Heavy criticism of the policy comes in a paper by Richard Kerley, director of the Scottish Local Authorities Management Centre, which outlines the pitfalls awaiting new councils in their selection procedures, and how to avoid them.
The paper, The best person for the job? - Selecting a head of paid service, says the policy of restricting applications to existing local government staff is 'weak in both principle and practice'.
'The circular was a form of advertising and should be subject to the same legal requirements as any advertisement,' the paper says.
The commission said it opted for a selection procedure which would only be open to serving officers to ensure continuity in Scottish local government at a time of unprecedented change.
Commission secretary Ted Davison said: 'The commission very strongly believes that where the whole system is being reorganised, the people working in it carry some premium value, and that's the reason for doing what we did.'
Asked whether open competition would harm current employees' chances of being appointed to the new chief executive posts, Mr Davison said: 'We concluded on balance that the arguments for what we wanted to do were stronger and should prevail. In doing that, I don't deny there are other things at issue.'
Mr Davison said all councils were free to advertise more widely should they wish. He denied the commission had opted for a process of limited competition because it would be cheaper.
As well as its criticism of the commission, Mr Kerley's paper offers guidance to shadow authorities on how they can avoid discriminatory practice.
They should define the nature of the post more precisely than the Staff Commission has, assess whether newly elected members should be given training in selection procedures and ensure they can cope with a situation where a candidate is offered more than one post, it says.
Mr Kerley is damning about selection policies adopted by many councils. Too many rely too heavily on interviews as their way of appointing chief officers, he says. He cites work carried out by the Institute of Personnel Management which shows interviews to be the least valid way of assessing aptitude for a job.