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Employee Referrals Save Time, Save Money, Deliver Quality

Thoughtfully implemented employee referral plans are excellent ways to attract the best people at the lowest cost. Employees like to help their friends, and they don't expect lavish rewards.

May 31, 2001
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When employee-referral programs make the news, it's usually because thecompanies involved have paid a big bounty for a hire. Earlier this year, SRAInternational, a Fairfax, Virginia, systems integrator, awarded an employee a$50,000 grand prize in its annual employee-referral lottery. And in 2000,Blackstone Technology Group, a San Francisco-based IT company, picked up the tabfor a referring employee's BMW, the prize in a company raffle.

    For any HR person who has concluded that it takes big bucks to create asuccessful referral program, here's the real news: the programs' value lies intheir economy and ability to not only attract good job candidates but also showgoodwill and commitment to the employee making the referral.

Why institute a referral program?
    The programs are valuable for four reasons, according to "EmployeeReferral Programs: Optimizing Your Most Effective Recruiting Tool," a June2000 white paper by Angami Systems, a referral-technology company that has beenacquired by Hire.com.

  • Low cost per hire. Referral programs cost $500 for exempt employees and$70 for non-exempt, versus $2,884 and $726 for print advertising, and evenmore for agencies and executive recruiting firms, according to the 2000Employment Management Association's cost-per-hire survey.

  • High-quality hires. Employees are unlikely to recommend people who theythink are unqualified or unreliable.

  • Decreased time in hiring. Employees are selling the company to the peoplethey refer. Interviewers, including people in HR, can spend their timeevaluating a candidate's background and qualifications. Employees also tendto recommend people who they know are ready to make a job change, which alsospeeds the hiring process.

  • An opportunity to strengthen the bond with existing employees. Referralprograms acknowledge and reinforce the company's commitment to rewarding theindividual for helping the company.

    Additionally, an Ohio State University study shows that employees hiredthrough referrals have a retention rate that's 25 percent higher than that ofemployees hired through other methods.

What motivates employee referrals?
    A recent survey of employees in a dozen industries by Referral Networks, aNew York City-based company that markets a Web-based application to helpcompanies create and manage employee-referral programs, gives some insight intowhat it costs to get employees interested in making referrals.

    The news is good: five-figure bounties are not what drives the process.

    Forty-two percent of the 2,300 employees surveyed by Referral Networks saidthey referred because they want to help a friend find a good job. Twenty-fourpercent said they wanted to help the company. Another 24 percent said they weremotivated by a reward, according to the survey.

    More good news: employees don't even expect a lot of money for makingreferrals. In the Referral Networks survey, 85 percent of the respondents saidthey'd be motivated by a reward of $1,000 or less. Thirty-two percent of thosesaid they'd be happy with a sum between $100 and $400. Interestingly, 24 percentof the companies in the survey were apparently overpaying, offering $1,500 ormore as a reward.

    Meanwhile, two-thirds of the respondents told Referral Networks that they'dbe happy to receive such non-cash awards as airline tickets to U.S.destinations, weekend getaways, two extra vacation days, or a piece ofelectronic equipment.

    Computer hardware giant Intel Corp. uses a combination of monetary andnon-monetary incentives, says Erin Gorsline, program manager, Intel e-Staffing.In addition to a cash reward for referrals, the company also offers a raffle forthose employees who've made referrals. Last year, the prize was a choice betweena $1,000 travel voucher or a home entertainment system.

    "We like to give folks choices," Gorsline says, "and we'vedefinitely seen increases in the number of quality résumés submitted sincewe've begun the process." Gorsline said 50 percent of the company's newhires have come from referrals.

    John Sullivan, head of the Human Management Program at San Francisco StateUniversity and an expert in referral programs, agrees that "mix andmatch" programs like this are effective because the enthusiasm for aprogram dies down after a year or so. Giving away something big every six monthsgoes a long way toward revitalizing interest, he says.

    Unifi Network, a division of PricewaterhouseCoopers, uses non-monetaryincentives in its referral program. But "money gets people's attentionfaster," says Tom Casey, a partner in charge of the talent managementpractice.

    From its research, Referral Networks concludes that the programs are not"a game of dollars," says Catherine Drogin, the company's vicepresident of marketing. "You don't have to offer more than $1,000. We don'trecommend taking it away if you're offering more than that, but if you'rethinking that a higher reward is better, it's not. We recommend that you takethe money and put it into promoting your program. Spend it on driving awareness,so that the employees don't have the excuse of 'Oh, I didn't know we had aprogram.'" Typically, Drogin says, only about 5 percent of a company'semployees participate in the referral program. With best practices, she says,the number can be raised to 25 or 30 percent.

Why employees don't refer, and how to get them involved
    The top three responses for not referring, according to the survey byReferral Networks:

78 percent: Don't know anyone suitable for the positions

42 percent: Afraid the referral will reflect badly on them if the candidate doesn't work out

21 percent: Process is too much of a hassle

    On the surface, the first reason seems to have nothing to do with referralprograms or their incentives. But this response actually gets at what Sullivansees as a flaw in many referral programs: they assume that employees know how tofind job candidates. Some employees are "meeters," and have bigpersonal networks. For other employees, Sullivan recommends that HR provideinformation (via meetings, or the company's intranet) on how to:

  • Find referrals through e-mails and listservers

  • Work a convention to identify and build relationships with potential referrals

  • Find names first, and then build relationships

  • Assess the potential of a contact

    The next reason, fear of bad fallout if a candidate doesn't work out, mightsound like a drawback, but it isn't, Drogin says.

    "This is a big positive for companies. It says that the employees aredoing the first level of screening. Unlike job boards and classified ads, wherethere's a huge influx of résumés and HR managers have to weed out the 85 or 90percent that aren't appropriate, this 42 percent says that while employees mighttalk to 10 people, they'll only recommend one. That's why these programswork."

    That's been the experience at Unifi, where the reward for referrals isparceled out in two installments: one-third immediately and two-thirds when thenew recruit has finished one year. The result has been that employees don'trefer someone who is not capable of lasting out the year, or would likely leavein six months. The employee who made the referral also sticks around for a year-- a great side-benefit when retention rates are low nationwide.

    For those who think the program is a hassle, there are easy fixes, accordingto those who run referral programs. The most popular is automating the programby putting it on the corporate intranet, as Intel has done. The referral site isaccessible to all employees and has the guidelines and eligibility requirementsfor the employee-referral program, along with listings of prize winners. Jobcandidates can submit their résumés electronically to the site, and recruitersand hiring managers have instant access.

    Intranets don't necessarily solve every issue, Drogin says. In some cases, acompany's intranet merely holds a referral form that the employee downloads andfills out. Some companies ask that the referring employee fill out half the formand pass it on to the applicant. She fills out the other half and attaches arésumé. Then the material comes back through an external scanning source andinto the company's applicant-tracking system -- a tedious route, to be sure.

    A smoother approach (and one that Referral Networks provides) is to allowemployees to see the jobs that are available and, with one click, send theinformation to several friends who might be potential candidates. The candidatescan respond to the job site directly.

    The benefit, Drogin says, is that the employee spends a minimal amount oftime in the process, and lets the friend decide, by reading about the job andits criteria for hiring, if it's right for him. "It takes a huge burden offthe HR managers."

The need for speed
    Whether a company uses an intranet, a Web service, or some other system,rapid response is vital. If candidates don't hear from the company right away,they assume that nothing is happening, Sullivan says. The employees who make thereferrals may refrain from doing so in the future if they find their friendsgetting strung along or ignored. That undermines your entire program.

    At Agilent, the Hewlett-Packard spinoff company where Sullivan was arecruiting consultant, a referred candidate would receive a phone call from acompany representative within 24 hours of applying. In addition, the referringemployee would receive a personal e-mail and a phone call. Both persons would bekept abreast of where things stood in the hiring process.

    "You have to get the hiring managers to understand that, through thisprocess, you get A+ quality résumés that have to get acted on rapidly."

Workforce, June 2001, pp. 67-72 --  SubscribeNow!


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