Monday, April 09, 2012

External vs. Internal Hires: The Pay-Performance Gap

Wharton Professor Matthew Bidwell has conducted some fascinating new research that contrasts external vs. internal hires.   Do people hired from the outside get paid more than internal workers doing comparable work?  Do external hires perform better or worse than their internal counterparts?   Bidwell finds that external hires get paid substantially more than internal workers.  Why?  His research shows that, on average, they tend to have more education and experience than internal workers (in other words, their resumes look stronger).  However, a strong resume doesn't necessarily equate to on-the-job performance.   Bidwell finds that these external hires tended to do worse on merit reviews in their first two years at the new organization.  Moreover, they leave more frequently than internal workers.   If they survive those first two years, then they tend to do better, even getting promoted faster than internal workers.   However, those first two years can be quite rough, especially when you consider how much the organization is paying for this new talent.  

We should take a few key lessons away from Bidwell's research.  First, we have to be wary of becoming enamored with a beautiful resume.  Credentials don't necessarily translate into performance.  Second, we have to recognize that the first year, even for quite competent folks, can be a difficult transition period.  Acclimating to a new culture, new processes, and new colleagues can be very challenging.   Finally, in baseball, we often hear that general managers "fall in love" with their own minor league prospects.  They sometimes overvalue them, and demand far too much in return for trading them.   Others "fall in love" with outside free agents and give up a great deal to acquire that "external" talent.  In business, it seems that we often undervalue our own "prospects" in favor of the free agents.  We have to focus on developing our internal talent and assessing it fairly and accurately. 

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