Hiring is an exciting process – you get to decide on the fate of your team and choose the people you work with. However, most CEOs and startup founders dread hiring. The reasons are obvious – it’s expensive, it takes quite a long time and there’s no guarantee you’ll find someone great.
Over time, HR teams have found a way to minimize costs and find better quality candidates. One that stood the test of time and proved itself as valuable is an employee referral program.
Let’s define what an employee program is, why it’s important, how to set it up and measure its effectiveness, as well as show some examples from real life.
What is an employee referral program?
An employee referral program is a hiring method where an existing employee refers someone they know for an open position at a company. Instead of searching for applicants through job boards and career sites, companies can let their own employees do the search for them.
In reward for bringing on someone great to the team, the employee gets an incentive in the form of money, days off or some other prize. The new applicant has an easier way in and doesn’t have to go through several rounds of selection, screening, and testing.
It’s a win-win situation for everyone involved. Companies hiring referred employees get better quality hires, the employees get to work with people they know and like and they get a reward for bringing great talent on board.
You may be wondering – why would employees refer someone for their company? If you guessed money, you would be wrong. According to LinkedIn’s research from 2015, 35% of people refer someone to help their friends, with 32% doing it to help their company. Another 26% do it to be seen as a valuable colleague, while only 6% do it because of the cash reward.
Why an employee referral program is important for your company
There’s a reason why employee referral programs are used to this day by many companies across industries.
Referred employees stay longer. Retention rates for referred workers are 46%, compared to 33% for companies who hire through traditional sources.
The employees you hire are better quality. According to CareerBuilder’s research, 88% of employers rate employee referrals as the top choice for finding quality candidates.
The onboarding is faster. Because they know someone from the company, referred employees finish training and onboarding more quickly – 29 days compared to 55 days from the career site.
It’s cheaper. Even when you calculate in the reward to the referrer, a referred employee costs $3,000 less than one that came through a job board, on average.
The disadvantages of an employee referral program
Although they have numerous upsides, there are some cons to hiring people through referrals. First, you might run into a problem with diversity. As science confirms, we like people which we think are similar to ourselves. Your employees could end up referring people of the same age, race, ethnicity, social status, gender, sexuality, religion, etc. If you don’t pay close attention, referral hires could set your diversity goals backward.
The second problem is that referral hires may not have as strict of a hiring process as job board/career site candidates. Since they were referred by someone from the company (especially if they’re an outstanding performer), the HR team could cut them some slack in the hiring process and hire someone not suited for the role.
How to set up an employee referral program
If you’re down with the idea of creating an employee referral program, you’re probably wondering where to start. Here are a few quick steps to have in mind.
1. Define the position and skill set.
Determine what position you want to hire and what kind of skills they need to bring to the table. If you want to hire a developer, for example, be specific about the job-related (as well as soft) skills the person needs to have. Once your employees have this information, they can do a better job of referring someone.
2. Define the incentive
Even though research suggests that employee referral programs don’t succeed because of rewards only, they’re a great motivator. To keep it simple, you can use cash rewards. Amounts vary, but the best course of action is to determine the sum based on the average cost per hire for the position. For 69% of companies, the incentive is between $1,000 and $5,000.
Alternatively, offer non-monetary incentives. For example, you can offer days off, free travel, ability to work flexible hours or remotely, a budget for new equipment, a great parking spot or something as unconventional as renting them a Ferrari for a day.
3. Set the rules
In order for the referrer to get their reward, they need to meet the conditions set by the employee referral program. First and foremost, how long does the newly referred employee have to stay at the company for the referrer to collect their reward? By setting a fixed amount of time, you’re ensuring that the new hire stays longer so that everyone involved wins. Some companies break the incentive in half – the first portion when the candidate is hired and the second half after X amount of days.
4. Spread the message
Let your employees know that there’s a referral program set up. Send out a company-wide email blast, notify employees through Slack channels, put up posters, bring it up at every team meeting – the list of ideas is endless. As long as the applications are open, make sure that everyone in the company knows that they can refer someone for the position.
5. Ensure objectivity
Once you hire someone new through a referral program, there’s a chance that they might get special treatment. Communicate from the start they need to be treated just like any other employee who applied through a career page or job board – to ensure the hiring process is as objective as possible.
6. Make the referral process as easy as possible
The more steps there are in the referral process, the less likely it is that someone will be referred for the position. Make sure the application process is as simple as sending a link to a person who would be a great fit for the job.
How to measure the effectiveness of an employee referral program
In order to measure the results of your campaign, there are some KPIs to keep an eye out for.
Retention rate – how long do the referred employees stay in your company compared to those hired from job boards?
Cost per hire – how much does it cost to hire someone referred compared to putting out a job ad and hiring in a more traditional manner?
Average time to hire and time to fill – how long does it take to fill a position compared to traditional hiring methods?
Referral hire rate – how many of the referred candidates end up getting the job?
Examples of great employee referral programs
InMobi is a marketing and advertising platform with headquarters in more than 19 cities across the world. Several years ago, they had only six recruiters and 900 employees, with a need for many more. Clearly, traditional hiring methods wouldn’t cut it.
They started out with a cash-based employee referral program and got 20% more hires than before. However, this was only a tip of the iceberg. Since they realized that experiences are worth more than cash, they started offering incentives such as beach vacations, weekend getaways, wine club memberships etc. Since they introduced this change, their number of successful referral hires increased by 50%.
One of the most famous examples of a referral program was carried out by the marketing giant HubSpot. Interestingly enough, in order to participate, you didn’t even have to be an employee. In 2013, HubSpot offered a whopping $30,000 to the person who referred a new developer for their team. Besides great talent, the program (and the prize) brought them quite a lot of publicity.
Not only private companies have employee referral programs. The city of Torrance is located in California, USA, and it has about 90,000 inhabitants. The city itself has a great referral program where you can get both monetary and non-monetary incentives. They offer a $100 bonus when a successful applicant is hired, as well as 8 hours of vacation time once they’ve stayed in office for 90 days.
Google uses referrals as one of its strategies to find the best talent in the market. According to its own employees, just money wasn’t enough. When they raised the referral cash incentive from $2,000 to $4,000, it barely moved the needle in terms of successful hires.
What did work was transparency. When they referred someone, the employee had full insight into what happened next. They would get weekly updates on where the candidate was in the pipeline and stayed informed about their progress.
For a more unconventional technique, an HR staff member would sit behind a Google employee and watch them scroll through their social media contacts, identifying potential candidates.
Another company well-known for making lots of hires for referrals is Accenture. Besides the tried techniques, they have an approach called Get Referred. The applicant uses the form to find someone in their network (on LinkedIn) who works for Accenture and asks for a referral. If they don’t know anyone directly, they can reach out and build trust with an employee before asking for a referral.
DigitalOcean is a platform for developers and engineers to build and scale applications. It was growing rapidly and the management used a creative employee referral program to bring on new talent. For each successful referral, employees would get a $3,500 bonus, as well as $1,500 which went to a charitable organization in their name. Using this method, they were able to hire 40% of their new workers through referrals in 2017.
Employee referral programs are one of the best ways to source new talent and every company can benefit from one if it’s properly executed. You will be able to source, hire and retain better quality candidates in less time and with fewer resources while giving out rewards to your employees. Who could say no to that?