Look to the outside or promote from within?
May 17, 2012
Article courtesy of SBAM Approved Partner ASE
By Joe DeSantis
Promote from within. It’s not only cheaper, but you’ll get better performance and more stability over the next two years from the worker you moved up rather than the one you paid more to bring in from the outside. But then if the more expensive new hire survives the bumps and stumbles of those first two years, that person will probably move up faster than his or her colleagues.
So argues Assistant Professor of Management Matthew Bidwell of the Wharton School at the University of Pennsylvania. To reach his conclusions, Prof. Bidwell studied the personnel records of a large division of an investment bank from 2003 to 2009. Among his other findings and conclusions are these:
- Hiring managers will spend 18-20% more in salary to bring in someone from the outside than they would have spent to promote someone internally.
- Hiring managers do not know much about their outside candidates. Therefore, they tend to put greater value on factors they can see and measure—like education and experience—than on less predictable factors such as work behaviors and culture match. This, says Prof. Bidwell, despite the fact that “education and experience are reasonably weak signals of how good somebody will be on the job.”
- Promotions from within tend to work better because, most of the time, they happen after the fact. In other words, the worker is already handling the higher level duties well. The promotion is really just the formal acknowledgment of that fact.
- It takes about two years for the outside hire to learn the job well enough to be effective in it. This is because it takes that long to build the relationships needed to work well with others. In the meantime, the risk of failure is relatively high. In fact, says Prof. Bidwell, in those first two years outside hires get lower performance ratings and have higher turnover rates than their veteran colleagues.
- If the employer considers promoting someone internally, the nature of the promotion is important. If the move is not only upwards but also to a different department or division or work group, the promoted worker will be prone to the same errors as an outside hire would be.
Prof. Bidwell concludes that the dynamics of the hire-vs.-promote decision come down to two factors: 1) the skills that workers bring to their new jobs, and 2) how much information the worker and the employer have about each other at the time of the hire or promotion. Comparatively speaking, the internal employee knows the organization better and the organization knows his or her skills better. The outside hire does not know the organization, and the organization is only guessing at that person’s skills, which it expects to be much stronger than those of its internal workers.
Prof. Bidwell comes down on the side of favoring promotion from within as a business strategy. But it is important to note that his research focused on workers and organizations where job success depends heavily on how well the employee knows how the organization works and has built good relationships with colleagues. In those organizations work is less a commodity, easily transferrable to other organizations, than it might be elsewhere. In the latter organizations, the same dynamics might not be in play.
But his work does seem to lend a certain insight into the reasons why workers are so much more mobile today than they were a generation ago. It tends to validate workers’ suspicions that they can find career advancement only by moving elsewhere.
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