If you think the only way to get a big pay raise is to find a new job, you may be right. New research validates employees' sneaking suspicions that they have been wrongly passed over for a promotion in favor of someone from outside the organization – who often gets paid more. To add insult to injury, it turns out that external hires don't do nearly as good a job as people who are promoted from within.
The reality is, companies might be better off hiring or promoting from within.
"Companies should understand that it can often be harder than it seems to bring in people who look good on paper," said Matthew Bidwell, management professor at the University of Pennsylvania's Wharton School of Business and author of the study. "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."
Bidwell found that hiring from the outside has two major drawbacks. Chief among them is that it generally takes about two years for new hires to adjust to new responsibilities within an organization. Additionally, hiring managers reported that they typically pay these hires more, between 18 and 20 percent more, to lure them away from their current position. However, those who made it past the first two years were promoted more quickly than internal candidates.
Even if external hires are qualified for the job, Bidwell notes that success is not guaranteed.
"This is not a free lunch for the external hires," Bidwell said. "There is a much greater risk of being let go during those first few years, mainly because they may not develop the necessary skills and thus will not perform as well as expected. Then, too, they might decide to leave voluntarily."
While being passed over for a position within an organization for a person from outside the organization may frustrate employees, Bidwell does not recommend quitting as a move to improve your situation. According to Bidwell, that is nothing more than a way to show disloyalty toward your organization and potentially be fired.
"If you like where you are, stay there," Bidwell said. "Or at least understand how hard it can be to take your skills with you. You think you can go to another job and perform well, but it takes a long time to build up to the same effectiveness that you had in your previous organization. You need to be aware that often your skills are much less portable than you think they are. While the pay may be less, your performance is better, and there is more security."
"Paying More to Get Less: The Effects of External Hiring versus Internal Mobility" was published in the journal Administrative Sciences Quarterly.