How internal job candidates could have an advantage

Employees may worry that a more qualified external candidate will get the job. But new research from Texas McCombs finds that internal candidates are more likely to be promoted if they meet one condition: work harder.

The research is published in the Accounting Research Magazine.

Assistant professor of accounting Eric Chan found that before a hiring decision, employees will work harder to increase their chances of promotion, especially right before the decision. Managers are more likely to promote them than hire highly qualified outside candidates.

“It’s this gift exchange idea,” says Chan. “We found that workers work harder prior to the hiring decision as they try to influence the manager in their favor. In return, the manager rewards them with a promotion.”

Their extra efforts endure, the study found, even after a promotion has been made, and the worker reaps no short-term financial benefits from continuing to put in more effort.

The reason is to thank the manager for the opportunity through his actions, Chan says. “This gift exchange continues.”

Greater effort before hiring

To study what drives managers’ decisions and employee behavior to fill vacancies, Chan conducted an experiment in collaboration with Jeremy Lill of the University of Kansas and Victor Maas of the University of Amsterdam.

They recruited 138 business school students to fill the roles of managers and employees for six work periods: three before a hiring decision and three after. For each period, employees earned a fixed salary in points that was converted to real money at the end of the experiment.

For each period, employees chose what level of extra effort to put in, from 0% to 100%. That effort in practice may mean working overtime, taking on additional projects, or volunteering to help colleagues.

Increasing their efforts by more than 20% would cost them points, but could increase their chances of promotion. Any extra effort benefits managers by increasing their profit points. At the end of each period, a manager learned the amount of effort from the employees.

After three terms, the manager decided whether to promote or hire from the outside. The study found a strong correlation between effort and promotion:

• Overall employee efforts increased by as much as 51%, peaking just before making a hiring decision.
• Managers promoted employees internally 54% of the time.
• Average effort was 18% higher for employees who were promoted.
• Even after a promotion decision was made, employee effort levels decreased by only 8%.
• When the researchers introduced statistical noise to make employee effort levels harder to identify, managers were still 26% more likely to hire internally.

“Managers view past employee effort as a gift that must be reciprocated,” says Chan.

Gifts that keep on giving

Would different methods of measuring employee performance affect managers’ decisions? To find out, the researchers tested two systems. Some managers learned the precise effort levels of employees. For others, statistical noise was added, making efforts harder to identify.

Managers were more likely to promote from within when the measurements were less accurate, the researchers found: by a 26% margin.

“When managers don’t really know whether workers put in a lot of effort or not, they give workers the benefit of the doubt,” Chan says. “’Let me promote you anyway to show you my confidence.’”

Even after a promotion decision was made, he found that employees kept trying harder. Its levels decreased only 8%.

That indicates that managers get some benefits from internal promotion, he adds. “The employee continues to work hard, so the manager gets a little more that way.”

The ‘black box’ of hiring decisions

The research has implications for both employees and managers. For workers hoping to be promoted, “it helps to understand how companies and their managers make promotion and hiring decisions,” says Chan.

Managers need to be aware of their biases toward employee promotion when choosing between an internal and an external candidate, he cautions.

“In the case of a system that captures employee effort inaccurately, you may be promoting someone who is not as hard-working as you assume and therefore may not be a good fit for that higher-level role. Chan says.

On the plus side, managers can be sure that if they promote hard-working employees, the employees won’t back down from their efforts afterwards.

Such research can help both parties understand what drives managers’ promotion and hiring decisions and how employees react to them, Chan says.

“Managers may be reluctant to be transparent about their promotion criteria, in order to maintain control and discretion over the decision,” he says. “For many employees, promotion criteria remain a black box. But further research can help us look inside.”