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The complete guide to effective employee referral programs

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Once referred to as the “holy grail of hiring” by Forbes, employee referral programs are one of the most productive ways to find high-quality talent. While only about 7% of applicants are referrals, they comprise up to 45% of all internal hires, according to  Zippia. An employee referral program is a structured process that allows existing employees to recommend their contacts for job openings. In return for submissions, referrers receive some sort of incentive. Ultimately, the goal is to make employee referrals a reliable source of top candidates.

There’s a reason that employee referrals remain a primary source of new hires. “Referred candidates are of higher quality than applicants from the general public and are more likely both to receive and accept an offer, stay at the job longer and perform better, according to research cited in Harvard Business Review.” In addition, you can increase recruitment efficiency and employee engagement while reducing hiring costs.

A successful employee referral program is focused, clearly defined, simple and measurable. This guide will cover the essential aspects of employee referral programs, including their benefits, steps for implementation, program management advice and pitfalls to avoid.

Benefits of employee referral programs

In a competitive labor market, it can be difficult to attract top talent. That’s why employee referral programs are an effective way to boost your hiring efforts.

Some of the benefits include:

Improved recruitment efficiency

Given that your employees are recruiting on your behalf, you’re able to eliminate extra screening steps. As a result, employee referrals greatly reduce the time it takes to source new applicants. In fact, referred candidates typically take 29 days to become new hires, compared to 39 days for those found through job boards and 55 days for those found through career sites, according to LinkedIn research.

Reduced hiring costs

When you create a robust employee referral program, you save on recruiting costs. Instead of relying on traditional job postings, your workforce does the work for you. Even if you decide to offer a referral bonus to employees, it’s still a fraction of what you would spend on recruiting and advertising.

Increased employee engagement

When you allow current employees to recruit potential candidates, they feel empowered, which increases engagement. Then when their referral gets the job, it gives them a sense of pride and accomplishment. At the same time, newly hired employees are more enthusiastic because they are already familiar with the organization and know someone from day one.

Higher retention rates

Candidates hired through employee referral programs have higher retention rates than those sourced through other channels. In fact, referred employees remain with the company 70% longer than non-referral hires, according to research by Zippia. On average, they have a 46% retention rate compared to 33% for job board hires.

Better cultural fit

One of the most challenging things to convey in a job description is company culture. Yet, no one understands your core values and what it takes to succeed better than current employees. That’s why they’re the best people to find individuals who will thrive within your organization. Once your workforce understands what qualities to look for, they can be incentivized to refer people who are a better cultural fit.

Steps to set up employee referral programs

Now that you understand the benefits, here are the key steps to create an effective employee referral program:

1. Define your hiring needs

The initial step in creating an employee referral program involves planning. That way, you can focus your efforts. First, make sure you understand and define your hiring needs. For example, are you just filling current vacancies or expanding the organization? Are there specific positions or departments that you will need to focus on? Remember, not all job openings will be good candidates for referrals. In those cases, you should identify the positions open to referrals and actively source for others.

2. Set clear goals

The second step is to define your goals. While the ultimate goal is to make inbound referrals a sustainable source of candidates, you’ll want to be more specific using the SMART goal format: specific, measurable, achievable, relevant and time-bound. Be ambitious but realistic at the same time. In doing so, you set yourself up for success.

Some examples of SMART goals include:

  • Reduce cost per hire by 25% in the next six months
  • Increase the total number of referrals by 10% next quarter
  • Acquire 15% more high-quality job applicants in the next 60 days, or
  • Reduce the time to hire by 10 days.

3. Create a simple referral process

By keeping the process straightforward, employees will be more likely to participate. “Almost all the companies I’ve worked with implement employee referral programs on a company-wide basis – which can work for large organizations,” says James Arnold, a principal recruiter and talent acquisition expert who has worked for companies like Meta and Cruise. “With smaller companies you must focus your referral efforts. Otherwise, you risk jeopardizing your company brand when you fail to keep up with the potential backlog.”

Consider creating a simple online form, using an employee referral platform or creating an email template employees can use for referrals. Once someone submits a referral, let the referrer know what’s happening at every stage of the process. If a candidate isn’t selected, send referrers a thank you email. That way, they still feel appreciated and motivated to refer someone in the future.

4. Communicate the program to employees

To help your employee referral program succeed, announce it prior to the launch. That way, you build excitement and awareness. It’s also a good idea to work with the marketing team on an official launch schedule so it can be announced accordingly. Once the program is live, find ways to include the details in onboarding documents and new hire orientation materials.

Also, be sure to work with your internal communications team so you continue to promote it often. “Consistent reminders from managers or leaders to their teams can also help drive the program’s effectiveness,” adds Arnold.

5 Determine employee incentives and rewards

Think carefully about how you’d like to encourage your team’s participation. Employee referral bonuses can be monetary or non-monetary. Monetary rewards typically range from $500 to $5000. Non-monetary bonus options include items such as additional time off, gift cards and tickets to sporting events and concerts.

You may even choose to reward employees by recognizing them on social media or the company website. Some organizations even donate to the employee’s favorite charity as an incentive. Finally, consider having referral contests between teams. That way, you can distribute fun prizes while building excitement and encouraging teamwork.

6. Measure and optimize the program

Tracking the metrics that you identified in step two will provide insight into whether you’re meeting your objectives. In addition, benchmarking your data with industry standards is another way to gain valuable information.

It’s also helpful to solicit feedback from your team to identify the strengths and weaknesses of the program. You may even want to consider automating the process to keep accurate records. That way, you can measure the impact in a way that’ll make it easier to identify areas of improvement and adjust as needed.

Practical advice for managing the program

An employee referral program can be an excellent recruiting tool if you manage it correctly. These practical tips will get you on the right track.

Regularly update your referral guidelines

Your workforce can only recommend appropriate candidates if they know exactly what you’re looking for. That’s why it’s critical that employees clearly understand the requirements for the positions you’d like to fill. For example, explain the ideal set of skills, experience and culture fit you’re seeking.

Also, be sure to emphasize the quality of candidates over quantity. You’ll also want to regularly update your referral guidelines, including details regarding incentives, which employees can participate and who can be referred.  

Foster a referral culture

At the heart of a referral culture is building a place where people want to work. In order to do that, focus on developing a strong employer brand. The three primary components of an employer brand are reputation, proposition and experience, according to Harvard Business Review.

  • Company reputation refers to the perception of the company in the marketplace. When candidates evaluate a  job offer, the company’s reputation weighs heavily in their decision. In fact, 75% of people would not take a job with a company that has a bad reputation – even if they are unemployed, reveals LinkedIn research.
  • The employer value proposition describes what the employer has to offer its workforce. Some examples include salary, benefits and flexible hours. In return for those rewards, the company expects a certain level of productivity and performance from employees in return.
  • Employee experience (EX) encapsulates everything workers encounter during their tenure at the company. Post-pandemic, EX is more important than ever to attract and retain talent. A survey conducted by WTW confirmed this “great EX awakening,” with 92% of organizations stating they plan to prioritize EX initiatives over the next three years.

Ultimately, you’ll know you have a referral culture when employees are excited to refer candidates for open positions. If they do, that means they genuinely like the work environment and want to share it with others. Also, don’t forget to include new hires in the referral process. They’re often in the best position to recommend appropriate candidates, given they just went through the job search process themselves. Finally, involve executive leadership. Once management participates, they can motivate employees to take part.

Provide feedback to employees who make referrals

If an employee takes the time to submit a referral, they deserve clear and prompt feedback in return. Be sure to keep the referrer in the loop throughout the process. If the person they refer isn’t a good fit, let them know why. This approach will ensure that your team understands what makes a good referral and will increase the quality of recommended candidates in the future.

Pitfalls to avoid when designing an employee referral program

An employee referral program can be successful as long as you steer clear of typical pitfalls. Here are some of the most common mistakes and how to avoid them.

Lack of automation

While you may be tempted to manually monitor your employee referral program, it’s not an efficient method. So instead, take advantage of an automated solution. That way, you’ll have a scalable model that allows you to track metrics accurately. Plus, you’ll create a confidential process while making it easy for employees to share open opportunities with their network.

Inadequate communication

Employees can’t participate in a program if they aren’t aware of it. To make the referral process successful, be sure to communicate the details via an official company announcement. Then, continue to provide updates through regular emails that include information on the process, what qualifies as a successful referral, what the incentives are and what limitations apply, if any. It’s even a good idea to train your employees regarding what makes a good candidate and how to approach them.

Overcomplicated process

By simplifying the employee referral program, employees will be more likely to participate. Ensure the process is clear and easy. For example, you can ask employees to fill out a short form that requires only a few fields like the candidate’s name, email and LinkedIn profile link. You can even create a referral email template encouraging employees to recommend potential candidates for open roles. In addition, by using a referral software or platform, you can make the program even more user-friendly.

Insufficient rewards or incentives

Employees want to feel appreciated for their efforts. If the rewards or incentives offered are ineffective, it could negatively impact the program’s success. While the awards don’t necessarily have to be monetary, they need to motivate people to participate. A good idea is to conduct a survey asking employees what it would take for them to participate in the program. By conducting research, you’ll have a more accurate view of what drives your staff to make quality referrals.

Neglecting to provide feedback

When employees take the time to refer a candidate, they expect to be kept in the loop. Therefore, provide transparency by keeping the referrer informed along the way. For example, if their referral doesn’t make the cut, let the employee know why. That way, they can consider your feedback when they recommend future candidates.

Failing to track and measure the program

To evaluate the success or failure of the program, you need to track and analyze specific metrics. Technology and automation make it easy to monitor employee actions and report on the data gathered. This approach also allows the HR team to make intelligent decisions based on real-time analytics.

Ensuring a fair and inclusive referral process

While employee referral programs are effective, they may also negatively impact diversity in the workplace. Fortunately, there are things you can do to avoid unintentional discrimination.

Establish diversity and inclusion goals

A diverse workforce leads to higher retention and productivity, resulting in better business performance, a study by McKinsey shows. Yet, according to an analysis conducted by Glassdoor, referral candidate pools tend to be less diverse than online applicant pools. To ensure an inclusive referral process, collect demographic data to identify gaps so you can set diversity goals. A well-defined set of goals will help you align your referral program with your overall company strategy. Once those goals are set, communicate them clearly to your team.

Train employees on unconscious bias

Another concern around employee referral programs is that workers might recommend people who share similar gender, race or other backgrounds. Commonly known as affinity bias, this type of unconscious bias causes employees to be attracted to people like them. To combat this and other forms of implicit bias, the first step is to become aware of them. Then, train your workforce to identify and challenge these biases directly.

Implement diverse referral-sourcing strategies

Instead of simply asking for referrals, one idea is to ask for “leads” instead. Because employees tend to refer people like themselves, asking for leads broadens the pool of candidates. Another idea is to identify channels to reach diverse audiences like minority groups and organizations. Finally, instead of relying simply on your website, leverage social media postings on sites like LinkedIn and Instagram to reach a broader talent pool.

Encourage referrals from underrepresented groups

Another way to increase diversity is to encourage underrepresented groups within your organization to participate in the referral program. You can even launch employee resource groups to promote and request referrals to help you meet your goals.

Finally, consider offering increased rewards for each successful diversity hire. For example, Intel doubled its referral bonus to $4,000 for minorities, women and veterans. They hope to increase the diversity of the workforce, which white males have historically dominated.

Monitor and report on diversity metrics

To measure the impact of your employee referral program on diversity efforts, be sure to track and analyze the data. Some common metrics to monitor are the percentage of total referrals that are diverse, pass-through rates of diversity referrals (from referral to interview) and percent of offers presented to diverse groups. By monitoring key metrics monthly and quarterly, you can continue improving the program over time.

Frequently asked questions

Read on to learn more about how to create an effective employee referral program and some of the most frequently asked questions.

What are the best incentives for an employee referral program?

Employee referral incentives can be monetary or non-monetary. Monetary bonuses normally range from $500 to $5000. Non-monetary bonus options include items like additional days off, gift cards or tickets to sporting events and concerts. You may even consider less traditional rewards like a shout-out on social media or a donation to charity.

How can I ensure the confidentiality of the referral process?

Establishing a confidential referral process means ensuring the tracking system is secure and accessible only by authorized parties. That way, you’ll be able to protect private candidate information. Also, make it clear to employees that all hiring decisions will be kept confidential. 

How can I measure the success of my employee referral program?

The first step is to define the goals of the program. Then choose the metrics that will help you measure your progress and performance over time. Some examples of common metrics include referral rate, quality, retention, diversity and cost.

Can I have different referral programs for different job categories?

While you can have separate programs, it’s not ideal. For example, the most successful employee referral programs are simple and easy to navigate. However, if the process is too complex, you may inadvertently discourage people from participating.

How can I prevent employee referral programs from becoming too insular?

To prevent employee referral programs from becoming insular, establish diversity and inclusion goals. For example, to combat discrimination, educate your team on the different forms of unconscious bias. It’s also a good idea to encourage referrals from underrepresented groups and establish diversity metrics like the percentage of total referrals that are diverse, pass-through rates of diversity referrals and percent of offers presented to diverse groups.

Forging a path forward

In today’s work environment, job candidates have more options than ever. As a result, traditional sourcing techniques can only go so far. Through an employee referral program, you can hone in on passive candidates more likely to be a good fit and hit the ground running. It’s also a great way to empower employees and reward them for identifying top talent.

By establishing a systematic approach that includes key metrics, tracking and automation, you’ll be able to evaluate and improve the program over time. While a successful referral program isn’t built overnight, it’s worth putting in the effort to get it right. By following these tips and strategies, you’ll quickly get on the path to transforming your organization’s hiring practices.

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