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How effective are employee referral programs?

Research shows up to 40 per cent of new hires are referrals

By Brian Kreissl

Employers are increasingly recognizing employee referral programs as an efficient and effective way of sourcing candidates.

With the war for talent starting to resume as the economy improves, employee referral programs are poised to become even more popular as organizations ramp up their recruitment activities. Employers that use innovative means of sourcing talent in a tight labour market are at an advantage when it comes to finding so-called “passive candidates” who aren’t necessarily pounding the pavement looking for work.

According to research conducted by applicant tracking system vendor Jobvite, while only 7 per cent of candidates come through referrals, they account for a whopping 40 per cent of all new hires. The statistics even show that referrals generally have greater job satisfaction and retention rates than employees sourced through other means.

Employee referral programs usually pay a bonus to an employee who recommends someone — typically a friend, relative or former colleague — for a position with their employer. These programs can be a highly effective means of sourcing candidates for a number of reasons:

  • Existing employees have a strong understanding of an organization’s strategy, culture, mission and values, and are more likely to recommend someone who is compatible with the organization. They often understand what’s required to be successful on the job.

  •  Employees’ friends, relatives and former colleagues have usually had a realistic job preview provided by the employee.

  • Since their reputations are at stake, existing employees are unlikely to recommend someone they wouldn’t personally vouch for.

  •  Referred candidates generally want to avoid disappointing the person who recommended them.

  • Since like-minded people tend to stick together, a successful employee tends to have a network of suitably like-minded individuals with similar values and skill sets.

  • Employee referral programs often produce candidates who aren’t necessarily applying to every online job posting available.

  • Referral programs are usually more cost-effective when compared with more expensive channels such as job boards and employment agencies.

  •  Employee referral programs help facilitate effective employer branding because employees act as brand ambassadors in promoting the company as an employer of choice.

Technology now even makes it possible to leverage the networks belonging to an organization’s employees. For example, recruitment software vendor 1-Page has a tool that creates customized company clouds with profiles of professionals connected to their employees.

1-Page allows recruiters to search candidates by job title, companies and location and see instantly who matches their criteria. The tool also identifies employees who can make an introduction and enable HR to automate the referral process.

Potential drawbacks associated with employee referral programs

In spite of all of the advantages of employee referral programs, they can also have certain drawbacks. These include nepotism, favouritism, a negative impact on diversity and the potential “inbreeding” of ideas as a result of employees who are too much alike. Being paid a bonus can also result in employees putting forward too many candidates – some of whom may not be a good fit.

Employee referral programs can occasionally lead to inducement damages when a candidate is enticed away from secure employment elsewhere to come and join a new employer. If that employee is then terminated without proper cause, the employer can be liable for additional inducement damages, over and above regular damages awarded for wrongful dismissal.

To overcome some of these potential issues, organizations should consider the following measures:

  • Have a policy stipulating that referred candidates hired by the organization must stay for a minimum period of time before a bonus payout is made to the referring employee.

  • Consider having a maximum number of referral bonuses that can be paid out to any one employee during the year — that way, employees are more likely to concentrate on referring only the strongest candidates.

  • Provide feedback to a referring employee if a referral doesn’t quite meet the requirements for the position.

  • Disclose to candidates that referring employees are being paid a bonus and communicate to employees they should not make false representations or promises to a candidate in relation to job security, promotional opportunities or financial rewards.

  • Don’t rely solely on referral programs as a candidate-sourcing strategy.

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Brian Kreissl

Brian Kreissl is the product development manager for Thomson Reuters Legal Canada's human resources, OH&S, payroll and records retention products and solutions.
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