Bonus referral programs: Do they work?


One of the hottest recruiting trends is expanding internal and external referral programs. Referral bonuses, which sometimes approach the level of placement agency fees, are becoming more prevalent. But before hiring managers jump on the bonus bandwagon, they should consider some important questions.

  • What constitutes a referral?
  • Do referrals lead to more quality hires?
  • Are referral programs invitations for employees to engage in "conflict of interest" behavior? Are they an incentive to commit outright fraud?

To answer those questions, think of the times you have referred someone to the human resources department. I have made over two dozen referrals during my career, with spectacular results -- all but one of my referrals was hired, and they all stayed in their jobs long enough to contribute. Why the success? I was willing to put my credibility on the line, explain why the person would succeed, meet with the hiring manager to pitch my candidate, follow up on the status of the position, and offer continuing support to the friend who was hired. I never received a dime for my efforts. (However, it did make my job easier to have numerous connections outside of the mainstream organizational structure.)

In the 1960s, employers began to methodically mine employee referrals. They developed campaigns to brand the activity as an important "team effort," and sometimes offered rewards. But HR staffers quickly learned how wary employees were of risking their credibility by recommending someone for a job. So HR made adjustments to ensure that referral programs were fun, that everyone was acknowledged, and that results were rewarded.

McGill University in Montreal conducted an in-depth study of the phenomenon and found that employee referral programs were more successful when incentives were linked to results: a higher-performing employee with longer tenure.

Almost all incentive programs excluded human resources professionals and department (hiring) managers. The oft-stated reason was that it was those folks' job to find, attract, and hire. There was also the possibility of collusion between the hiring managers: "I'll hire your candidate if you hire my candidate." By hiring each other's referrals, they could increase their income at the company's expense if they did not hire the most qualified candidate.

The bane of most employee referral programs was the labor they necessitated. Tracking each and every referral and referrer was time-consuming. Renewing interest in a program every few months became a logistics and communications nightmare. Little time was devoted to evaluating results to determine whether the bonuses awarded to employees not only produced better candidates, but cost less than other recruiting strategies. Most corporate programs languished during the '80s. Very few corporations' employee referrals yielded a 25 percent (or higher) new-hire rate.

Now, the Internet allows easy automation of tracking and communication requirements. The labor factor has practically disappeared; we can now track a recommendation from outside the company just as easily as one from within. In the rush to reinvent the employee-referral concept, corporations have begun automating the collection of referrals from vendors, customers, clients, former employees, and total strangers visiting a Website. Employers appear willing to pay essentially the same incentive, no matter where it comes from, and the incentives have increased. Offers of $5,000-10,000 are not that unusual, and a $500-$1,000 bonus is now considered paltry by many.

A dozen dot-coms have sprung up this year that offer turnkey solutions, each with a different twist. Such companies as Angami, CareerRewards, jobTAG,, and have been in the news and acquired converts.

Consider the following as you revamp your referral programs to take advantage of the newest trends in automation:

Some referrals are not as good as others

"A" players tend to refer "A" players. Your employees know your company's culture. Is someone is an outsider to your company, their referral may be off target and simply lead to another referral in a long chain of connections. Mining this chain of referrals is what often differentiates third-party staffing pros from corporate recruiters. The pros will tell you that it is a labor-intensive activity that requires communication at each step.

The size of the reward is both good and bad

A large reward for a successful referral gets attention. The chance to receive a much larger reward is even more enticing. But as the reward increases, an employee's priorities shift from helping the company to helping himself. Studies show that the employee is less likely to refer people he knows, and more likely to refer any Tom, Dick, or Harry in his Rolodex. Look for a balance: If your employees can make a living making referrals, then maybe they should.

Duplication of effort makes more work, not less

Automated referral systems facilitate posting job content, track and report referral activity, and manage the payouts and acknowledgements. But they do not cover every situation. Make sure employees can easily find these bonus positions via their intranet. Make sure bonus referral job openings are distinctly separated from those that don't offer a bonus.

Measure results and employee satisfaction

What is the real cost benefit of hiring via referrals? Do larger bonuses yield more qualified candidates than other sources? If the percentage of new hires from this source is increasing, which are decreasing? If agency hires are not significantly affected, savings might not be an appropriate measure. Are employees who have made successful referrals satisfied with the program or do they resent being paid only a portion of a placement fee?

Valuing diversity requires diversity

How many professionals who are female or persons of color will a typical white male refer? If your referral program results in a significant number of new hires, be sure to learn about the demographics of the referral population.

The potential for conflict of interest

Imagine you are a CEO and you discover that several of your rising marketing stars are making a significant bonus income by surfing to referral bonus sites and recommending talented friends for jobs with other companies. Some of these friends are their coworkers. How do you feel about an employee helping some of your best talent connect with your competitors? What will you do?

What message are you giving your employees when you publicly encourage your competitors' employees to send you their coworkers in return for $1,000, $5,000, or $10,000? That is what third-party firms do, but they tend to be a tad less intrusive. Do you wait until you discover that one of your corporate recruiters has set up a friend outside your company (with the resumes he has mined from third-party Websites) before you ask the secret of his success in hiring outside referrals?

Less than 100 years ago, a referral was someone who showed up at the door with a letter of recommendation from someone you knew and trusted. Today, we have a multitude of tools to expand and develop the concept. Let's not forget the fundamentals nor overlook the pitfalls. Limit the downside and measure your results carefully.

Mark Mehler also contributed to this article

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