Wharton research shows that external hires cost 18 to 20 percent more than those  promoted from within. They also have significantly lower performance for the first two years.

I was skipped over four times in my career for promotion, when the company hired from the outside. Each time I ended up leaving the company and so did most of the other internal applicants. One of those companies was sold to its biggest competitor, one is now less than half its previous size, and one declared bankruptcy.

Although it was not always the case, all three companies had a habit of hiring from the outside. I saw first hand how this practice caused disruption, negatively impacted productivity, and increased turnover cost.

Enter Wharton Professor, Matthew Bidwell, whose research shows three cost impacts of external hiring:

1. Attracting Outside Talent

External hires made 18 percent more than the internal promotes in the same jobs. You often have to pry away top talent from their secure employment situation, and dangling a higher salary is usually the most effective way.  

Also, those hired externally often have more education and experience on paper than internal candidates, and you pay more for these easily comparable attributes on a resume.

However, these "externally observable attributes" are not necessarily predictors of success at work.  

Signs point to this cost increasing in the coming years as states implement employee friendly laws that reduce the company's salary negotiation leverage.  In the state of California and a few other states, employers can no longer ask about the applicant's salary history and -- if the applicants ask -- the company must give them a pay range for the job.

2. Getting Up to Speed

Externally hired employees have to learn how to be to effective in the new organization and must start from scratch building relationships. This long ramp up period to full performance results in two years of lower performance compared to promoting from within.

3. Turnover

External hires were 61 percent more likely to be fired from their new jobs than were those who had been promoted from within the firm. There is a greater risk of failure which can result in termination and generate more hiring process costs.

This, of course, does not mean you should never hire externally. You can benefit from these research findings by prioritizing promoting from; and when you hire, account for the cost and the potential negative performance impact, and when you hire account from the cost and the potential negative performance impact.

When you promote, you tap into those with longer experience and company-specific skills. When you hire, you are betting that stronger qualifications trumps this internal experience.

If you will hire externally, start with this strategic question.

"Will you primarily fill your future leader pipeline by promoting or hiring?"

If you will primarily hire externally consider these actions to fill the cost and performance gap:

  • Create a focused plan to keep your hire for at least two years. Bidwell found that external hires who get beyond the two-year milestone often get promoted more quickly (a positive indication). Add support structures to help retain them for the first two years. You miss the potential benefit if you do not keep them around that long.
  • Account for the cost impact when making personnel decisions. Hiring can come with damaging costs that many leaders never even consider. Create and plan and budget for the three costs above.
  • Shore up performance early on. Prepare for the possible disruption in performance, and provide additional support and leadership to smooth the transition.