External Hires Cost More, Perform Worse

By Dori Meinert Jun 1, 2012

June CoverWhen a job opening comes up, many hiring managers may be tempted to hire someone from the outside rather than promoting from within the company.

But such external hires will cost more and will receive significantly lower performance evaluations for their first two years on the job compared to current employees, according to a study by a researcher at the University of Pennsylvania's Wharton School.

In fact, external hires are paid about 18 percent more than internal employees, concludes Matthew Bidwell, an assistant management professor at Wharton. Part of the reason may be that those hired from the outside often have more education and experience, he says. Another reason for higher pay: They take on some risk in leaving a secure job for a new employer.

He attributes lower performance scores to the need for new employees, no matter how successful elsewhere, to build relationships within their new organizations.

"This has made me a much bigger fan of internal mobility," he says.

In his study, Bidwell analyzed data from 6,000 employees at a U.S. investment banking division from 2003 to 2009. He also looked at smaller samples from a publishing company and another investment bank. He found similar patterns for different kinds of jobs.

His advice for HR professionals: "At a minimum, pay close attention to the skills sets of your existing people." When in doubt, lean toward the internal candidate. If employers must hire from the outside, they should focus on the onboarding process—even for superstars. "They know what to do, but they don't know how to do it in your organization," he concludes.

Ethics Programs Could Be at Risk

Twenty years ago, the U.S. Sentencing Commission issued the first set of guidelines for federal judges to use in sentencing corporations. The guidelines offered incentives for companies to adopt compliance and ethics programs, and many companies did so.

However, an advisory group for the Ethics Resource Center warns that those programs may be at risk.

That's because the federal government isn't giving companies enough credit for compliance programs, according to an Ethics Resource Center report issued in May.

Under the sentencing guidelines, companies with strong compliance programs—where executives and managers are working hard to prevent misconduct—are supposed to receive reduced penalties. But many criminal cases involving large companies are resolved in plea agreements, circumventing the process for doing that, the report states.

"The concern is that … the government is making a promise but not really backing it up," says Win Swenson, who co-chaired the advisory group. Without hard evidence that corporate compliance programs are worthwhile, "It's going to become increasingly hard for people who are managing these programs to get the resources and access they need to really be effective."

Swenson is a partner with Compliance Systems Legal Group and a former deputy general counsel of the U.S. Sentencing Commission.

In addition, too many business executives take a "check-the-box" approach to ethics, according to the report. It recommends private companies weave ethics into daily operations and ensure that compliance and ethics officers operate with the authority, autonomy and resources necessary to be effective.

Companies with compliance programs based on the sentencing guidelines see misconduct reduced by as much as 50 percent, says Ethics Resource Center President Patricia Harned, citing results from the center's 2011 National Business Ethics Survey. "They grow stronger ethical cultures," she says.

The advisory group recommends that the guidelines be tweaked to directly encourage companies to offer incentives for employees' ethical behavior and to include a commitment to ethical behavior in employee performance evaluations.


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