Susan Adams, Forbes Staff 4/5/12
This week The Wall Street Journal wrote about an intriguing new study looking at the cost of hiring employees from the outside, versus promoting from within. The study is by Matthew Bidwell, an assistant professor at Wharton who focuses on patterns of work and employment. Bidwell was interested in the 30-year-old trend of workers jumping from one employer to another multiple times in their careers. Bidwell says there’s not much data on the costs of job-hopping. He suspected that employers didn’t realize how much more they were paying to bring in workers from the outside.
Indeed, Bidwell found that not only do external hires get paid more, but for their first two years on the job, they receive significantly lower marks in performance reviews. External hires are also much more likely to get laid off than are those promoted from within. Bidwell scrutinized seven years of employee data, from 2003-2009, from the U.S. investment banking unit of a financial services firm, which included information on 5,300 employees in multiple jobs, from traders and research analysts to support staff. He also examined data from another investment bank and a publishing company.
The external hires made 18% more than the internal promotes in the same jobs. In addition to scoring worse on performance reviews, external hires were 61% more likely to be fired from their new jobs than were those who had been promoted from within the firm. The external hires tended to have more education and experience than the internal hires, but Bidwell says employers don’t appreciate how important it is for workers to know the ropes of an organization. “People don’t hit the ground running on day one,” he says. “We have relationships in organizations that are key to getting work done and a set of structures and routines we need to know.” Knowing where and when to file papers, for instance, or whom to ask about approving a project, can make work much more efficient.
Employers underestimate the time it takes for workers to get up to speed, says Bidwell. After two years, the performance reviews of the external hires caught up to the internal promotes. But sometimes an employee has already moved on, or gotten laid off, before hitting that mark.
Bidwell’s study was recently published in a journal called Administrative Sciences Quarterly. After he finished the study, Bidwell says he did some further analysis, of how people in a particular unit were affected by an external hire. Because everyone had to work to bring the new hire up to speed, the performance of the whole unit declined. The silver lining for workers is that bringing in an employee from the outside also tends to raise the pay for everyone in the unit.
In his paper, Bidwell references the work of Harvard Business School professor Boris Groysberg, who published a well-received book two years ago about what happens to star investment analysts when they switch firms. In Chasing Stars: The Myth of Talent and the Portability of Performance, Groysberg examined the careers of more than a thousand top analysts and found that in most cases, those who change firms suffer an immediate and lasting decline. It turns out that their strengths depend to a large extent on their former firms’ resources, networks and colleagues. There were exceptions, like when the stars moved together with their teams, or they switched to much better firms. Also exceptional women tended to do better after a switch than did men. But most top analysts performed much worse after changing jobs.
Hiring professionals should consider both Groysberg and Bidwell when deciding whether to bring in new blood. It can be tough to resist the allure of a superstar, and it’s challenging for companies to build up a pipeline of employees who are suitable for promotion. The mobile American workplace will likely only become more fluid. But managers should know that there is a cost to bringing in talent from the outside and that it pays to nurture and promote from within.