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Great post. More important than most people in the compensation realize. Too many great people with potential leave companies because their abilities can be seen clearly by those who don't know them, but whose real value is lost to their employers whose compensation rules cannot allow for true outliers.

Perhaps familiarity breeds contempt, Dan. But it does seem that many of the same executives who endorse such abuses to low-end outliers see themSELVES as legitimate high-end outliers who always deserve more pay. Maybe their "outlier sensitivity" only applies to special people.

I'm not sure many people really think about it when they promote someone to less salary than what they would pay on the outside.

I think there is a certain amount of mystery, attraction to a person on the outside --- like maybe they can bring be a real superstar, etc.

And oddly enough while the inside person has performed and everyone knows much more about this person's capabilities --- they are not as sure he/she will be able to perform.

Maybe they are used to seeing him/her in their current role. Like some companies won't promote someone from Secretary to an exempt position because they can't see HER any other way but as a Secretary.

You are right, Jacque, about future expectations being influenced by past experiences. In the military, they used to say that no corporal ever looked like a sergeant until after they had three stripes on their sleeve.

More relevant, I fear, is the fact that insiders have ALWAYS made at least one mistake known to the hiring authorities, while no outside candidate ever willingly published a resume showing a mistake. Thus, the outside hire is always a safe selection, because who could have expected flaws from the otherwise pristine record shown by the stranger?

But I still don't think the dynamics of the hiring decision should affect the promotional amount so dramatically.

I describe this phenomenon as 'the devil we know is not as good as the devil we don't know'. Everybody has warts; the problem is that we know and see the insiders warts, while the outside candidate is viewed at face value. That person has warts too; we just don't know what they are. Human nature being what it is, we tend to fantasize the unknown candidates abilities as 'new' or 'fresh', and delude ourselves into thinking that bringing in outside blood will add greater 'value' to the organization, even though the perception of that value is fairly abstract. Thus, the insider is always competing with phantom value, with deference usually given to the phantom.

I've probably just reworded Jacque's astute observations, which I agree with. Great post and, I might add, very timely.

It is a hard bias to overcome, but I do my best to fight it. I don't think it's helped by the big guns asking for and reporting on promotion pay increases and reinforcing that a standard % increase is somehow a best practice.

This one of the biggest "demotivators" of current staff. When this occurs on a regular and consistant basis, employees start thinking "so to get the right pay I have to quit and get rehired" and become disengaged. In this era of transparancy, everyone is aware of others pay there are no more dark closets to hide. Managers hide behind the "max of 15%" rule but are quick to go outside and pay huge increases based on external reported pay, not even considering where and when that pay occured, or perhaps the outside candidate is being overpaid for their value. As the compensation team we set the pay range, but we are not usually consulted regarding the hire side.

One of the reasons that this happens is a cognitive bias called the "rookie fallacy." We view potential as more valuable than an equivalent demonstrated skill, which means that, according to our limbic systems, the new person is newer and shinier, and, therefore, more attractive than the internal candidate: http://www.hullfinancialplanning.com/you-could-become-the-next-big-thing/

(cross-commented at TLNT...feel free to delete if desired)

Great comments from all! Thank you. Keep them coming, please, so we can pass this link on to top management in order to END a toxic practice. This is exactly why we raise these issues here: to stimulate a high level of professional discussion to improve the effectiveness of total reward systems.

Every time I hear that "it's too much" it feels like hearing nail over chalkboard. I try to recommend staggering the increases over time in those cases so the incumbent get caught up but the excuse of "Well, we don't know if he will be successful in the new role" makes me >facepalms<.

Right you are, Jules! Someone needs to write up a list of toxic words and loaded phrases that should trigger a "tilt" alert to tradecraft professionals. With recommended responses, maybe. Send them to me, please, and I'll take a stab at it. Been a long time since I wrote "Personnel Jargon" in the old Personnal Journal.

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