You hire externally instead of promoting from within a lot.  Here are my top 5 reasons why that happens:

1.  Development of Internal Talent for the next step is HARD.

2.  #1 + you have a business to run.  It's hard to find time to develop talent.

3.  #1 + the Internal Talent doesn't know what it wants.

4.  You need some fresh ideas.  Things feel stale, and it's a great way to shake things up.

5.  Did I mention development of Internal Talent for the next step is HARD?  Too bad, it's big enough I'll list it again.  

So, you hire externally for more $$ and hope for the best.  A new study indicates what you have already experienced many, many times.  Going outside doesn't always work out.  More from Knowledge at Wharton:

"According to Wharton management professor Matthew Bidwell, "external hires" get significantly lower performance evaluations for their first two years on the job than do internal workers who are promoted into similar jobs. They also have higher exit rates, and they are paid "substantially more." About 18% to 20% more. On the plus side for these external hires, if they stay beyond two years, they get promoted faster than do those who are promoted internally.

"Most jobs are entered into through a variety of different routes, sometimes by being hired from the outside and sometimes by moving up from inside the firm," says Bidwell. "I was curious as to what the effect of these different routes would be" on an individual's job performance. His research is presented in a paper titled, "Paying More to Get Less: The Effects of External Hiring versus Internal Mobility."

"Although external hires are paid quite a bit more than employees promoted into similar jobs, "this is not a free lunch for the external hires," he says. "There is a much greater risk of being let go during those first few years, mainly because they may not develop the necessary skills and thus will not perform as well as expected. Then, too, they might decide to leave voluntarily."

Moment of clarity from the research: Those who are willing to take the risk to jump companies reap the rewards.  Make no doubt about it, there's risk.  Not everyone's willing to accept it, but those who are get the cash.  By the way, I've always said that the percentage increase it takes to rip a talented person from a job and company they're happy with is 20%.  Nice to see that confirmed by research.  Here's more on the "tipping point":

While doing his research, Bidwell noted one particular difference between the external hires and those already in the company who are being promoted. "People hired into the job from the outside often have more education and experience [than internal candidates], which is probably some of the reason they are being paid more," he says. "When you know less about the person you are hiring, you tend to be more rigorous about the things you can see" -- such as education and experience levels listed on a person's CV, or what Bidwell calls "externally observable attributes." And yet "education and experience are reasonably weak signals of how good somebody will be on the job, he notes.

Which means that if you're going to hire from the outside, go ahead and buy the degrees and past titles. But you better dig in like crazy and figure out what the person has actually done, and what they'll do for you when you bring them in that's different than what would happen if you promoted from within.

Last note - isn't an external hire's ability to come in and get results in a brand new culture related to what's in their behavioral DNA?  Seems like we all would be well-advised to find a tool that could help us understand how likely the person is to come in to our company and be aggressive and assertive to make things happen in a way that was consistent with our culture (to the extent those things can match up).

Go ahead and make that external hire.  Just make sure you evaluate and understand the probability that they're going to add value and action equal to 20% of their annual salary.