Cafe Classic: Why Are Outsiders Paid More?

Editor's Note:  In this classic Cafe post, our own Chuck Csizmar takes on the perennial question of why outsiders are so often paid more than insiders, when filling an open position.  Great food for thought for recruiting and compensation professionals alike, plus any of us who are looking to make an advantageous climb up the inside ladder.

Take it away, Chuck!

Have you heard this one?  “The Company would rather pay more to an outsider than give one of us insiders a decent promotion.”

The complaint is that, when considering two individuals for the same job someone on the inside oftentimes will be offered a lower salary than if the company went outside to hire a stranger.  To compound the insult, it is not unusual for managers to ask insiders to train and orient the new ‘wunderkinde” in how the company operates.

Aggrieved employees feel that an insider already knows the company, the people, the products / services as well as the policies / procedures.  That knowledge and experience is an advantage, they say, shortening any learning curve and cultural orientation.  Taking on the role and responsibilities of the new position and not being paid the “going rate” seems unfair – actually a penalty for being an insider.  It’s as if the company realizes they don’t have to pay as much for an existing employee, that the time spent in the company somehow reduces their market value and limits a willingness to pay a competitive wage.

Prevailing practice is that when a company looks to the outside recruiters will be instructed to search for someone who already meets the qualifications of the job; an experienced candidate who has already performed the job, whose only learning curve would be a brief acclimation to new policies and procedures.  Outsiders are considered to be free of “baggage”: no biases, preconceived notions or social network, and are thus considered more reliable as agents for change within the company.

Note: if someone already has performed the subject role the chances are good they are already being paid about the competitive rate.  If that is the case then the company would be forced to pay a premium to attract such qualified talent.  They would likely have to pay above the going rate (or above the midpoint in some companies).

So, what’s an insider to do?  How can you best position yourself for the inevitable comparison with an outside candidate?  

Compare yourself against the description or requirements of the new position and try to be as honest as you can with your internal assessment.  Can you do this job from Day 1, or how much of a learning curve would you need?  Are there aspects of the new responsibilities that you haven’t experienced before?  The results of this assessment will give you an opening for your talk with HR.  They in turn will push the “we’re giving you an opportunity” angle, and you both know they could always go outside for a better qualified candidate.  In fact, an advantage you have is that you are likely a cheaper choice for the Company.  So don’t push the pay issue too hard, or you risk throwing the baby out with the bathwater.

Here’s a checklist for you to remember when you’re doing your self-assessment: 

1) Are you already familiar with company policies, procedures and personnel? 

2) In your present role have you already demonstrated an ability with the technical side of the new position? 

3) An advantage: internal promotions look and sound good to other employees, and managers know this

4) Can you develop an inside track with the manager (the all-important “fit)

5) You are likely a cheaper option than hiring from the outside.  Use that fact to your advantage.

Don’t be afraid of compromise.  Your plan should be to gain visibility for your performance and value, though it may take some time for a positive result to work its way through the bureaucracy.  No matter what you gain from your initial conversation (short of complete victory) suggest a follow-up salary review in three months.  Managers know they’d have a better chance of getting an adjustment approved after the initial hire / promotion, when it’s more likely an exception would be approved.  A manager who agrees to that review (and who will be thankful to avoid a contentious meeting) is already halfway to approving an adjustment down the road.

By being aware of the restrictions your managers are operating under you may be able to help them help you.  Do not beat yourself against the wall of bureaucracy, but plan for your next step; use your insiders knowledge to your eventual advantage.

Chuck Csizmar CCP is founder and Principal of CMC Compensation Group, providing global compensation consulting services to a wide variety of industries and non-profit organizations.  He is also associated with several HR Consulting firms as a contributing consultant.  Chuck is a broad based subject matter expert with a specialty in international and expatriate compensation.  He lives in Central Florida (near The Mouse) and enjoys growing fruit and managing (?) a clowder of cats.

Image: Creative Commons photo by Photos8.com

Comments

[Jay Schuster]

If you begin to start worrying about 'outsiders being paid more than you' it may be time to move on to greener pastures. Loyalty to a single organization and counting on them for your 'daily bread' for a full working career has proven to be pretty risky business.

Perhaps as professionals we need to be concerned about developing skill and competency that has broader appeal in the marketplace. Again and again we see some very good and talented people 'passed by' for career growth they expected to realize because they somehow committed to a single organization. Mobility and flexibility might be the way to ensure a career meets your goals.

[Jacque Vilet]

I think there is something psychological at work too. Sometimes management gets all "dewy-eyed" over someone from the outside whom they fantasize is the ideal employee. Then they look at their insider who is far from their ideal. Reality just isn't as pretty as fantasy.

[Ross]

You also have to look at the total rewards package. Is the outsider giving up vacation? Loss of company match in the 401k plan? What is their eligibility for benefits, bonus, etc in the new company? Are there waiting periods? Are their relocation expenses fully reimbursed? They may also be giving up an established reputation from the old company that will benefit their career there, that will have to be re-earned in the new one.

Thus, there is some justification for the higher pay in some circumstances.

[E. James (Jim) Brennan]

Simple. Insiders have been observed making a mistake at some time. Outsiders have pristine resumes. Besides, the ones with the most glowing references, blessed by the most influential members of the hiring committee, arrive with the halo effect in full force.

Promoting the internal candidate can bring great criticism. Everyone knows they are imperfect. But no one challenge a final decision to select that perfect well-vetted outsider, especially if they arrive with the higher pay that is a self-fulfilling justification. Those who endorse and approve the outsider's hire have a vested interest in their higher valuation.

[Tony Bergmann-Porter]

My own experience has been that when Mr/Ms Inside is 80+% of what we need, Mr/Ms Inside gets the opportunity. Obviously, YMMV

[E. James (Jim) Brennan]

Just realized, Tony, that my old piece about recruiters ignoring "overqualified applicants" just republished as a "classic" today dovetails nicely with this article of Chuck's.

While an 80% perfect internal candidate might indeed get the nod (and I completely agree that they almost always prove much better than expected), an external candidate with over ~125% of the ideal qualifications might get snubbed for many reasons. Hiring managers might obsess over be a relative narrow "ideal candidate" band.