One of the most effective recruiting strategies, in terms of time invested and future employee retention, is also one of the cheapest ways to hire. Employee referrals bypass high agency fees for successful introductions, while increasing employee investment and strengthening company culture. Even so, many companies underutilize the power of employee referral. Here, in numbers, is why you should prioritize your employee referral program and how you can optimize it.

According to a Jobvite study, only 7% of applicants come from referrals, but these applicants make up 40% of total hires. The nature of an employee referral has prescreening built in, saving your hiring managers valuable time by discarding the lowest quality candidates before even making the connection.

Further, employees referring their friends have a longer standing relationship with and better understanding of the candidates they recommend than recruiters typically have. It is thus no surprise that 88% of employers rated the quality of new hires from employee referrals above all other sources of talent, according to CareerBuilder’s 2010 ‘Referral Madness’ whitepaper.

Because there are fewer weak candidates to sift through before narrowing down those who may be a good fit for the open position, positions can be filled more quickly. In a 2011 Social Recruiting Survey by Jobvite, 67% of respondents said the recruiting process for referrals was shorter than typical.

The same research shows that new employees hired through referral start working at their new jobs 55% faster than those who applied through career sites — 29 days, on average, instead of 55 days. Getting new employees on the clock sooner means that they can start adding value sooner.

This is compounded by faster onboarding of hires through referral. “The new employee is already connected,” says Liz Ryan, CEO of Human Workplace, “it’s not like they’re walking into a strange place. They may have met some of the employees before. The energy is great around the new hire.” Referred candidates have the benefit of knowing at least one of their new coworkers already on day one and, through that connection, have a built-in mentor. “‘[The referred hire] feels like they have a friend who’s not their boss to turn to and ask questions as they onboard, so it helps to get them integrated into the culture much more quickly.’” says Kara Yarnot, Founder of Meritage Talent Solutions.

Beyond comfort asking questions about their work, referred candidates can get a sense of the corporate culture before beginning work and can more easily ascertain fit. According to Jobvite’s 2011 Social Recruiting Survey, 70% of employers felt that referred hires fit the company culture and values better than hires without referral.

The more positive onboarding experience and the better cultural fit of referred hires converts into improved employee retention. Research by Jobvite shows that 46% of employees hired through referrals stay for 3 or more years, compared to 39% of employees hired from career sites and only 14% of employees hired from job boards.

Even better, this employee retention benefit is two-fold. “A successful referral makes an employee feel better about the company they work for” says Yarnot. “What I’ve found is not only do they tend stay longer after the referral, but they are more engaged as well.” Increased employee engagement is indubitably great for corporate culture and replacing employees is expensive, so this reduced employee turnover is great for your bottom line.

According to Jobvite’s 2011 Social Recruiting Survey, sales positions have the highest employee referral hiring, but other positions take advantage of referrals, as well. “Employee referral is the best recruiting channel I know” says Ryan. “It is certainly not the only one, but it’s the only one that reinforces and celebrates your employees in a tangible way for contributing to your company’s success. It’s the only one that builds on the community you’ve already established in your organization.”

With so many major advantages, not including an employee referral program in your company’s recruiting strategy is a costly mistake. But how do you incentivize your employees to refer their contacts for open positions? After all, if they refer their best friend for a position and the best friend has a negative experience either during the interview process or on the job, your employee can suffer social consequences or guilt.

To make the risk of referral worth it for employees, 69% of respondents compensate employees for successful referrals. Cash is the most popular form of compensation, according to a 2014 Employee Referral Trends report by Meritage Talent Solutions. This matches employees’ desires.

48 percent of employees in a 2010 CareerBuilder survey said cash bonuses would further motivate them to participate in their company’s employee referral program and “a limited incentive for participating” was among the top reasons given for not participating. When asked what they would change about their organizations’ employee referral programs, the number one response employees gave was, “Increase the value of the incentive.”

So what is the sweet spot? 69% of those who offer cash incentives for referrals offer between $1,000  and $5,000. For a $50,000 salaried position, assuming an agency contingency fee of 20%, that saves the company between $5,000 and $9,000, while financially rewarding current employees. The higher the salary of the open position, the higher the savings from filling it via employee referral.

After choosing a value for the cash incentive, choosing how it is paid out can optimize your results. To increase both quality of referrals and employee turnover, many companies pay out their incentives in two stages. An initial payout is awarded upon hiring a referral. A second, supplementary payout is awarded as a bonus once the referred employee reaches a certain number of days or months of employment.

Employers who choose not to offer cash rewards for successful referrals often offer other incentives, like time off or additional paid vacation days. When making a successful referral means either making more money or enjoying more time to rest and recharge on vacation, employees are eager to participate.

These incentives motivate employees to put in the effort of looking through their social networks to make a referral, but a scrupulous employee is still unlikely to refer a good friend if doing so would set the friend up for a bad time. There are two big things that will make employees less reluctant to make a referral.

First, satisfied employees are much more likely to refer their contacts for an open position. “An employee referral program is a temperature gauge on your culture” says Ryan. “If your employees are lobbing in their friends’ resumes like crazy and you’re hiring a lot of them, your culture is great.”

Second, employees are much more likely to make referrals if referred candidates are treated with respect. This means clear communication throughout the process. According to CareerBuilder’s ‘Referral Madness’ whitepaper, employees regularly cite frustration with a lack of follow-up on the status of their referrals. 49% of employee respondents said their company doesn’t keep them informed about the progress of a referred candidate. Frustration with a first experience participating in an employee referral program makes them much less likely to make a second referral.

The bottom line, when it comes to employee referral programs, is that they can be extremely valuable to your company and are not to be overlooked. According to CareerBuilder’s ‘Referral Madness’ whitepaper, 82% of employers rate employee referrals above all other sources for generating the best return on investment. Employees are providing a valuable service to companies by referring their contacts and should be both financially compensated for that service and shown respect through clear and timely communication. Develop a strong employee referral program and your investments will pay dividends.

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