Ed. note: This is a new series from Bruce MacEwen and Janet Stanton of Adam Smith Esq. and JDMatch. “Across the Desk” will take a thoughtful look at recruiting, career paths, professional development, human capital, and related issues. Some of these pieces have previously appeared, in slightly different form, on AdamSmithEsq.com.
A Wharton School professor has analyzed the performance, and pay levels, of external hires versus internal staff promotions. He used personnel data from a division of a major U.S. investment bank for 2003 to 2009, and the characteristics of that talent market are remarkably similar to our own.
Investment banking, Professor Matthew Bidwell writes, represents “an interesting context in which to study the effects of internal versus external mobility [because] organizational performance often depends on the skills of the workforce, [thereby] increasing the importance of personnel decisions.” In addition, workers in banking are “notoriously mobile, making this a context in which organizations regularly engage in external hiring at all levels.”
The genesis of his study was seeking an answer to this question: what has the increased mobility of workers over the past 30 or so years meant, as firms turn away from offering lifetime employment in favor of relying on the external labor market to find experienced workers at all levels of the organization?
Here’s the bottom line:
“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% to 20% 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.
“Most jobs are entered into through a variety of different routes, sometimes by being hired from the outside and sometimes by moving up from inside the firm,” says Bidwell. “I was curious as to what the effect of these different routes would be” on an individual’s job performance.[...]
The issue has significance for organizations, Bidwell says, as they think about where they source their employees, especially higher-level ones. Do they “grow their own” or do they go out into the job market and hire outsiders? “My research documents some quite substantial costs to external hires and some substantial benefits to internal mobility,” he notes.
The “two year learning curve” that represents the primary risk for external hires is the length of time it takes them to learn how to be effective in the new organization, and specifically to build relationships, learn whom to trust and whose judgment is questionable, and so forth. Internally promoted people already know this landscape instinctively.
The converse is true as well, is it not? That is, firms know more about potentially promotable internal candidates than they do about external hires. To counterbalance that (consciously or unconsciously), firms require greater education and experience from external hires than internal candidates:
“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 CV, or what Bidwell calls “externally observable attributes.” And yet “education and experience are reasonably weak signals of how good somebody will be on the job,” he notes.
He’s not done. While external hiring has a poorer track record, and is more costly to the firm than internal promotions, it’s also becoming more prevalent — partly because it’s exciting (as are dating and new romances):
External hiring has grown much more frequent since the early 1980s, especially for experienced high level positions and especially in larger organizations. “It used to be that smaller organizations always did a lot of outside hiring while big ones focused more on internal mobility. But now the pendulum has shifted toward external hiring and away from internal mobility for large organizations as well.
“Companies should understand that it can often be harder than it seems to bring in people who look good on paper,” says Bidwell. “In addition, there is a suspicion that ‘the grass is always greener’ attitude plays a role in some companies’ desire to hire from the outside. Managers see a great CV and get excited about playing ‘Let’s Make a Deal,’ even when it’s hard to know what weaknesses the external hires bring with them.”
On the other hand, “to promote more people internally also means that companies need to have a long-term perspective [emphasis mine] and know how big a pipeline of people will be needed in the future,” notes Bidwell. … “Finally, there are clearly some costs to internal mobility — for example, the cost of training people in-house versus piggybacking on someone else’s training.”
There you have it.
I’m not sure this piece requires additional extensive exegesis, but let’s summarize the findings:
- External hiring has increased substantially vis-à-vis internal promotions over the past three decades.
- Despite the fact that (because?) we know less about them than we do about potential internal candidates, it’s an exciting hunt.
- External hires fail at greater rates than internally promoted candidates.
- They come with a 15 to 20% premium in compensation.
- This is particularly true in jobs that “require high levels of general skills [citing securities research, surgery, and scientific research, because] while such work depends on individual workers’ skills and knowledge, it also requires intense coordination with others in the organization.”
Now let’s change the subject, while not really changing the subject….