External Hires vs. Internal Promotions

“Paying More to Get Less: The Effects of External Hiring versus Internal Mobility” is a research paper from Wharton management professor Matthew Bidwell.

An article in Knowledge@Wharton describes Bidwell’s findings, some of which may surprise managers.

In his research, Bidwell found that external hires get significantly lower performance evaluations for their first two years on the job than do employees who were promoted internally to similar jobs.

They also have higher exit rates, and are paid “substantially more” (i.e., between 18% and 20% more).

However, he also found that if external hires stay beyond two years, they get promoted faster than do those who are promoted internally.

It takes approximately two years for external hires to “get up to speed” according to Bidwell.  He suggests that they need this long because outsiders need that amount of time to learn the organization and how to be effective, specifically, how to build relationships.

Those who are internally promoted have already established relationships and understand the organization.

For external hires, the risk of failure is substantial.  According to Bidwell, “there is a much greater risk of being let go during those first few years, mainly because they may not develop the necessary skills and thus will not perform as well as expected.”

External hires may want higher pay to reflect the unfamiliar environment that they face coming into a new position.

Bidwell noted one particular difference between the external hires and those who are being promoted internally.  “People hired into the job from the outside often have more education and experience [than internal candidates], which is probably some of the reason they are being paid more,” he says.

“When you know less about the person you are hiring, you tend to be more rigorous about the things you can see” such as education and experience levels listed on a person’s resume, or what Bidwell calls “externally observable attributes.”

However, education and experience are reasonably weak signals of how good somebody will be on the job.

HR POINTER: Don’t overlook internal staff who may be ready to step up to the next level. Internal candidates will likely be able to “hit the ground running” and be more effective in their new roles than newly hired external staff.

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