Employee referral programs are the most powerful corporate recruiting tool, bar none. They can produce a high volume of quality hires who have been statistically proven to have lower rates of attrition.
When designed well, they can not only be cost-effective, but they can produce one of the highest ROIs in the entire HR function.
Firms with well-designed referral programs can tune them to produce over 70% of hires (AmTrust, for example, has reached 78%).
However, there can be a dark side to referrals. Because the concept seems so simple, many program managers design their programs based on intuition, guesswork, and emulation.
Unfortunately, while the concept truly is simple, executing it in a world-class way is anything but. As a result, most referral programs sadly underperform their potential by using numerous “program killers,” or common components of a majority of corporate referral programs.
If your referral program is struggling to produce a mere 30% of your organization’s hires, I guarantee that you have more than one of these 15 killer elements as part of your program design:
- Responsiveness of the program. Nothing kills a well-designed program faster than slow or no response rates to employee referrals. If the person being referred doesn’t hear something unique to their submission within 72 hours, they will become discouraged. If the employee making a referral doesn’t get a similar rapid response, they will also begin to wonder about the program. If nothing ever happens, they will simply stop referring. This happens in a majority of referral programs. The first step in increasing responsiveness is to “mark” referral resumes and to develop a system to immediately notify individuals and to screen all referrals within five days. Respond rapidly to the employee and the candidate, and be honest as to the reasons why someone is not selected.
- Delaying reward/bonus payment. Withholding payment of the bonus for 90 to 180 days post-hire is silly. Do sales people have to give back their sales bonuses if the customer stops buying after 90 days? Do you delay payments to staffing agencies or executive search firms? Well, of course not. So why should you treat your employees more harshly than you do your vendors? Rewards work only if they are immediate and there is no “risk” of not getting them. Nothing discourages participation more than delaying the reward based on something beyond the employee’s control. Paying half of the fee upfront is not an acceptable alternative. In addition, it’s not the employee’s responsibility to hire a candidate, only to refer them. Hiring managers do the final assessment and they determine whether the person is the right fit. If the person does quit prematurely, it’s the manager you should blame, not the employee making the referral, because they have no control over how the individual is treated.
- Referral spamming. Designing a process that allows individuals to inundate the referral system with high-volume, low-quality resumes will cause the program to suffer or even fail. If you allow it, some employees will bring you stacks of resumes that they got from a recruiter friend or from the Internet. Although it’s tempting to accept them, never accept large volumes of resumes or referrals. The reason for this is that the person giving a large volume of referrals cannot know them all, and one of the key design features for program success is that employees only refer people they know on a professional level. Unless it’s an unusual circumstance, limit referrals to no more than three a month for many individuals.
- Excluding senior managers and HR people. The idea behind a referral program is to get as many people as possible scanning the streets and talking up your firm. To exclude anyone, especially highly visible individuals like senior managers and HR professionals, is not advised. Excluding them makes them feel like they are second-class citizens, and they will not refer at the same rate if they are excluded specifically from the program and the reward. If you’re worried about these individuals referring people who are qualified just to get the money, then these individuals should be fired on the spot. The best programs allow hiring managers or anyone with a perceived conflict to “opt out” of the bonus or donate it to charity.
- Allowing “I found you” referrals. The idea behind quality referrals is that you seek out individuals and assess their work and their fit with the company over a period of time. However, as many as 60% of all referrals are not actually referrals but instead are situations where an individual proactively approached one of your employees (because they knew where they worked) and asked them to put in their name as a referral. In this “I found you” situation, there is no in-depth assessment of the individual. In fact, the referral is made more as a favor because someone asked. The best programs require the employee making referrals to provide enough information about the individual to ensure they know them. Program rules should specifically prohibit “I found you” referrals.
- Failing to continuously refurbish. Referral programs are essentially marketing programs and as a result, they lose their effectiveness over time. In fact, even the best designed programs begin to produce significantly lower results in as little as six months if the marketing materials and approach are not updated. So refurbish and re-energize your referral program at least once a year.
- No referral cards. Give employees “referral cards” to hand to impressive individuals. The best referral cards include praise for the individual and an action statement that encourages them to apply for a position. Unfortunately, most companies have no cards or fail to replenish an individual’s supply on a regular basis.
- No ATS marking. If all individuals being referred are required to visit the corporate website in order to apply, there is a significant chance that the source of the resume will not be “marked” as a referral. In fact, some HR technology does not allow referrals to be “marked” so that they can be given higher priority. And without prioritization, the slow response rate will quickly degrade program participation.
- Equal rewards for all jobs. All HR programs should reward performance, and referrals are no different. Referrals for hard-to-fill jobs and mission-critical jobs should get a bigger bonus than easy-to-fill jobs. In addition, there should be a supplemental bonus if someone turns out to be a top performer after they are hired. If you fail to include reward differentials, your key jobs will be filled more slowly or not at all. In fact, the best programs allow referrals only for jobs that are high impact or are hard to fill.
- No feedback on weak or bad referrals. Most employees have good intentions when they’re making referrals, but if you don’t notify them after they’ve made a particularly weak or bad referral, they have no way of improving future referrals. The best systems rate referrals and the individuals making them so that future referrals by this individual are given a higher priority as a result of their previous successful track record.
- Individual recruiters are allowed to “ignore” referrals. It’s not unusual for regular recruiters to ignore or pay little attention to candidates who come from employer referrals. It’s generally an ego thing because they didn’t initially “find” the candidate. In any case, there needs to be measures and rewards that encourage recruiters to focus on employer referrals.
- Not tracking referral rates. Employer referral rates vary dramatically among departments in almost every firm. If the program manager is to increase participation in these underperforming departments, there needs to be a process to track and report participation by managers. In the best cases, participation rates are part of the manager’s bonus formula.
- Big-dollar bonuses. Paying too much money can actually kill a program, as large bonuses incent employees to spend more time looking for referrals than doing their jobs. This angers their managers and eventually it will cause these managers to resist the program. Research shows that anything over $1,500 will generally have little impact on referral volume of quality candidates.
- Paying a miniscule reward. Do not embarrass yourself by paying a ridiculously small bonus. Yes, you can pay nothing or just have drawings for prizes and still have an effective program, but don’t pay $50 or $100 for something that if you had to hire an external consultant to do would cost thousands of dollars. If you’re paying significantly lower than the market standard, you will get push back from your employees who compare what your firm pays to what is paid by close competitors.
- Employee program manager turnover. Because of weak metrics, most employee referral programs are under-appreciated by recruiting, HR, and senior management. As a result, turnover rates among ERP program managers are quite high. Because the learning curve is steep, the replacement manager almost always “damages” even the strongest referral program. In order to avoid this problem, the position needs to be given as much recognition and pay as necessary to encourage the program manager to stay in it for at least three years. If the person running the program views this position as one small step on their way to becoming an HR generalist, you have made a bad hiring decision.
Final Thoughts
Most managers in HR and recruiting view employee referral programs as simple to design and maintain. After years of research and studying over 600 companies, I have concluded that the exact opposite is true. Almost every firm has an ERP program but only a small percentage reach the full potential of well-designed employee referral programs.
It’s important to realize upfront that there are factors that lead to program success (which I’ve highlighted in previous ERP articles for ERE) but more importantly, there are factors that seem innocent on the surface, but when present, they can literally kill your program results in a very short period of time.