Everything you need to know about employee referral programs

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Everything you need to know about employee referral programs

featured image for employee referral programs

Finding the right candidates is often a lengthy and expensive process, and it’s even more challenging to make sure candidates are aligned with the organization’s culture. 

To better tackle the challenges of hiring, many companies have set up employee referral programs in which their existing employees refer potential candidates to them, often in exchange for bonuses or other perks. 

According to a detailed review of existing research, referred employees often stay longer at the hiring company and perform better, which makes employee referral programs an excellent hiring strategy.  

This article will explain the benefits of having an employee referral program, guide you through the details of how to create an effective referral program, and give you some examples of cleverly designed programs that help companies hire top talent.   

Table of contents



What is employee referral?

Employee referral is a recruitment method companies use to find prospective candidates in the social networks of their current employees.

An employee referral program enables you to source people who are a good cultural fit for your business and are more likely to stay past the first year. 

Many companies are struggling to source qualified staff these days. HR teams are constantly sifting through countless resumes to try and find the most qualified applicants.

Even once they do find the right person, they might not stick around for long. This is a costly and time-consuming endeavor that companies regularly engage in to remain competitive. 

image defining employee referral

Employee referrals are a different story, however.

With this method, candidates are already aware of your business, its values, and its work ethics since they know someone who works for you. Being part of your employees’ social network makes them better candidates because they are more likely to reflect your current staff’s potential. 

In addition, an employee referral program self-replicates. The more referrals you receive, the bigger the talent pool you have to choose from.

Employee referral programs have the highest ROI of all recruitment methods, so if you don’t have one in place in your company, it’s time to get on it. 

Indeed, employee referrals are on the rise, and having a solid employee referral program will help you recruit the best candidates out there. 



Why is it important to have a referral program?

Having a referral program is logical since the people who work for you are best suited to promote your business to potential candidates. After all, they know the ins and outs of the organization and will give details about their work to their circle of friends.

People are also more willing to apply to a position if the company has been praised by someone they know.

Furthermore, using employee referrals makes good business sense since they are less expensive than other recruiting methods and improve the quality of hire.

They also snowball over time. For example, an employee who was referred is more willing to refer your company to someone else, giving you a potentially endless talent pool to choose from.  

According to CareerBuilder, 69% of companies have a formal employee referral program, and 26% of external hires are generated through such a program, making employee referrals the leading source of new hires.

The same report states that 82% of employers have rated employee referrals as the best return on investment (ROI) for their efforts, and 88% have deemed the quality of hire from employee referral programs to be superior. 

If your business does not have a referral program set up, then you, as a recruiter, should definitely opt to create one as soon as possible to reap both its short- and long-term benefits. 



How much does a referral program cost?

Using a referral program is cost-effective for several reasons.

First, it is a word-of-mouth form of advertisement that promotes your company to potential candidates without you having to do much. You simply create the program, promote it to your employees by describing the benefits they’ll receive for a successful hire, and leave them to do the rest of the work for you.

Second, you don’t have to spend resources on advertising or external hiring agencies. You can choose to only pay bonuses for referrals when you recruit a new candidate.

In comparison, you need to pay for staffing agencies and career websites even if they don’t produce the desired result. For example, if an agency charges 15% of your new hire’s net annual pay of $50,000, then you will have to fork over $7,500 to them.

On the other hand, a generous referral bonus would normally cost you around $2,000. This is $5,500 less than what you would have paid the agency. Not to mention that the bonus you give to your employees doesn’t even have to be monetary – you could offer referring staff extra vacation days or other less expensive perks. 

Third, it takes less time and fewer resources to train a referred candidate than a non-referred one. As mentioned, referred candidates already know the job requirements and work ethics of your business, so they will learn faster and begin working quicker.

It takes 29 days for referred candidates to begin work, 39 days for those recruited via job boards, and 55 days for those recruited through career sites. 

Overall, the ROI of a referral program tends to be higher than those of other sources of hires. This is because you not only pay less for recruitment but also get more qualified employees since they are members of your current staff’s social network.  



What are the benefits of an employee referral program?

As mentioned, there are various benefits of having an employee referral program.

We can break them down as follows: 

image showing the benefits of an employee referral program

1. Improves quality of hire

According to a report made by LinkedIn, referrals are the number one way people find job opportunities. Additionally, companies can expand their talent pool by 10 times when they tap into their employees’ social networks.

The report also finds that employee referrals are the top source of quality hires.

Simply put, your best employees will refer people who will benefit your business. After all, their neck is on the line if they refer someone who is not up for the job. Not only will they not get a bonus, but their professional reputation could be damaged as well.

That’s why referring employees will screen and suggest only high performers, making them a valuable asset for your company.  

An additional benefit to employee referrals is that you can reach those hard-to-get passive candidates. These people are already trained and have the necessary knowledge and skills to perform their job well. They could be an asset if they join your company since they are qualified and can work in positions that are difficult to fill.

However, passive candidates are not actively searching for a job, and it would be unprofessional for you to try and poach them from the competition. Nevertheless, these candidates are usually open to suggestions for new opportunities.

Hearing from a trusted friend that your business is hiring and that you can offer them attractive benefits or a position their current employer cannot might just sway them to reach out and contact you. 

2. Increases employee retention rate

Every company wants high employee retention and low turnover

Employees can leave a business for many reasons, including major changes to their lives or career paths. But they might also leave because they don’t like their new job, feel undervalued, or are overworked. 

On the whole, referred employees stay with a company for longer.

The job satisfaction and retention rates of these employees are higher than those sourced through other methods: 46% of referred employees stay for more than one year, compared with 33% of those hired through career sites and 22% via job boards. 

This is largely because referred employees are more content with the position they applied for since they trust the person who suggested it to them.

Once hired, they also have a familiar face to show them the ropes of the business. This makes their transition into their new workplace smoother and motivates them to stay on for longer. 

3. Reduces cost and time per hire 

Using an employee referral program significantly reduces the cost and time per hire compared with other methods of finding new personnel. 

As mentioned above, you don’t have to pay for advertisements or any third-party staffing agencies when you have a referral program.

You also cut down on recruitment time since you are basically outsourcing the work of finding and prescreening candidates to your own employees. 

You determine whether to give your employees monetary bonuses for making a referral or to instead offer non-monetary perks. 

On top of that, once you find the perfect candidate, you will spend less to train them, and the referred employee will start working faster than hires from other sources. 

This is because these candidates already know what is expected from them. They may also have some expertise in the field, and most importantly, they will feel more at ease knowing someone who already works there. 

Altogether, your organization can save $3,000 or more, driving down your cost and time per hire significantly. 

4. Enhances employer branding

When you have a referral program in place, your employees essentially become brand advocates who promote your company to their networks of friends and acquaintances for a low cost.

In essence, they are spreading the word that your business is a great place to work at.

This will boost your reputation as an employer of choice, and potential candidates will be more likely to reach out to you rather than your competition.

However, for your employees to be brand advocates, they must mean what they say. This is why having a stellar employee referral program is vital for your success. 

The following section will give you several tips on how to build a successful employee referral program. 



Tips for making your employee referral program effective

Now that you know the benefits of having a good employee referral program in place, let’s look at a specific strategy you can use to create one.

image showing tips for making your employee referral program effective

1. Outline hiring needs and resources

Before launching your employee referral program, it’s important to determine your hiring needs and what resources you have at your disposal.

You can start by asking yourself the following questions:

  • How many positions do we need to fill?
  • Is there a certain position that is usually hard to fill?
  • What does the ideal candidate look like? 
  • What defines our company’s culture?

Once you’ve answered these questions, you can start setting measurable goals, such as the following: 

  • Reach X number of referrals 
  • Reduce the time to hire from X to X 
  • Hire X number of employees by X date
  • Onboard referred employees by X date 

Then, you can assign a person or a team to be in charge of drafting your employee referral emails, automate them, or even create a platform for referrals.

You need to think about how much you can spend on bonuses and what perks you will offer for successful referrals. 

These initial steps are important because you need to be able to measure the success of your employee referral program.

Imagine what it will be like if it doesn’t turn out to be very effective, and you keep splashing resources on it as if trying to quench a wildfire. Or perhaps it will work great apart from the onboarding stage, which you will need to enhance. 

Making a plan and setting goals will make the difference between your employee referral program being ineffective and being excellent. 

When you have a clearer idea of what needs to be done, you can begin designing your company’s referral program.

2. Define job requirements clearly

Although it may be obvious to you as a recruiter what exactly you are looking for in the ideal candidate, the picture might not be so clear to your employees.

For this reason, you need to define job requirements clearly to dispel any confusion about what you are looking for. 

This will also help you define which skills are essential for the job so that you can use the right talent-assessment tools and pre-employment skills tests during the recruitment process. 

There are two aspects of the job requirements that are extremely important to consider: culture alignment and the job description.  

Culture add

An extremely important aspect of not only referrals but recruitment in general is hiring for culture.

This is the practice of hiring based on whether candidates’ values, work ethics, and ideas match those of your business. Clearly assessing and defining your company’s culture will boost the effectiveness of referrals: Your employees won’t refer just anybody but will take their time and think hard about who would be ideal for a position.

Of course, you are at an advantage here because your own employees will have an idea of your company’s culture, even if they aren’t entirely sure about it. Even so, you must spell it out for them to avoid confusion. 

During the recruitment process, you can also use a Culture Add test to make sure that your candidates’ values and behaviors align with your organization’s values. 

Job descriptions

When you send emails asking for referrals from your employees, include job descriptions for all the roles you want to fill. 

Similar to how recruiters quickly sift through resumes, job seekers spend less than 30 seconds skimming a job description. That’s why you want to make it impeccable and easy to understand.

This will enable your employees to describe the job with ease and send a link to prospective candidates without having to contact you with additional questions.  

Also, remember to point out to your employees what types of things would disqualify candidates. Even though someone is a good friend, they may not necessarily be a good candidate.

Being frank and sharing what kind of people you would not like referred will save you the hassle of dealing with many unqualified candidates vying for the job. 

Job descriptions have one more crucial advantage - they enable you to clearly define the skills you need to assess during recruitment and easily pick the most appropriate pre-employment skills tests if you’re using an online skills-testing platform.

3. Promote your referral program

Once you’ve planned out your program, you’ll need to advertise it to your teams.

You can do this via email, by asking a chief executive to address the company via video, or by preparing a company meeting, like a lunch or staff party. This will be your chance to hype your employees and motivate them to start referring.

Then, you can start a promo campaign in which you outline all the incentives for successful referrals. 

4. Incentivize your employees to make a referral

One of the top reasons employees are willing to make referrals is because they get some sort of incentive for it. Most companies offer cash incentives ranging anywhere from $1,000 to $5,000.  

However, cash prizes may not be the only strategy you can use – or even the most effective one.

According to research done by LinkedIn, 35% of employees make referrals to help out a friend, 32% do it to help the organization, 26% do it to be seen as a valuable colleague, and only 6% do it for the cash incentive or to get recognition

That’s why it’s a good idea to simply ask your employees what they would like to get as a prize for making a referral. 

The best approach, however, is mixing cash rewards with non-monetary incentives, such as extra annual leave, paid vacations, or consumer goods like headphones or clothes. Some incentives may be less expensive than flat-out cash prizes, and employees will still be interested in them if you make them diverse enough.

If you decide on cash incentives, then consider devising a tiered system. You can give cash bonuses for each stage of the hiring process that the referred candidate passes, each larger than the one before.

If the candidate is hired and then stays on for one year, you can give the referrer a final bonus for finding an ideal employee. You can even increase the bonuses with each referral an employee makes.

The cumulative bonuses of such a tiered system will incentivize employees to refer only top talent so that they can receive larger prizes. 

5. Update your employees during the recruitment process

When an employee makes a referral, they want to stay updated on the recruitment progress.

Not updating employees, even if their candidate was unsuccessful, will surely make them feel reluctant to make a referral again.

If you choose not to hire the candidate, give the referrer honest feedback about why you made this decision to encourage them to keep making referrals.

Additionally, if you have an employee referral platform in place, then you can automate the whole process and have updates sent automatically to the referrer when their candidate moves through the stages. 

Send them a thank-you email when the process is complete, whether or not the candidate was successful, and don’t miss an opportunity to make them feel appreciated and valued at your company. 

6. Recognize successful referrers publicly 

In addition to offering employees monetary and non-monetary benefits, consider acknowledging all-star referrers publicly.

If an employee has referred several candidates and they have all been recruited, then you can give them a shout-out via email and during team meetings. This will make them feel recognized and valued and is a sure way to incentivize them – as well as other employees – to make more referrals in the future. 

7. Evaluate your employee referral program

To have a stellar employee referral program, you need to assess it on a regular basis and enhance it whenever possible.

The key measurements you want to keep an eye on are:

Retention rates and job performance 

First, it’s important to evaluate the following:

  • How many employees were recruited via the referral program? 
  • What is their turnover rate?
  • How do referred employees compare with employees hired via other means in terms of job performance and retention statistics?

Feedback

Send out surveys to your employees asking about the program. Try to find out the following information:

  • How easy is the referral program to use?
  • Are employees happy with the incentives they receive? 
  • How aware are people of the program? Do you need to promote it even more? 

Effectiveness

To assess the program’s effectiveness, you need to answer the following questions: 

  • How many employees participate in the referral program?
  • Are the numbers increasing or diminishing? 
  • If they are going down, why? How can you fix the problem? Where did the program go wrong? 

Once you have answers to these questions, you can begin enhancing your program to make it even more effective. 

Make sure to come back every six months or so and reassess your program’s progress so that you can make it as cost-effective and efficient as possible.  



Five examples of genius employee referral programs

The following five examples of exceptional employee referral programs can inspire you as you draft and implement your own.

image showing five examples of genius employee referral programs

1. Intel’s double bonus

To diversify its workforce, Intel introduced a double bonus if referrals were for women, minorities, or veterans. 

Since the tech industry is dominated by white men, this simple yet powerful strategy can aid companies that wish to diversify their talent pool and stay competitive in the global market.

2. Fiverr’s gamification system

Fiverr has created a gamification system by using referral software to make their employee referral program more fun to interact with.

Essentially, employees receive points for referring friends and sharing jobs. These points can then be exchanged to receive real prizes. 

The interesting part of the gamification method is its competitive nature. Candidates receive points for every action they take to refer someone. The more points they have, the higher they are on the referral leaderboard.

The top five employees receive gifts quarterly and annually. 

3. Google’s clever questions

When assessing the company’s referral scheme, recruiters at Google saw that doubling the cash incentives was not enough to get people to refer more candidates.

So instead, they decided to try asking specific questions, like “Who is the best C# developer you know in New York?”

This helps employees make better referrals than a general question like “Do you know any software developers?” Narrower, more focused questions guide them to think about specific roles and locations. 

This makes employees think twice before referring someone, which ties back into the idea that referred employees are more suited to open positions because the people who referred them know they will be a good match. 

4. Accenture’s emotional reward

As mentioned above, more people make referrals because they want to help out a friend than for the cash incentive. 

Accenture uses this in its approach to its referral scheme. They identified that helping out a friend makes you feel good.

To foster this feeling, they allowed employees to donate part of their referral bonus to a charity of their liking, and the company matched the amount.

This is a clever idea to not only get new employees but also make your current staff feel good when they refer them. 

5. Salesforce’s happy hours

Another great idea is Salesforce’s happy hours. The company hosts informal parties to which employees can bring the friends they want to refer.

This method not only enables candidates to interact and mingle with current employees and see if they like the atmosphere but also gives recruiters a chance to get a glimpse of the people who might one day work for them. It’s a win-win scenario that removes the guesswork of whether someone will be a good fit for the organization.

You can get creative with your employee referral program and try all sorts of systems, especially if you have a clear idea of what you want to achieve.

Maybe you need to attract more women or minorities to your business? Or perhaps you can only afford $1,000 cash incentives, but you can also offer a major discount at a convenience store? 

Use your imagination and create a memorable employee referral program. 



Key considerations for employee referral programs

Overall, having an effective employee referral program can save your company money, time, and effort in the hiring process.

Once hired, referred employees are onboarded easier, begin working quicker, and have low turnover rates, with some employees staying for more than three years. 

Nevertheless, there are some key considerations that you need to be aware of when building an employee referral program: 

1. Employee referral programs need to be used together with other hiring methods.

If you only rely on employee referrals, you risk hiring a workforce that is too homogenous and therefore not diverse enough.

To prevent that, you need to use a variety of hiring tools and methods and constantly look for ways to expand your talent pool. 

2. A referral program might not be suitable for all positions.

Other hiring methods might be more appropriate for some roles.

For example, you might prefer to work with an external recruiter in some instances or create a targeted recruitment campaign for others. Choose which positions to open for referrals, and communicate these choices clearly to your employees.

3. Be mindful of referrals from your middle and upper management.

Referrals from powerful employees can be a double-edged sword since you might be biased or feel pressured into making a hiring decision that is not in line with your hiring goals.

To minimize the risk of making bad hiring decisions, you should use employee referral programs in combination with a well-designed hiring process that enables you to test candidates’ skills objectively.

Skills tests can help you make the most of your employee referral program

Skills tests enable you to evaluate candidates’ skills and personalities objectively without bias or favoritism. To make the most of your employee referral program, we advise you to use it in conjunction with skills assessments, such as skills tests, work samples, or job evaluations. 

This way, you can be sure that the candidates referred to you are a good fit for your company culture-wise and have the skills required to be successful in the role. 

Assessment tools such as pre-employment skills tests can help you save time and money in the hiring process and reduce employee turnover rates.

With the help of an assessment platform like TestGorilla, you can easily create and administer custom-made assessments to your candidates, track their progress, and compare results side by side. 

Get started for free today and start making better hiring decisions, faster and bias-free.

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