By Claudine Kapel
Chances are you’ve crossed paths with at least a few disgruntled employees who felt they were passed over for a promotion in favour of an external candidate.
You’ve also probably heard a lot of good arguments supporting external hiring, including the value of industry experience and fresh perspectives and the benefits of introducing new blood.
But a research paper by Wharton management professor Matthew Bidwell turns a lot of that traditional thinking on its head. Entitled Paying More to Get Less: The Effects of External Hiring versus Internal Mobility, the paper is based on Bidwell’s analysis of personnel data from a U.S. investment banking division from 2003 to 2009.
Through his research, Bidwell found external hires tend to have more education and experience and are initially paid around 18 per cent more than internal candidates promoted into similar positions.
But Bidwell’s research also found external hires receive significantly lower performance evaluations for their first two years on the job and also tend to have much higher rates of exit from the job. Those who stay, however, generally experience faster subsequent promotion.
According to Bidwell’s research, external hires have a 61 per cent higher rate of involuntary exits than workers promoted into a job, and a 21 per cent higher rate of voluntary exit. Bidwell suggests the higher voluntary exits of external hires “reflects problems of firm-specific skills and fit, rather than a higher fixed propensity to turn over.”
The initial lower performance of external hires reflects the fact that they need about two years to learn how to navigate and build relationships in a new organization. “Although those new hires will learn about the organization over time, they are likely to suffer an initial performance disadvantage when firm-specific skills are important,” notes Bidwell.
The research findings raise some important issues regarding organizational staffing strategies. Here are some questions to consider with respect to your own organization’s staffing practices.
- To what extent do you emphasize promoting from within versus hiring externally? How is this supported internally?
- What obstacles, if any, are hampering your organization’s ability to promote from within? Are there talent gaps that can only be addressed by hiring externally?
- If you do hire externally, how successful has your organization been in retaining such talent? Are there opportunities to enhance how external hires are on-boarded and integrated so they can get up to speed and start performing at higher levels more quickly?
- If you do hire externally, do you pay such talent more relative to those in the same job who have been with the organization for an extended period of time? How do you address the potential internal equity issues that could arise from a compensation perspective as a result of delivering premium pay to external hires?
Organizations that want to optimize the performance of their talent pool may need to ask some tough questions about their hiring and promotion practices. More attention to growing talent instead of just buying it may yield dividends of both enhanced employee morale and better performance.
Claudine Kapel is principal of Kapel and Associates Inc., a Toronto-based human resources and communications consulting firm specializing in the design and implementation of compensation and total rewards programs. For more information, visit www.kapelandassociates.com.