Insiders and Outsiders in Organizations

A learning from my corporate experience has been the fascinating differences between “insiders” and “outsiders”. Insiders are those who have been with the organization for a long time, often their entire career has been with a single firm. Outsiders are those who have been hired to bring fresh ideas, competences, and blood into the organization.

Compensation Differences

Insiders often complain that they are at lower salaries compared to newly recruited outsiders. To bid the compensation above their market value, insiders must convince the firm that there is a credible threat of their departure. A credible threat is when the firm believes the insider would leave and wishes to retain them. In such a situation, firms are theoretically willing to pay their insiders above market value because of the costs associated with hiring and getting a replacement up to speed.

The problem for insiders is that despite their constant declarations of how much other firms desire them, companies know their own insiders intimately. By virtue of the long association, the firm is aware of the mobility barriers facing a particular insider. Besides the emotional costs of leaving a known environment, other mobility barriers may include geographical location, spousal employment opportunity, and inability to change schools for their children. Consequently, many insiders are unable to command a premium to their market value.

Of course, the argument above ignores the reality that insiders who have only worked within one company for decades lower their market value. Other firms are unlikely to hire them. Single organization insiders, unless one has worked for aspirational benchmark organizations such as GE, Google, Facebook, or Procter & Gamble, are viewed as only being effective within the system they have grown up. In a sense, they end up becoming prisoners (see my blog Prisoners & Free Agents).

In contrast, hiring an outsider will require offering above market compensation. The potential hire takes the risk of going from being an insider to an outsider. They leave an environment that they know and have mastered for one that is unknown. Therefore, a compensation difference is built in between insiders and outsiders. And, it favours the outsiders.

Companies know that hiring an outsider has risks associated with it. No hiring process is perfect and some mistakes will be made either in judging the capabilities of the outsiders and/or their ability to fit in. From the company’s perspective, this risk is only worth taking if the outsider is of substantially higher quality than the insiders available or brings unique capabilities. This exacerbates the compensation differences between outsiders and insiders as, all other things being equal, the average market value of the former is higher.

Since it is natural human tendency to feel undercompensated (see my blog: Should Data on Salaries be Transparent?) and have positive illusions (see my blog: How Do We Perceive Ourselves?), the entry of high profile outsiders may bring considerable envy and heartburn. Outsiders may need to ‘to walk on water’ to justify their compensation. And, even walking on water may draw snide comments such as “it’s because she can’t swim.”

A Case for Readers

Recruited as an outsider, I worked with many organization insiders or “lifers”. Two of these insiders were close colleagues who adopted different approaches to interacting with me. One, whose responsibilities were in the domain where I am globally recognized as an expert, was respectful yet challenging. After some initial wariness on both our parts, I came to respect him. The other was very generous in his praise, often to the point of overt adulation that made me uncomfortable.

To make sense of my experience, I related my observations about insiders versus outsiders to my insightful ex-colleague, Professor Madan Pillutla of London Business School. His response:

Insiders bring knowledge about how to work the levers of power and influence, understanding of tradition, deep connections with specific individuals, and a large support base as most people do not want change. 

What do outsiders have – expertise clearly; otherwise they would not have been hired. 

Insiders know that expertise gives more status than knowledge about working internal levers of power. This might be especially true for insiders like your two colleagues with outstanding academic achievements from many years ago because they crave being seen as experts. These insiders might initially attempt to learn from the outsider or attempt to coopt them.  This might work well or turn to envy. 

So, readers, my questions to you are:

  • What are the personal qualities of the insider and outsider that leads to positive or negative effects?
  • What are the situational factors (i.e., culture) that lead to positive or negative effects?

I will collate the answers and responses that I receive via email or on LinkedIn in a subsequent blog. Only caveat is that for me to consider your response, please do not make this about my experience. The case is a provocation to set up a learning discussion and draw general conclusions. As an academic, I do not want “me” getting in the way. 😊

To get the wheels in motion, let me share an observation by Larry Summers on this subject:

“Outsiders can say whatever they want. But people on the inside don’t listen to them. Insiders, however, get lots of access and a chance to push their ideas. People – powerful people – listen to what they have to say. But insiders also understand one unbreakable rule: They don’t criticize other insiders.”

Warmly

Nirmalya


Magic Dust:

I invite you to follow me on Twitter @ProfKumar and LinkedIn.

One Comment Add yours

  1. Thanks for sharing your thoughts. As a hiring solutions provider, I get involved in being a ring- side observer of the dynamics -and concerned about the balance that is required to be maintained for the organisation.

    The flip side of ‘insiders’, is that often the tenure and the previous successes can lead to a trap of fostering an attitude of entitlement.The complacency, so derived, often helps some to ‘manage’ -at times, to even drive personal agendas at the cost of the department/company. This in turn often causes the most talented people to look for greener pastures elsewhere, and eventually, making recruiting top talent (outsiders) in the market close to impossible!

    It is essential for the leader to communicate to the early contributors/insiders that “yesterdays achievements were appreciated and that they were compensated well for them.” And if everyone were to prove their worth everyday, and give nothing short of their best, the company can attract the best, scale as a team and create massive opportunities for all.

    Like

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