Hiring Internally Versus Externally

When hiring, organizations can either hire internally or externally. Internal applicants are those that are employed at the same organization. In contrast, external applicants are those coming from a different organization, are entering the workforce, or are unemployed.

New research in the Journal of Applied Psychology examined whether hiring internally or externally was better. The researchers analyzed data from 3,697 retail managers at one organization. They examined the performance of internal versus external hires. Several results emerged:

• Teams led by internal hires performed better when it came to their company’s service criteria. This was likely due to internal individuals’ better understanding of the kind of service that the company values. This performance gap became narrower as external hires learned more about the company. However, internal hires still performed better than external.
• Both types of hires, internal and external, performed the same on financial performance. The researchers explained this finding by discussing the similarity of human capital resources across organizations. Human capital resources refer to the knowledge, skills, and abilities that the employee has. Some human capital resources are specific to a particular organization. Therefore, when employees transition to new organizations, they must learn how to be productive in ways that the new organization values. Internal hires typically “know the system” early on given that it is an easier learning curve. However, this is not always the case. For example, when it comes to financial performance, organizations typically operate similarly and have similar human capital resources.
• Internal hires were more accepting of lower salaries. They were also less likely to receive promotions when compared to external hires. The researchers took this to mean that internal employees need less enticing to stay with the same organization. They likely do not want to incur the costs of seeking new jobs and possibly relocating. As a result, internal employees require less salary and promotional opportunity to stay satisfied.

DeOrtentiis, P. S., Van Iddekinge, C. H., Ployhart, R. E., & Heetderks, T. D. (2018). Build or buy? The individual and unit-level performance of internally versus externally selected managers over time. Journal of Applied Psychology.