Employee referral programs: Highly qualified new hires who stick around

Word-of-mouth, or employee referral, can be the most effective means of attracting new, qualified recruits. It is also one of the most efficient, because candidates who learn about a company through an existing employee tend to be a better fit, and to stay with the company longer.

There are many reasons for this. First, the employee knows a great deal about the person (usually a friend) he is referring. The employee can vouch for the person’s character, often a difficult evaluation to make during a half-hour interview.

Second, because the candidate will have been briefed about the company by the existing employee, possible culture clashes can be avoided. The existing employee will represent the culture of the firm, and will therefore have more accurate expectations right from the start.

Third, people enjoy working with their friends. Teams are more productive when they gel and their members become friends outside the office.

Also, word-of-mouth tends to be more unbiased and leaves a more lasting impression than, say, advertising which is perceived as inherently biased.

Referred employees also tend to be of higher quality than those attracted to the firm through advertising. The reason is simple — the existing employee has a stake in how well the recruit does in the firm. He will tend not to refer unskilled recruits because ultimately it will reflect badly on him.

Because of a better quality of recruit, and a better cultural fit, the hiring cycle will inevitably be shorter. That will be directly reflected in the bottom line. In any company, when a valuable employee departs, the company loses money for every day that position is not filled. Most companies have a benchmark like $100,000 per employee per year in lost revenue. The number differs per industry and per job, but whatever that number is, it will far outweigh any cost associated with having a referral program.

Adding a fee
It is a common practice for companies to increase the incentive for their employees to refer new recruits by paying them for each person who joins the firm and stays beyond a certain term, say three or six months. Adding a fee to a referral program has its pros and cons.

Pros – It gets everyone in the company thinking like a recruiter, always looking for talent. People are the most significant factor in any company’s success, so having your current employees constantly on the lookout for talented people can be a powerful tool. It’s harnessing current talent to attract future talent.

Cons – If your current people are going after new talent just for the bounty, they might not always have the company’s best interests at heart. To counterbalance that, the HR department should always structure the referral program so that it only pays employees if the new recruit stays for a certain length of time. And, of course, the HR department should never rely on an employee’s endorsement alone. Referrals are a complement to, not a replacement for, the usual screening process.

Companies usually pay a higher referral fee for more senior executives than for junior employees. For finding an executive, for instance, an employee may receive $2,000; for finding someone in an entry-level position, $500. The actual amount depends on the company, the need for new employees, the difficulty in attracting them and the position sought.

If a referral program is working properly, it will more than pay for itself. The money paid employees is money saved through shorter hiring cycles and not having to advertise or use a headhunter. Referrals are much less expensive than external recruiters. Besides that, current employees know the business — and its personnel needs — much better than a headhunter.

Communication is key
Internal communication of the referral program is important. If employees don’t know the program exists — and in many companies they don’t — then they can’t refer candidates. Companies must take advantage of the company newsletter, intranet, e-mail system, postering facilities and management meetings to spread the word about the program.

Many companies today turn to their superstars, encouraging them to make referrals. The logic is that superstars hang out with superstars. HR would be wise to speak with those people directly and let them know they would be interested in their input on finding new recruits. Not only will they be attracted by the financial reward, but being singled out as a superstar can be very motivating.

Non-monetary referral rewards
Companies in every industry have the opportunity to “incentivize” employees through referral rewards, and it may not always be in cash. For example, a retailer might give a $50 gift certificate to employees who refer candidates. This may well be (or seem to be) more valuable to the employee than the equivalent amount of cash, particularly if the retailer sells merchandise attractive to the demographic of its employees.

Industries using referrals
Not every company uses, or needs to use, referrals. The high-tech industry, for instance, once so hot for new people, is now largely in a hiring freeze. For the next six months or so, high-tech firms say they’re laying low to give the market a chance to even out. (A year ago, of course, they were one of the biggest users of high-priced referral programs.)

Today, one of the biggest hiring industries is health care. Due mainly to a shortage of nurses, health care is extremely competitive and we’re seeing the kind of innovative recruiting methods used that we recently saw being employed in the high-tech sector. Signing bonuses, “exploding” bonuses (if you sign up on the spot you might get $10K if you wait a week you get $8K — the bonus decreases the longer you wait) and re-poaching Canadians back from the U.S. are becoming commonplace strategies. So, of course, hospitals are big users of referral programs.

The teaching industry is also booming. There is a dearth of teachers across North America.

Public utilities and other industries, whose employees have a high average age and are therefore scheduled for retirement in the next five or 10 years, are also aggressively recruiting. In the retail industry now, as always, there is a need for qualified young people.

Organizations in these industries, and others in similar high-need situations, will benefit greatly from referral programs.

Companies that should not use referrals
Implementing an employee referral program in a company that has poor employee morale is going to elicit poor results. Companies should look inwards first, and monitor their current employee satisfaction levels, before making any decision to implement a major plan to hire. If a company intends to put an employee referral program in place because it is having difficulty attracting staff, it should ask itself why it’s having that difficulty in the first place. Whatever that problem is — too-low compensation levels, an unattractive work environment, poor product — it should be solved first. For that company, merely adding new staff to replace the outgoing employees will be like filling a bucket that is full of holes.

Companies complain about how tough the labour market is, and rightly so. However, it must be remembered that, in the midst of a tight labour market, thousands of dotcoms managed to staff themselves very quickly. Many dotcoms may subsequently have failed, but it doesn’t mean they didn’t attract good people. Companies today don’t have to follow the dotcoms’ business model, but they can take advantage of their recruiting models. Because not only were they successful in attracting young, skilled talent, but in many cases they lured away experienced people from established organizations. Having an attractive work environment made it very easy for the dotcoms to attract new employees.

Organizations must not make the mistake of ignoring the fundamentals when implementing a new recruitment campaign such as an employee referral program.

Also, firms looking to hire in bulk will find that a referral program, alone, will not fulfill their hiring needs. Referrals are more about quality than quantity.

Mark Laurie is the co-publisher of Canada’s only student jobs magazine, jobpostings. He can be reached at 1-877-900-5627 or [email protected]

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