Is it Better to Promote from Within or Hire from the Outside?

Many businesses seek outside talent while others have a policy or preference to promote from within their organization. Which is better?

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When it comes to filling open positions, there are two schools of thought. Many businesses look to bring in outside talent for certain positions while others have a policy or preference to promote from within their organization. Internal recruiting – when HR looks to promote from within the organization – reportedly represents between 15% to 28% of hires across industries.

There are pros and cons to each approach, but at least one prominent study by Matthew Bidwell, an assistant professor at Wharton who focuses on patterns of work and employment, shows some of the pitfalls of hiring from the outside. We’re going to take a look at the enormous benefits of promoting from within but let’s start with the main takeaways from Bidwell’s study.

Is it Better to Promote from Within or Hire from the Outside?

Bidwell found some negative outcomes of hiring from outside the organization:

  • External hires typically get paid 18%-20% more than internal employees who are promoted, increasing the cost of labor.
  • For their first two years on the job, external hires receive much lower marks in performance reviews.
  • External hires were 61% more likely to be fired from their new jobs than those who were promoted from within the organization.
  • Productivity is temporarily decreased for the whole team that has to spend time getting the new employee up to speed with how the organization works.

Why are employers tempted to hire externally?

It is true that external hires tend to have more education and experience than internal hires, which can make them seem more qualified for the role. But companies that consistently choose external hires often focus on past job titles and degrees and overlook how much longer it takes someone from outside the organization to get up to speed as they build relationships, learn the culture and how the business operates. They may also be over-estimating how easy it is for an employee to transfer the skills they were using in their prior position to a new company. While outside employees do catch up on employee reviews after two years on the job, many are long gone by then.

There are some advantages to hiring external employees, including bringing in new skills, perspective and ideas. Sometimes, external hiring is the only real option. It’s not that it can’t work out, but it is riskier.

Benefits of promoting from within the organization:

  • Internal hires cost 50% less to hire.
  • A considerable amount of time can be saved by avoiding a search for outside candidates.
  • Internal hires are productive more quickly because they already know the workplace culture and how to work in the environment.
  • Hiring internally comes with a lower risk of making a bad hire because you already know a lot about the employee, including how well they get along with others, their work style and on-the-job performance.
  • Internal hires already have relationships within the organization that can help them work effectively. Hopefully, internal hires are already well liked and respected by their peers and management, making for a smooth promotion that doesn’t breed resentment.
  • Consistent commitment to hiring internally increases employee engagement and morale. Employees are more likely to want to stay with your company if they feel they have a chance for promotion and they are more likely to refer others to apply to your business if their careers have advanced with your business.

It’s important for HR managers to weigh the pros and cons of hiring from within versus hiring externally. But the overall message is that managers should know that it can be much more beneficial to nurture talent and promote from within the organization than to hire from the outside.

Partnering with Makai HR

Need help with HR decisions? We’ve got you covered through HR outsourcing! When you partner with Makai HR you can get on with the business you are trying to grow while we take care of your employee needs from payroll to taxes, health insurance/benefits and worker’s compensation. You also gain peace of mind that you are compliant with all of Hawaii’s employer laws (if you’ve ever looked you know that the list is very long). When choosing a PEO to partner with, there are many things to consider including cost, services and technology solutions.

With the cost of doing business in Hawaii at record highs, we know how important it is to keep labor costs in line with revenue. Our plans are priced competitively and include value-added services like time-in/time-out systems. Our three tiers of PEO service plans are tailored to the size of your business and specific needs. We offer a 100% paperless solution which means that your employees can manage their needs through a computer, tablet or phone. We can truly improve your employees’ work benefits while freeing you up to run your business.

What are you waiting for? Companies that partner with a PEO benefit from 7-9% faster growth, 10-14% lower employee turnover; and they are 50% less likely to go out of business. Contact us today to get started!

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