Employee referrals may have negative consequences: U.S. study

Lack of diversity, pay gaps among considerations
By Marcel Vander Wier
|Canadian HR Reporter|Last Updated: 01/31/2018

Canadian recruiters say they will continue to promote employee referral programs, even as a study out of the United States suggests there may be negative consequences to this approach.

One-third of new job offers go to recruits who had a referral, according to PayScale’s recent survey of 53,200 U.S. workers.

But alongside the benefits of increased employee engagement and retention, referrals can negatively affect diversity and lead to pay gaps, said Chris Martin, director of research at PayScale, a compensation data and software company in Seattle.

“Referrals are easy in a lot of ways, but there’s this kind of darker side to them as well,” he said. “If diversity is one of the goals that you’re looking for in your workforce… you want to weigh these two things against each other and be cognizant of this trade-off.” 

In Canada — where the unemployment rate sits at a 40-year low of 5.7 per cent — referral programs are a popular avenue for recruitment, said Trina Casey-Myatt, metro market manager at Robert Half in Calgary.

Referral programs typically trigger a financial bonus for an employee who successfully recommends a recruit.

“We’ve seen many companies employing this more often, and for more positions,” she said. 

“Good people know good people. Having the top talent in the marketplace is a competitive advantage for any organization that can’t be replicated anywhere else. It certainly is very beneficial from a competitive standpoint, but it can also significantly increase employee retention.” 

“We all spend a great deal of time at work every day and if you enjoy who you work with, you’re probably less likely to look outside the organization for additional opportunities.”

Diversity challenges

But referral programs can disproportionately benefit white men, with 44 per cent of successful referrals going to that social group, according to the Payscale survey.

The success rate for women and non-white referrals was much lower, said Martin.

“If you’re leaning on referrals, you’re recruiting from the networks of people that already work for your company,” he said.

“If you think through this network effect, you’re going to run into problems with diversity where the peer groups of your employees may not necessarily be from different backgrounds than they are.” 

But the majority of new employees still don’t come from referrals, said Casey-Myatt.

“It still is exceptionally important for the person doing the interview to ensure that they put the person through the same questions, the same process as they do everyone else,” she said. 

“You want to make sure that you have the very best hire — and that may not be the referral.”

Salary differences

Payscale also found referred employees often earn less per year than those who were hired organically — depending on the person who referred them. 

Those referred by a family member or close friend often receive a starting salary that is US$1,600 lower than average, while a successful reference from a former colleague or client can bump starting pay by US$8,200 for men and US$3,700 for women.

Often, recruits referred by family members or friends are “already sold on the company” and may be willing to accept a lower wage, said Martin.

The opposite may occur for those referred in a professional context, especially when an employer is sold on the potential benefits a recruit would bring to the organization, he said. 

“In those cases, you need to attract this employee that someone at your organization has already identified as being valuable and worthwhile in pursuing.”

The results are surprising, as most companies use a pay grid, said Tracy Arno, CEO of Essence Recruitment in Saskatoon, Sask.

“How they were introduced into the organization shouldn’t determine how much you’re going to pay them,” she said. “I’ve never run into that issue in 15 years of doing this.”

Engagement benefits

Negatives aside, major benefits of employee referral programs include increased engagement and satisfaction among workers. Not only do referred recruits transition better in terms of workplace fit and culture, but the employee who made the successful referral often feels valued and validated as well, said Arno.

“The reason why referrals work is because people are advocating for organizations because they understand their fit and their culture.” 

The referrals are very specifically chosen by a current employee who believes they would fit within the corporate culture, said Casey-Myatt.

“Most individuals won’t provide a referral if they’re not confident in the individual because it’s their reputation (on the line).” 

With the availability of talent more scarce than ever, employee referral programs should continue to be recommended, said Arno.

“We need a whole bunch of programs to attract and retain talent, and referral programs is just one,” she said. “It’s a good one if you do it right.” 

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