Review: Promotions in the Internal and External Labor Market

by Geoffrey Grosenbach

📄 From Promotions In the Internal and External Labor Market: Evidence From Professional Coaching Careers in “The Journal of Business”

Economists have long recognized that there can be substantial differences between transactions that occur inside firms and transactions that occur in market settings.

The conventional wisdom in the tech startup industry says that if you want to get promoted, the best strategy is to leave your current company and get hired at a new one. This causes problems for companies who want to keep good employees, and it makes career building awkward for professionals who like their current company and would rather build a long career there.

A research paper from The Journal of Business in 2006 shows that the necessity of an external promotion is in fact the case for coaches in the NFL (National Football League). The study looks at hiring data for head coaches and level 2 coaches (offensive coordinator and defensive coordinator).

Summary

A study of career movement by coaches in the NFL (National Football League) finds that only 30% of coaches were promoted internally, whereas 70% were hired from other teams. Team performance was less important to career opportunities than individual performance. The main constraint is that new job openings are unlikely to appear within a team that is performing well, and teams that perform poorly are likely to replace the entire coaching staff with external hires (thus creating job openings for coaching staff from other teams).

DISCLAIMER: This research paper specifically covers the NFL, a cartel with a fixed number of job roles and extensive rules about budgets and recruiting. The findings may not be applicable to all industries or all career tracks. Fast growing software startups create many more job openings and may be able to avoid the dynamics seen in the NFL.

Study Notes

As with all research papers, it starts with a summary.

“The likelihood of external promotion is strongly related to individual performance and only weakly related to team performance.”
“The likelihood of an internal promotion is not related to individual performance.”
There are many implications for hiring, promotions, compensation, incentives, and organizational design.

It starts right away with a contrast between internal promotions and external moves to any role on another team. How do other teams find existing coaches they want to hire? They pay much less attention to how successful the candidate’s entire team was.

It appears that outsiders rely heavily on individual performance measures when assessing an individual’s ability.

Then they drop a very unintuitive observation. If a non-head coach leads a part of the team that does especially well, they are much less likely to be promoted on the same team.

We find that individual performance has a negative and insignificant effect on the likelihood of an internal promotion.

They outline the conditions where this could occur.

For an individual to be promoted internally, it must be the case that a) there is an opening for an insider, and b) the organization chooses the individual over other internal candidates.

To clarify, someone must retire or leave the team in order to open up a head coaching or assistant coaching role. Then the candidate must be the best choice out of all remaining staff.

So that’s how a coach might possibly be promoted internally. In what circumstances might they be hired by another team?

For level 2 coaches [not head coach], it appears that lateral job movements [the same role at a different team] reflect a process in which individuals are let go following poor team performance and, within this set of dismissed coaches, those with the best past individual performance are able to secure comparable positions with a new team.

So there’s a regular process where a head coach is fired, their entire coaching staff is let go, and then those coaches go on to find other jobs (but not all).

The paper shifts to thinking about what’s best for the individual vs what’s best for a company (or team), including observations on the efficiency of the job market overall.

How might an internal promotion go well or poorly? A promotion can be used as a way to keep staff at the company.

In particular, since promotions involve a change in job responsibilities, it is not clear that using promotions for pure incentive reasons will generate the optimal assignment of individuals to jobs.

This is the classic conundrum between Practicing at the top of your license (doing work that requires the best of your skills) vs the Peter principle (people are promoted internally until they reach a role that requires more skills than they have). The paper suggests that it’s better to think of the organization’s needs rather than optimizing for frequent promotions of individuals.

In some employment settings, particularly near the top of the hierarchy, the number of jobs of a particular type or level may be fixed by technological or organizational considerations.

There’s only one head coach, and once you achieve the role of offensive coordinator or defensive coordinatior, there might not be many other roles for you to ascend to. That’s often the case in other businesses where there’s only one CEO and a limited number of other level 2 leadership roles.

Even if you perform well, there may not be a higher role for you to be promoted into.

The paper suggests that it’s best for some coaches to move on to other teams as their skills and achievements progress.

If the ability of an individual is revealed to be high, it may be optimal for the individual to switch to an employer who can more efficiently use the individual’s talents.

This next quote could be an entire research paper or blog post on its own, and is the topic of many conversations about fairness and compensation.

Differences between internal and external job changes may arise because internal transactions occur in the context of a firm’s implicit and explicit contractual relationship with all its employees, whereas external promotions do not.

Translation: companies have pay scales and job levels, and they try to stay close to those. It might be easier for a person to negotiate a different job level or salary band at an external company, rather than their current one. They might even skip levels or salary bands compared to their current company.

The advantage of studying a sports labor market is the wealth of data.

The wealth of data makes pro sports a great area for research, and it makes it difficult to make career decisions in most other fields that don’t publish the same kind of salary data, or data on hiring and promotions in a consumable format.

Using this data, the paper discovers that in the NFL, about 30% of head coaches or offensive/defensive coordinators arrived at that role from an internal promotion. The rest were hired externally.

…paints a picture of a labor market with a substantial interfranchise mobility and a great deal of outside hiring.

Most coaches work for many different teams in their career, and most of those are short (a year to a few years).

Increasing performance in the activity under your control appears to help you a great deal in finding a prestigious assignment elsewhere, but it gets you nowhere in terms of being promoted from within.

Again, this conclusion is drawn from a dataset covering NFL coaches and might not apply to growing companies that create many new roles every year.

But one thing that does seem to be universally true is the need to demonstrate individual competence.

When it comes to the external market, it appears that employers look more closely at individual rather than team performance when assessing ability.

What’s the software industry takeaway from this? It’s a career boost to work for a name brand company, but it also helps to have your name associated with the success of a specific project or department.

“You worked for a company that achieved IPO? Cool. But what did you do?”

The lack of a relationship between internal promotions and individual performance may arise because head coach job openings are rare when a team is performing well.

This starts to explain why internal promotions are rare in the NFL. If a team’s performance improves significantly (they win more games), the team will want to keep the head coach and most of the assistants. Unintuitively, the likelihood of internal promotions decreases the year after a successful season (such as winning the Super Bowl).

I’d love to see a similar study of software companies. My impression is that profitable software companies respond to increasing revenue by creating new roles, which opens more opportunities for promotions. This isn’t possible in the NFL.

Prospective employers look carefully at objective measures of individual performance…we find no strong evidence that outsiders also use team performance in making these ability inferences.

I think the paper may have missed some context here. There’s a long history of the emergence of new head coaches by high performing individuals who also worked for successful teams (those who worked with Super Bowl winning coaches Vince Lombardi, Bill Walsh, Bill Parcells, Bill Belichick, etc.).

Since there are very few top positions to go around and since the internal prospects at the individuals at the top are closely related, it is quite rare for strong individual performance to lead to an internal promotion.

The conclusion of the paper is that the labor market as a whole has different compensation dynamics than a single company’s internal market.

Personal Observations

The observations in this paper are thought provoking, but some recent data points add to the story. The paper downplays the career impact of having been part of a successful team. But in the NFL today (14 years after the paper was written), 7 of 32 current head coaches were once part of a single team: the New England Patriots. So it must be that the external market favors those who come from winning teams, or at least one particular team (note that none of the level 2 coaches from the Patriots have won a Super Bowl as a head coach).

The paper is also narrowly focused on promotions and lateral job moves. But that’s not the only motivating career achievement for professionals. Some might stay with a team because they think they have a better chance of achieving the career milestone of winning a Super Bowl, no matter their current role or how much time has passed since their last promotion.

But many of the insights in the paper are clearly true. For any person, it’s important to make significant individual contributions to the success of a company and to make those known. For someone working at software companies, this probably means blogging, making public commits to a source code repository, speaking at conferences, or otherwise broadcasting a public narrative about one’s achievements.

There’s also the fact that if you reach higher levels in a career matrix, fewer roles are available so you should expect that longer amounts of time might pass between promotions.