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Reliable Internal Candidates Preferred Over More Qualified External Ones, According to New Study

Reliable Internal Candidates Preferred Over More Qualified External Ones, According to New Study

Working hard is regarded as a strong motivation for earning a promotion. But new research suggests companies that are hiring favor such extra effort when displayed by internal candidates even more than better-qualified external candidates.

“People will sometimes undervalue the work they’ve done, the knowledge they’ve gathered by being at a specific location and the relationship they’ve developed with a manager. So when making hiring decisions, we show how that quality really matters,” said Jeremy Lill, associate professor of business and the Jack and Shirley Howard Mid-Career Professor at the University of Kansas.

His new paper “Promote Internally or Hire Externally? The Role of Gift Exchange and Performance Measurement Precision” reveals that employees exert costly effort to increase the chance of being promoted, and they raise their effort level as the hiring decision becomes imminent. Managers respond by promoting those who exert greater effort, despite employees’ inferior ability compared to external candidates. The article is published in the Journal of Accounting Research.

“When managers are deciding how to fill an open position, they’re either going to promote internally within the organization or go externally and find somebody to come in. In general, in the external pool of candidates there’s going to be somebody who is more qualified, simply because it’s a broader pool,” said Lill, who co-wrote the article with Eric Chan of the University of Texas and Victor Maas of the University of Amsterdam.

But their research indicates superior resumes become secondary considerations when compared to valued qualities exhibited by internal candidates. The study also determines that less precise performance measurement systems, like those used in remote work and less-monitored labor settings, presents internal employees with even more of an advantage when it comes to capitalizing on promotions.

“What we find is if there’s not a precise measurement of what people are doing, many people will work hard to overcome that imprecision, and managers are more likely to reward people with internal promotions because of this kind of ambiguity that’s out there,” Lill said.

Basically, employers are investing in trusting workers to do the right thing. And when evidence implies their effort is competent and efficient, such individuals are usually rewarded.

His team tested this theory using a two-stage experiment involving 138 business students from the University of Texas acting as employee and manager prior to an impending hiring decision. In Stage 1, the employee selects an effort level during several initial periods – higher effort levels prove more costly to the individual but produce higher expected output. At the end of each period, the manager learns the employee’s output.

In stage 2, a new higher-level job becomes available, and the manager must fill this slot by either promoting the current employee or hiring an external candidate. If the manager chooses to promote the employee to the higher-level job, then the external applicant will fill the employee’s original job; if the external applicant is hired to fill the higher-level job, then the current employee will remain in the original job. After the manager makes this promote/hire decision, the current and newly hired workers select their effort levels in each of three later periods.

“We’re testing the gift exchange theory,” he said of a metric designed to determine the effort poured in by an individual in a person-to-person relationship.

“In other settings, treatments and observations where that theory would apply, then I would expect this would replicate in a real-world setting. Essentially, gifts beget gifts.”

Having also attended KU as an undergraduate, Lill has served as a faculty member since 2019. He teaches managerial accounting, and his research focuses on control system design and employee motivation.

“Working hard before promotion — especially going above and beyond your normal job description— is taking a risk because you’d much rather not be doing it than doing it,” Lill said.

“But we find that, in general, managers do respond. They appreciate and reward that risk.”

This story was originally published by the University of Kansas on June 27, 2023.