Insider advantage: empirical evidence from firms’ personnel data

ZHANG Hong1 ZHOU Li’an2 LIANG Jianzhang2

(1.Institute of Industrial Economics, Jinan University)
(2.Guanghua School of Management, Peking University)

【Abstract】It is well discussed in the literature that insiders are preferred by firms when there is an open position. There are several theories that explain sources of the insider advantage, but very few studies provide empirical evidence on it. By employing a large personnel dataset from an online travel agency in China, we try to fill up the gap between the theory and empirical test. We find that outsiders have a better beginning with higher wages and greater likelihood to be promoted than their insider counterparts, which implies a handicap on outsiders in the recruitment. And the handicap disappears as the job level increases and varies with job categories. What we find is consistent with the tournament theory. Moreover, we document the negative effect of outsiders on insiders' productivity and exit rate, which further riches the evidence for the tournament theory. Besides the tournament theory, we also explore other possible explanations of the insider advantage, and find little supportive evidence.

【Keywords】 incentive; promotion; recruitment; tournament;


【Funds】 Major Project of National Natural Science Foundation of China (71333007) Key Laboratory of Philosophy and Social Science of Regular Institutions of Higher Learning in Guangdong Province

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(Translated by SUN Zhuojiayue)


    [1]. ① [^Back]

    [2]. ② For more information about this company, please refer to Bloom et al. (2015) and Zhang et al. (2016). [^Back]

    [3]. ③ The order from the lowest job grade to the highest job grade is: employee (job grade 1), senior employee (job grade 2), supervisor (job grade 3), senior supervisor (job grade 4), manager (job grade 5), senior manager (job grade 6), director (job grade 7), senior director (job grade 8), deputy general manager (job grade 9) and senior vice president (job grade 10). [^Back]

    [4]. ④ Administrative hierarchy includes financial, personnel, administrative management and other work content;, service hierarchy includes booking, customer service and other work content; product hierarchy refers to sales, tourism product design and other work content; and technology hierarchy refers to the technical support of IT in the company. [^Back]

    [5]. ⑤ The main reason why this paper classifies employees into three categories is to make the table concise and clear, and the main results of this paper are still valid in unclassified data, which is not listed in this paper due to limited space. [^Back]

    [6]. ⑥ It is also seen that there is a dramatic change in the number of insiders in 2009 and 2010: the number of insiders increased significantly in 2009, while the number of insiders declined sharply in 2010. This is mainly because: generally, the promotion frequency of the company is half a year—in January and July of each year; in 2009, the promotion was postponed from July to December. Since the promotion time in December was very close to that in January 2010, the company advanced the promotion in January 2010 to December 2009 in order to save the operation cost of the personnel department. As a result, half of the employees with promotion in 2010 were placed in 2009, leading to a dramatic change in the number of insiders in 2009 and 2010 shown in Figure 1. [^Back]

    [7]. ⑦ In the company, there are two specific measuring indicators of the current production performance of employees: one is the output of employees. Such measurement appears mainly in departments where output can be directly observed, such as sales and reservation; and the other is performance appraisal. In the part that cannot be directly observed, the company will make a subjective evaluation of employees’ performance in the current period, and generate a subjective performance evaluation result. [^Back]

    [8]. ⑧ It is true that the most ideal state is to directly use performance appraisal to measure productivity, but the performance appraisal information in the data of this paper is only from 2008 to 2012, while the data of this paper cover the period from 1999 (the year of company establishment) to 2012. It can be seen that the sample size of performance is too small, and the small sample may lead to wrong results. Furthermore, no such information is available in the company’s key departments, such as booking, sales and customer service. Therefore, if the performance evaluation result is used to measure employee productivity, too much data are missing and the heterogeneity between different departments cannot be discussed in depth. Although this paper cannot directly use performance evaluation information as the main dependent variable of this paper, subsample regression can be used to verify the relationship between this intuitive productivity measurement and salary and promotion. The regression results show that after controlling the dummy variables of year and job types in the subsamples, the elasticity coefficient between employee performance evaluation and salary is 0.728, which is significant at the 1% level. This means that for every doubling of employee performance, wages will go up by 72.8%; and the elasticity coefficient between promotion and performance is 0.492, which is also significant at the 1% statistical level. It can be seen that there is a statistically significant and economically significant positive correlation between wages and promotions and employee productivity in the company. In addition, in order to avoid the interference caused by other factors in addition to productivity, the paper controls the dummy variable of job grade, dummy variable of year, dummy variable of city, and dummy variable of department in the regression with wages and promotion to measure productivity. [^Back]

    [9]. ⑨ Certainly, the impact of new departments may not only occur in the first year, but also in the second year or even the third year. To eliminate this influence, the author also tries to remove samples from the previous two or three years, and the results were still robust. It can be seen that the establishment of new departments is indeed not the reason for the existence of insider advantages. [^Back]

    [10]. ⑩ The author would like to thank the anonymous reviewers for their valuable comments in this section to make this article richer and more thorough in its analysis. [^Back]

    [11]. ⑪ After these outsiders enter the company, their ability or work concept does not match the position, so they cannot perform normally even if they have the ability. Therefore, they will be in a low position in the wage distribution. [^Back]

    [12]. ⑫ The author also tries to make the cut-off points of four, six and even seven years. The results of four years show that there are still differences between external and insiders, but the numerical results are smaller than those in Table 2. The results of six and seven years show that the difference completely disappears. Due to limited space, the results are not listed in the article. [^Back]

    [13]. ⑬ Surely, the work experience in the definition of outsiders can be adjusted in this paper, and the results after adjustment show that it does not affect our results. When the employees with less than 0.5 year of work experience before entering the company are defined as those without work experience, it is noticed that the wages of outsiders with work experience are still 13.3% higher than the insiders at the significance level of 1%, and the promotion probability is 2.2% higher than the insiders. However, when the employees with no more than two years of work experience before entering the company are defined as those without work experience, it is noticed that the wages of outsiders with work experience are still 14.1% higher than the insiders at the significance level of 1%, and the promotion probability is 2.3% higher than the insiders. [^Back]

    [14]. ⑭ The performance evaluation results are values between 0 and 1, which measures employees’ performance and ability in the current period. [^Back]

    [15]. ⑮ According to the Labor Contract Law of the People’s Republic of China, when an employee is dismissed, the company shall pay a certain amount of compensation to the employee, which is generally one month’s salary. Therefore, this paper defines whether an employee is resigned passively on the basis of whether the other compensatory salary in his/her salary exceed one time of his/her basic salary. [^Back]


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This Article


CN: 11-1235/F

Vol , No. 12, Pages 141-157+188

December 2017


Article Outline


  • 1 Introduction
  • 2 Data Description
  • 3 Insider advantage
  • 4 Mechanism analysis
  • 5 Conclusion
  • Footnote