Employee Referral Programs

by Sharlyn Lauby on December 10, 2009

Even though there are many reports about unemployment at record setting levels…hiring is still taking place.  Jobs are still available.  And, one of the most cost-effective ways to recruit is via an employee referral program.  (Please note: I said ‘one of’ and not ‘the only’ because organizations should source candidates from a variety of methods.)

If you have an employee referral program in place or are considering adding one, let me toss out a couple thoughts to contemplate.

Referral bonus amounts need to be fair and significant.  If your referral bonus is $25, reality check…no one does anything for $25 anymore.  For your employees to tell their friends that your company is great and they should come work there, the bonus has to be meaningful.  How much is meaningful?  Calculate your cost per hire and use that as your guide.  How do you calculate cost per hire?  Here’s the formula (compliments of the SHRM Metrics Toolkit):

Cost Per Hire = (Advertising + Agency Fees + Employee Referrals + Travel Cost of Applicants and Staff + Relocation Costs + Recruiter Pay and Benefits) / Number of Hires

Let’s toss out a hypothetical example.  You’ve determined it costs $5000 to hire a sales manager in your company.  It might be possible to offer a referral bonus in the thousands and still net ahead (depending on other costs.)  Plus you get the added benefit of increased employee engagement in the recruiting process.

I also would challenge organizations to eliminate the so-called ‘waiting period’ for paying referral bonuses.  The employee’s role in a referral program is to provide the company with the candidate.  The responsibility for selection and retention doesn’t belong to the employee.  It belongs to the manager.  So why is the employee being penalized by having to wait for their referral bonus?  The responsibility of selecting the right candidate, setting the new employee up for success, training them, providing recognition, etc. belongs to the manager.  If the new employee leaves in 60 or 90 days…then the issue wasn’t the referral.  And, the company needs to look somewhere else for answers.

Referral bonuses have the potential to be a very effective recruiting tool for organizations.  But the key to their success is in appropriate pricing, timely payment and placing responsibility for the program where it belongs.

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Ben Madden December 10, 2009 at 9:58 am

Great post Sharlyn. It is important that organizations figure out the sweet spot between meaningful reward and losing money on referrals. We offer a increasing scale from $1000 for the first and up to $3000 after 3. Additionally we offer a signing bonus and prize drawings at the end of the year to reward our staff for referrals.

Mark December 11, 2009 at 3:44 pm

Right on the money about the “waiting period!” I’ve fought that battle with “management” numerous times over the years!

Paul December 14, 2009 at 10:21 am

refferal shemes are usually very effective, as you said as ‘one of’ and not ‘the only’ way to recruit. Were trying to expand the use of refferal schemes throuhg social networks, allowing for candiates to be reffered to employers through their professional and friend networks..

David December 15, 2009 at 1:42 pm

This is a great post. I can’t disagree with anything.

People should be shifting from job boards to indexing jobs via xml in vertical search engines – so easy, ye yet hard for people that don’t fully understand search marketing issues.

One point of information: HR should own relocation costs always, not just for college recruiting. Your equation, while simple and direct, is the ideal state, not the current state.

Rich DeMatteo December 19, 2009 at 8:32 pm

The last company I worked for handed out $3,000 referrals. I was OK with the amount, but what I didn’t like was that it was $1,500 up front and $1.500 after the referred employee works a year.

The amount was also used for every position. So, technical support analysts were surely easier and less expensive for us to hire than Software Programmers, but both positions handed out the same bonus.

We were looking to change things, but before that happened the company was acquired and it was game over for us.

I agree 100% in what you’ve said. An organization can’t expect to hand out bonuses under $100 or even maybe under $500 and expect many people to work on finding a viable candidate.

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