The Most Effective Recruiting Tool: Employee Referral Systems

What’s the best recruiting tool? Web pages, relationship recruiting? It may come as a surprise to many that the tool which brings in the highest quality of candidate for the buck is an employee referral program. The very best firms get more than 50% of their hires from employee referrals. Many firms have employee referral programs, but most are poorly designed, haven’t been updated in years, and provide no proof of any real business impact. In this piece I will show you the advantages of a comprehensive referral system. The secret to a great referral program is to make sure that it’s not an “Human Resources program.” To be successful, referrals must become a valued part of the company’s culture and a standard way of doing business. Every employee must actually believe that the key competitive advantage over others is the entire company’s involvement in the recruiting process. No centralized recruiter can know as many working professionals in a discipline as the employees themselves. Therefore, if a recruiting effort is to be successful, the “ownership” of recruitment must be shifted to the managers and their employees. Developing a culture that continually seeks out and learns from talented people is the key to business as well as to recruitment success! The most common weakness of referral systems is:

    1. They fail to vary the reward with the importance of the job and the actual performance of the hire,


  1. they assume everyone knows how to find referrals, and
  2. they lack of rewards for managers and for over-all program success metrics.

Not all jobs are equal

Most HR professionals treat all jobs “equally” when they should in fact be learning to prioritize jobs according to their business impact. Referral bonuses should not be equal. They should, in fact, vary with the importance of the position and how difficult it is to fill. It doesn’t make sense to offer any referral bonuses for jobs that can be filled easily with walk-ins. In a similar light, referral amounts for key/hard-to-fill jobs need to be significantly higher than for an “average” job. Listings of job openings also need to be prioritized so employees can easily see which jobs will have the most impact on the firm’s goal of sustaining a competitive advantage over its rivals. Performance always matters

All hires are not equal. Smart business people know that the top performers contribute more to the bottom line than average workers. By offering a “follow-up” performance bonus (on top of the normal referral bonus) if the new hire becomes a “top-level performer,” you add a valuable twist to the to the otherwise standard program. First of all, this sends a message to employees that quality matters and that just sending HR “names” is not the goal. Secondly, this ties the new hire to the referring employee. This, in turn, encourages the employee to continue the relationship with the new hire as a type of mentor since their bonus is tied to the first 6 months / year’s performance rating. In addition, by giving the employee information about the quality of their referral, you provide them with feedback about the viability of their selection criteria as well as their sources. Don’t leave it to chance

Most referral programs assume employees all have an equal ability to find referrals. Some employees are better connected than others are and smart firms know to take advantage of that. HR needs to track which employees make the most successful referrals (in each job category) and then e-mail notices of key opening to them. To the surprise of many HR professionals, employees don’t automatically know how to go about finding great referrals. To amend this, HR should provide information on the firms intranet and offer information sessions on:

  • How to find referrals through e-mails and list-servers
  • How to “work” a convention to identify and build relationships with potential referrals
  • How to find “names” first and then build relationships
  • How to assess the potential of a contact

Rewards and Metrics

A major failing of most recruiting programs is the failure to tie a manager’s pay to recruitment success. Management ownership of recruitment success is THE key to a world-class program. At least 10% of all mangers’ bonuses need to be tied to the attraction, retention and development of great employees. HR can also offer bonuses to managers for a minimum participation level in the referral program from their employees. Managers also need to be made aware of the side benefits of referrals. This includes opportunities to gather competitive intelligence and increased learning by all employees who seek out top performers in their fields. HR also needs to track referral success by department and distribute it to all managers so that they know who is the most successful in getting referrals. How much?

Referral bonuses vary a great deal. Hewlett Packard offers no bonus; Cisco generally keeps it under 1K; and some firms (Sun, Adobe) have been known to exceed 5k for certain key jobs. The amount offered turns out not to be as important as the development of a culture that will involve the entire team in the building of the firm’s bench-strength as a key goal of the firm. However, the amount of the bonus must be enough to get their attention, but not so much as to distract them from their real job. The amounts must vary with the job; generally I recommend starting with 2 – 4% of the jobs’ pay and then adjusting as the number of referrals fall short/ exceed your needs. A world class referral program

In addition to the above elements, the very best referral systems meet most of the following criteria. They:

  1. Track the referral hires to see if they turn out to be “better” performers than those recruited from other sources.
  2. Have a strong marketing effort (web pages/ posters/ brochures/ e-mails) to show each worker the importance of involving everyone in building a winning team through great referrals. Periodic (quarterly) e-mail reminders or paycheck inserts serve as good reminders for employees.
  3. Vary the amount of the bonus by these factors:
    • Hard to hire/high-value jobs
    • How long the employee stays in the job
    • The performance of the hire
    • Salary of the position
    • Key employees from competitor firms
  4. Give small rewards to workers for finding “names” or “leads,” even if it is not an immediate referral.
  5. Use drawings and contests to excite employees as well as to reduce costs. Keep the referring employee continually informed about what is happening to their referral.
  6. Track and reward departmental and team referral rates.
  7. Treat all referrals with courtesy and speed up their assessment process over that of normal recruits.
  8. Measure the customer satisfaction of all referred hires and referring employees.
  9. Give quick payment of half of the reward within 2 weeks, the rest after 3- 6 months.
  10. Reward managers for great recruiting, retention and the development of their people.
  11. Offer suggestions/training on how to convince friends to apply.
  12. Rapidly respond to all employee referrals (within 2 days) and give reasonable feedback (to the applicant and the referrer) during the process (and after it, if the applicant is not hired).
  13. Track cost and referral performance to check the program’s Return on Investment.
  14. Offer ANYONE-(employee or not) a reward for referrals in key positions.
  15. Are an accepted part of the company culture; the CEO and top officers encourage employees to participate.
  16. Include managers in the referral bonus program (where it fits the culture).
  17. Communicate openings often-to all levels of the organization (electronically).
  18. Encourage referring employees to mentor their referrals.
  19. Educate workers on “what the company has to offer” so they can better “sell” the company to applicants.
  20. Have several diversity initiatives to counter the tendency to refer “people just like us.” Have alternative diversity recruiting programs and sources to avoid any adverse impact problems.
  21. Continually re-advertise their program and revise their materials from time to time in order to keep the program energized.
  22. Utilize “push technology” to get push information about key positions rapidly to your employees.
  23. Track and “tether” referrals that were finalists or that turned you down for the next few years. Continue your efforts to convert them to hires.
  24. Develop a system to resolve conflicts and duplicate referrals.
  25. Give all employee that make “unsuccessful” referrals a small token reward (pen/T-shirt) to encourage future efforts.
  26. Ensure referral systems are global in coverage but are customized to fit “local” needs. Put the referral program on-line so that non-US employees get a chance to fully participate.
  27. Have a similar referral program to encourage internal movement within the company (intra-placement).

Possible problems with employee referral programs

  • Firms assume the status quo is working without proof
  • HR fails to “forget” old referral practices and rules
  • Expect an argument or two as to who gets credit for a referral
  • Some companies exclude management from bonuses because they feel it is part of their normal job
  • HR often worries that it is giving away “too much” in bonuses
  • They are slow because they are not paperless
  • Referrals are treated the same as all other applicants, which offends the employee doing the referring
  • One firm had to reduce the bonuses in order to keep employees from spending too much time on referrals when they should be doing their job
  • Where there is a lack of diversity in a firm, referrals often do little to increase diversity
  • Offering higher rewards for certain jobs can create an US vs. THEM feeling
  • Referral systems work best in larger cities, from where there is a larger base of employees to refer
  • HR people will whine that it’s too complicated or that’s not the way we have always done it!

Benchmark firms

  • Cisco
  • Sun
  • Adobe
  • SAP
  • EDS
  • Baynetworks
  • Microsoft

About Dr John Sullivan

Dr John Sullivan is an internationally known HR thought-leader from the Silicon Valley who specializes in providing bold and high business impact; strategic Talent Management solutions to large corporations.

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