- Talent Management
It happens over and over again in organizations everywhere. You need to hire a key position in the company and you conduct the usual search, get a ton of external applications, sort through them with all due diligence and select who you think will do the best job. Then several months into the new hire, it becomes apparent that it’s just not going to be a good fit. You limp along for a year until finally things come to a head and you let the person go. Back to square one. It’s a very frustrating process to go through, especially if it happens repeatedly. What went wrong? Any number of things might be to blame, but the one I want to zero in on for this article is the business case for promoting from within.
Back in 2012 The Wall Street Journal ran an article about a study that compared the costs of hiring externally versus promoting from within. Assistant Professor Matthew Bidwell at the University of Pennsylvania’s Wharton School found that those external hires are paid 18-20% more than internal hires while at the same time receive lower performance ratings (source). This means the company winds up not only spending more on the labor cost, but also gets less return on that investment in the form of lower performance.
The study also found that those external hires were more likely to be laid off or leave the job by their own choice, which then invokes all the substantial costs of making yet another replacement hire. Why does this happen? Even though those external hires may come with more education and experience, what they so often lack is the fit with a brand new organizational culture, and companies are notorious for underestimating how long it takes for a new hire to get up to speed. The internal candidates already know the company and how it works. It’s a huge advantage that translates into better performance and much more cost-effective use of precious resources.
When you hire from the outside, you have to make sure your compensation and benefits package are competitive with the entire industry, when in reality your company may not be in the upper echelon of those figures. You can often wind up boosting all of that much higher than needs to be the case at your company. By promoting from within, you have the opportunity to keep all of that more in line with the reality at your organization rather than trying to compete industry-wide (source).
Boris Groysberg, a Harvard Business School professor wrote a book several years ago called Chasing Stars: The Myth of Talent and the Portability of Performance. He examined what happens when top-notch financial analysts switch firms. For whatever reason, changing companies seemed to make for an immediate and lasting decline. What made them a star at one company doesn’t necessarily translate to a new organization (source).
Cost savings can also be realized from several other aspects, such as not needing to do extensive external advertising for a position, reducing the overall time spent on the hiring process, and spending less time and resources for onboarding and training.
Finally, if employees can clearly see the possibilities of being promoted within the company, they’ll be much more likely to stay put, which is why promoting from within is such an important secret of retention. It can be a powerful motivating force for employees to do better.
All of this isn’t to say that promoting from within will always work. If not done with care, it can be just as disastrous as any other bad hire. If you force the hiring of internal candidates, you run the risk of promoting someone who doesn’t have the right skillset for the new position. Your organization might also have policies in place that give preferential treatment according to seniority, which may have little or nothing to do with who is the best person for the position. You would also want to make sure that the internal candidate has the management and leadership potential needed to thrive.
Promoting from within can be tricky, but considering the benefits of reduced hiring costs, reduced compensation costs, and the likelihood of better performance, it’s worth the effort of doing it right at your company.