Business Banking E-Newsletter - May 2012

Why External Hires Get Paid More, and Perform Worse, Than Internal Staff

This research is sure to rankle every employee who has applied for an internal promotion and been passed over in favor of someone brought in from the outside.

According to Wharton management professor Matthew Bidwell, “external hires” get significantly lower performance evaluations for their first two years on the job than do internal workers who are promoted into similar jobs. They also have higher exit rates, and they are paid “substantially more.” About 18% to 20% more. On the plus side for these external hires, if they stay beyond two years, they get promoted faster than do those who are promoted internally.

“Most jobs are entered into through a variety of different routes, sometimes by being hired from the outside and sometimes by moving up from inside the firm,” says Bidwell. “I was curious as to what the effect of these different routes would be” on an individual’s job performance. His research is presented in a paper titled, “Paying More to Get Less: The Effects of External Hiring versus Internal Mobility.”

The issue has significance for organizations, Bidwell says, as they think about where they source their employees, especially higher-level ones. Do they “grow their own” or do they go out into the job market and hire outsiders? “My research documents some quite substantial costs to external hires and some substantial benefits to internal mobility,” he notes.

Getting Up to Speed

The context for Bidwell’s research lies in the increased mobility of workers over the past three decades as companies have turned away from offering lifetime employment in favor of relying on the external labor market to find experienced workers at all levels of the organization.

By comparing internal mobility and external hiring processes — looking specifically at performance and pay — Bidwell’s research can help employees learn more about “the consequences of their career decisions,” including the tradeoffs that characterize internal and external mobility, Bidwell writes in his paper.

Some of those tradeoffs are easily identified. In noting that external hires need about two years “to get up to speed” in their new jobs, Bidwell suggests it is because outsiders need that amount of time to learn how to be effective in their new organization — specifically, how to build relationships. Meanwhile, the risk of failure is substantial. Although external hires are paid quite a bit more than employees promoted into similar jobs, “this is not a free lunch for the external hires,” he says. “There is a much greater risk of being let go during those first few years, mainly because they may not develop the necessary skills and thus will not perform as well as expected. Then, too, they might decide to leave voluntarily.”

While doing his research, Bidwell noted one particular difference between the external hires and those already in the company who are being promoted. “People hired into the job from the outside often have more education and experience [than internal candidates], which is probably some of the reason they are being paid more,” he says. “When you know less about the person you are hiring, you tend to be more rigorous about the things you can see” — such as education and experience levels listed on a person’s CV, or what Bidwell calls “externally observable attributes.” And yet “education and experience are reasonably weak signals of how good somebody will be on the job, he notes.

Those tradeoffs might help explain why external hires earn so much more than internal employees promoted into the same jobs. If these hires have better resumes and are perceived as able to get a job more easily outside the company, then they can demand higher pay than internal people. Hires may also want higher pay to reflect the unfamiliar environment that they face on coming into a new position. Hiring managers confirm that they typically pay 10% or 20% more to pull people out of positions “where they already have some security and where people know them and know they are doing a good job,” Bidwell says.

He acknowledges that his research may frustrate an organization’s in-house workforce. “It is sadly the case that being more marketable, as external candidates are, is always going to be valuable and will generally lead to higher compensation. So the question is, should internal people threaten to quit to raise their pay?” It’s well known in academia, for example, that the only way to get a significant pay raise is to nail down an outside offer, Bidwell notes. “But in some organizations, that’s an easy way to get fired. People will take it as a signal that you are disloyal.”

Bidwell offers this career advice: “If you like where you are, stay there. Or at least understand how hard it can be to take your skills with you. You think you can go to another job and perform well, but it takes a long time to build up to the same effectiveness that you had in your previous organization. You need to be aware that often your skills are much less portable than you think they are.” Bidwell is clearly a fan of internal mobility. “While the pay may be less, your performance is better, and there is more security.”

‘Let’s Make a Deal’

For his research, Bidwell analyzed personnel data from a U.S. investment banking division from 2003 to 2009. In that study, he documented twice as many internal promotions as external hires. Investment banking, Bidwell writes, represents “an interesting context in which to study the effects of internal versus external mobility [because] organizational performance often depends on the skills of the workforce, [thereby] increasing the importance of personnel decisions.” In addition, workers in banking are “notoriously mobile, making this a context in which organizations regularly engage in external hiring at all levels.”

One important feature of investment banking jobs is that promotions tend to involve some measure of continuity with the prior job. Promotions often involve getting a higher title, such as vice president or director, while continuing to do similar work. In fact, as Bidwell notes, promotions in many organizations do not instantly lead into a very different job. Instead, responsibilities increase gradually, being recognized over time by a promotion. When considering their future staffing needs, though, organizations still must think about how they will acquire the workers capable of operating at the higher levels: Will it be by hiring or promotion?

Bidwell found similar patterns for different kinds of jobs and within different organizations. He analyzed separately the investment professionals (traders, salespeople, research analysts and investment bankers) and the support staff at the research site. His findings about pay and performance were consistent across those groups. He also looked at another investment bank and a publishing company, and found the same results of “paying more for external hires while giving them lower performance ratings.”

He concludes, however, that the nature of the promotion mattered. Unlike other promoted workers, those who were simultaneously promoted and transferred to another group did not perform any better than external hires. Bidwell speculates that “the skills that are important to our jobs may be very specific to the positions that we are in. Even large changes in the nature of jobs within the organization were associated with performance declines.”

Yet overall, Bidwell says, external hiring has grown much more frequent since the early 1980s, especially for experienced high level positions and especially in larger organizations. “It used to be that smaller organizations always did a lot of outside hiring while big ones focused more on internal mobility. But now the pendulum has shifted toward external hiring and away from internal mobility for large organizations as well.

“Companies should understand that it can often be harder than it seems to bring in people who look good on paper,” says Bidwell. “In addition, there is a suspicion that ‘the grass is always greener’ attitude plays a role in some companies’ desire to hire from the outside. Managers see a great CV and get excited about playing ‘Let’s Make a Deal,’ even when it’s hard to know what weaknesses the external hires bring with them.”

On the other hand, “to promote more people internally also means that companies need to have a long-term perspective and know how big a pipeline of people will be needed in the future,” notes Bidwell. It also requires managers to ensure that internal people are aware of the opportunities open to them. “Finally, there are clearly some costs to internal mobility — for example, the cost of training people in-house versus piggybacking on someone else’s training.”

Another variable in the mobility equation, he adds, concerns non-compete clauses which tend to complicate the movement of employees between competing firms. “Although these have not always been so salient in investment banking, non-compete agreements have become increasingly important in many states and many jobs, particularly in areas like technology where employers can plausibly claim that employees will take critical competitive knowledge with them.”

‘Involuntary Exits’

In his paper, Bidwell argues that the differences between internal and external mobility all ultimately stem from two factors: the skills workers bring from their prior jobs, and the amount of information that firms and workers have about each other.

He comments on the significant amount of new knowledge that external hires are required to learn, even in those jobs that demand “high levels of general skills, such as securities research, scientific research and surgery…. Although such work depends on individual workers’ skills and knowledge, it can also require intense coordination with others in the organization.” Because internal movers have longer experience within the firm, “they are likely to have already acquired important firm-specific skills that new hires will lack,” Bidwell writes.

In terms of the process that takes place when firms and external employees are eyeing each other for a possible matchup, Bidwell writes that the task can be difficult because each side often has “highly incomplete information about each other. Firms struggle to evaluate the true qualities of applications, and workers struggle to know which of the jobs available will best suit their preferences and abilities.” But, as Bidwell notes, companies obviously have more information about internal job candidates, including how well they have performed in prior roles and how well they fit in with the current organization.


How Partnerships Can Extend Your Small Marketing Budget

When you're a startup with a new product and a small marketing budget, it's tough to get customers' attention. Finding a marketing partner with an established audience that might like your product can help boost your own sales. 

Take the case of Healthy Foods LLC. Founded in May 2011, the company had a fun new product called Yonanas, a machine that turns overripe bananas into a tasty, low-cal, dairy-free frozen dessert. While Healthy Foods did well initially, selling the machine on the Home Shopping Network and getting it into some major department stores, there was potential for better sales. What Yonanas lacked was exposure to more of its perfect target customer: people who love bananas.

Meanwhile, a big brand in bananas -- Dole -- had a problem of its own. Grocery stores were complaining that their bananas too often started turning brown and became overripe before their purchasers had a chance to eat them. 

Last fall, Dole reached out to the company, and announced a partnership with Healthy Foods to promote Yonanas. Dole even made an equity investment in the company.

The co-marketing campaign just began rolling out. Dole plans to distribute 100 million bunches of bananas with stickers that say "Turn me into Yonanas." Future plans include adding the sticker to Dole frozen fruit.

This case demonstrates that if you can get the marketing started, a big player may notice you and reach out. But don't wait for opportunity to knock -- small business owners should also be out proactively approaching partners.

The Curious Child, a new upscale toy store in a Seattle-area neighborhood, did just that. It is in an out-of-the-way location that's easy to miss.

But the store made a smart move in partnering with public elementary school. The school sponsored a family math-game night with dozens of interesting games that involved geometry or calculation, set out on tables in the gym. About 200 people turned out.

The Curious Child had provided the games and had a large display table at the event. Families had a chance to try the games, and then buy them on the spot. 

The partnering event offered an educational opportunity the school might not otherwise have been able to afford, and it provided a terrific marketing opportunity for the toy store, putting its products in front of its ideal target audience. It was a classic win-win.


Six Reasons Small Talk is Important, And How To Get Better At It

You may not be a small-talk fan. “Hot enough for you today?” Who cares, you can’t do anything about it. “Pollen’s really bad this year, huh?” Yes.

So what’s the point of it all? Why don’t we just agree to ride the elevator or wait at the DMV in peace?

Because small talk is where it all begins—and if you want to get somewhere, it helps, we’re told, to start at the beginning.

If that logic doesn’t satisfy, here are six reasons that small talk can have a big impact (not least on the 20% of U.S. citizens who aren’t working or actively looking for work but who’d really like a job):

You Have No Idea Where It Will Go. Small talk is a gift rarely found in nature or the financial markets: It is a free option—that is, an investment with no initial cost, no risk (other than a temporarily bruised ego) and unlimited upside. Small talk can lead to a host of outcomes, from a merely pleasant exchange to the signing of multimillion-dollar business deal. When a free option comes along, you take it—every time.

It Makes You Smarter. A recent study by researchers at the University Of Michigan found that friendly, social interaction can boost our ability to solve problems—as, say, working a crossword puzzle might. That’s because, as Oscar Ybarra, a psychologist at the university explained: “Some social interactions induce people to try to read others’ minds and take their perspective on things.” (“Social” being the operative word: When conversations had a competitive edge, cognitive performance didn’t budge.)

It Feels Good. Some days the very thought of returning a verbal volley can feel exhausting. Think about it, though: How many times did a little light banter leave you feeling…a little lighter? Humans are social beings: We crave connection—that’s why Facebook founder Mark Zuckerberg is worth $17.5 billion—and small talk, while maybe not scintillating, is a way to connect.

It Opens Your Eyes. Small talk makes you pay attention. Yoga types call it “living in the present.” Others call it “putting down your stupid smart phone long enough to have a conversation with a human being in three dimensions.” Whatever you call it, it’s a good thing.

You’ll Be Liked. If you want, as the book says, to make friends and influence people, being liked is important. People like people who are generous (and confident) enough to engage them. Small talk isn’t just about being gregarious or entertaining—it’s a gesture of respect.

You Have No Choice. Getting a job, working with colleagues, winning new clients, entertaining existing ones—all of it requires small talk. Want to be on a path to the 1%? Better have the gift of gab. As Scott Hoover, associate professor of finance at Washington and Lee University, writes in his excellent primer How To Get A Job On Wall Street: “In trying to generate business, the deal pitch is obviously critical. What is not so obvious is that simple, seemingly innocuous conversation with potential clients can be just as important. Companies want to hire people who can think on their feet.”

Now that you’re convinced small talk is worth the effort, here’s how to get better at it. Ready? Practice. Try stuff out, see what works. That’s it. As for technique, remember the basics: make eye contact, drop a compliment (if you mean it), share a common experience (while keeping the focus on the other person), and don’t be too self-conscious.

Short on confidence? No problem. Even big dogs have confidence issues. Here’s some sage advice from psychiatrist, executive coach and Forbes contributor Steven Berglas:

“Building self-confidence is a two-phase process. The first phase involves purging yourself of self-doubt; in the second, you build up your confidence. It’s like erecting a skyscraper: First you clear the site and lay a solid foundation, then you stack the superstructure. How high you go–how much confidence you muster–is up to you.”


Business Etiquette: 5 Rules That Matter Now

The word "etiquette" gets a bad rap. For one thing, it sounds stodgy and pretentious. And rules that are socially or morally prescribed seem intrusive to our sense of individuality and freedom.

But the concept of etiquette is still essential, especially now—and particularly in business. New communication platforms, like Facebook and Linked In, have blurred the lines of appropriateness and we're all left wondering how to navigate unchartered social territory.

At Crane & Co., they have been advising people on etiquette for two centuries. They have even published books on the subject—covering social occasions, wedding etiquette and more.

Boil it down and etiquette is really all about making people feel good. It's not about rules or telling people what to do, or not to do, it's about ensuring some basic social comforts.

So here are a few business etiquette rules that matter now, whatever you want to call them.

1. Send a Thank You Note

"I work at a paper company that manufactures stationery and I'm shocked at how infrequently people send thank you notes after interviewing with me," says Crane. "If you're not sending a follow-up thank you note to me, you're not sending it anywhere."

But the art of the thank you note should never die. If you have a job interview, or if you're visiting clients or meeting new business partners—especially if you want the job, or the contract or deal—take the time to write a note. You'll differentiate yourself by doing so and it will reflect well on your company too.

2. Know the Names

It's just as important to know your peers or employees as it is to develop relationships with clients, vendors or management. Reach out to people in your company, regardless of their roles, and acknowledge what they do.

We spend too much of our time these days looking up – impressing senior management. But it's worth stepping back and acknowledging and getting to know all of the integral people who work hard to make the business run.

3. Observe the 'Elevator Rule'

When meeting with clients or potential business partners off-site, don't discuss your impressions of the meeting with your colleagues until the elevator has reached the bottom floor and you're walking out of the building. That's true even if you're the only ones in the elevator.

Call it superstitious or call it polite—but either way, don't risk damaging your reputation by rehashing the conversation as soon as you walk away.

4. Focus on the Face, Not the Screen

It's hard not to be distracted these days. We have a plethora of devices to keep us occupied; e-mails and phone calls come through at all hours; and we all think we have to multitask to feel efficient and productive.

But that's not true: When you're in a meeting or listening to someone speak, turn off the phone. Don't check your email. Pay attention and be present.

Everyone has been attached to a smart phone, constantly checking the influx of alerts. But if someone rarely uses theres—you will stand out. You will notice they are present and never distracted in meetings or discussions. And it doesn't make them any less of a success.

5. Don't Judge

We all have our vices—and we all have room for improvement. One of the most important parts of modern-day etiquette is not to criticize others.

You may disagree with how another person handles a specific situation, but rise above and recognize that everyone is trying their best. It's not your duty to judge others based on what you feel is right. You are only responsible for yourself.

We live in a world where both people and businesses are concerned about brand awareness. Individuals want to stand out and be liked and accepted by their peers--both socially and professionally.

The digital landscape has made it even more difficult to know whether or not you're crossing a line, but it's simple. Etiquette is positive. It's a way of being—not a set of rules or dos and don'ts.

So before you create that hashtag, post on someone's Facebook page or text someone mid-meeting, remember the fundamentals: Will this make someone feel good?

And remember the elemental act of putting pen to paper and writing a note. You'll make a lasting impression that a shout-out on Twitter or a Facebook wall mention can't even touch.

Source: - Eliza Browning

Insurance Strategies to Help You Protect Your Business

As a business owner, you need to ensure that you have adequate insurance coverage to protect family, business partner(s) and key employees, so that no matter what the future holds, the business can continue to provide for those who depend on it.

With the right insurance strategies in place, you can guard your business against financial loss due to illness, disability or death. Here are some tips for putting in place a proper plan that will help protect your business, yourself and your families’ needs.

Obtain adequate life and disability insurance to cover all assets

Did you take out loans secured with personal assets to start or grow your business? If your family inherits the company and the loans have not been paid off, they might have to sell or liquidate the business (perhaps at a discount) to satisfy the debts. Protect them with an individual life insurance policy that provides funds to cover debts, ongoing living expenses and future plans.

Have a plan in case a business partner becomes the only partner

A buy-sell agreement ensures that you or your co-owner will buy out the other’s share of the business when circumstances take one partner away from the company. 

Develop an exit strategy

Be prepared to leave your business, no matter what the reason, with a strategy that focuses on four key areas: estate planning, retirement planning, succession planning and business valuation.

Insure the right-hand man (or woman)

Purchase key person life and/or disability insurance for employees who greatly contribute to the bottom line of your business; the policy’s benefits can help make up for lost sales or earnings and help cover the cost of finding and training a replacement.

Take care of the employees, and they’ll take care of you

Workers consider employee benefits (health, life, dental, vision insurance, retirement plans) a decisive factor when evaluating a new job opportunity. However, employee benefits can be costly, so if you are a small employer you will want to share the costs with your employees. 

Reward the top executives

Section 162 plans (Executive Bonus Plans) are a simple way to reward top employees and offer certain tax advantages. Your employee purchases a cash rich insurance policy and names himself/herself as owner; you receive a tax deduction for paying the premiums, which are considered compensation to the employee. 

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