Internal vs. External Hires – Should you promote from within or look outside?

Job openings are filled through a variety of methods. Sometimes a new employee is hired from outside sources, and at other times an employee is promoted from within the company.

Professor Matthew Bidwell, a Sloan Industry Studies Fellow, conducted some research to figure out the effect of these two different methods of hiring. The title of Bidwell’s study is “Paying More to Get Less: The Effects of External Hiring versus Internal Mobility.”

According to Bidwell, this subject has importance for managers when they contemplate where they source their employees from, particularly top-level employees.

He documented external hires vs. internal promotions from 2003 to 2009 in order to conduct his study. The organization he chose to monitor was a U.S. investment banking division.

He chose investment banking because he says that organizational performance is often dependent on the skills that are required to succeed in the field. In which case the importance of personnel decisions would increase. Bank also regularly hiring external candidate at all levels, so the setting was a good fit.

So what is the best route? Should you promote from within, or should you hire external personnel? Let’s see what the result of his research demonstrates as far as the costs and benefits of one method over the other.

External hires acquire considerably lower performance evaluations in the first two years on the job, as compared to internal employees who are promoted into comparable positions.

This is In part, because the worker may not develop the needed skill set and therefore, performance is not as worthy as it was projected. External hires also need “catch up” time to get familiar with the company, mainly to understand it’s ways of working and to build relationships. In the interim, the threat of failure is extensive.

In addition, they seem to have higher exit rates, and yet are paid “substantially more.” Approximately 18% to 20% more to be more precise. However, if external hires stay past two years, they get promoted quicker than those who are promoted from within the company.

During his research, Bidwell noted that when hiring external workers, their level of experience and education tended to be more substantial than that of an internal prospect. These components are also the cause of hiring external workers at a higher salary. In addition, external hires may negotiate a higher salary to leave their current position and move into the unfamiliar environment of the new position.

However, in Bidwell’s opinion, experience and education are not necessarily the strongest indicators about how well that candidate will perform their job.

Bidwell’s research paper demonstrates the benefits of internal promotions, which enable companies to staff higher-level positions with existing employees, at a lower rate and with better performance results.

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