The Art of Employee Referral Programs

Finding quality talent in a tight job market requires recruiters to be proactive, leaving no stone unturned in an effort to identify suitable candidates. One goldmine for recruiting is your existing workforce.

Existing employees can be a valuable resource when it comes to referring potential new employees who will be a good fit with your company’s culture. According to Forbes, while fewer jobs may be advertised in this current economy, both employees and employers can be looking inward towards their own networks to uncover excellent opportunities for job seekers.

5 minutes

1st of April, 2023

What Are Employee Referrals?

An employee referral program is a method that can be used by hiring managers and recruiters for finding new employees. This method allows existing employees to aid in the filling of roles within their own company. Often, employees who refer qualified candidates will be rewarded with incentives such as a referral bonus or gift cards if their recommendations are successfully hired.

When a company utilizes an employee referral program, a current employee refers a candidate for an open position. The hiring manager will review the candidate and decide if the candidate is a successful referral and encourage the person to apply for the open position. From there, the hiring process is the same for the referred candidates and those that have applied externally. If the referred candidate becomes a successful hire, then the employee who made the referral may be rewarded through company incentives.


Good Employees Give Good Referrals

Researchers at the Institute for the Study of Labor (IZA) in Bonn, Germany, found that referrals work “because they allow firms to select workers who are better suited for particular jobs.” The IZA study concluded that referrals from existing employees often result in candidates who are a better match for specific jobs. “Of possible interest to managers is the fact that not all referrals may be equal,” noted the IZA report. “Our analysis suggests an underlying mechanism is behind the better performance of referred workers: That people tend to refer individuals who are similar to themselves.”

Moreover, the IZA research found that companies realize a better ROI from referrals that came from higher quality employees. “Thus,” they observed, “employers may wish to give priority to referrals from their best current workers.”

In order to encourage employee referrals, HR departments should clearly communicate both the need for referrals as well as the current job openings. HR should also provide employees with the copy of the job description and requirements along with the request for referrals. Employees that have a good understanding of the open positions and the job duties can then look towards their own professional network to make successful referrals.

Along with communicating the open positions and needs of the organization, HR departments with a well organized employee referral program should communicate the benefits of employee referrals to their current employees. HR departments can communicate these benefits through referral meetings and other marketing strategies.


Benefits of Employee Referrals

According to the Society for Human Resource Management (SHRM), while companies are still utilizing job boards for posting their job openings, employee referrals are an important recruiting source. With nearly 30 percent of new hires in organizations coming from employee referrals over the past decade, companies are looking at improving their employee referral programs.

“Creating and managing a vibrant employee referral program makes good recruiting sense because employee-referred job candidates are usually a good cultural fit and may need less on-boarding when hired,” notes a SHRM report. “Employee referral programs have also proven to be a cost-effective way to tap into a large, qualified labor pool of passive job seekers.”

Employee referral programs can lower overall recruiting costs and improve the recruiting process. Employers may keep their referral systems open, even after filling the open positions, so that employees can continue to suggest qualified candidates at any time. Successful employee referral programs can also improve employee satisfaction and lead to better employee retention rates. When a referred candidate is a good fit for the company, everyone wins.


4 Tips for a Successful Employee Referral Program

When creating an employee referral program it’s important to make it easy-to-use and one that employees will be encouraged to participate in with the right mix of rewards.

  1. Make sure that the company culture is encouraging of employee referrals. Companies should openly accept employee referrals and regularly provide feedback to employees on the suggestions they make.
  2. Set clear guidelines on the referral process, who can make referrals, and the referral rewards if there is a successful hire. There should also be clear guidelines within HR as to the timeframe about the expected timeframe for both the current employee and the referred candidate to receive a response from the hiring managers. Some companies utilize employee referral software which can take the guesswork out of the referral process.
  3. Motivate current employees to refer candidates through rewards and incentives. While while many companies use bonuses or gift cards as rewards, others may offer additional paid time off or conduct drawings for prizes, or public recognition within the company.
  4. Providing feedback to the employee who made the referral, successful or not, is important for making the employee feel valued in their contribution and can even improve the quality of referrals made by the employee in the future.

It is also important to put analytics in place to measure program performance. Finally, SHRM suggests using an internal marketing campaign to ensure ongoing employee participation. “Employers should consider branding their program so employees and candidates alike are familiar with the program, and come to expect consistent communications from it,” says SHRM.

Recruiters know that it can be a challenge to find the right person, especially for a hard-to-fill position. While tapping-in to your existing network of employees requires a concerted effort, the reward may just be new prospects who are a really good fit. In the long run, that will save time and money, while adding cohesiveness to your existing company culture.

Employee referral programs are one way to ensure your talent feels valued. If you're exploring more ways to enhance your existing company culture, discover more about the importance of employee recognition here.


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