Learn About Employee Referral Programs

Adapted from the book Finding Keepers: The Monster Guide to Hiring and Holding the World’s Best Employees by Steve Pogorzelski, Jesse Harriott, Ph.D., and Doug Hardy. Published January 2008 by McGraw-Hill.

In the last few years, employee referral programs grew to be regarded as hiring’s “killer application.” Everybody said they wanted 30 percent, 50 percent, or more of their new hiring to come from employee referrals. Like most killer apps, however, referral programs must be intimately connected to a bigger picture. They also require a lot of care and feeding to get right.

When it comes to referral programs, our research finds a disconnect between manager and employee perceptions. While 81 percent of employers believe employee word of mouth strongly influences candidate opinion, only 33 percent of employers involve their employees in promoting the employer brand. While 66 percent of employers believe they effectively communicate key employer branding elements, only 30 percent of employees say their organization promotes the benefits of working there. If employees don’t know the message, how can they be ambassadors for the brand? Something’s broken here; so let’s review how a good referral program connects to the rest of recruiting.

Employee referral programs reward current employees for bringing candidates into the company. A typical program pays employees a bonus after people they have referred land a job at the company.

The logic of using employees to bring in candidates is strong:

  • Employees know what it takes to succeed at a company, and they understand its culture, so they tend to refer appropriate candidates.
  • Employees know others with similar skills, such as former coworkers, schoolmates, members of networking groups, and friends.
  • Employees have seen others (typically former coworkers) under actual workplace conditions, not just in the context of a job interview.
  • Employees in a referral program have a double interest in locating strong candidates — to earn a referral bonus in the short term and increase the long-term success of the company.
  • Employees know individuals who are not actively looking for a job but are poised to move.
  • Employees who are careful of their reputations recommend only highly skilled candidates.
  • Employee referral programs can be less expensive over time than other methods.

Employee referral programs also have pitfalls:

  • People tend to know people like themselves, and most referral programs do little to encourage diversity in the workplace (either social/demographic diversity or a diversity of talent).
  • People’s closest circles of acquaintance tend to be within a small geographic area, and this limits the pool of potential hires who might relocate.
  • Amateur recruiters are much less experienced than managers or professional recruiters at judging whether a candidate has the right level of skills for the job. The referral system is a pipeline for finding candidates, not for making final decisions.
  • Careful record keeping and rules are needed to ensure, for example, that two employees don’t both claim to have made a referral. (Does the first to refer get the reward? What happens if employee A makes a referral that doesn’t result in a hire, and a year later employee B refers the same person, who then does get hired?)
  • If it’s too complicated, people won’t play.
  • Employees need to be trained to use the system effectively.
  • In larger organizations, referral programs need to be publicized steadily to remain active. Otherwise they become part of the amorphous grab bag of benefits used by just a few employees. (Also, when someone refers a friend, he expects that friend to get red-carpet treatment, or at least a quick phone call. It’s a good expectation, so follow up quickly on referrals.)
  • The programs cost money and time to run. Cost-effectiveness needs to be calculated against other methods.

At their best, employee referral programs become part of an organization’s culture, even integral to the employer brand if you use words like teamwork or reward for initiative. To achieve their potential, they need active understanding, support, and promotion from top to bottom. If the lowliest junior assistant brings in five good employees because he’s well networked and active, the CEO should stand him up in front of the entire company and cheer (better yet, he should hand the guy a check in front of everyone).

The more people who participate, the larger your potential pool for referrals. Why stop at your employees? How about extending your referral program to contractors, vendors, and customers? How about former employees? If you run a pet store, take down that “Help Wanted” sign and put up a poster saying “Send us a great employee and get a month of food for your pet!” Run a physical therapy practice? How about offering every customer who brings you a successful hire five free visits?