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Summary: Employee referral programs incentivize current employees to help with recruitment by offering them rewards for referring appropriate candidates.
Employee Referral Program (ERP)
An employee referral program (ERP) is a recruitment program designed to make use of the networks and social connections of a company’s current human capital. These programs offer various rewards to employees when they refer candidates who are successfully hired for open positions. In this sense, these programs take their inspiration from referral marketing programs, which reward individuals for spreading the word about a business to get their friends, family, and associates to become new clients.
In an ERP, employees are encouraged and incentivized to help their employer fill vacancies by referring people they know. The underlying assumption of the ERP is that employees will know people who are qualified and a good fit for the business. It’s also assumed that this kind of program will be more efficient than public recruiting measures or that they may work well in unison.
How Does A Referral Program Work?
ERPs are generally quite simple. First, a company decides to offer incentives to current employees to help them fill open positions. When a position is open, the company informs its employees of the characteristics of a desirable candidate. If an employee puts forward a candidate and that person is hired and also retained for a specific period of time, they receive a reward.
How To Design An Employee Referral Program
Creating an employee referral program can involve three important steps as follows:
- Planning: The company has to decide how the referral program will work. This includes choosing the duration of the program, how long it will be in effect for each open position, and how to judge whether a hire has been successful and the reward should be given. Also crucial is a mechanism for giving referrals and tracking them that’s easy for all employees to use. Finally, a budget has to be allocated for the program.
- Prizes: The company needs to choose how to incentivize its employees to achieve the best effects. Aside from pure monetary rewards, they might choose to offer things like physical prizes, vacations, charitable contributions, recognition, or other rewards they might desire. Rules for how and when rewards will be given need to be set.
- Promotion: Finally, the company will have to create and implement a strategy for communicating the ERP to its current employees so they know how it works and the role they can play in it.
Pros And Cons Of Employee Referral Programs
There has been a lot of research into ERPs, and findings show that these programs are generally beneficial. At the same time, they do have their weaknesses which employers should be aware of.
- Pros
Cost savings
Traditional recruiting can cost a lot of money. A company either has to use in-house professionals or contract a recruitment agency to find them the employees they need. While referral programs normally have monetary costs involved, these are typically much less than the fees recruiters charge.
Time savings
Since current employees already know their network of contacts, it can take no time at all to gain their referrals. In contrast, traditional recruitment usually allows a few weeks or months for information about a job opening to spread to enough potential candidates. The candidates they put forward may be able to fast-track to the interview process, which saves even more time.
Better workers
Employees who want to receive the rewards of an ERP will recommend only good workers to protect their own reputations. They may also help to police and encourage the good behavior of the workers they recommend since it reflects on themselves.
Better fit
When opening applications to the public, a company will receive candidates largely based on their skills and availability. Referred candidates, however, have already been pre-screened by current employees who know them personally and are, therefore, better able to assess their fit.
Lower turnover
Referred employees have a better fit and also have friends at the organization. They also get to learn a lot about the company and their potential role from the first-hand experience of their contact. These factors seem to influence retention and make their turnover significantly lower than that of no-referral hires.
- Cons
Recruitment skills
Employees may not be as talented at recruiting their contacts as professional recruiters can be. They may not know the best ways to interest the people they know in actually applying for open positions with their companies.
Less diversity
Academic study of referral programs has noted a lot of homophily in social networks – people associate with others who are like them and have similar interests. However, if a company is looking to gain strength through diversity, ERPs may not always provide what they need.
Avoiding competition
Current employees have to think about their own success in the company. If they wish to stand out, receive promotions, and get raises, they may be hesitant to refer others who may outcompete them. This could cause the ERP to limit staff quality.
Employee Referrals Lower Costs And Turnover
When well-planned and properly incentivized, employee referral programs can produce a lot of benefits. Companies can fill vacancies faster and find better talent with their employees’ help than they normally could with recruiters alone. These programs can save money if companies can be creative and offer attractive incentives that don’t cost a lot.
Frequently Asked Questions
Not at all. Companies can offer anything they think might incentivize their employees. Rewards can include paid leave, physical prizes, praise and recognition, or even donating to charities on the employee’s behalf.
Generally, you shouldn’t give a reward right after a referred candidate is hired. Instead, set a limit of a few months to ensure that the new hire has worked out and then give the reward. This helps limit the high cost of turnover and ensures employees are truly motivated to find quality hires.
Andrew (Drew) joined the Remote People team in 2020 and is currently Director, Regulatory Affairs. For the past 13 years, he has been a trusted advisor to C-Suite executives and government ministers on international compliance and regulatory issues. Drew holds a law degree from the University of Otago, a PhD from the University of Sydney, and is an enrolled Barrister and Solicitor of the High Court of New Zealand.
