Do You Have an Employee Referral Program? 5 Benefits You Might Be Missing

Want to get a better ROI on your new hire? Consider an employee referral program. They work. As many as 88% of employers say an employee referral is a cost-effective way to source new talent.

Employee referrals also tend to find people who will better fit the role. These candidates have a direct source of information on the day-to-day tasks of the job and can easily get first-hand knowledge about your company. By leveraging your employees' networks and recommendations, your talent acquisition team can reduce the effort they need to create a pool of diverse and knowledgeable candidates for each role.

By not engaging employees in the process of finding new candidates, companies risk facing a limited talent pool, higher recruiting costs, longer processes, and a lack of diversity in the workforce—all of which will have ripple effects outside of HR and across the company.

But it’s not as simple as sending out an email and asking employees to send candidates your way. Establishing and maintaining an effective employee referral program takes planning and tools to make it run effectively. For example, utilizing an easy applicant tracking system (ATS) can improve the hiring process and prevent referrals from falling through the cracks.

Let’s dive into what you need to know about how to use employee referrals to reduce hiring costs.

What Is an Employee Referral?

An employee referral program encourages employees to refer people in their networks, such as friends, former colleagues, or even qualified family members, for open positions in their organization.
Instead of using outside hiring techniques like recruiters and job boards, your employees do the heavy lifting by using their existing networks to find a suitable person for a job opening.

Harvard Business Review (HBR) stresses that there’s also a difference between strong and weak referrals. HBR’s Kate Gautier says it’s wise for companies to test how well employees know their referrals. (After all, people who only know each other through social media have the same hiring outcome as candidates with no referral at all.) Instead, companies should aim for their employees to be referring people they have “strong connections” with.

“These people were former coworkers who had known each other for more than one year,” Gautier says. “At the other end of the spectrum were referrers connected only through social media, and we found that the strong connections were nearly three times as likely to result in a good hire than the online connections. In fact, the online connections were no more likely to result in a good hire than people who weren’t referred at all.”

The Strategy Behind an Effective Referral Program

Referral programs are more effective than other methods like job boards and recruiters at finding a candidate that fits. Studies show that referral programs cut recruitment costs and allow companies to tap into a talent pool they might have never had access to through their employees.

Using an applicant tracking system helps keep track of referrals made by employees and will move the hiring process along efficiently. Employees can track their applicant recommendation throughout the recruitment process to stay informed on where the person they recommended is in the hiring process. Not all applicant tracking systems include employee referral programs; however, many can be found in the BambooHR marketplace.

Should You Offer a Referral Bonus?

Only 4% of company referral programs successfully hire 30% of their employees through referrals. This is likely due to the lack of employee incentives. Consider rewards that will encourage employee participation.

The average employee referral bonus amount is $2,500. Depending on the need for the role, however, bonuses can vary. One concern that may arise with employee referral programs is hiring homogenous candidates. However, the data shows that employee referrals tend to create more diverse talent pools. Using bonuses and other incentives to encourage all employees to participate in an employee referral program can help increase diversity.

It is common for companies to have requirements for an employee to redeem their employee referral bonus, such as that the new hire must stay for six months or the referring employee must be working full-time in a permanent role. This ensures that companies can retain employees and reduce their cost-per-hire.

Not all referral bonuses have to be cash incentives. Other creative options can be used to incentivize employees that may work better:

• Extra PTO
• Vacation referral bonus
• Gift cards
• Prizes and raffles
• Lunch paid for by the company
• Recognition

Incentivizing employees can be seen as more of a thank you rather than a motivator. 35% of employees refer to help their friends and former colleagues, which is their main motivator. Referral bonuses are just the cherry on top!

5 Strategic Benefits of Employee Referrals

1. Employee Referrals Source Strong Candidates

Referrals are source above-average applicants. That’s great for the business—but what about the employee that referred them?

An employee referral program that rewards referrals for above-average applicants can turn your hiring process into a win-win situation. Of course, you can offer employees financial rewards and bonuses but try to think outside the box, too.

Companies can now move towards other rewards and experiences to encourage employees to give referrals for above-average applicants. Distillery, for instance, hands out Apple Watches and iPhones, while DigitalOcean makes a $1,500 charitable donation in the name of the employee who gave the referral.

If your employees are being rewarded, they’re more likely to make good referrals.

2. Employee Referrals Fast-Track the Hiring Process

Referred candidates are quicker to hire than those you find on job boards.

A candidate that’s been referred takes about 29 days to hire and onboard. However, if you find a candidate through a recruiter or on a job board, it takes an average of 39-55 days to bring them on board.

If we break down those stats, a clear pattern emerges. Instead of going through the timely process of posting on job boards, screening CVs, and running candidates through pre-interview tests, you can jump straight to the interview. This cuts out weeks of precious time and can fill a job earlier instead of having it vacant.

3. Employee Referral Programs Are Extremely Cost Effective

According to research by LinkedIn, an employee referral program helps you cut down on hiring costs as you don’t have to pay for job boards, recruiting fees, and agency commissions.

The money you save can go beyond these obvious cuts. There’s also the money you’ll save in time as you don’t have to screen a candidate or spend weeks going through the traditional hiring process. Instead, the employee that’s made the referral will do the heavy lifting as they’ll be screening the candidate for you.

Research from Meritage Talent Solutions Founder Kara Yarnot found companies can make significant savings using an employee referral program even after factoring in the cost of a bonus.

“For example, if a typical agency charges a fee of 20% of a hire’s first-year salary, that could be $20,000 for a single $100,000 hire,” she says. “Even if you gave your employee a $2,000 referral bonus for successfully recommending a new hire, that’s an $18,000 savings, compared to hiring through an agency.”

4. Employee Referrals Support Long-Term Retention

Finding the right employees is one hurdle; keeping them around is even harder.

Studies have found that employees hired through referral programs are likely to stick around for longer than those hired using traditional channels like job boards and recruitment agencies. Employees that were referred stayed in a job for at least 38 months, while non-referred employees left after 22 months—a 70% difference.

The logic is simple: a current employee is unlikely to encourage someone to work at your company unless they think it’s a great place to work themselves. Therefore, candidates are likely to stick around for longer once they find out how great your workplace is!

5. Employee Referral Programs Boost Workplace Engagement

Finally, employee referral programs can make a workplace feel more like a family.

If an employee feels entrusted by your company to make hiring recommendations, it can boost their investment and self-worth at their workplace. It’s unlikely an employee is going to recommend somebody for a position if they don’t think they’re up for the job. On the flip side, encouraging them to look into their own networks to source good employees can instill a sense of pride and belonging at the company that monetary rewards can’t.

Tableau is a great example of bringing employees together and getting them more involved in the company. The company organized Recruitment Happy Hours, where they ask employees to bring along people who they think would be a good addition to the company.

It’s not to say that Tableau doesn’t pay cash rewards for referrals (they’ve handed out $5.5 million worth), but their referral strategy goes beyond money. They’re showing referrals why their company is a great place to work—and it’s working.