How a company fills a vacancy significantly impacts culture and success. Approach turnover wrong and you’ll quickly see resentment, burnout, and more resignation letters.
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The story here doesn't folllow cause and effect. Too easy to pin blame on the company. We don't know any of the background issues of why the existing staff was not promoted. However, I would fault the company for a lack of honesty, trust, and openness in communicating the role expectations and the exact reasons an internal promotion was not made.
Almost all my clients first look to internal promotions before hiring from the outside. Sometimes, the internal candidates are not strong enough. I always recommend being very clear with everyone about expectations and interview process. All candidates, regardless of source (recruiter, internal, ads, off the street) should be put through the same exact steps, questions, and process to compare apples to apples.