How Do We Create a Robust Internal Labor Market so that Employees can Move Freely into New Roles?

Abstract

The success of an internal labor market (ILM) is predicated on the successful communication of stakeholder benefits. One of the benefits of an ILM include higher assessed performance in the first two years among internal promotions and transfers compared to external hires relative to both objective (i.e. sales) and subjective measures (i.e. supervisor performance ratings). Firm-specific skills provide the initial advantage to the internal mover over the external hire, and as the external hire acquires that knowledge the gap in performance is narrowed. Another benefit of a robust ILM is financial. Companies stand to save money over ~7 years because the salaries of internally promoted workers were found to be significantly less (18%) than externally hired employees. Therefore, in order to maximize the value of a firm’s human capital the firm should employ processes and tools in service of retaining and developing its internal talent in preparation for promotion and internal transfer, rather than shoulder the costs of hiring externally. In cases where firms routinely hire externally, managers report an observable drop in employee morale.