What Is an Employee Referral Program?

Here are ways employee referral programs can help you bring in more top talent — plus tips on how to set up your own.

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When it comes to finding talent, recruiters who look for every possible source tend to be the most successful. Advertising on job boards, in local papers, and putting signage on windows are common strategies. Employee referrals are another way to source potential new hires to join your team.

An employee referral program lets businesses use their internal resources — current staff members — to help do the recruiting for them. It’s a smart practice that typically costs less than external recruitment and often nets top candidates. Whatever size your organization, you can multiply your recruitment team by every staff member if you decide to start an employee referral program.

Why employee referral programs work

Employees with a strong work ethic typically associate with others who do also.

People tend to gravitate toward like-minded friends and colleagues. Hard working employees don’t typically find common ground with slackers. Work ethic is a personality trait: employees with a strong work ethic typically associate with others who do also. When your hard workers make a referral, it’s likely the person they recommend is hard-working as well.

The workers in your employ who have proven themselves are assets to your company. You often wish you could find others “just like” some or all of them. You can — when you initiate an employee referral program. An employee referral program builds a team of recruiters who know the company, along with its culture and demands. They also know the work ethics, knowledge, and capabilities of their friends and colleagues. These staff members are in a unique position as a bridge between what the company needs and what their associates can offer. They create a pathway for potential new hires to come to the interview process informed and intrigued.

More formal than asking staff members to recommend friends and family, a referral program asks employees to thoughtfully consider who among their circle is the best match for a vacancy. They then act as your “advance team,” discussing the position with their match. Employee referrers can sell the company on the potential hire — discussing the benefits of working for the organization, the culture, and even the demands. When candidates arrive for a first interview, they’re already well-versed and interested in what you have to offer.

Active and passive recruitment

They also set the stage for active and passive recruitment. Perhaps they know someone qualified for a vacancy who is currently out of work or looking to make a change. They can also make inquiries and gauge interest from friends and colleagues who may not be actively looking for work, but would be a great match for your company. Internal referrals may come for positions that are vacant, but you can also set up your program to reward employees for referring candidates for jobs that may become open in the future.

Success rates 

Companies with employee referrals enjoy a no-risk, high reward program. The Society for Human Resource Management reports that for companies that use these programs, the percentage of new hires made can be as high as 45% of all their recruitment efforts. Employee referrals also have the highest applicant to hire ratio, at 40% — according to Undercover Recruiter. When it comes to retention, they report greater job satisfaction and referrals stay with the company longer: 46% are retained after a year; 45% after 2; and 47% after 3 years.

51% of employers said it was less expensive to hire through referrals and up to 10 days faster to get a potential candidate on the payroll.

The average cost per hire for a new employee is over $4,000 per SHRM. Time consuming and a drain on resources, the Undercover Recruiter survey found 51% of employers said it was less expensive to hire through referrals and up to 10 days faster to get a potential candidate on the payroll.

In addition to lower cost and higher quality of applicants, consider what an employee referral program says to your current staff. The message is you value their suggestions and trust their judgment. An internal referral program costs nothing and benefits everyone: the company, the existing employees, and the new hires.

Creating an employee referral program

Planning an employee referral program starts with the basics: what will you offer employees and what will the terms be for them to receive payment. Most companies opt for monetary referral bonuses based on an actual hire and satisfaction of a short probationary period.

How much to pay 

You can create a payment system that works for your business. Some companies work on a percentage basis: 2.5% of annualized wages, for example. For entry-level hires at $15 per hour (assuming 40 hours per week) the annual salary would be $31,200. A 2.5% referral bonus would equal $780. Other companies develop a set bonus based on job categories: for retail/food service workers, a $500 bonus; for clerical/administrative workers, a $750 bonus; for management team members, $1,000 — and so on.

If you decide to work on a percentage basis, make sure to include that the bonus will be based on the lowest wage allowed in the salary range. If the hiring range for a particular job is $40,000 to $50,000 per year, your bonus should be based on the low end of the range — irrespective of the final offer for the new hire. At 2.5%, the referral bonus for this position would be $1,000, which is potentially less than the cost of a single job board ad.

When to pay it

Many companies pay out referral bonuses after the new hire’s 30th day on the job. If you typically lose new hires on the 45th day, however, consider setting your payment schedule for Day 60. The payout date is completely up to the employer.

Some organizations stagger the bonus throughout the first year. This can help reduce churn during that crucial first 6 months or year on the job. Some estimates put over 30% of new hires resigning their position within the first 6 months. To help prevent retention, if you intend to pay out $1,000 bonus for the referral, you may consider setting the payments at $250 every 3 months, until the new hire hits their first anniversary, or $500 every 3 months until they hit the 6 month mark. In this way, you have an advocate for the company helping the new hire make it past those first, difficult months.

You may even consider additional bonuses, on top of the set payment amount, if the new hire is retained for longer than the original payout term. An example would be a flat payout of $500 for a retail hire, paid to the employee who made the referral when the new hire made it to Day 60 on the job. Adding additional bonuses down the road encourage the employee who made the referral to help the newest member of the team stay with the company longer. A $100 bonus for every additional month or quarter the referral stays on the job can be highly cost-effective.

Rollout the plan

Once you’ve determined how much you’ll pay for referrals and what the payment schedule will be, it’s time to make the announcement to staff. Let them know the details of the program and how they can participate. Announce all vacancies internally to all employees via email (or text messaging) and ask them to make referrals to HR or the hiring manager.

Some companies have Employee Referral Forms that staff members complete to document the referral. Others rely on emails, but you’ll want to document the referral so the right payment can be made to the right employee if a hire is made. Whatever your process, try to make it fast, easy and user-friendly. The fewer hurdles you place, the faster you’ll start scheduling quality interviews.

It might be worthwhile to try internal announcements first; if you can set up quality interviews before you’ve spent a dime on advertising, you’re ahead of the game.

In many organizations, vacancies are announced internally before jobs are posted outside the company for a short period of time, say 5 to 10 business days. In others, internal and external posts are announced at the same time. It might be worthwhile to try internal announcements first; if you can set up quality interviews before you’ve spent a dime on advertising, you’re ahead of the game.

An employee referral program is a cost-effective way to hire. It turns your existing staff into ambassadors to recruit friends, colleagues, and contacts to your organization. It helps businesses save money and time on recruitment, and demonstrates the value you place on your employees and their recommendations. You may have an informal employee referral plan in place, but creating a structured policy can help more staffers participate and result in more referrals.

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