It’s a dilemma frequently faced by hiring managers: is it better to go for an internal candidate or someone from outside the organisation?
An applicant working at the same place is a known quantity, and already has a sense of how the office works and a network to help them get things done.
On the other hand, an external candidate can introduce new thinking or skills, and won’t require backfilling another position.
Yet despite this being a commonplace question in modern workplaces, it’s been little examined by academics.
But a new study in the Journal of Applied Psychology of the behaviours of nearly 3700 managers at a “quick-service retail organization based in the United States” has compared job performance, promotion and salaries across internal and external hires.“Internally hired managers are likely to perform better, stay longer, and cost less than externally hired managers.”
“The overall results suggest that organizations should strongly consider filling managerial positions by promoting from within,” argue the authors of ‘Build or buy? The individual and unit-level performance of internally versus externally selected managers over time’.
“Indeed, internal hires generally outperform external hires and cost less in terms of salary and other incentives (e.g., promotions).”
Not only did the internal hires perform better in their own job, but units managed by them performed better as a team.
The authors differentiated between organisation-specific skills — understanding the organisation’s performance expectations or processes, workplace networks, knowledge of colleagues’ strengths and weaknesses, and so on — and general skills, such as intelligence, academic qualifications, sector-level knowledge.
Unsurprisingly, internal hires perform better on organisation-specific skills in particular.
“The results suggest that organizations should fill manager position with internal candidates whenever possible,” the authors believe.
“Simply put, internally hired managers are likely to perform better, stay longer, and cost less than externally hired managers.
“Internal hires may be particularly superior to external hires when (a) the most valued criteria are organization-specific (rather than general) and (b) when new hires need to influence those criteria soon after they assume the job and cannot wait to develop the requisite organization-specific HCR [human capital resources].
“Furthermore, internal selection may create positive spillover effects by motivating other employees who see that the organization rewards hard work with promotions.”
The authors estimated that it may take up to six years for external hires to close the performance gap on their internally recruited colleagues at the organisation studied.
But when it comes to jobs that don’t require much in the way of organisation-specific skills, it may not matter whether you choose an insider or outsider.
In addition,”factors such as the lack of viable or diverse internal candidates may lead organizations to focus on external candidates” the authors note — or an expanding workforce may require new recruits.
The study found that external hires tended to command higher salaries, despite performing less well on average. This seems to be partly as compensation for the inconvenience of shifting organisations — which can mean moving cities and involves taking on risk that the new workplace might not be desirable after all — and because internal applicants are likely choosing to stay in the organisation because they get non-financial benefits from remaining there.
External hires are also more likely to be promoted. This is perhaps because the organisation needs to use such incentives as a way of keeping them on, given that they have shown themselves willing to take the leap and move workplaces.