External hires underperform internal workers for 2 years, are paid 18%-20% more, and exit faster.

According to Wharton management professor Matthew Bidwell, “external hires” get significantly lower performance evaluations for their first two years on the job than do internal workers who are promoted into similar jobs. They also have higher exit rates, and they are paid “substantially more.” About 18% to 20% more. On the plus side for these external hires, if they stay beyond two years, they get promoted faster than do those who are promoted internally.”

Most jobs are entered into through a variety of different routes, sometimes by being hired from the outside and sometimes by moving up from inside the firm,” says Bidwell. “I was curious as to what the effect of these different routes would be” on an individuals job performance. His research is presented in a paper titled, “Paying More to Get Less: The Effects of External Hiring versus Internal Mobility.”

The issue has significance for organizations, Bidwell says, as they think about where they source their employees, especially higher-level ones. Do they “grow their own” or do they go out into the job market and hire outsiders? “My research documents some quite substantial costs to external hires and some substantial benefits to internal mobility,” he notes.  [….]

For his research, Bidwell analyzed personnel data from a U.S. investment banking division from 2003 to 2009. [….]

Unlike other promoted workers, those who were simultaneously promoted and transferred to another group did not perform any better than external hires. Bidwell speculates that “the skills that are important to our jobs may be very specific to the positions that we are in. Even large changes in the nature of jobs within the organization were associated with performance declines.”

Yet overall, Bidwell says, external hiring has grown much more frequent since the early 1980s, especially for experienced high level positions and especially in larger organizations. “It used to be that smaller organizations always did a lot of outside hiring while big ones focused more on internal mobility. But now the pendulum has shifted toward external hiring and away from internal mobility for large organizations as well.

“Companies should understand that it can often be harder than it seems to bring in people who look good on paper,” says Bidwell. “In addition, there is a suspicion that ‘the grass is always greener’ attitude plays a role in some companies’ desire to hire from the outside. Managers see a great CV and get excited about playing ‘Let’s Make a Deal,’ even when it’s hard to know what weaknesses the external hires bring with them.”

On the other hand, “to promote more people internally also means that companies need to have a long-term perspective and know how big a pipeline of people will be needed in the future,” notes Bidwell. It also requires managers to ensure that internal people are aware of the opportunities open to them. “Finally, there are clearly some costs to internal mobility — for example, the cost of training people in-house versus piggybacking on someone else’s training.”

Why External Hires Get Paid More, and Perform Worse, than Internal Staff (Matthew Bidwell) | March 28, 2012 | Knowledge@Wharton at http://knowledge.wharton.upenn.edu/article.cfm?articleid=2961.
Why External Hires Get Paid More, and Perform Worse, than Internal Staff - Knowledge@Wharton

Original publication as Matthew Bidwell, “Paying More to Get Less
The Effects of External Hiring versus Internal Mobility”, Administrative Sciences Quarterly, September 2011, vol. 56, no. 3, pp 369-407, doi:10.1177/0001839211433562