External hires cost 18% more & perform worse for 2 years. So why do we keep hiring them?
- jrezvani
- 2 days ago
- 4 min read
A recent Globe and Mail article highlighted research showing that external hires typically command 18% higher compensation than internal candidates, yet they perform worse over the first 24 months and are 20% more likely to leave within their first year. These aren't just statistics, they represent real disruption in organizations where stability and relationships matter deeply.
For mission-driven organizations, those disruptions have consequences that extend far beyond the executive suite. When leadership changes create instability, it ripples through to frontline teams and ultimately to the communities you serve.
What Internal Candidates Bring That You Can't Hire
Internal candidates bring something irreplaceable: they already know your culture, understand your community context and have established relationships with the teams doing the hardest work. They know which battles have been fought, which coalitions exist and how to navigate the informal networks where real work gets done.
The data supports this. 75% percent of internal hires succeed in their new roles, and nearly half stay an additional three years or more. They drive faster decision-making, leverage existing relationships and inspire their colleagues by demonstrating that advancement opportunities are real, not rhetoric.
When Organizations Get It Right
The Globe piece shared a compelling example: a team that initially dismissed their internal candidates as "just not ready" or "not strategic enough" finally agreed to "take the chance" on someone they knew. The result? Faster decision-making, better understanding of the marketplace, stronger relationships and the team's best performance ever.
This resonates with what we see across sectors. When organizations trust their people to step up, unexpected benefits emerge. Internal leaders understand the cultural nuances already embedded in the organization. They know which stakeholder relationships are essential. They can navigate complexity because they've lived it.
Investing in the Leaders You Have
Here's the reality: internal candidates labeled "not quite ready" often just need targeted development. Instead of paying an 18% premium for an external hire who may underperform, invest that resource in coaching and training the talent already committed to your mission.
Leadership development doesn't have to mean lengthy programs or massive budgets. Targeted coaching focused on executive presence, strategic thinking and stakeholder management can bridge gaps quickly. Training in areas like change management, financial acumen or board relations can build specific competencies your internal candidate needs.
When you invest in developing your people for leadership roles, you're sending a powerful message: we see your potential, we believe in your growth and we're willing to back that belief with resources. That investment pays dividends in loyalty, performance and organizational stability that no external hire can match.
The Growth Mindset Goes Both Ways
We talk constantly about employees needing a growth mindset. But if we want our people to grow, we as leaders need to demonstrate that we believe in their capacity to do so and we need to provide the support that makes growth possible.
This matters profoundly for retention. When Millennials and Gen Z professionals, who overwhelmingly prioritize career growth potential, see their colleagues advance into meaningful leadership roles with genuine development support, they stay. They invest. They bring their best work. When they see organizations consistently pass over internal talent in favour of external "superstars" or promote people without proper support, they read the message clearly: your development here has a ceiling, or worse, you're on your own.
When to Look Outside (And When Not To)
This isn't to say external candidates never make sense. Sometimes you need fresh perspectives to challenge entrenched thinking. Sometimes you're building something entirely new that requires skills your organization has never needed before.
Look outside when you're seeking fresh perspectives or staffing a role that's quite unique relative to other roles in your organization. Look inside when you're strengthening leadership in areas core to your mission and when success depends deeply on teamwork and contextual knowledge.
And when you do look inside, be prepared to invest in preparing that person for success through targeted coaching and development.
What This Means as Boomers Retire
As Baby Boomers retire over the next 5 years, organizations face critical succession challenges. We can't afford to keep making the same mistakes, paying premiums for external hires who underperform and leave, all while overlooking talented professionals already committed to the work.
The organizations that will thrive are those that identify internal talent early, invest in developing them through coaching and training, and trust them to lead. This isn't just good talent management, it's strategic workforce planning that recognizes the value of institutional knowledge and authentic cultural fit.
The Bottom Line
Strong leadership requires more than an impressive resume. It requires deep understanding of context, established relationships and genuine commitment to your mission. Sometimes the person who brings all of that is already on your team.
When we get succession planning right, when we invest in developing internal talent through meaningful coaching and training and when we trust them to lead, we don't just improve organizational performance. We build cultures where people want to stay, grow and do their best work.
That's not just good HR. That's good leadership.
