Studies show both employers and employees benefit from internal career paths
Human resource managers understand there are times when it makes sense to recruit talent from outside the organization. A launch of a new product or service, or a significant expansion of business, often requires luring talent from competitors, for example. Also, HR may favor external management hire when a department (or even the entire company) is stagnating—in hope that an outsider will bring new ideas and energy to reinvigorate a group of employees in a slump.
But while there may be a time and place for hiring an outsider, research shows that companies and their employees benefit more from policies that encourage internal career paths and promotions from within.
External Hires Cost More
A 2012 study by management professor Matthew Bidwell of the University of Pennsylvania’s Wharton School found that external hires, while paid 18 percent to 20 percent more, received significantly lower performance evaluations in their first two years of work compared to internal workers who had been promoted to similar positions. In addition to being better workers in the first two years, internally promoted staff were less likely to leave the company, compared to those hired from the outside.
For his research, Bidwell examined personnel data of 5,300 employees from a U.S. investment bank over a six-year period. Bidwell noted that external hires would often have higher levels of education and experience than internal staff, which may be why external hires could demand higher compensation. But education and experience don’t always equate to success.
“Education and experience are reasonably weak signals of how good somebody will be on the job,” Bidwell said in an interview with Knowledge@Wharton.
Internal Candidates Have a Better Understanding of Company Culture
Workers hired from outside also may have difficulty adapting to the new company’s culture, which is why performance is comparatively lower in those early years on the job. And if the experience doesn’t meet their expectations, they may walk away, leaving an expensive round of executive search and recruitment in HR’s lap. Internally promoted staff aren’t presented with those challenges. Having long figured out the company’s culture, internal politics, and “the way things get done,” internal candidates will likely stay for the long term.
Opportunities for Internal Mobility = Happy Employees
Although internal candidates may get frustrated when they see outsiders brought on board with bigger paychecks, research shows that over the long run, employees are usually better off pursuing different advancement opportunities with the same company, rather than switching employers. Bidwell and fellow Wharton professor Ethan Mollick discovered this in a 2015 study of executive mobility. They found that managers who moved up to new positions within their company would not only get a pay raise, but also a big boost in their responsibility: a more powerful title and a 59 percent average increase in the number of employees under their supervision.
Conversely, managers who voluntarily left for other firms would do so for higher pay, but they typically would not see an increase in their responsibilities. Bidwell said that for many managers, jumping from company to company in pursuit of higher pay was essentially a wash because although their pay would go up, opportunities for promotion and bigger responsibilities would diminish.
“It is those internal moves that lead to advances in pay, rank, and responsibility, and provider long-term gains in pay and satisfaction,” Bidwell said in an interview with Knowledge@Wharton.