The world is full of smart and capable people with enticing resumes. When you have an empty position to fill, your inbox fills up with impressive sounding pitches from these folks. No wonder you're tempted to snag some of this talent for your business. But if you have an in-house candidate who might be able to fill the role, new research suggests they'll probably perform better for less money than those fancy-sounding external candidates.
The research, carried out by Wharton management professor Matthew Bidwell, and highlighted recently by Knowledge@Wharton, compared internal promotions with external hires for several functions at an investment banking division over six years. What he found offers a strong counterweight to the impulse to bring sexy new hires into your business.
New hires have an obvious appeal. "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," Bidwell says, noting that "when you know less about the person you are hiring, you tend to be more rigorous about the things you can see," things like education and experience. But it turns out "education and experience are reasonably weak signals of how good somebody will be on the job." In fact when Bidwell compared the performance and pay of internal promotions and external candidates, the advantages of the former were clear, Knowledge@Wharton reports:
"External hires" get significantly lower performance evaluations for their first two years on the job than do internal workers who are promoted into similar jobs. They also have higher exit rates, and they are paid "substantially more." About 18 percent to 20 percent more. On the plus side for these external hires, if they stay beyond two years, they get promoted faster than do those who are promoted internally.
The takeaway for bosses here is straightforward: When you have a role to fill, try to keep your excitement for new, flash candidates in check and give a more serious examination to current team members in similar roles who might be ready to move up a notch. With their better knowledge of the organization and their coworkers, existing staff often perform better than new folks, even if those folks comes bearing impressive resumes. "Companies should understand that it can often be harder than it seems to bring in people who look good on paper," Bidwell concludes, adding "'the grass is always greener' attitude plays a role in some companies' desire to hire from the outside."
The lesson for employees looking to move up is less obvious. If external hires get paid more, is the only way to significantly improve your compensation to move to another firm? Should you threaten to quit to strong-arm your company into a raise? Bidwell, perhaps unsurprisingly given his endorsement of in-house mobility, says no:
If you like where you are, stay there. Or at least understand how hard it can be to take your skills with you. You think you can go to another job and perform well, but it takes a long time to build up to the same effectiveness that you had in your previous organization. You need to be aware that often your skills are much less portable than you think they are. While the pay may be less, your performance is better, and there is more security.
How has the performance of internal promotions compared to that of external hires in your organization?