Many executives and HR professionals have mixed feelings about referral bonuses, i.e. rewarding employees who refer a candidate for an open position with a bonus or gift. For those in favor of the practice, referral bonuses serve as a cost-effective and efficient way to attract qualified candidates, but critics would argue that employee referral programs reinforce nepotism.
Nevertheless, employee referral programs are becoming increasingly popular, and their popularity stems from the fact that they are, overall, very effective in recruiting entry-level and mid-level talent. Here’s why:
Referrals foster company culture.
At the junior and mid-level ranks of a company, when an employee needs a strong work ethic but will likely need to develop their skills before they reach senior management level, culture-fit can be equally as important as skill set.
Now that “Employer branding” is a buzz-phrase, companies are beginning to fully understand that their employees are an extension of their company’s brand and want to align their reputation as an employer with their reputation in the marketplace.
Referrals help maintain and enhance the company culture that employers are taking such great care to establish. When an existing employee refers a candidate, they are typically bringing in people who they’d like to work alongside. They are recommending people who share the same work ethic and value the same type of working environment. As long as an employer has a solid base of entry and mid-level talent that is internally building a productive, engaging company culture, referrals should attract more of the same.
Referrals help screen candidates with brief professional histories.
Vetting entry-level and mid-level candidates who have brief job histories and a small list of references can be challenging. How can employees be sure that they getting the full picture?
A referral serves as a natural screening mechanism. It’s unlikely that an employee will risk tarnishing his or her reputation by referring someone unqualified for the job, even if an incentive is up for grabs. An employee will pre-screen a candidate by asking themselves "Is this candidate a good fit for the company? Is he/she serious about the job? Does he/she have the right qualifications?''
According to a study conducted by Jobvite, a recruiting software company, employee referrals have the highest applicant-to-hire conversation rate, retention rates, and fastest start dates.
Referrals attract candidates who aren’t on the market.
Employee referral programs exponentially extend the reach of an employers’ job listing. Referrals help employers connect with candidates who aren’t currently looking for a job and, therefore, wouldn’t be exposed to a company’s job advertisements. These “off-the-market” candidates are the toughest to reach, but are typically strong candidates.
While employers may have to make a more aggressive offer to lure them away from their existing position, they are a better investment with a higher likelihood for long-term employement. Active job seekers may accept a job they’re not truly committed to until something better comes along, while off-the-market candidates have no reason to jump ship unless they’re 100 percent dedicated.
To ensure that referral programs are effective, though, employers need to implement certain safeguards and procedures. Including a retention clause in an employee referral program is the best way to discourage employees from recommending candidates solely for the financial incentive. Generally, companies will set up a clause that states an employee will only be able to receive a bonus after their referral has been at the company for a set amount of time.
It’s also important to promote the referral program internally, through a newsletter or an employee intranet, and share success stories. Doing so will motivate employees to refer candidates and demonstrate which referrals are the most effective.
When an employee refers a candidate who is not a good fit, explain to the employee specifically why their referral wasn’t chosen. This will improve the quality of their referral in the future.
If run efficiently and effectively, employee referral programs can be valuable assets to human resource departments for attracting entry and mid-level talent. However, these programs become less effective for more senior positions. If you have a critical vacancy at a senior level, the goal should be to cast the net far and wide to find the best possible candidate, even if takes significantly longer than combing through employee referrals. While there’s nothing wrong with considering referrals for senior positions, they should be one of many candidates vetted from many sources.
Today, a majority of organizations rely heavily on referrals for hiring new employees. Deloitte, Booz Allen, and Ernst & Young, have designated referral program teams to help HR manage employee referral resumes. In fact, Deloitte receives 49 percent of its new hires from referrals and Ernst & Young’s goal is to reach up to 50 percent. Companies have also started taking their incentives to the next level by offering free iPads, cars and dream vacations for employee referrals.
It’s true that not every company has the means to provide such generous bonuses, but if companies can establish a system that is user-friendly, transparent and intrinsically motivating, they will see a positive ROI.