Why your star recruit is a waste of money

What is it about us that we always think that an outsider can do it better? Whenever there is an important spot to fill, we always seem to look to our rivals to see who we can steal away.

Yet research tells us that external hires are less likely to work than picking a “known quantity” from inside the business.

There are a few factors at play here:

1. Star performers are more reliant on supporting players and the power of their company’s brand than we realise. When they move into new networks, organisations and markets, they often flounder.
2. We tend to underestimate the people we know. We have seen their failings, but we often have not been close enough to the failings of those people on the outside.
3. Recruitment companies make money from people changing employers, so there is a powerful, moneyed lobbying force to encourage employers to hire from outside.

CEOs often have the “grass is greener” approach, says Peter Cappelli, the director of the Centre for Human Resources at The Wharton School in the United States.

Writing in Human Resource Executive Online, Cappelli says research in a very large financial company shows that internal candidates performed better by a “significant amount”.

Cappelli’s colleague, Matthew Bidwell, finds it took about three years for the outsiders to reach the same level of performance as the insiders in the same job title.

Says Cappelli: “Depending where you are in the business world, three years is either a lot or an eternity. It is hard to think of too many places where three years is not considered a long ramp-up time, especially given the stated mandate in most places is to get candidates who can ‘hit the ground running’.”

In his study Paying More to Get Less: The Effects of External Hiring versus Internal Mobility, Bidwell says, despite the lag in performance, outsiders were paid about 15 per cent more for the equivalent job.

“It took on average about seven years for the individual who came from within to earn as much money as the individual who was hired from the outside. If three years is a long time, seven years is a generation in modern business,” says Cappelli.

Cappelli says, as well as the higher cost and lower performance, other costs include the effects on company morale and the higher staff turnover rates.

“Of course, that doesn’t mean it is always a mistake to bring in outside candidates. There may be lots of good reasons for doing so, such as changing the culture, bringing in new ideas, meeting unusual requirements and so forth.

“But the assumption that it is necessarily a good idea doesn’t hold up,” he says.

Bidwell’s research is a good follow-up to the work of Boris Groysberg, Linda-Eling Lee, and Ashish Nanda in Can They Take It With Them? The Portability of Star Knowledge Workers’ Performance.

In this, the researchers found “star” analysts who switched employers experienced an immediate decline in performance that persisted for at least five years.

“This decline was most pronounced among star analysts who moved to firms with lesser capabilities and those who moved solo, without other team members,” the researchers said.

“Star analysts who moved between two firms with equivalent capabilities also exhibited a drop in performance, but only for two years.

“Those who switched to firms with better capabilities and those who moved with other team members exhibited no significant decline in short-term or long-term performance.”

The researchers concluded that firm-specific skills and firms’ capabilities play important roles in the performance of “star” analysts.

“In addition, we find that firms that hire star analysts from competitors with better capabilities suffered more extreme negative sharemarket reactions than those that hire from comparable or lesser firms.

“These findings suggest that hiring stars may be perceived as value-destroying and may not improve a firm’s competitive advantage.”

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