June 2014Strategy

The Real Costs of Hiring Versus Making Leaders (and How to Reduce Them)

Cost of Hiring Leaders

Recent research by Wharton management professor Matthew Bidwell reveals the real costs of hiring senior leaders. Not only are they paid significantly more than those promoted from within an organization, but they are less likely to stay at the firm and get much lower performance evaluations compared to internally promoted peers.

But for many companies, building a solid leadership pipeline is a formidable challenge. Bidwell says, “Internal staffing requires a long-term strategy and long-term investment. If you lack people inside who are ready to step into the role, it is often because they don’t have the necessary skills. They haven’t been given stretch assignments that would help them grow those skills.”

Grooming people for senior positions takes a longer term view, he notes. “You need to develop some scenarios about what you will need in three years’ time. It’s tricky — no one knows exactly what the company will look like in three years — but you need to plan for what your needs will probably be.”

If your organization is beginning that process now, you will need to ‘buy’ rather than ‘make’ leaders in the short term. Bidwell offers some suggestions for getting the most from external hires in his session in the program Making Strategy Work: Leading Effective Execution.

“When people move into a new organization, it can take two to three years to be as effective as those who have been there for a while. Along with the cost in dollars [of their substantially higher salaries], this is a real cost. With that in mind, you need to be selective. What are the jobs that are most important to fill with people from the outside? Which positions are worth that cost?”

Bidwell notes that another challenge is breaking the “grass is greener” habit, based on a belief that everyone on the outside is more appealing than who you have on the inside. “Everybody looks better from the outside,” notes Bidwell. “The person you’re hiring can look good on paper and interview well, but you don’t get to see the potential problems. There is, or there should be, a concern that maybe you are not getting the full picture.”

What about companies that want an external hire because they’re looking for new ideas to shake up their culture? “That can be a good idea,” says Bidwell, “but it should be done sparingly. It’s a very difficult thing to task someone with. Few executives are skilled in shaking up a culture, especially in a way that really gets results. Just shaking things up for the sake of doing it differently is not a viable strategy in and of itself.”

Once you have selectively identified a position that needs to be filled with an external hire, are ready to see a candidate “warts and all,” and have reasonable expectations for what that person can deliver, Bidwell says you need to reevaluate your hiring and onboarding processes to get the most from your talent. “Hiring is often impressionistic. It comes down to chemistry between the hiring manager and the applicant, and that is not a very good guide to how someone will perform. A systematic approach is much more effective. First, determine what the job requires, and then look for someone who has those skills. How do you know who has them? Create a rigorous assessment. Determine the kinds of questions you need to ask to see if applicants have those skills. Then — critically — hold yourself to that. Don’t be blindsided by a charismatic applicant who doesn’t have the right skills.  You should also look at past performance, and consider giving them a small project they can complete for your company that lets you see if they can do the job.”

Bidwell acknowledges that these changes are not easy to make. “There is an emotional component to hiring. We like to form relationships with people. But if you create process around tests and relevant interview questions, you can better focus on what you want and whether you are likely to get it, as opposed to assessing whether you got a good impression.”

Once the decision has been made, a structured onboarding process will help you get the most from an external hire as quickly as possible. But, says Bidwell, most companies don’t have one. “They have a nice idea about how to get the person up and running,” he notes, “but detailed processes are relatively rare. You have them meet with their manager, give them a binder of HR policies, and that’s it.”

Instead, he suggests, have a meeting with key stakeholders before the new hire begins. Determine what you expect of him or her, and put together a detailed, nuanced guide to the company. Ask each of the stakeholders to answer questions such as, ‘What are the events that have shaped our company?’ ‘What are the words we use differently than others?’ ‘What surprised me when I first came to the company?’ This information will help the new leader understand your history and culture more quickly.

In addition, speed the transition process by using a mentor to provide support and coaching, and help the new hire build connections in the organization. “Don’t just ask them to get out and meet people,” says Bidwell. “Give them assignments that put them on a first-name basis and form working relationships with key people faster.”

Of course, Bidwell, adds, it’s one thing to understand this process, and it’s another to actually implement it. “The real value of my session in Making Strategy Work: Leading Effective Execution is that the participants spend hours talking about an issue that is a real struggle for many of them. They know they ought to do better, and when they hear about others’ experiences and learn best practices, they can see how to improve.”