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Talent Management Column

Do Outside Hires Perform Better?

HR leaders tend to try to push back against the fetish in their corporations to hire from outside instead of promoting from within. A new study offers some evidence to bolster their case.

Monday, April 23, 2012
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My editors always say give away the story early on, so the answer is, "no." But it requires a little more background to make the story interesting.

Probably the most important development in corporate life over the last generation or so has been the decline of lifetime careers and the rise of outside hiring. The situation in many businesses now is that, when there is a vacancy, they automatically think about filling vacancies by looking outside. Internal promotions are something of a rarity.

I don't have any hard evidence for this, but my sense from anecdotes is that the outside hiring trend has been driven by CEOs and other top executives who (a) if they were hired from the outside think that is the way to go for other roles as well or (b) seem to have a "grass is greener" view of external candidates, especially those who come from an admired employer.

Human resource leaders have more often argued for internal candidates, sometimes making that argument somewhat sheepishly.

Has that outside hiring been worth it? Real evidence on this has been very hard to come by, and opinions about the evidence seem to reflect prior views. To the extent that there is anything like evidence, it has seemed to suggest that employers hired outside candidates who, on paper, had better credentials than did the insiders. Did that make them better performers, though?

My colleague Matthew Bidwell has completed a study that provides the best evidence so far on this question in "Paying More to Get Less: The Effects of External Hiring versus Internal Mobility," published in the Administrative Science Quarterly in September 2011.

Here's what he did.

He looked at jobs in a very large financial company and found those job titles where the equivalent position was filled from within versus where they were filled from outside hires. Then he looked to see how well each individual performed in that job, using the company's own measures of performance. He also looked to see how much each person made doing the equivalent job.

The bottom line is that the internal candidates performed better by a fair amount. It took about three years for the outside hires to perform at the same level as the internal individuals in the same job title.

Depending where you are in the business world, three years is either a lot or an eternity. It is hard to think of too many places where three years is not considered a long ramp-up time, especially given the stated mandate in most places is to get candidates who can "hit the ground running."

Then he looked at pay. The external candidates were paid about 15 percent more for the equivalent job than were their internal counterparts. It took on average about seven years for the individual who came from within to earn as much money as the individual who was hired from the outside. If three years is a long time, seven years is a generation in modern business.

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One final conclusion: The outside hires who came in as unsolicited applicants -- over the transom, as they used to say -- performed quite well, better than those that were "sourced" through outside agencies. Employee referrals also did well.

This last point is complicated, of course, because the decision to hire a particular candidate may be tied up with the unique requirements of a job in ways that are hard to sort out: Maybe we only go to search firms to fill the toughest positions.

What do we conclude from this? There is, at least in this company, a large price to pay for bringing in an outsider. The combined factors of higher cost and lower performance don't include other costs, such as the effects on morale of the insiders and the higher turnover rates that we know happen after.

Of course, that doesn't mean it is always a mistake to bring in those outside candidates. There may be lots of good reasons for doing so, such as changing the culture, bringing in new ideas, meeting unusual requirements and so forth.

But the assumption that it is necessarily a good idea doesn't hold up. If you're looking for evidence to help push back against the outsider fetish that we see in many organizations, this is the place to start.

Peter Cappelli is the George W. Taylor Professor of Management and director of the Center for Human Resources at The Wharton School. His latest book, with Bill Novelli, is Managing the Older Worker: How to Prepare for the New Organizational Order.

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