Is the Talent Wound Self-Inflicted?

A University of Pennsylvania professor says it is – and he advises companies to grow talent from within.
Marielle SegarraJuly 8, 2013

Growth companies often talk about the talent war — the increasingly fierce competition they face for skilled workers. Peter Cappelli, professor of management at the Wharton School of the University of Pennsylvania, says their pain is self-inflicted.

“So many companies have decided that they need to hire people from their competitors rather than develop them themselves that they have created a problem. But it’s a problem of choice,” Cappelli says. “As a company, you make the decision not to grow your own talent and to hire it from somebody else. If everybody does that, it gets harder to do.”

Among 37 large firms (with 185,000 job openings) surveyed in a 2013 whitepaper  by CareerXRoads, 58 percent of the positions were filled by external hires. That percentage would probably be even lower at smaller growth companies with fewer workers to pull from, Cappelli says.

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Besides their being harder to find, external hires may also be more expensive than workers promoted internally. In a recent paper, a researcher at the Wharton School analyzed personnel data from the U.S. investment banking arm of a financial-services company from 2003 to 2009. He found that although external hires were paid 18 percent more than internal hires, they received significantly worse performance reviews for the first two years in their jobs. They were also more likely to leave the company or be fired, despite the fact that they had more experience and higher levels of education.

The takeaway? Companies will likely save money and time by hiring from within, says Cappelli. Indeed, more companies should consider promoting and growing their own talent, he says.

Of course, internal promotions are not always possible, especially at fast-growth companies. Seamless, an online food-delivery service with just under 300 employees, is hiring about 25 to 30 employees each year, says Ted Pastva, the firm’s vice president of finance and accounting. With such a gaping hole, it can be hard to find quality talent, Pastva says. “We get stuck on the hiring process. If we’re able to get good people that understand technology, data-driven decisions and metrics, that’ll be very valuable for the organization overall. But it’s a war for talent out there, from the IT perspective and the finance perspective.”

Most importantly, Pastva wants to ensure that Seamless continues to hire workers of the same (or higher) caliber. “We want to make sure we’re continuing to upgrade the overall talent,” he says. “We don’t want to bring in an average player that’s going to bring the overall talent level of the team down.”

If companies can’t find or grow talent within, they should start by looking for employees outside of their own industries. “Why is it that we think the best candidate is necessarily going to be somebody who has done exactly the same job someplace else?” Cappelli asks.

Growth companies that want to compete for finance talent should also free their employees from the days they spend laboring over spreadsheets, said David Axson, managing director at Accenture, the consulting firm. Companies that allow their finance staffs to spend most of their time analyzing data and interacting with decision makers will attract higher caliber talent than the ones that force employees to spend days on rote tasks like data collection and manipulation, Axson says.

Companies should also be sure they’re offering competitive salaries. “Most employers these days are very unrealistic about what people will accept in terms of salaries,” says Cappelli. “And the reason they can’t hire is because they won’t pay.” 

At the same time, some companies will have trouble hiring for reasons outside of their control (for instance, because potential employees do not want to relocate overseas), Axson says. “CFOs are finding it very hard to get people to relocate globally,” he says.

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