Paying More to Get Less

Abstract

Individuals often enter similar jobs via two different routes: internal mobility and external hiring. I examine how the differences between these routes affect subsequent outcomes in those jobs. Drawing on theories of specific skills and incomplete information, I propose that external hires will initially perform worse than workers entering the job from inside the firm and have higher exit rates, yet they will be paid more and have stronger observable indicators of ability as measured by experience and education. I use the same theories to argue that the exact nature of internal mobility (promotions, lateral transfers, or combined promotions and transfers) will also affect workers’ outcomes. Analyses of personnel data from the U.S. investment banking arm of a financial services company from 2003 to 2009 confirm strong effects on pay, performance, and mobility of how workers enter jobs. I find that workers promoted into jobs have significantly better performance for the first two years than workers hired into similar jobs and lower rates of voluntary and involuntary exit. Nonetheless, the external hires are initially paid around 18 percent more than the promoted workers and have higher levels of experience and education. The hires are also promoted faster. I further find that workers who are promoted and transferred at the same time have worse performance than other internal movers.