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Dec 21, 2017

Over the course of a long career in talent management, I’ve often been asked about strategies related to critical hires. The conversation usually goes something like this: “We are having a difficult time hiring for xyz job. There just doesn’t seem to be enough qualified candidates in the market with the right skills, competencies and experience for this particular role. How can we more effectively hire for this position? What are we missing?”

And my answer is usually something along the lines of: “You’re doing it wrong. You need to be growing and promoting most of your critical talent from within, wherever and whenever you can. You should focus most of your external hiring on more junior talent with a strong focus on behavioral competencies, retention markers, and long-term growth potential, and only move to a hiring strategy for critical roles when you absolutely have no choice, which should be relatively rare if you are proactively engaged in workforce planning conversations.”

At this point in the conversation, one of two things usually happens. People either have the much sought after “aha” moment and ask a bunch of great questions that break the logjam and get them moving in the right direction, or they begin launching into excuses as to why this approach won’t work.

Let’s knock down the excuses by laying out some critical research in this area. In 2011, The Wharton School professor, Matthew Bidwell wrote the research paper, “Paying More to Get Less: The Effects of External Hiring Versus Internal Mobility.” It was a seminal work that established, for the first time, distinct performance and tenure outcomes linked to the hiring of internal versus external candidates.

There were four key findings from his research, all of which are as relevant today as they were when he published them — perhaps more so.

1. Better initial performance

“The two most common forms of internal mobility — simple promotion and simple transfers — lead to significantly higher initial performance than external hiring.”

Within this broad conclusion, Bidwell identified two important patterns:

  • “Workers who entered the job through simple promotions perform better than external hires in all specifications… and over the full duration of the job using contribution, which is the performance measure most closely tied to objective results.”
  • The performance gap lasts an average of two years before external hires fully catch up.

2. Internal hires cost less

“All internal movers received significantly lower salaries than external hires. Internal movers also received lower total compensation than external hires when looking across all observations.” He also found that the size of this effect is quite large.

Initially, workers entering their jobs through simple promotions receive salaries and total compensation that are around 18% lower than external hires.

“The interaction coefficient with time in job suggests that the salaries of simple promotions would only catch up with external hires after seven years… and that their total compensation would never converge with external hires.”

3. Internal hires get better ratings

External hires were much more likely than internal movers to receive below median performance ratings.

4. External hires more likely to be fired

External hires have higher involuntary and voluntary exit rates than workers entering the job through either promotions or combined promotions and transfers. External hires have an approximately 61% higher hazard rate of involuntary exit than workers entering through simple promotions, and a 21% higher hazard rate of voluntary exit.

In conclusion, Bidwell writes,

“Results show that external hires have worse performance than internal movers while being paid substantially more. Compared with workers entering a job through simple promotion, the most common form of internal mobility, external hires receive significantly lower performance evaluations for their first two years in the job yet are initially paid around 18 percent more.”

What This Means for Your Hiring Strategy

Given this research, it’s clear what human resources professionals need to do: Significantly reduce your dependence on external hiring for critical, hard-to-fill roles and instead focus your attention on growing those people from within.

To do this successfully, you need to lay a lot of groundwork to put a solid talent management process in place. The alternative — continued and growing reliance on overtime and agency fees in a market driven by ever-increasing labor costs and tighter margins — doesn’t really leave much of a choice.

See “How One Company Makes Lateral Moves A Win-Win

Your long-range goal, therefore, should be to make promoting or transferring your default “fill” strategy. In the end, the real question for talent leaders is whether you want to be in control of your own destiny or remain at the mercy of larger market forces over which you have no control.

A strategy focused primarily on external hiring leaves you at the mercy of the market; a strategy focused on growing your own talent means you can reduce your dependence on the market and exert far greater control over your hiring practices, reducing your overall business risk for years to come.