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Basics of Employee Referral Programs

January 21, 2001
Does a program that can producequalified candidates for hard-to-fill job openings, reduce recruiting costs and- at the same time - boost employee morale, sound too good to be true? 

    Referral programs are not a new idea.Companies have used them successfully for decades. But they have evolved to adifferent level of popularity. Referral programs can be simple to administer andare not legally risky, which has added to their instant appeal. Companies thatare trying referral programs for the first time report that they are likely tocontinue offering existing employees rewards for recruiting new applicants. 

    Referral rewards have proven effectiveat increasing the number of applicants, per position, by soliciting passivejob seekers. It makes sense that, even for highly technical or specializedpositions, your employees may know other people who do similar work.  Perhaps they know colleagues in trade organizations orneighbors who work for competitors. 

    This approach can replace the basicservices of a retained search firm, which can cost between 20% to 40% offirst-year salary on each position, depending on the level of applicantscreening and background verification. Instead, employees cultivate their ownnetwork contacts and reap cash rewards once their referrals are hired. 

    Data is not fully developed on theimpact that referral rewards have made on reducing recruiting costs, but mostcompanies agree that their programs have reduced recruiting costs. Cash rewards are also a great motivator for existing staff. Employees making referrals have an incentive to welcome and support newrecruits in that critical introductory period because referral programstypically pay out only after the new hire has remained on the job for a periodof time. 

    Cost savings aside, employee referralprograms can be highly effective to jump-start an expanding operation whenspecialized skills are in demand or time is limited. This was the case when the law firm of Brobeck, Phleger and Harrisonexpanded to its new facility in San Diego - now headquarters for 104 attorneys.With as many as 16 attorneys being hired in a single month, the need wascritical for a large number of experienced legal secretaries and paralegals whowere familiar with local courts.  Heftyreferral rewards got the word out in the legal network and qualified applicantsin the door to support the firm’s sudden business growth. 

What’s the downside? 
   Referral programs stimulate a broaderapplicant base but really don’t disturb the normal interview and hiringprocess. Yet, there is a risk that the company may depend too heavily onword-of-mouth referrals and end up with a workforce that has anunder-representation of a protected class, per Title VII of the Civil RightsAct. The more diverse the existing employee base, the less likely that is tooccur. 

    There is also a risk that you willanger your competitors by encouraging aggressive pursuit of their employees.Take this into consideration, just as you would weigh other factors in thehiring process. 

    Where referral programs have becomemore complex and require more detailed management, there is the risk thatemployees may complain about program design, payment errors, or unfair selectionof applicants. 

    Referral programs are an instantsuccess only for those companies who are new to the concept. They are actually atried-and-true recruiting technique boosted by new technologies and a tightlabor market. “Simple is better” in referral program design andadministration. Keep your attention on maintaining sound interview and hiringpractices, and the downsides are truly minimal. 

Referral questions and answers
   Are you establishing a new referralrewards program for your company?  HereareQ & As to assist you in basicprogram design: 

1. On what basis should referral amounts be standardized?
Flat rates or a graduated amount per level of position is typical.  This approach can be simplified by using broader categories.For example, one company pays $250 for non-exempt, $500 for exempt, and $1,000for “hard-to-fill” positions.
2.  Are companies offering items other than cash rewards?  
Yes. From DVD players to cell phones, companies are taking advantage oftheir own products and services or vendor connections to offer employees specialitems as Referral Rewards.
3.What are the disadvantages of installment payments ofReferral Rewards?
Lump-sum payments are usually made after the new employee has remainedsuccessfully on the job for a period of time; 60 to 90 days is a commontimeframe.  Programs may requiremonthly installment payouts to the employee for as long as six months, but theserewards are more difficult to administer and lose the impact made by a lump-sumpayment in a single paycheck. Even so, this approach may be worth the trouble ifit provides incentive to retain the referring employees, in addition to securingnew ones.
4.  Are there any program restrictions that should be considered?
Referral programs often limit the number of referred candidates to onlyseveral per employee (per position). This serves to keep self-managed systems ata reasonable size and builds in some screening by the employees to make suretheir best referrals have a shot.
5.  What information should be tracked to evaluate effectiveness of aReferral Rewards Program?
Determine if you have a higher applicant response, per position, wherereferral rewards are offered. Collect information on retention rates andrecruiting costs of employee-referred candidates, as compared to those locatedusing other methods.  Interview thereferring employees or conduct an opinion survey to learn more about employeeattitudes concerning referral bonuses and how your program is being implemented.

Web site resources 

  • www.referrals.com - A Web-based application that automates the entire employee referral process for an effective, easy-to-manage turnkey program.
  • www.refer.com - A site where employees earn money for referring their friends to jobs.