So I've talked a lot about the importance of hiring the right people, but not every job is filled by hiring as jobs become more senior in the organization as we move up, kind of from very entry level. We often have a choice, we can hire somebody into the role, all we could promote somebody from inside into that job. And so one of the questions we want to ask ourselves, why is it important to try and figure out how to fill jobs by promoting. Maybe by investing in people by kind of preparing a pipeline in that way, or would you better just to go out and just whenever we need somebody more senior higher. It's like it's been a bunch of research on this and I think it's fair to say that the general conclusion is the organizations that make an effort to fill roles by promoting from inside tend to do better. Okay, let me explain that a little bit more. Let's just talk about what are some of the benefits promoting from inside and why it plays an important role in many organizations human capital management process. So say there are really three benefits to filling jobs by promotion from within. Okay, the first of these is around motivation and I've talked about this a little bit of module one, I'll talk about it much more in the final module. But we think that one of the advantages of promotion is the prospect of being promotion is an important source of motivation for people. One of the reasons why I want to work hard in my job is because I think if I do so I'm more likely to be promoted. And so if you look at some organizations again in module four talk more about Chipotle it's a Mexican food, quick service restaurant. They make a big effort to promote people from within. They say about 80% of their managerial roles are filled from within. And they see this is an important part of kind of building people's commitment to the organization. So if we tend to promote from within, it does hopefully help to motivate workers who are going to work hard because they want that promotion. It may also have an additional benefit, which is, it may make the people who are promoted more committed as well. There's a very nice study by a couple of professors, Alan Benson at Minnesota currently and Ben Racing at Cornell. What they did was they looked at people promoted in stores and kind of compare them to people hired from outside. They found the people who were promoted got better sales than the people who are hired. What's kind of interesting is when they looked into the details of this, what was it that enabled the people who were promoted to do better? They found that a big reason was when people were hired, the ones who star performers tended to leave quite quickly. And this role, for whatever reason, people who did well maybe find their better offers elsewhere. The people who were promoted and did well, they were the ones that stuck around and because of that, overall, the people are promoted, performing better than those who were hired into the role. And so, an advantage of promotion is your motivating people before they get promoted and potentially the people whom you then promote into the role are going to be more committed than the ones who you would hire from outside. So motivation is important. It's not the only reason. So a second reason kind of an obvious one is knowledge. So when we think about what it takes to be successful in a role, you've got to understand the organization. You've got to understand the processes that we use kind of logistics, all of those sorts of things, how we get things done, you've got to understand the culture, going to understand the product and really how to sell them. You've got to understand the customers, there's a lot of stuff that's really specific to this organization that you need to know something about. When we hire somebody from outside, they don't have that knowledge, right? And so it takes them time to learn that and get up to speak and they may bring in other skills. But without really understanding how to operate in this organization, there's a learning curve. The person we promote, they already know the organization, its products and so on. So that should make them more effective. And again, certainly there's evidence from research, another nice study that looked at managers and looked at those in retail who are hired into the stores and those who were promoted from within. And again, found that those managers who were promoted from within did better, there was better customer satisfaction in their stores also rated as performing better. It's that kind of knowledge of the organization really matters, not having that learning curve of bringing new people. The third advantage and a slightly strange one maybe is the cost. So partly you don't incur all the costs of hiring when you promote somebody or they have to back fill their role. But a bigger cost advantage I think is you often end up paying them less, which sounds a bit strange. So I kind of just, hiring from within maybe a bad idea because the people you get maybe less committed and they're not going to understand the organization, they're going to perform worse. And so you thought, well my external hires aren't doing so well, I probably don't want to pay them as much. But in fact we find kind of across organizations consistently when people hired from outside, they end up getting paid more than people who are doing the same job who were promoted from within, which is weird. I mean, I'm an academic, I'm not strong commercial document, but even I feel that seems like kind of a poor deal, what's going on here. So it turns out to have a lot to do with the differences between these processes. Think about promoting somebody. What would you use to make a decision about whether to promote somebody. Well, you look at their performance, you look at their behaviors, what is it, what are their strengths and weaknesses in the role? And from kind of having seen them over time, you get a sense can they do that next job, can they not, okay? Now think about hiring somebody, you don't get to see that performance because they're not working for you. You see very little of their behaviors, you do the things we talked about, the structured interviews and so on. But we have to admit those are somewhat imperfect. It's like you can't be as confident and so what you end up looking at much more is what's on their resume. So you look at do they have the education and the training? What's their experience quite frequently when we hire from outside, well hire somebody who's basically already doing the same job somewhere else and so somebody who's got quite a lot more experience. What this means is compared to the person who we promote, the person who hire from outside usually has a better resume because we've insisted. Person I promoted, I don't care your education, I don't care your experience because I know you can do the job. Person I'm hiring, I don't know those things, so I really do start to care about your education, your experience, because that's what gives me confidence you can do the job. So I'm hiring people ultimately have better resumes than the people in promoting. The challenge is a resume is something you can shop from employer to employer to employer, it makes you horrible everywhere. So in order to get those people with good resumes, I have to pay more. So ultimately, another reason why I might want to think about promoting people into the role is I end up having to pay them less, it costs me less. So that also provides a big advantage. Should we promote everybody from within? I mean obviously there can be some downsides, I think sometimes people can be a little concerned if we only promote from within, we not bring in a lot of new ideas when we promote people from within. They understand the organization, maybe they don't have so much experience with managing people, that could be an issue. I mean, I think there are particular issues when you use promotion within as a big part of your motivation as well. Which is when we have these programs around, promoting from within their success relies on our continuing to promote people from within. I brought you in and I promised you stay here do well, you'll get a promotion. What that means if you stay here and do well, I need to find a role to promote you into. If I've got high levels of managerial turnover, that's not a problem but what if I'm doing a good job, my managers want to stay, where am I going to find a position to promote you into. This works very well when stores are expanding, right, as long as I'm continuing to grow and creating new positions, new stores that I can hire managers into. When I stop expanding, it can actually be a problem. And there are some examples of stores where they actually use this as part of their expansion plans. Had a nice story about convenience store here in Pennsylvania continue to expand. A big part that's driving is actually they've told people we promote from within, this is a part of how we reward people. They actually, it means they need to continue expanding even beyond the implications for profits and so on in order to keep the system working in order to keep motivating people by promotion. They need to be able to keep generating new opportunities, and so there can be a slight risk. Overemphasized promotion from within that it ends up creating a need for you to grow, which sooner or later could create problems. But overall, most of the evidence that we have is that promotion from within does enable you to get more out of your workforce through motivation, people who really understand the business and ultimately lower salary costs. All of this obviously means that you need to prepare people for those promotions. You need to think about the skills they have, how we can develop them. These are things that I want to talk about in the next module.
