Companies are saving recruiting and advertising costs by hiring from within.  But they still need to invest in due diligence and make sure that internal promotions are vetted with the same rigor as external hires.

We’ve written before about the challenges of hiring in our article “Hiring Due Diligence Should Include an Attitude Check.” Every employer has their wish list for a job candidate, but there are usually two constants: the candidate has to be well qualified to meet the demands of their new position; and they have to be a good fit in the company.  In most cases, you can’t be sure that an employee will satisfy both requirements until they’ve been on the job for a while.  This means that every outside hire is a gamble.

And, according to a recent study from the University of Pennsylvania’s Wharton School of Business, an outside hire might be an expensive gamble at that.  Published in the journal Administrative Science Quarterly, the study determined that outside hires tend to be paid 18% more than internal employees in comparable roles.  Which would be tolerable if they did a better job than internal hires.  But the study also compared the performance reviews of new and internal hires, and found that at least for their first two years on the job, external hires tend to do a worse job than established candidates.  The study’s author, Wharton associate professor Matthew Bidwell, explains that the difference may be attributable to the difficulties inherent in integrating new hires into a company.

It would seem that the solution is to promote internal candidates.  After all, they have already adapted to the corporate culture, so that’s not an issue.  And with the proper training and monitoring mechanisms in place, companies can ensure that employees obtain the skills and experience necessary to succeed in new positions.  An added bonus: The shift to hiring from within also cuts down on recruiting and training costs. 

But as we wrote in the entry “Background Search for All: Lessons From the Alleged Archdiocese Theft,” recruiting from within is not without its dangers.  Many firms are willing to invest in thorough due diligence of new hires, scrutinizing their resumes, verifying their previous education and employment history and running expansive background checks.  But the same level of scrutiny may not be applied to internal candidates.  After all, it could be assumed that candidates were scrutinized when they were first hired.  So, presumably more vetting would be unnecessarily expensive or intrusive.

This assumption would be a mistake

Companies should have due diligence policies in place that scrutinize internal promotions with the same level of rigor as new hires.  For instance, internal candidates may have been hired when a less expansive vetting process was in place.  They were therefore not previously subject to intense scrutiny.  A promotion would be a good time to remedy this oversight. 

Many companies and organizations reserve their more rigorous vetting for people who hold certain posts.  They might save money on due diligence costs by limiting background checks to employees who work with minors, handle finances or have access to sensitive or confidential information.  These companies need to make sure that all internal hires filling these positions be checked anew.  Any candidates originally hired to posts that did not require a background check should not be eligible for promotion until they are thoroughly scrutinized

In some organizations, only senior level hires are subject to expansive due diligence.  In contrast, lower level hires will only have to endure a cursory resume and employment history check.  Therefore someone who is promoted from within to fill a senior-level or management position may need to be rigorously re-vetted

Companies should remember that saving money on due diligence of internal hires may be tempting, but doing so could be at their own peril.