Organizations can fill open positions with internal applicants or external applicants, but very few studies have considered which approach is better. New research (DeOrtentiis, Van Iddekinge, Ployhart, & Heetderks, 2018) demonstrates advantages to hiring internally instead of externally. Internal applicants are those already employed at the same organization. External applicants are those moving from a different organization, are currently unemployed, or are entering the workforce for the first time.
To explain, the researchers discuss human capital resources (HCR), meaning the knowledge, skills, and abilities that employees bring to the table. Some of these HCR are organization-specific, meaning they only reflect what is needed to succeed at a particular organization. Organization-specific HCR are non-transferable. When employees switch to new organizations, they must re-learn how to be productive in the specific way the new organizations value. Because internal hires have already developed HCR that are tailored to the organization, they likely have an easier learning curve in their new position. These hires “know the system” from day one, in addition to their knowledge of interpersonal dynamics between coworkers.
INTERNAL HIRES VERSUS EXTERNAL HIRES
The researchers analyzed data from 3,697 retail managers from a single company. They pitted internal hires against external hires, and found several interesting results after measuring ensuing on-the-job performance.
- Units led by internal hires performed better on the company’s service criteria. This is likely due to the internal hires’ better initial understanding of the kind of service valued by the company. This performance gap narrowed over time (but did not completely close) as external hires learned more about their new company.
- Units led by internal and external hires performed similarly on financial performance. This is likely because the HCR needed for financial performance is similar for all organizations, so external hires could thrive immediately.
- Internal hires started with lower salaries and were less likely to receive promotions compared to external hires. The researchers say that internal applicants are better able to assess organizational fit, and may need less enticing to stay with the same organization if they feel it is right for them. They are similarly aware that their organization-specific HCR would not follow them to a new organization, and that they could incur major costs in seeking new jobs, especially in the event of relocation. For these reasons, companies can offer less salary and promotional opportunity to internal hires and still leave them satisfied.
PRACTICAL IMPLICATIONS FOR ORGANIZATIONS
This study confirms that organizations can benefit slightly from hiring internally as opposed to externally. They can pay less and receive better organization-specific performance, meaning certain criteria that the organization uniquely values. On the other hand, the discrepancy between internal and external hires is not drastic, is reduced with time, and is not different when it comes to general performance (such as financial metrics). When organizations do hire externally, the authors recommend training and mentoring the external hires until they get up to speed on organization-specific values.
DeOrtentiis, P. S., Van Iddekinge, C. H., Ployhart, R. E., & Heetderks, T. D. (2018, April 16). Build or Buy? The Individual and Unit-Level Performance of Internally Versus Externally Selected Managers Over Time. Journal of Applied Psychology. Advance online publication. http://dx.doi.org/10.1037/apl0000312.