Designing and Managing Employee Referral Programs

Overview

An employee referral program is a recruiting strategy in which employers encourage current employees, through rewards, to refer qualified candidates for jobs in their organizations. It is a popular strategy because recruiters have long known what research confirms: Employee-referred new hires tend to be better performers than nonemployee-referred new hires and to stay with their organizations longer.¹ Employee referral programs are also more cost-effective than other recruiting strategies and often are the fastest way to find external talent.

This toolkit discusses the positive affects employee referral programs can have on an organization's recruiting strategy in particular and on the workforce as a whole, and highlights strategic, practical and legal considerations when designing and managing an employee referral program. This toolkit also discusses the business case for creating an employee referral program, HR's role in developing and implementing it, and steps HR professionals can take to create and manage an effective employee referral program.

Business Case

Employee referral programs have proven to be a cost-effective way to tap into a large, qualified labor pool of passive job seekers. Employees frequently network with professional peers and former co-workers outside of their organizations, giving them access to highly qualified cohorts who may not be actively seeking a new job but would consider one if the opportunity arose. Employee referral programs essentially turn all employees into recruiters.

Employee referral programs have proven to lower overall recruiting costs and improve the recruiting function's return on investment. Well-designed and well-managed employee referral programs can also improve employee satisfaction and lead to better employee retention rates.

Legal Issues

An employee referral program is an effective way to source new talent, but it may create unintentional disparate impact if employees refer candidates of the same race, religion, national origin or other protected class. See Do employee referral programs negatively affect diversity in the workplace?

A strategy to avoid unintentional discrimination when managing an employee referral program might include:

• Using a variety of recruiting methods when advertising job openings in the organization. This will help keep the applicant pool—and by extension, the workforce—more diverse.
• Keeping the employee referral program open to the entire organization, not limiting it to specific employee groups, departments or divisions.
• Evaluating all candidates—including employee-referred candidates—using the same qualification criteria.
• Conducting ongoing analyses of the workforce and the applicant pool to ensure that the employee referral program is effective and is yielding the intended results. Included in the analyses should be diversity categories, the quality of hire and resulting tenure from referrals. If the program is not meeting its intended goals and is negatively affecting workforce diversity, the organization may need to reevaluate its program.

See Tapping ERGs During the Recruiting Process.

Designing an Employee Referral Program

The ultimate outcome is to design a process that is easy for employees to use and that offers the right mix of rewards to encourage employee participation. Too many restrictions on who in the organization can refer candidates or overly burdensome paperwork for employees to complete may well put a damper on employee participation and the program's success. In designing a successful employee referral program, HR professionals may want to take the following steps:

1. Determine the strategic goals and anticipated outcomes of the employee referral program.
2. Design the process and participation rules.
3. Devise rewards that will encourage employee participation.
4. Include features to maximize referrals.

See 6 Tips for Effective Employee Referral Programs.

Determine the strategic goals and anticipated outcomes of the employee referral program

Organizations should first determine their reasons for needing an employee referral program. What long- and near-term strategic goals will be met by having an employee referral program? Identifying the strategic goals and anticipated outcomes of the program from the outset will help set the stage as the program is developed and will help garner senior leader support for the program.

Strategic organizational goals that might be achieved with the creation of an employee referral program might include:

• Improving the quality-of-hire metric.
• Increasing new employee retention.
• Improving employee morale.
• Improving the cultural fit of new hires, thereby reducing turnover and streamlining onboarding.

Anticipated outcomes of an employee referral program might include:

• Lowering overall recruiting costs.
• Reducing the time-to-hire for external candidates.
• Better targeting and sourcing of passive job seekers.
• Deepening the pipeline of potential applicants.

Design the process and participation rules

Nothing can sink a new program faster than adding unnecessary hurdles for employees to jump through. If the employee referral process is too complicated, employees will not participate. An employee referral program has the best chance to succeed when, from the employee's point of view, it is easy to navigate.

Employee referral programs should be designed to be fast, simple and user friendly. To start, employers should develop a standard form for the employee making the referral to submit either through the intranet, by email or by paper copy. The form should ask for enough information to properly identify the employee, the referral candidate and any particular opening the candidate is recommended for. If HR professionals have follow-up questions for the employee, they can contact the employee directly at a later time. The goal is to get the referral in hand as efficiently as possible.

HR can use either its applicant tracking system or a simple Excel spreadsheet to track employee referrals, including the date of the referral and any contact with the applicant, through to the hiring decision. Once the hiring decision is made, the tracking method should indicate the amount of the reward and the due date for providing it, assuming all plan criteria are met.

See Employee Referral Form and Employee Referral Program Procedures.

Some employers are turning to social media to maximize and manage their employee referral programs. Social media platforms can expand the reach of who employees refer to former co-workers, professional associates and former classmates.

When deciding who can participate in the program, a good rule of thumb is to keep it as simple as possible. Some organizations limit who can participate in the employee referral program, choosing to exclude HR employees and managers to whom the new hire will report from receiving bonuses. Others exclude vice presidents and above, while others exclude temporary, summer, contract and former employees. Employers should keep in mind, however, that limiting who may participate in the program may increase the chance of unintentional disparate impact and may be a de-motivator if employees perceive the program to be unfair.

Some employers are even broadening who can participate in an employee referral program to include alumni, contractors, customers, vendors and partners. This is an option HR professionals may want to consider when designing their employee referral programs. HR professionals should work with their finance department to devise a simple yet effective way to administer rewards to nonemployees. HR professionals should also determine if referrals from nonemployees should be rewarded at the same level as employee referrals.

Devise rewards that will encourage employee participation

Organizations have a number of ways to reward employees for referring candidates who become successful new hires. Most employers offer bonus payments, but there are other options, for example:

• An extra day off with pay.
• Points employees can exchange for a prize.
• Gifts.
• Gift cards.
• Eligibility to participate in a quarterly drawing for a "valuable" prize.
• Recognition in a company newsletter or staff meeting.

The amount of a bonus payment depends on the organization's recruiting budget, but according to a 2021 WorldatWork survey, the average payment that year was between $1,000 and $2,499.¹ Employers can issue rewards immediately when the new hire comes on board or defer based on requiring the new hire to work a certain amount of time (for example, after he or she has successfully completed 90 workdays). And although bonus payments can be split—the first half when the new hire starts and the last half after a certain period of time, for example—most employers avoid these multiple payouts because they can cause confusion in administration and delay reinforcement for the employee. More than sixty percent of employers pay the bonus in one payment, according to the 2021 WorldatWork survey.

Employers may want to consider offering rewards as immediately as appropriate to encourage continued employee participation and a constant stream of referrals.

Recognition does not have to wait until a referral is hired. Organizations could award a gift card, for example, to an employee who submitted a good lead. Employees whose referrals land job interviews could have their names entered into a quarterly raffle, and employees who consistently refer good leads could be given an extra day off. Sometimes recognition in the form of a cash bonus is appropriate. Employees whose referrals are successfully hired for hard-to-fill positions, for example, might receive a larger cash bonus than the average.

Build in features to maximize referrals

To maximize the program, employers can consider including the following in their design of the program:

• Always accept referrals, even if there is no current vacancy. This practice is particularly important for hard-to-fill positions. There may not be a current opening in an organization's IT department, for example, but if an employee knows of someone who may be a good fit, HR should accept that referral. The referred (potential) candidate should be informed that there is no vacancy, but that his or her resume will stay on file for a period of time determined by the HR department. Employers should be aware of both the Office of Federal Contract Compliance Programs' and their internal definition of "applicant" for record-keeping purposes.
• Communicate transparently with referees on the status of their referrals.
• Ensure that recruiters are encouraged to contact employee referrals and that they do not feel that finding their own candidates will reflect more favorably on their performance.
• Keep communication open and timely. Organizations should keep the referred candidates and the employee who referred the candidates up-to-date on where the candidates are in the hiring process. The candidate and the employee should be notified within the first week of receiving the referral, and then ongoing as needed throughout the process. Employees who take the time to refer a candidate deserve feedback about the strengths and weaknesses of the candidates they refer and where their candidates are in the hiring process.
• Fast-track referred candidates through the hiring process but evaluate them on the same criteria as nonreferred candidates. If their knowledge, skills, abilities and work history meet the job criteria, employers should schedule them for the next step in the hiring process. A slow hiring process could lose the candidates.

Communication

An employee referral program will succeed only if employees know about it. HR professionals should build in a communication plan when designing the program and articulate ways in which the program will be communicated before, during and after its launch. Communication plans should include multiple forms of delivery (e.g., via company intranets, newsletters, presentations) and should move in all directions. Effective communication plans:

• Consider the multiple ways employees access and retain information. Some generations may prefer to receive information by e-mail; others may want it delivered by text to their phones. Still others may want to hear about it through a formal presentation during a meeting or through a social media website.
• Move in all directions. Communication plans should include circulating information up and down the management chain, across the management chain, and up and down to nonmanagement employees. The plan should also include how the employee referral program will be marketed to individuals outside the organization, because it is an employee benefit that might attract job seekers.
• Start at the beginning. Employers should tell new hires about their organization's employee referral program during orientation.
• Communication should be ongoing.

Once employees know about the program, it is important to market it for continued participation. Employers should consider branding their program so employees and candidates alike are familiar with the program and come to expect consistent communications from it. HR professionals should ensure that the program stays front and center in employees' minds by reporting on the program regularly and in creative ways. Marketing does not have to be overly formal, so organizations can have fun with it. Some ways to market the program might include:

• Promoting the program by using payroll stuffers and posters and including it in discussions during staff meetings.
• Prioritizing hard-to-fill positions within marketing strategies to make them stand out.
• Listing—and thanking—referring employees in company newsletters, on social media and in publications.
• Holding quarterly raffles so that employees who have referred candidates can win prizes; HR should be sure to report on the employees who were entered and what they won.
• Recognizing top referrers in newsletters, during staff meetings, on social media and through other means on a quarterly basis.
• Marketing the program at external and internal career fairs. The printed material should catch the eye. If cash bonuses are awarded, HR can consider including in marketing materials the amount awarded in employee bonuses the previous year.

Metrics

HR professionals should include at the design phase of an employee referral program ways the program will be measured to see if it has met its intended strategic goals and outcomes. Metrics HR professionals may wish to use to measure the program's effectiveness may include the:

• Number of employees hired from the employee referral program versus other recruiting methods.
• Number of qualified candidates referred versus other recruiting methods.
• Workforce participation rate in the program.
• Retention rate of referred new hires versus new hires sourced through other recruiting methods.
• Employee satisfaction with the program through employee surveys.

On a regular basis, HR should assess the program using metrics that senior leadership identified and agreed to during the planning phase. Metrics should align with the articulated strategic goals and anticipated outcomes identified before designing the program.

Global Issues

There are often global issues to consider when designing an employee referral program. Employers with international offices my want to consider how their current global HR practices are structured. If the organization has taken a more centralized approach (where HR policies and procedures are set at headquarters and flow out to other locations), they may want to appoint a single lead but include regional teams that can better understand local norms and customs. If HR practices are decentralized, it may be best to let individual locations customize their programs.

Other global issues to consider when designing an employee referral program include bonus payment issues in each country (taxes, acquired rights issues), eligibility to refer across borders and scale of bonus as related to pay structure in that country. HR professionals with international responsibilities have no doubt come across these same issues when designing other HR programs and processes. HR professionals should work closely with peers with global HR experience to design global employee referral programs customized for each location's needs.

Additional Resources

Employee Referral Program Procedures

Employee Referral Form

Employee Referral Program Payment Approval Form

Are Referral Bonuses Included in Overtime Calculations?

Endnotes

¹WorldatWork. (2021). Bonus programs and practices. Retrieved from  https://worldatwork.org/media/CDN/resources/surveys/WAW1021_Survey_KF_Bonus-Programs-and-Practices_FNL.pdf