What is an Employee Referral and how to get it right?

April 26, 2021
Kristjan Kristjansson
5 minute read

More than a third of U.S. workers landed their current job via an employee referral. Employee referrals is on of the most common and productive ways of finding talents to hire. It can improve quality metrics such as time to hire, cost per hire and quality of hire and increase employee retention.

So what is an Employee Referral, is it something for you and your organisation and how to implement it the right way?

Definition of Employee Referral: What is an employee referral?

Employee Referrals is when someone you know is vetting another person for job opening. This could be a co-worker, a friend, or someone from your network. When someone who got recommended for a job gets hired, it’s referred to as an employee referral.

An employee referral program is when an employer has built an internal structure for employee referrals and how to treat them. This often entails an incentive for internal employees (and sometimes external recruiters and friends of the company), to suggest candidates for open positions for a reward if they apply or get hired. Sometimes this comes with strings attached, e.g. if someone stays on the job for longer than 3 months or more.

Why should you think about using an Employee Referral program?

Setting up a structured referral program can come with many benefits such as:

A) Time to hire

A Key Performance Indicator when it comes to hiring, shows that referred candidates are 55% faster to hire, compared to employees sourced through career sites (HR Technologist)

For many employers, volume is no longer the issue. They often deal with a surge in applications of varying quality and relevance. The problem is the time it takes to find the best, most relevant candidates quickly and efficiently.

B) Cost per hire

A referred candidate can cost less than a traditional candidate. You can skip advertising costs on a job-board, agency fees and on internal labor costs. This especially applies if you are using agencies and high referral feels for most hires (e.g. a typical agency might charge 20% of a hire’s first-year salary, that could be $20k for a single $100k hire.

Even if you gave your employee a $2k referral bonus for successfully recommending a new hire, that’s an $18,000 savings, compared to hiring through an agency.

C) Quality of hire

Multiple research indicates that the quality of an applicant and of the hire is higher, when the candidate is referred.

An HBR research team recently tested, and reverified this:

"At first, we looked at the group of people who came through internal referrals compared to those who came through other channels. Consistent with prior literature, referrals did better than non-referrals: For every 100 applicants, referrals generated 70% more good hires than non-referrals. However, when we looked more closely at the nature of relationships in the employee referrals, there were clearly some connections that were stronger than others and that relationship strongly correlated with the quality of the hire."

D) Driver internal Employee engagement

Your employees want to know if you as an employer are hiring or not - and what they can do to help or have leads for a job. If you successfully build a structured referral program, where employees are notified of upcoming hires, this can reduce employee turnover, and increase overall employee satisfaction.

How to setup a referral program

Before deciding what kind of referral program is right for you, start doing internal research and formulate your plan to success. You can try our simple ROI calculator below, or a more detailed version here.

The numbers

A) How many people are currently hired through referrals, and how many people would you like to see hired through referrals in 3, 6, 9 or 12 months from now?

B) Do you have issues with specific roles? List these out before getting started, and decide if you only want referrals for these roles or all openings

C) Are you trying to get more applications overall, or just higher quality of applications? If quality is what matters, you might want to make sure you are measuring the ratio between hiring stages, e.g. from applied to interview and interview to hire.

Referral Incentives

Most referral programs have a bonus falling between $1,000-$2,500 for each referral that gets hired. Generally, the value of referral incentives ranges from $250 for entry-level positions to more than $25,000 for top executives (The Muse)

Sometimes referral bonuses are tied to the employee staying on the job for a certain period of time, e.g. 3 months, before rewards are paid out.

Terms and awards varies. Some employers don't offer any cash-awards, but often introduce internal gift-cards, employee of the month parking-lot etc.

Others incentivise employees based on the number of applications, or even the quality of applications, not just how many get hired.

Whatever method you prefer, you need to decide if you want to have referral incentives and be clear about the terms up front with your employees.

Introducing referrals internally

When you introduce your referral program internally, you need to share the terms and strategy.

Consider these questions and make sure you get them right before introducing your referral program internally:

A) Are you asking employees to share job openings with their social network in general to create a company buzz?

B) Are you asking employees to properly look through their existing network, and reach out to people they think are competent for the job and would be a great fit.

C) Do you expect employees to have a relationship beyond a social media connection for referrals?

D) Do you expect employees to introduce a candidate properly through a job-opening on a 1-on-1 basis?

Many referral bonus programs incentivise nothing more than sharing job posts on social media, where people can have thousands of connections, followers, or friends. This can supplement your job-board strategy in reaching a larger audience, but it's very different from a high-quality vetted referral from someone they know and trust for the job.

A simple way to address this is for hiring teams to ask referrers if they’ve worked with the candidate in the past, how they know each other, and for how long they have known each other. This will enable employees to reach their full matchmaking potential, resulting in faster screening, lower turnover, and better hires.

Diversity & inclusion

Focusing to much on referrals can lead to pay inequities and a less-diverse workforce. In a recent study by Payscale results showed that female and minority applicants were much less likely to report receiving an employee referral than their white male counterparts. The most common type of employee referral was from a family member or close friend (41% of employees who received a referral). Talent Acquisition specialists should be mindful of findings when deciding their hiring strategy.

How to Use Employee Referrals Without Giving Up Workplace Diversity

A) Build a streamlined recruiting process
The only way candidates end up in your talent pool, is if they hear about the opening. Referrals can be one of those channels. Make sure you have a system that can track where applications are originating from. Make sure that employee-referred candidates don't get special treatment in the hiring process. If every candidate, regardless of how they were sourced, isn’t evaluated in the same way, you may be perpetuating a less-diverse organization.

B) Use data to understand your applicant pool better
Start building your data pipelines to understand what types of applicants are coming from which sourcing channel. If you are underreprecented as an employer, you might be posting your ads in the wrong places, and need to broaden your scope.

C) Focus referrals towards diverse referrals
Consider paying more for candidates who are currently underrepresented in your employee population. Intel is one organization that is doing just that by paying twice as much for diverse referrals.

D) Blind hires
Consider implementing blind hires in your process — removing all information that could lead to a bias during the first steps in your hiring process. Everyone applying might require to take the same assessment test, or answer certain qualification questions — referral or not, they need to pass the bar like everyone else.

Practical examples of implementing referrals

Below is a practical way of implementing referrals within your organisation:

  1. Build and post a job in your hiring system and push it live to your career website.
  2. When building the job-post, use a system where you can configure if there are rewards set for referrals, what type of awards and what kind of terms apply.
  3. Build a template or a FAQ area to share with employees on how to send in referrals, what templates to use in messages on social media and answers to common questions candidates might have.
  4. Use a system that can send unique referral links to your existing employees using your internal communication tools (e.g. Slack, Workplace by Facebook, Microsoft Teams) (see example here).
  5. Regularly share reminders to employees about openings, e.g. every week/month/company townhall meeting etc.

Conclusion: what works best for you?

Every employer is different. Referrals for small startups in hiring mode is different from larger enterprises with hiring teams and external recruiter partners. Start by looking at your current numbers, if you want to improve, get your goals right, put the systems in place, and evaluate over time if you are getting the results you desire.