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Better to Promote Than Hire Externally: Study

By Andrew Chow, Esq. | Last updated on

External hiring decisions are important for any small business, but it may make more business sense to promote from within, a new study finds.

External hires are usually more costly for a business in more ways than one, according to the study by Matthew Bidwell of the University of Pennsylvania's Wharton School of Business. External hires also take about two years to "get up to speed" in their new position, the study found.

"My research documents some quite substantial costs to external hires and some substantial benefits to internal mobility," Bidwell said in a statement. His research found:

  • External hires are generally paid about 18% to 20% more than employees promoted from within.
  • External hires leave their organizations, voluntarily and involuntarily, at higher rates than promoted workers.
  • External hires receive significantly lower job-performance evaluations during their first two years on the job, compared to internal hires who are promoted.

Why do external hires seem to perform more poorly in the first two years? Because it takes that long to solidify new relationships, and to figure out how best to be effective in the external hire's new role, Bidwell's study says.

After the two-year learning curve, however, external hires usually impress their employers -- so much so, they get promoted at faster rates than internal promotions, the study found.

Bidwell based his study, entitled "Paying More to Get Less: The Effects of External Hiring versus Internal Mobility," on data from an investment-banking firm. He found "consistent" results across different groups of employees at the firm, including salespeople, research analysts, and investment bankers.

As many small businesses struggle to survive, Bidwell's study suggests it may behoove business owners to consider internal promotions instead of external hires. The study appears in the journal Administrative Science Quarterly.

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