Business research

Hiring friends and family could be good for business, study finds

Mark Zuckerberg, CEO of Meta/Facebook, recently noticed in a podcast interview that when it came to hiring new employees, his preference was for people whose “values ​​aligned with the things you care about.” It, he said, was akin to “choosing a friend or a life partner”. He went on to say that many young people were too “goal-oriented” and “not relationship and… people-oriented enough”.

This ties in with one of the eternal questions managers have when deciding who to hire: do you choose the candidate who objectively has the best abilities or the one whose values ​​are more in common with your own?

While some would unambiguously select the most capable candidate, others like Zuckerberg might weigh differences in candidates’ abilities against the extent to which they share the employer’s values. Some would go further and hire family or friends.

Many companies actually promote this with employee referral incentive programs that encourage the hiring of people with similar characteristics – or at the very least those who move in the same networks. the stated goal of these programs is to reduce hiring costs, increase employee retention rates and improve employee engagement. There are even guides dedicated to helping managers who hire their friends.

On the other hand, such an approach to recruitment by accompaniment seems to contradict anti-discrimination laws. These have been enacted around the world to ensure that certain groups of individuals are not treated worse than others. For example the UK Equality Act 2010 makes it illegal to discriminate on the basis of age, sex, religion, race or sexual orientation (among others). The American equivalent, the Equal Employment Opportunity Lawsalso aims to reduce discrimination in the workplace.

The problem with hiring your friends

Generally speaking, anti-discrimination laws promote diversity, while favoring the hiring of friends, family members or people who share common values ​​seems to do the opposite. The American Psychologist Gordon Allportin his 1954 book The nature of prejudice, noted a distinction between hiring based on negative biases (discrimination) and hiring based on positive biases (factors other than ability). He asserted that while hiring based on negative biases created social problems, hiring based on positive biases did not.

Gary BeckerAmerican economist, made a similar distinction in his 1957 book The economics of discrimination but came to a different conclusion. He called hiring based on negative biases discrimination and hiring based on positive biases nepotism, and he argued that both lead to economic inefficiencies. Indeed, both involved hiring workers for reasons other than capacity, which he said was the best predictor of output.

The role of human behavior

But why would many companies explicitly focus on recruiting friends and family if it was really bad for business? Could it be that hiring decisions that don’t prioritize a candidate’s abilities could lead to lower performance, but having employees who share common values ​​is always better for an organization as a whole?

In a recent post I and two research colleagues, Catherine Eckel and Rick K. Wilson, set out to find out. We conducted a controlled laboratory experiment with a sample of college students with strong social ties at Rice University, Texas. Upon admission, Rice students are assigned to “residential colleges,” which are essentially accommodations where they typically stay throughout their studies. Students from the same college live together, eat together, and compete with other colleges in a variety of activities, instilling a strong collegiate identity and shared values.

In our experiment, we asked students to play a famous two player game that economists use to measure trust. This simulates a manager-employee relationship by first giving an individual in the role of a manager a small amount of money – typically US$10 (£7.66).

They are then asked how much they would like to transfer to a person in the role of an employee. Anything they transfer is then multiplied, usually by three, and given to the employee. The employee must decide how much to remit to the manager. The two try to end up with as much money as possible. Therefore, the manager invests in the employee and trusts him to repay part of the investment. The employee chooses the amount they send to the employer, which is a measure of reciprocity/effort.

In our version, managers had to choose between investing in an employee from the same residential college (i.e. they had common values) and one that was not. They were also told that different employees had different “abilities”, in that the multiplier that determined how much money they received from the investment would be smaller – for example, 2.5 instead of three.

In some cases, the employee with the shared values ​​had a “lower capacity”. This meant that the manager had to trust them to return a higher proportion of their money than the alternative choice would return.

With equal skills, 80% of managers choose that of their college. Even when their fellow college member was “of lesser ability,” 40% of managers still chose them. In other words, while at least some managers chose partners based on ability, a significant proportion incorporated college membership into their decision.

Employees from the same college put in more effort for their managers (meaning they returned more of the money) when they were “lower able” than the other candidate. This suggested that members of the “low ability” group compensated for their disability by increasing their effort. On average, when managers with a choice of “equal ability” candidates went with their college classmate, they earned 10% more money. And of those who were offered a “lower ability” college mate and a top underdog, they earned 7% more by going with the college mate.

These results imply that focusing solely on ability ignores the contribution to production of behavioral factors such as commitment, trust, motivation, and effort. As long as skill differences are not too large, hiring within employee networks appears to be a profitable strategy. Becker was wrong, in other words.

So while hiring based on network or family ties was previously thought to be primarily altruistic, our research suggests otherwise. It may still show managerial challenges, like having to tell those employees what to do or call them when they don’t meet expectations. But employers trust employees more when they share their values, and employees can compensate for their lesser ability by working harder, which benefits the organization.

This article from Sheheryar BanuriAssociate Professor, School of Economics, University of East Angliais republished from The conversation under Creative Commons license. Read it original article.