Why internal hiring is important and companies need to look into it
Did you know that a company has the highest turnover rates?
This is true of some of the biggest tech honchos including Google, which offers its employees gourmet cafeterias, massage rooms, and nap pods, among other perks. When companies are going to such great lengths to ensure their employees are comfortable and happy, why are employees leaving them?
According to this article from Bloomberg, young employees jump ship despite shiny perks as soon as they get a better offer elsewhere or get bored in their current roles. Long careers within a company isn’t a priority for the current generation, unlike their/our predecessors who would have preferred working for a firm regardless of growth opportunities.
The key to reversing this trend is attempting to retain an employee for a longer duration by marketing a career and not just a job to them. Candidates should see themselves growing and advancing the corporate ladder so that they are not tempted to leave. One way to do this is by creating a culture of internal recruitment.
Internal hiring refers to filling vacant job positions with existing employees of a company either through promotions or through lateral transfers. It involves looking inward to fill positions rather than hiring someone from the outside. But why has internal hiring become so crucial in the last few years and why do companies need to consider it seriously?
Importance of internal hiring
Improves employee morale and productivity
When employees know that they can apply for positions and take control of their career advancement, it automatically improves productivity fueled by a desire to perform better on the current job. This motivates them and boosts employee morale. On the contrary, positions that are predominantly filled externally send a message to employees that no matter how hard they work, their credentials and experience are just not good enough to grow within the company.
Internal hiring also improves employee productivity. It’s easier for internal employees to succeed in a new role as they have pre-established connections and knowledge of how things get done in the company. They also tend to work harder if they know that the company believes in promoting from within.
Carries low risk
Companies that prefer recruiting internally understand that the risk with internal hires is lesser compared with ones recruited externally. They have detailed records of employee performance reviews, compensation, recognition or awards, along with peer and manager reviews that are reliable predictors of performance. Since these jobs are usually filled via self-nomination where candidates express their interest to move, the risk of turnover is also considerably lower as employees tend to stay longer.
Cheaper than external recruitment
It is common knowledge that hiring is an expensive activity. The cost per hire is estimated to be around $4000. This includes external costs such as agency and recruiter fees, job board fees, and internal expenses like recruiter salaries and the money spent on the referral program.
When companies hire from within, they skip all the external costs and most of the internal costs. Internal recruitment is significantly easier in the company’s pockets. There is also the cost of a bad hire, the likelihood of which is higher with an external recruit. This is because, unlike an internal hire, there isn’t first-hand information on the employee’s work ethic, critical thinking, leadership abilities, etc., making it difficult to predict the employee’s performance.
Quicker results
Internally hired employees tend to assimilate and deliver results faster. They are either nominated by the hiring manager or might know someone from the team, which helps them get comfortable with the team faster. For projects that have imminent deadlines, hiring someone internally results in quicker turnaround times as they are already aware of the processes, systems, and company expectations. Companies also spend less time onboarding them which saves a lot of time and associated costs.
But what’s the catch?
If internal hiring is cheaper, faster, and less risky, why aren’t companies able to successfully utilize it more often? There are many internal factors responsible for this.
Firstly, there is the compliance issue, where companies fear that if they continue to select candidates from an internal pool, there is a higher chance of disgruntlement, complaints, and lawsuits filed by employees who are not selected. Thus, companies rely on self-nomination where employees proactively apply for jobs or positions of interest. While this might sound like a safe alternative, it is also not the best one because in this case very little is done to educate those who might not be actively looking for movement but might be an excellent fit for open positions. The gap between talent and requirements persists.
Secondly, the very thing that internal hiring is supposed to boost can sometimes get adversely impacted — employee morale. Employees who are not picked for positions or promotions might feel disheartened and end up looking externally for growth opportunities.
Thirdly, there are restrictive policies that were once meant to enhance productivity and reduce turnover but may seem restrictive and claustrophobic to high-caliber employees. For instance, some companies make it mandatory for employees to have a tenure of one year in their current positions before applying for other roles within the same company. Sometimes, the employee needs to get additional sign-offs from their managers. Loyal employees who would rather avoid uncomfortable discussions with their bosses are quite unlikely to apply for an internal role; instead, they would rather take up an external opportunity.
Lastly, and probably the biggest factor is pressure from current managers to restrict mobility. Every manager has those stellar employees on his or her team who have been around for a long time, who know the processes in and out, and who are excellent at their jobs. They are hesitant to nominate them for a different position because they are worried about the void that will be created once they leave. Managers are not discussing employees’ career advancement plans for fear of losing them.
A lot of these issues arise because companies are being short-sighted in their approach, with the focus solely on filling positions rather than investing in candidates. For internal hiring to give positive results, there needs to be a culture of internal promotions, open and honest communication with employees about their individual development plans, and a system in place to fill vacancies that arise when employees move to different roles.
When do you hire internally and not externally?
There are many factors to consider when deciding to hire internally as opposed to getting external talent. These factors depend on company and job characteristics so that the right strategy for a firm depends on its context and situation. However, there are certain circumstances when a company can give preference to internal hiring or, at the least, consider it before hiring personnel externally.
The first consideration is the cost of a bad hire. If the cost of a wrong hiring decision is significantly high for the company, it is best to go with an internal hire. For instance, the cost of hiring the wrong CFO is significantly higher than say, an inept project coordinator. This is the reason for many leadership and managerial roles being filled through lateral moves and promotions. In 2014, the Harvard Business Review published a list of the world’s 100 best-performing chief executive officers (CEOs). While both internal and external recruitment has been used to hire the top ten CEOs on that list, internal promotion is far more prevalent than the latter. Clearly, internal recruitment is more crucial the higher you go up the corporate ladder.
The second consideration is whether employee productivity in a role depends highly on specialized knowledge and skills applicable to the company in question. If that is the case, then it’s best to hire from the experienced pool of workers from within the company so that companies are not spending a lot of time and money seeking these skills outside.
The third consideration is the reliability and swiftness with which skills can be assessed externally. If a firm already has a robust screening and recruiting process that can quickly pick out quality talent and help avoid bad hires, then it can rely on external recruiting alone. This is also crucial if the skills are dynamic and ever-changing, and the role is such that the company thinks it’s best to get someone who will infuse it with fresh ideas. Nevertheless, it is still recommended you first open these positions up for other employees within the organization to ensure you don’t miss out on any talent available within the company.
Internal hiring is not meant to replace external recruitment; instead, it should be used alongside other recruitment tactics to get a balanced mix of candidates and talent. To truly retain employees, companies must prioritize having open discussions with employees to understand their strengths, motivations, and goals to keep their “marriage” with the employee long, happy and prosperous. If not, these employees will walk out when they find more tempting offers outside.
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