Why Do Companies Pay More to External Hires Than Current Employees?

In today's competitive business environment, it's not uncommon to see companies offering higher salaries to external hires compared to current employees. This article aims to explore the underlying reasons behind this practice, shedding light on the financial, strategic, and psychological aspects that drive such decisions.

The Financial Aspect: Cost Comparison

One of the primary reasons companies choose to hire externally is the financial advantage. For example, if an internal worker is paid a base salary of $90,000 and the company has to pay for additional benefits such as health insurance, the total cost could reach up to $130,000. In contrast, an external hire with a base salary of $110,000 would only cost the company $110,000, saving them approximately $20,000 per person. This cost comparison is significant, making external hires a more financially lucrative option for companies.

Strategic and Cultural Differences: Promotions vs. Hires

As a Founder and CEO of a large company, I have firsthand experience in this matter. Initially, my company focused on promoting from within, aiming to reward existing employees and retain talent. However, over time, we realized that promoting existing employees does not always align with the company’s strategic goals.

1. Experience and Routine: Employees who have been in the company for a long time have often settled into a routine and may not be able to bring fresh perspectives to their roles. New employees, on the other hand, are expected to bring new ideas and expertise, thereby fostering innovation and growth.

2. Cost-Neutrality: Companies prefer to hire cost-neutral employees who can take over current job responsibilities without increasing headcount. Existing employees, even those who are top performers, may not be top performers after a long tenure. Hence, the company might not be inclined to pay them more as their additional contributions are no longer significant.

3. Motivation and Adaptation: New hires are often more eager to prove themselves and fit into the company culture, making them easier to train and integrate. On the other hand, long-term employees may feel saturated and unmotivated, even when offered a salary hike, as they may not see the need for additional effort.

4. Employee Morale and Company Policy: The company also considers the morale of existing employees. Promoting from within might create an internal conflict, whereas hiring new employees allows the company to avoid such conflicts. Additionally, a policy of rewarding promotion to new hires is economically more feasible, as it impacts a smaller number of employees.

Psychological and Company Culture Factors

The strategic and cultural factors mentioned above contribute to the overall decision-making process. There are several psychological and cultural factors that influence this practice:

1. Current Employee Acceptance: Some existing employees have settled into their roles and might not feel the need for a significant salary increase. They might be content with their current salary and the standard norm of salary increments.

2. Company Image and Stability: The company might want to promote a clean and stable image by avoiding internal conflicts. By hiring external candidates, the company can minimize the pressure and ensure a smoother transition for all parties involved.

3. Economic Viability: It would be economically unfeasible to offer a significant salary hike to a large number of current employees every few years. By offering higher salaries to new hires, the company can maintain a balance between retaining existing talent and attracting new talent.

Conclusion

In conclusion, the decision to pay more to external hires than current employees is multifaceted. It involves strategic, financial, and cultural considerations. Companies aim to maximize efficiency, foster innovation, maintain company stability, and ensure economic viability. Understanding these factors can help demystify the practice and provide insights into corporate decision-making.

Share this article with your colleagues and friends who might be wondering about this too. If you have any additional reasons to add, please share in the comments. Together, we can help more companies find the right balance between promoting from within and hiring new talent.

More power to you! Peace