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Employee Referral Programs: The Bigger Picture

2.15.2015
In an increasingly competitive job market, the success and popularity of employee referral programs—69% of organizations say they have a formal program in place—is a reminder that your own employees are your best recruiters. Employee referrals are not only those most likely to stick around—with 46% retention after one year–they are also the leading source for new hire quality, according to a 2011 Staffing.org study. Employee referrals directly affect the bottom line, producing approximately 25% more profit than hires from other sources. Every company should have an employee referral program.

Tangible Benefits: Time and Money

Though retention and quality are sufficient reasons to implement an employee referral program, saved costs, both measurable and immeasurable, are just as compelling. Employee referral programs initially may appear more expensive; job boards hires cost on average $1,671 versus referral hiring costs of $2,306, according to a 2011 study. When saved time and resources are taken into account—employee referrals lead in time-to-fill (29 days for referrals, 39 days for job boards, and 45 days for career sites)—these referral programs not only save money but also substantially lessen the likelihood of future hires and their associated costs. Viewed in this light, the substantial cash reward that many companies pay their employees for referring potential new employees pays for itself and then some.

Intangible Benefits: Diversity and Better Cultural Fits

Employee referral programs also have intangible employer benefits: they help a company grow organically, and increase the diversity of its workforce. Dispensing with the old myth that “referrals have a negative diversity impact,” a 2012 CareerXroads study found that employee referrals are actually “the most productive source for diversity hires, well ahead of major job boards, company affinity groups, and diversity career fairs.” Eighty-nine percent of hiring failures are due to poor cultural fit, and as soon as an employee leaves, the clock and costs reset. Employee referrals can act as an inoculation against a failure of “fit.” In addition to already having a personal connection inside the company, referred employees are better acquainted with the intricacies of company culture that for external hires could later turn out to be an unwelcome surprise and cause to leave.

Focus on Culture

A recent Towers Watson survey found that even in a recession, 54% of companies surveyed had difficulty finding the right person for a position. But according to human resources consultant Susan M. Heathfield, there’s a simple solution: “companies can overcome the shortage of top performing employees by creating a culture that inspires great employee referrals.” The two go hand-in-hand. Employee referrals are instrumental in creating an open, sociable culture, but without a positive work environment, employees won’t refer others to their work.

Future Trends

Look for employee referral programs to become more sophisticated and more visible. What does this mean? 

• Referral sources expand to non-employees. While this type of program poses its own risks, many companies realize that their business partners and former employees can be a good source of referrals.

• Variable fees depending on the type of position. 

• Innovative and creative fee arrangements. The reward system, too, is changing. Instead of cash, some companies offer gift cards, vacation time, trips, and charity donations in the referring employee’s name

• Sophisticated third-party software–with social features–not only to track referrals but tap into employees’ social networks. Recent startups like Top Prospect and Germany-based AdviseMeJobs have found a market in this space.

• Employee Referral Programs will become a more visible and communicated part of a company’s talent acquisition strategy and culture. 

If these trends continue, hiring is sure to become more social than strictly business—instead of soliciting applications, soliciting people. So, the next time a position opens up in your company, make sure you turn first to the best recruiters in your business: your employees.

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