Everything You Need to Know about Employee Referral Programs
What is an employee referral program?
An employee referral program is an HR strategy used by companies to encourage current employees, often using incentives, to refer qualified candidates for jobs in their organizations.
Why do employee referral programs work?
In the last 10 years, 28-30% of new hires in organizations have come from employee referrals. – Gerry Crispin, a principal at CareerXRoads, a staffing strategy firm.
There are various benefits of employee referral programs:
- Employee-referred new hires tend to be better performers than nonemployee-referred new hires. LinkedIn survey revealed that star employees tend to refer other star employees.
- Employee referral programs can be more cost-effective than other recruiting strategies (headhunters, paid advertising etc.). It depends on the referral reward value but as it is managed by the organization, it can be set below the average hiring costs, to prevent overspending.
- Employee referrals are often the fastest way to find external talent locally. A LinkedIn study found that it takes an average of 29 days to hire a referred candidate compared to 39 days to hire a candidate using other means like job boards.
- Employee-referred job candidates are usually a good cultural fit and may need less onboarding when hired.
- Employee referral programs can improve employee satisfaction and lead to better retention rates of the current employees. 46% of referred employees remain in their position for at least three years.
- Employee-referred new hires have higher retention rates than nonemployee-referred new hires.
- Referrals are found to produce about 25% more profit than hires from other sources.
- Employee referral programs make it possible to reach passive candidates that are difficult to get to through other means.
How to design a good employee referral program?
1. Define the goals of your employee referral program
Unsurprisingly, to design your referral program well, you need to start with setting up goals. Goals that might be achieved with the creation of an employee referral program might include:
- Improving the quality of hired employees.
- Increasing new employee retention rates.
- Improving employee satisfaction and morale.
- Improving the cultural fit of new hires.
- Lowering overall recruiting costs.
- Speeding up the time-to-hire for external candidates.
- Better targeting and sourcing passive job seekers.
- Widening the selection of potential applicants.
- Increasing diversity within the organization.
- Sourcing candidates with a specific skill set, especially for hard-to-fill positions.
2. Set up the infrastructure
To boost participation rates, employee referral programs should be designed to be simple and user friendly. Organizations should implement a standard process for the employee making the referral. The referral forms, whether online or paper, should ask for enough information to properly identify the employee, the referral candidate and any particular opening the candidate is recommended for as well as the relationship between the employee and the referral candidate. The forms should not be too long and ask unnecessary questions at that point of time. Further questions should be asked directly either to the employee or the referred candidate if the recruiting manager.
Referrals tracking should be automated, especially in large scale enterprises. The best tool for that is ATS (applicant tracking systems). Those could have a built-in referral program management or at least track the status of the referrals and enable sending an event to another referral management application (for example using an API call) if a referral meets the criteria to get rewarded. Then, the referral management system should assign the rewards to the eligible referrers.
3. Define who can participate in your employee referral program
You should decide who can participate in the program and explain it clearly in your terms and conditions. Popular limits include:
- Excluding HR employees and managers to whom the new hire will report from receiving bonuses.
- Excluding vice presidents and above.
- Excluding temporary, summer, contract, and former employees.
- Broadening who can participate in an employee referral program to include alumni, contractors, customers, vendors and partners. (Note that rewarding non-employees is a difficult question from both financial and logistical perspectives).
- Rewarding only those employees who are still an active employee at the time of the payout (which is often 3-6 months post-hiring).
4. Define the rules and conditions of your employee referral program
To write down the terms and conditions of your employee referral program, you should think of and internally discuss a couple of questions first:
- Who can refer candidates in your organization?
- How can they refer the candidates?
- Who is a valid candidate for a vacancy to qualify for a referral program reward? For example, only people who have not previously been employed at your company, who have not been employed in the last 12 months at your company, who have never applied for a position in your company etc.
- What are the rewards in your referral program?
- When will the rewards be paid out? After someone refers a candidate? After the candidate gets hired? After the candidate’s probationary period? After the first year of employment of the candidate? Will they be paid out at one of these occasions or more times (split rewards)?
- Are all positions eligible for the reward or only certain ones? Perhaps only full-time positions, only hard-to-fill positions, above certain payroll level positions, or certain locations.
- How can your employees refer candidates, is there a system for this or any type of referral counts?
- Are some positions incentivized better than others?
5. Think of the incentives for your employee referral program
The reward value must be enough to motivate, but not so much that it becomes distracting or overspends your budget. Experts recommend between two to four percent of the job’s annual cash pay. There are multiple ways to reward successful referrals, for example:
- Cash – this is the most common reward for referrals.
- An extra paid vacation day – this may come out cheaper than a cash prize and can be more motivating for the employee as there is no other way to get this prize.
- Points employees can exchange for a prize – you can create a gamified program out of your referral program and assign points for certain referral levels, for example 5 points if someone referred a candidate, 10 points if the candidate was invited for an interview, 15 points if they passed to the second interview round, 50 points if they got hired, 100 points if they stayed longer than the probationary period, 200 points if they stayed 1 year and so on. Then you can provide a prizes catalog the employees can exchange their points for. This is a great way to motivate more referrals as it acknowledges even the act of referring someone, not only successful hires.
- Gifts – swag, free products or services from your company or partner companies, gift certificates, flowers, chocolates, whatever motivates your employees.
- Eligibility to participate in a contest with a "valuable" prize – you can create a contest in which everyone who referred someone can participate in drawing an expensive reward.
- Recognition – it can be in a company newsletter or in a staff meeting, in person, over a 1:1 dinner with your employee. This can be very motivating for your employees, to see that you really appreciate their time and effort to make a referral.
- Tickets to shows or events – this depends on your employees, available venues and your business but if you have a business like Adidas, rewarding referrals with first-row seats at the greatest matches can be a really rewarding experience.
- Food and drink gift cards – simple, small gifts but it can be very useful for your employees. Imagine a full month free pass at the company cafeteria or a 200$ gift card for Starbucks. This is a prize most employees would really use.
- Trips or vacations – Google found out that giving its employees trips to Hawaii is better than offering them a $1M employee referral cash bonuses. People are usually not willing to spend much on expensive holidays themselves and would not, even if they were given enough money to afford it, because they are rationally thinking about spending their money. If they get a paid holiday as a prize, they will use it and enjoy it more than receiving cash that they would spend on more mundane things.
- Cash donations to charities of the employee’s choice – this can be motivating especially at workplaces where social responsibility or environment are in focus. Example: DigitalOcean gives the referral prize to charity.
- A full-day or weekend treatment at a luxury health spa – that is another variation of the holiday idea. It can be easier to redeem for those employees who do not plan big vacations or in non-vacation seasons. It is also cheaper than funding a trip to Hawaii.
- A paid day trip to a fun theme park for the employee and their family – this is another small vacation idea for employees with children.
- Education – sponsoring a short-term education/skill enhancement or training the referring employee has been keen on for some time.
- Gadgets – this can be motivating in technology companies where the employees tend to be interested in the latest gadgets.
- Additional health or life insurance – offer a lump sum paid insurance policy to secure the employee/employee’s family.
Recognition does not have to wait until a referral is hired. You could give a small reward to an employee who submitted a good lead. If you make employees feel appreciated they will refer again. Often it is not their fault the candidate was not hired, maybe they have provided a good lead but the position was filled with someone internal or the position was closed due to a budget cut. Rewarding even the act of referring, regardless of whether or not the candidate gets hired, is motivating the employees to refer more people better than rewarding only successful hires.
You can do it by giving smaller rewards for every referral or by displaying a referral count on every all-hands meeting to recognize those who make any. You can also give some special swag or product discounts to those, who are referring candidates.
6. Add gamification to your referral program
To make participating in the program more fun for your employees, you can add an element of gamification to it.
Freelancing marketplace Fiverr wanted to increase employee referrals by tracking social job sharing and adding gamification by offering points for sharing jobs and referring friends. They have implemented a competition element to referring candidates since their employee referral program gave employees points and credit for all actions they took and it notified them about status changes of their referrals. Based on the points the employees got on the referral leaderboard and the top referring employees received gifts on a quarterly and yearly basis.
7. Keep employees informed on the status of their referrals
Employees who refer candidates expect to receive updates on the process. They are interested in the status of their friend’s recruitment. Not hearing back from recruiters can make employees reluctant to refer again. Informing them every step of the way will make them feel engaged and important.
You should let employees know what’s happening at every stage of the process. Has someone looked at the referred candidate’s CV? Is there an interview scheduled? Will you be extending an offer? Be as transparent as possible and make the information easy for employees to access.
8. Advertise your employee referral program
Your employee referral program will be useless if your employees don’t know about your program or don’t know how to contribute to it. You should keep the program rules accessible and clear, for example on an HR employee portal or in their cockpit. Send notifications and reminders about the program regularly, for example if the program rules change, if there are new open positions, if some were successfully closed (giving a thank you to the referrers who made it possible). Also, send a regular advertisement of your program to all new employees who may not know about it. This helps to keep the program top of mind and generates sustained effort from employees.
You should develop a communication plan including ongoing and one-time communications delivered omnichannel to ensure everyone in the organization is well-informed about the program. Always, in all communications, remind employees of how they can submit referrals. Sometimes employees may know someone but be overwhelmed by the referring process or the amount of effort they need to put in it.
You can extend the reach of your referral program if you combine it with social media. If you only let your employees submit full CVs with emails, they will recommend less people than if you simply add a button “refer someone on LinkedIn” and let them pick people from their network, without requiring them to attach any CVs or provide any other contact details. One good option is also to use LinkedIn Referrals, LinkedIn’s built-in option for employee referrals.
How to measure the success of your employee referral program?
You should regularly measure the performance of your employee referral program and tweak it as needed (or discontinue it, if it is not working). Some metrics you may want to track for your employee referral program include:
- Number of total referrals.
- Number of referrals per role or department or location.
- Number of employees hired from the employee referral program versus other recruiting methods.
- Number of qualified candidates referred versus other recruiting methods.
- Number of employees hired versus the number of referrals in the employee referral program vs the same conversion rate from reviewed CV to hiring in other recruiting methods.
- Workforce participation rate in the program (how many employees participated in the referral program).
- Retention rate of referred new hires versus new hires sourced through other recruiting methods.
- Onboarding time of a referred new hires versus new hires sourced through other methods.
- Performance of referred new hires versus new hires found through other methods.
- Employee satisfaction with the program through employee surveys.
- Cost of hiring one person via referral program vs through other methods.
Best practices for managing your employee referral program
1. Always accept referrals
Even if there is no current vacancy. You should collect a base of people you can reach out to if there is a suitable opening. This practice is particularly important for hard-to-fill positions.
2. Fast-track referred candidates through the hiring process
But evaluate them on the same criteria as non-referred 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.
3. Start encouraging the employees to refer their friends in the onboarding phase
PURE, an American property insurance company, is a good example of that rule. Between 40% and 60% of its employees have been sourced through referrals. They reached these rates thanks to involving their employees in the referral program straight at the onboarding step. As soon as a new hire has made it through the first weeks at the company, they get asked if they know anyone else who could be a good fit for the firm.
4. Enhance user experience in your job application process
Your referral process shouldn’t be lengthy, complicated, or require lots of clicks. Otherwise, you risk driving referrers away. Referring a candidate should be as easy as selecting people out of your LinkedIn contacts list or email list. Applying for the position should be smooth and simple for the referred candidates.
5. Explain clearly who you are looking for
Your employees don’t instantly know what you are looking for in candidates. They might have an idea of the culture fit but specific job requirements may be less clear. Write clear job requirements including professional as well as personal traits and skills. Highlight what you are not looking for as well.
6. Organize recruitment happy hours
If your company culture is more on the informal side, you can try a tactic that works for Salesforce. Throw recruitment happy hours where your employees can bring their friends and acquaintances to get to know your company and open positions and talk to other company employees over an informal drink and snack. This will help your recruiters pre-screen the candidates, possibly schedule some more formal interviews and for the invitees, to get a grasp of the company culture, ask questions and see if they would like to apply. Consider it a big, informal interview with multiple participants. It will help to deter those candidates who would not fit anyways and encourage those, who can be a good fit. It will also increase your employees satisfaction as they will also enjoy the event and experience.
7. Localize your employee referral program
Come up with a country and culture-specific incentive to reward employees. InMobi varied their employee referral program rewards by country. In India, they offered a Royal Enfield bike (the Harley Davidson of India) and in the US a Vespa. Thanks to localizing the rewards selection, InMobi’s referral rate jumped from 20% to 50% for a 900-person company.
8. Keep your teams diverse
Unfortunately, if you have a problem with team diversity (for example, the majority of your company is composed of white males), implementing a referral program may deepen the trend (as your employees will bring along similar people). Intel, to stay on top of its diversity hiring, doubles its referral bonus when employees successfully refer women and minorities. It is a positive discrimination indeed but it is also a way to eat a cookie and have a cookie – have an employee referral program in place but focus on diversity.
Employee referral program examples with non-cash benefits
Distillary referral program shows how important it is to ask your employees first what motivates them most, because cash is not always the best incentive. Distillary replaced cash incentives with tech gadgets. They offered devices as a referral reward such as the newest iPhone or Apple watch. These hard to get rewards proved to be much more popular than cash.
It's a good employee referral program example that rewards referring employees through public recognition across all social channels. Successful referrers are called “champions” and projected as role models and positive examples for other employees.
They switched their rewards from cash to trips to Hawaii as a referral bonus. The Googlers within the pilot said the program was 28% more fun, 28% more memorable and 15% more thoughtful than the previous, cash-based system.
DigitalOcean makes a really interesting employee referral program example with their restructured program, in which they reward employees with a $3,500 referral bonus and an additional $1,500 charity donation on behalf of the staff member. If the employee opted to donate more, DigitalOcean matched their extra donation. Successful referrals increased substantially. In 2017, 40% of DigitalOcean’s new hires have been referrals.
As with any marketing campaign, employee referral programs are mostly trial and error. To weed out referral strategies that don’t resonate well enough with your employees, you need to do some testing and tweaking. But do not fret, once you find the formula for a successful referral program you will save time and money on expensive headhunters and get to hire valuable candidates who are more likely to stay with you for longer. And that is the win-win scenario.
Are you ready to build your first employee referral program with Voucherify?