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Why You Need an Employee Referral Program and How to Start One

Have you ever felt like you simply cannot find enough of the people you need to drive your business? The growing skills gap is a real thing, and it illuminates the marketplace’s need for niche skilled employees.

A shortage of experienced individuals has caused companies to go to extreme lengths to attract skilled workers. One such method is the implementation of an employee referral program.

What is an employee referral program, do you need one, and how can you get one started? We cover the answers to your questions and more in this guide to employee referral programs.  

What is an Employee Referral Program?

An employee referral program is defined as a recruitment method in which current employees are encouraged (and even rewarded) to introduce suitable candidates from among the people they know. Ultimately, employee referral programs aim to generate quality candidates for internal job openings. 

The goal of a referral program is to get your current employees to reach out to their friends, family, and colleagues in your industry and tell them about the excellent opportunities at your company.

The Advantages of Employee Referrals

As you can imagine, there are several benefits to implementing a referral program. Employee referral programs help you:

1. Find Passive Candidates

When a candidate search is particularly challenging, you may need to reach out to passive candidates. These are individuals who aren’t currently looking for a new job because they’re employed elsewhere, and possibly quite happily so.

Approaching these individuals can be tricky for hiring managers, but friends and family often have a lot more success. Passive candidates are often more receptive to referrals from friends than from management at another company. When an employee reaches out to someone they know, they can vouch for your workplace culture in a way that you, as the hiring manager, never could.

As an added bonus, passive candidates are higher caliber candidates more often than not.

2. Boost Morale

Successful placement of a referred candidate can be a substantial morale booster for an employee. In the first place, the employee will receive whatever incentive you've prepared for them through the referral program. Secondly, morale goes up when teams work well together, and one great way to guarantee that is to give your workers ownership in the hiring process.

Current employees are only going to refer team players. You’re not going to get employees reaching out to their old rivals or people they don’t enjoy working with. 

3. Save Time & Money on Recruiting

Successful employee referral programs can have a positive financial impact if it replaces alternative recruitment methods that can sometimes be costly. This may seem counter-intuitive since many referral programs are set up with financial incentives for the referring employee. But positions tend to fill faster when there is a referral. That means you’re spending less on job posting, recruiting, and searching.

4. Source Diverse Candidates 

Did you know that the diversity of your team influences their creativity? That's just one of the many benefits of a diverse workforce. Referrals are ranked number one as the most productive source for diversity hires, well ahead of major job boards, company affinity groups, and diversity career fairs.

5. Retain Employees Longer

Referral hires have greater job satisfaction and stay longer at companies; 46% stay over one year, 45% over two years and 47% over three years. It goes without saying that increased employee retention is a cost savings for any company.

The Downside

Employee referral programs are great. However, they are not perfect. Reasons why include:
  • Excessive reliance: Successful implementation of an employee referral program can sometimes cause in an inbred organization. This can lead to group think and can foster cliques to form internally.
  • Cost: Sometimes the cost of hiring via an employee referral program can be more than other recruitment methods. For example, job board hires cost on average $1,671 versus referral hiring costs of $2,306. 

Overall the advantages of implementing an employee referral program far outweigh the disadvantages, especially if you plan your program carefully.

If your company already has a program in place, make sure to give it the attention it deserves. If your company decides to start an employee referral program down the road, make sure to do your due diligence before implementing.

Are you considering developing a referral program at your company? Here is what you need to know to get started. 

What Does an Employee Referral Program Look Like?

The structure of employee referral programs vary company to company. If your company decides to implement an employee referral program, keep in mind the following variables: 
  • Compensation: Generally, all employee referral programs offer a monetary bonus for referred employees who are hired and retained for a set period of time. However, not all companies use cash bonuses as an incentive. Some companies offer their own goods or services to employees in exchange for referrals. 
  • Measurement: To measure the effectiveness of an employee-referral program it is important to track metrics such as the cost of employee referrals versus other recruitment channels, performance and retention of referred employees, employee attitudes toward referral programs, and the percentage of new employees who are hired via referrals.
  • Payment: Often companies will pay the employee who successfully referred an individual in a series of installment payments. These installments are based upon retention of the referred employee through numerous milestones.
  • Implementation: Referral programs need to be formalized and communicated just like any other company process or procedure.

How To Set Up an Employee Referral Program

Step 1: Decide what incentive you will use to get employees to make a referral. (Get some ideas in the next section!)

Step 2: Find out if your current management software will accommodate a referral program or if you need to implement new software.

Step 3: Teach your employees what you are looking for in job candidates and how the referral program will work.

Step 4: Respond quickly to referrals as they come in.

Step 5: Regularly revisit your referral program to evaluate it, improve it, and respond to any problems.

What Incentives Work Best?

On the one hand, the opportunity to work with someone you really enjoy is a strong incentive on its own. But on the other hand, if that’s the only incentive you provide to your employees, you likely won’t get a ton of buy-in.

There are a few methods for incentivizing participation in these programs. Depending on the interests and priorities of your employees, you can find the incentive combination that works best for your company.

  • Cash bonuses
  • Extra vacation days
  • Recognition within the company for being a team player
  • Donations to the non-profit of the referrer’s choice

Of course, you can get creative with your incentives, too! Perhaps you want to reward your best referrer with an expenses-paid weekend trip or a great reserved parking spot. You’ll need to figure out the best incentive for your employees, and this may take some trial-and-error.

4 Tips for a Successful Employee Referral Program  

  1. Communication is vital. It is important to publicize an employee referral program once it is implemented as often as possible.
  2. Be Specific. Job descriptions should be very specific including mandatory qualifications such as education, experience, expected salary range, etc. in order to avoid receiving a slew of unqualified candidate referrals. 
  3. Always offer feedback on each referral. If an employee refers an individual for a position internally, the company should ensure he/she hears feedback within 72 hours.
  4. Cast a wide net. It is important to encourage employees to refer outside their area of expertise.

Associate referral programs are just one recruiting trend that hiring managers need to be aware of in 2019. What else is new? Find out in our free offer, Recruiting in 2019. We are happy to provide you with this informative guide to what is happening in the recruiting world so that you can apply our expertise to your recruitment processes!

Select One is also happy to talk with you about your recruiting goals and frustrations so that we can help you figure out how to reach those goals and overcome those frustrations. Contact us today to learn how we can help! We look forward to hearing from you.

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Editor's Note: This post originally appeared on the SelectOne Blog in February of 2019. It has since been updated to include more information. 


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