable, then you've missed a managerial opportunity to make sure other people were cross-trained to fill needs that are important to your organization. You are also unprepared to promote Fred to the next level when he is ready. If you find yourself in this position, instead of "too valuable," you could say something like this to Fred:

Because I haven't thought about the problems you take care of in my group, you have become too valuable where you are. I messed up by not having someone else available to take over your work so I could promote you. Let's put together a plan to fix that.

After all, if you have a too-valuable employee, what would happen if that person quit tomorrow? What actions would you take to get the work done? Plan those actions now, so you aren't trapped with a "too-valuable Fred," and Fred doesn't feel trapped in a role he is ready to move beyond.

Maybe Fred is the magician in the test team (most test teams have one): he can find a bug in any software in five minutes, just by staring at the screen. If you let his talent become a ball and chain that holds him back, he may lose his magical powers, or take them elsewhere.

Not Quite Enough Experience: When They're Not Ready Now
Maybe you have an employee whose capabilities don't yet match their ambitions. When Fred doesn't have enough experience to be ready for the promotion, the "too valuable" phrase doesn't help him plan his next steps for getting the promotion he wants. You could say something like this to Fred:

You make valuable contributions to this team. However, based on your current behaviors and accomplishments, you have not yet shown me that you are ready to do the job you want to do. Let's put together a criteria list of activities and behaviors I'd like to see from you before I promote you.False Expectations: When They Will Never Be Ready for a Promotion
Some people have ambitions that don't match their behaviors. I've met incredibly talented technical people who are not managerial material—not because they can't manage tasks, but because they don't care how they deal with people. If you use the "too valuable" phrase with Fred in this case, you're setting false expectations for him. Be direct with Fred, and explain the problem:

Your technical skills are valuable. But based on the way you interact with people, you haven't yet shown the ability to manage people or projects.

Explain to Fred whether it's his current lack of ability, or if he does not behave appropriately for the desired position. Clarify the behaviors you want to see, and explain them to Fred. Leaders and managers need to show these behaviors:
 

• Manage their work
• Coordinate with the work of others
• Use their positional power to get things done, not to threaten or hold over people

Fred needs to understand where he is successful and where he isn't.

As the promoting manager, you don't have to promote people automatically to the next job level. In fact, the best way to promote people is to base their promotion on a comparison of their accomplishments relative to written criteria of how you want them to work.

However, if you haven't thought about why someone shouldn't be promoted, or you haven't ever given them honest feedback about their work yet, you may be tempted to just say, "You're too valuable here." Instead of hiding behind a catchall phrase (even if the person is quite valuable where they are), tell the truth. When you put the right person in the right place, you're helping your current staff learn from talented leaders (yourself included).