Employee Referral Programs

5 min min read
Updated on April 7, 2021
Employee Referral Programs

What is an employee referral program

Employee referral programs are a set of incentives and processes that promote hiring through employee referrals. In the program, current employees are asked or encouraged to recommend friends, family, old colleagues, and or clients for positions in the company In return, the employee is given some form of reward such as a referral bonus, a free trip, and or recognition.

It has become increasingly competitive for companies to find the right talent and fit for their companies. Employee referral programs are known for securing quality talent quickly. Additionally, referred employees are cheaper to recruit and are typically more productive. Taking all this into consideration, every company should be using their employee referral program as their key recruiting tool.

Benefits of a referred employee

Companies can experience many benefits of a referred employee that impact both the corporate culture and the bottom line. Some of these benefits include:

  • Produces High employee engagement – referred employees tend to engage more with the company as exhibited by their longer tenures and high performance. This may be a result of having a friend already at the company, which has been reported to higher job satisfaction and improved job morale with the company.
  • Lowers cost of hiring – paying referral bonuses is by far less expensive than paying fees for job postings, job boards, and recruiter fees. Recruiting fees can be anywhere from $4,285 to over $18,000 per hire according to Recruiter.com, whereas employee referral bonuses range from $1000 to $5000 per hire.
  • Improves quality of candidates – referred employees are often higher quality candidates and thus, go on to be more productive employees. This leads to better ROI on the individual candidate as well as the company.
  • Reduces turnover – referred employees are less likely to leave a company than employees who are hired from other sources.
  • Faster to hire – referred candidates are reported to be hired 55% faster than candidates from other sources. They are also more likely to accept an offer when made.
  • Faster onboarding – referred employees onboard faster than other employees because they have a friend at the company. This gives the employee someone who they can trust to ask questions. It is also in the referrer’s best interest for their referred friend to succeed, thus they will typically do their best to help their friend as much as possible. This can save a lot of time for the referred employee in getting up to speed with the culture and nuances of a team.
  • Expands candidate pool – employee referrals can widen the candidate pool by reaching individuals who are not immediately looking for a job. For example, Google asks employees simple questions like “Who is the best Product Manager that you know in Los Angeles,” to understand where the best talent is, regardless if they are on the job market or not.

Drawbacks of employee referral programs

One of the biggest drawbacks of employee referral programs is that it can lead to a less-diverse team. In a study done by PayScale and reported by HBR, data collected showed that men of color were 26% less likely to receive a referral than a white male while white women and women of color were less likely by 12% and 35% respectively. Given the speed and propensity to hire referrals, these numbers impact the diversity of company’s workforce by filling the pipeline of potential candidates with less diverse candidates.

Additionally, the study found that as a referred employee, the relationship you have to the referrer can potentially stunt your salary. Close friends and family members who are referred employees reported having up to $1,600 lower salary when compared to employees hired through other sources. Instead, being a former colleague or client as a referred employee leads to the highest salary impact, bumping up salary between $3,700 – $8,200.

What makes an effective employee referral program

Not all employee referral programs are built equal. There are, though, a few key things that every employee referral program should encompass.

  • Incentives – other than the opportunity to work with their best friend, incentive should be provided as a thank you for a referred employee. This an be a referral bonus, extra days off, or a gift of some sort.
  • Make it easy – when it comes to the process of referring a potential candidate, make it easy for employees. Paperwork and even lengthy online submission forms creates friction in the referral process. This can become a deterrent for employees when referring their friends.
  • Keep referrer in the loop –the referrer employee is a great middleman for gaining insight into a candidate and their perspectives. With that, keep the referrer employee in the loop about the progress of their referral.
  • Recognition – when an employee successfully refers a candidate, provide public praise. Hiring good talent is difficult; having employees pitch in by referring friends and family demonstrates support for the company in tasks outside of their traditional role.
  • Address pitfalls – in addition to designing the program, HR should take steps to ensure the effectiveness in upholding diversity in the workforce. This should be done by treating all candidates, even referred ones, fairly and promoting the referral of underrepresented groups.

Keys to Effective Employee Referral Program

Key takeaways

  • Employee referral programs are effective tools for recruiting quality talent quickly and cost effectively
  • Referred employees are typically more productive and have longer tenures
  • Beware of the diversity gap in referred employees. This can be addressed by structuring employee programs to encourage referrals of underrepresented groups

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