Hiring from Outside? Think Again

Here’s the bottom line. Management professor Matthew Bidwell, of the Wharton School at the University of Pennsylvania, has researched the question for several years—from 2003 to 2009. The basics of his findings are these: External hires get significantly lower performance evaluations for their first 2 years on the job than do internal workers who are promoted into comparable jobs. And, the external hires have higher exit rates and are paid between 18 percent and 20 percent more than an existing employee would have earned. Doesn’t sound like a good deal for employers.

But do note that after 2 years in a particular job, an external hire begins to fare as well as an internal promotion would have in a similar job. Think about it, though: Can you afford to coast in that way for a relatively unproductive 2 years?

The problem, clearly, is that outside hires don’t understand the prevailing culture and operational methods of their new employers anywhere near as well as their veteran colleagues do, and it takes them a precious 24 months to become effective.

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Bidwell suggests that the main problem is failure, in those first 2 years, to establish the relationships that are necessary for any employee to be effective. Why do outside hires nevertheless command higher salaries? Bidwell’s research showed that such candidates typically feature more educational credentials and more experience than internal ones do; hence, their higher salaries. But he notes that although education and experience are more visible than other positive attributes, they are ”reasonably weak signals of how good somebody will be on the job.”

One more basic finding: If an external hire stays for the requisite 2 years and catches up with longer-term colleagues, he or she will usually be promoted again more quickly than home-grown co-workers would be.

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Who and what was studied? Bidwell’s study is titled “Paying More to Get Less: The Effects of External Hiring versus Internal Mobility.” He analyzed 6 years’ worth of performance and pay data from a large U.S. investment banking division. Although his study was restricted to that one industry, he notes that banking employees are “notoriously mobile, making this a context in which organizations regularly engage in external hiring at all levels.” Banking thus particularly represents the dominant employment trends of the last 3 decades—lifetime employment in one company is nearly unheard of, and the average worker changes employers every 3 years.

Bidwell checked his results across all levels of jobs, and against findings from a different investment bank and a publishing company: His findings were consistent across the board. In sum, Bidwell advises employers to beef up their succession planning and strive to promote from within. It simply works better.