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    « How many bad decisions can you get away with - motorcycle crash edition | Main | Value, Pricing, and Early Retirement »
    Thursday
    Apr052012

    Your latest new hire: Are you paying more for less?

    A quick post today, and in a similar vein to yesterday's post on value pricing of jobs as evidenced by an NFL player's decision to retire fairly young, and the overall maturity in how NFL teams evaluate, compensate, and differentiate talent.  The net-net: in the NFL for some positions, (like running back), it is really easy to cut experienced talent loose as their skills begin to diminish and the compensation they demand rises. There is always another running back available, either one of the reserve players on the team, or a new hire that can be drafted or signed that can offer almost as good, (and sometimes better), production, usually at a significantly lower cost.

    However, for other positions on the team, the differentiation in performance is more significant, and often teams find that bringing in a new Quarterback, (the most important spot on the team), or even a new offensive lineman, doesn't result in a similar blend of performance gain and cost reduction. Often, teams seem to pay more to lure veteran free agents to the team, only to see their performance decline, at least in the short term, as the new player has to assimilate, learn new schemes, adapt to and partner with a new set of coaches and teammates. 

    But as always that might be the case in football, but none of us has the job of managing the talent for an NFL team, (yet). What about in the real world - do 'regular' organizations see this same phenomenon when bringing in higher priced talent from outside the organization?

    Turns out it happens in the real world too, at least according to the results of a recent study by Wharton School Professor Matthew Bidwell titled, "Paying More to Get Less: The Effects of External Hiring versus Internal Mobility."

    The net-net of this study's findings?

    According Bidwell, "external hires" get significantly lower performance evaluations for their first two years on the job than do internal workers who are promoted into similar jobs. They also have higher exit rates, and they are paid "substantially more." About 18% to 20% more. On the plus side for these external hires, if they stay beyond two years, they get promoted faster than do those who are promoted internally.

    The study looked at a data set of external hiring and internal promotions and transfers over a several year period in one large financial services firm, so it's conclusions might not be able to be applied with confidence too broadly, and as we have seen in the NFL examples, even within a company or industry the 'switching costs' vary widely across jobs and job families.  But taken more generally, the study documents "some quite substantial costs to external hires and some substantial benefits to internal mobility."

    The study is fascinating, and I'd encourage you to take a few minutes to dig through it in more detail, there is even some interesting data in their about the effectiveness and performance of new hires based on source of hire that I will have to post about another time, but even if you can't spare the time to read the paper you can at least take a few minutes to think about the implications of the findings.

    Unlike NFL running backs, most of the high-tech, high-touch, high-interaction types of jobs that we need to fill in our organizations carry with them some pretty significant transfer costs. It can often take more than a year, even two in large organizations for external hires to sort out the politics, build the relationships, and simply 'learn' how to succeed in the new gig. And all that time an energy comes with a price, and that isn't even the 'extra' salary costs that you had to pay to lure the new talent out of their old jobs.

    What do you think - what has been your experience when faced with the 'Hire from outside vs. Promote from within' choice?

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      Steve's HR Technology - Journal - Your latest new hire: Are you paying more for less?
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      Steve's HR Technology - Journal - Your latest new hire: Are you paying more for less?
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      Steve's HR Technology - Journal - Your latest new hire: Are you paying more for less?
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      Steve's HR Technology - Journal - Your latest new hire: Are you paying more for less?
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      Steve's HR Technology - Journal - Your latest new hire: Are you paying more for less?
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      Steve's HR Technology - Journal - Your latest new hire: Are you paying more for less?
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    Reader Comments (2)

    Great stuff Steve. We picked up on this too and did both a post and a webinar on it. Might be some additional nuggets in these that you or your readers might find value in:

    http://www.taleo.com/talent-management-blog/2012/03/30/external-hires-cost-more-and-perform-worse-the-case-for-internal-mobility/
    http://www.slideshare.net/TaleoResearch/hiring-for-critical-roles-youre-doing-it-wrong

    Warm regards - Dave

    April 5, 2012 | Unregistered CommenterDavid Wilkins

    Thanks very much for sharing those resources here, Dave!

    April 6, 2012 | Registered CommenterSteve

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