Hire externally or promote internally? In a labor shortage, the answer is clear

Sometimes the best choice is the one right in front of you.
Sometimes the best choice is the one right in front of you.
Image: REUTERS/Wilson Chu
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It’s no secret that for many job roles, there’s an acute shortage of talent, right alongside high unemployment. Most companies across the US, Canada, Europe, parts of Asia, and even China have struggled against hiring shortfalls in specific sectors. And it’s not just front-line workers, nor is it limited to a Great Resignation of disaffected millennials—this year, up and down the talent market, overall demand exceeds supply across all demographics and sectors.

Every organization has had to take a careful look at its talent pool and wonder, “Who is my at-risk talent? How do we replace this group if their knowledge of operations and customers  goes out the door?” High-value employees know you are thinking this. They are impatient to receive their due. Especially at growth companies, they expect to see their careers flourish at the same pace as the organizations—or even faster.

Externally focused recruiting of new employees is not likely to overcome the tidal forces at work here, including more poaching by competitors and the removal of geographic constraints on candidates who are now able to work from home. For new reasons, the revolutionary, old-school concept of employee retention is back.

Internal mobility: New reasons to emphasize a traditional approach to employee retention

An internal promotion or a job change with even a slight elevation in salary and responsibility has always acted as a loyalty motivator. This could be even more applicable now—a workforce that connects through video chats rarely gets face-to-face reinforcement, and esprit de corps and inspiration can lag.

In the 1950s and 1960s, throughout the era of Company Man, it was not unusual to spend a career inside one corporation. Today, mobility within a company can be—in fact, likely is—the most powerful loyalty builder and retention measure. For decades, it has been the greatest single source of hires, and it is still underutilized as a strategy for filling roles. We found that roughly 2 in 5 (38%) of companies we have surveyed do not promote jobs internally. They could be missing the opportunity to better leverage the talent they already have on board.

Internal hiring: Cons and pros

Let’s acknowledge the negatives of internal hiring. Managers don’t like losing good people from their teams and employees often fear being seen as disloyal to their current boss. These concerns must be dealt with, especially the reluctance to go around one’s manager, which is a major deterrent to internal role-switching.

Skeptics might point out that the employee you promote or move must be replaced, so internal hires don’t rid companies of the need for external hires. But refilling that employee’s position externally almost always costs less than it would to hire externally for the senior role they’ve ascended to. Over time, the returns on the internal hire are even stronger, because promoted individuals stay longer and are more resistant to poaching. In fact, our research at SmartRecruiters finds that merely changing an employee’s responsibilities—without upgrading pay or title—boosts retention over three years by 20%.

The internally promoted also are more engaged and more productive, with lower absenteeism and attrition than external hires. Advancing them costs less than replacing them, by a solid margin. It turns out that swapping two employees’ responsibilities could save the average $5,600 cost of replacing them both externally, while preparing them better for increasingly senior roles.

And if you don’t promote them? Your competitors almost certainly will. Recruiters somehow have a magical ability to catch the scent of the forsaken, unpromoted talent in your ranks.

How to increase internal mobility and retain talent in these crazy, fast times

Two fundamental steps will make it easier for the employee who wants to step forward (and up): for starters, an internal job portal and postings; and second, lowering the greatest barrier to internal movement by setting clear policies that protect employees who want to pursue another role.

Next, what about the manager whose team gives up employees for the greater good, as they move laterally or upward, and has to replace them”? There should be concrete recognition—even incentives—for managers whose leadership yields promotable employees, to say, “You have valuable skills in selecting and developing talent, and we reward that.”

Meanwhile, be sure that your internal candidates go through the same rigorous process as external candidates. Why? To ensure that the bird-in-hand, whether on the premises or working from their kitchen table, is as good or better as candidates served up by your external acquisition process.

In the war for talent, the best offense is a good defense

Internal mobility is already making a comeback by necessity. It is not a panacea; it will not make a labor shortage go away. So keep building your pipeline and fine-tuning your recruiting workflows. But think about adjusting your mix of internal and external recruitment to both boost retention and lower the costs of talent acquisition.

Whether your company is large or small, these steps can go far to mitigate the threats posed by outside recruiters, employee disillusionment, the pull of early retirement, and the realities of covid-era home-office burnout. Mind the pitfalls, and help HR facilitate a culture of internal hiring. The outcome should be less attrition, longer retention, lower hiring costs, and a more energized workforce.