External hires extract pay premium for their resume but it’s no guarantee of success

Many years ago I was perplexed by a decision taken by my then-employer’s senior decision makers.

They hired an external person into a critical leadership role when there was an obvious internal candidate perfectly ready for promotion to that position.

The external candidate had no relevant industry experience however his tenure at a couple of high-profile brands and his highly-respected qualification must have been enough to convince the powers-that-be of his likely success in the role.

Given my recent reading of research about such hiring decisions, I am now less perplexed than I was about what I witnessed.

Wharton management professor Matthew Bidwell’s 2012 paper “Paying More to Get Less: The Effects of External Hiring versus Internal Mobility” concluded, among other findings, that external hires

• Need about two years “to get up to speed” in their new jobs
• Get significantly lower performance evaluations for their first two years on the job than do internal workers who are promoted into similar jobs.
• Have higher exit rates,
• Are paid “substantially more (about 18% to 20% more)

Professor Bidwell noted one particular difference between the external hires and those already in the company who are being promoted, a difference that seemed to be at play at my then-employer: “People hired into the job from the outside often have more education and experience (than internal candidates), which is probably some of the reason they are being paid more,” he says.

“When you know less about the person you are hiring, you tend to be more rigorous about the things you can see” — such as education and experience levels listed on a person’s CV, or what Bidwell calls “externally observable attributes.” And yet “education and experience are reasonably weak signals of how good somebody will be on the job, he notes.

The perceived employability of a candidate is clearly a factor in why external hires earn so much more than internal employees promoted into the same jobs. When external hires have more impressive-looking resumes and are perceived as having more job options, then they can demand, and receive, higher pay than internal candidates.

Bidwell concludes that the differences between internal and external mobility boil down to two things: the skills workers bring from their prior jobs and the amount of information that firms and workers have about each other.

It can be relatively easy to establish the technical skills an external candidate possesses, however, the application of these skills inside a new organisation will be largely dependent on the relationships that the external hire is able to build from scratch within their new employing organisation. This relationship-building capability is far harder to accurately assess in an external candidate during a recruitment process.

By contrast, employers obviously have more information about internal job candidates, including how well they have performed in their current role and how effectively they build and utilise important internal and external relationships.

How did my then-employer’s decision work out?

The external appointment was a double disaster.

The overlooked internal candidate left the business soon afterward and went on to emphatically prove his leadership capabilities elsewhere for many subsequent years.

The external hire proved to be a disastrous choice; key people streamed out of the business and within 18 months, the company became a shadow of its former glorious self. Within two years the external hire departed to an undistinguished subsequent career.

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