How You Can Create an Effective Employee Referral Program

Job boards are the most popular way of promoting new openings. Sometimes, though, your ads don’t get as much attention as you would have expected.

They can sit for an entire month without generating a single qualified applicant. The longer it takes to hire a new employee, the longer work sits unfinished.

Encouraging your employees to refer their contacts can help you fast-track your hiring process by bringing in more qualified candidates. Read on to learn more reasons for establishing an employee referral program in your company and how to plan and execute the program.

Why do you need an employee referral program?

An employee referral program is an external recruitment method. Under this model, you ask existing employees to recommend suitable candidates for your job openings. There is usually a financial incentive attached to the recommendation.

Employee referral programs are a logical way to leverage the professional network of your employees. It is a strategy you can use to find qualified candidates quickly and is cheaper than using a hiring agency. Here are two important reasons for creating an employee referral program.

Reduced hiring cost

There are two sets of expenses associated with hiring. Firstly, you have the costs directly associated with hiring a new employee. The direct hiring costs include things like how much it costs your company to promote the position. That will cover the weekly cost of advertising a job on a platform like Indeed or LinkedIn, for example.

Alongside the advertising costs, you have headhunting expenses.

If you are trying to find candidates in-house, you will be paying a member of your HR team to look for suitable candidates. If you choose to use a hiring agency, you will pay them anywhere from 20-30% of the new hire’s annual salary. For a company hiring a senior manager, that can translate into $16,000 or more per hire. These are expenses that quickly add up.

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Alongside the costs that are easy to track, you have hidden hiring costs. Hidden hiring costs include things like how much it costs your company for every week that a job remains unfilled. Those costs are difficult to track, but they can be significant.

Reduced turnover rate

Referred candidates tend to stay longer at a company than people who are sourced through job boards. In fact, 45% of referred employees stay for four years or more at a business compared to just 25% who stay for more than two years sourced through job boards.

That’s a marked difference.

The reason that referred employees stay at a company for longer will be down to many factors. For a start, employees are only likely to refer someone to a job who they trust. After all, when you make a referral, you put your reputation on the line for that person.

Most people will only refer people they know. You generally refer people you:

  • Trust
  • Get along with
  • Think are hardworking

Companies look for candidates who tick those three boxes.

Furthermore, the candidate is likely to understand the company culture and the job better. After all, they have a personal connection who can answer basic questions about the job before starting the application process.

Effective Employee Referral Program

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Creating an effective employee referral program

We’ve covered the value of an employee referral program. Now, let’s discuss how you can start one for your business. The article will share a step-by-step process you can follow to get your employee referral program up and running and attract the most qualified candidates in no time.

Review your current hiring process

Before you start setting up an employee referral program, review your existing hiring practices.

You want to understand how long it takes to fill a position on average from search through to offer letters using your existing hiring channels, the costs associated with hiring for a new position, and how long employees stay with your company.

Finally, consider your hiring needs. Think about what positions you need to fill.

The answer to these questions will help you assess your current hiring efforts. You’ll also better understand which hiring channels work best and how much you are paying for new hires.

As you do your audit, you’ll likely discover that you struggle to fill certain positions at your company and find it easy to fill other roles. Those positions that are harder to fill are the ones you might attach a financial incentive to for a referral.

For example, if the average cost of hiring a manager was $10,000, you might provide a financial incentive of $2,500 or $5,000 for a referral who is hired. On the other hand, if the average cost of hiring an assistant is $1,000, you might offer a $100 incentive.

According to The Balance Careers, referral bonuses range from $250 to $25,000, with the most common amount ranging from $1000 to $2500. The amount of these bonuses vary according to the seniority or technical requirements of the role.

Aside from giving bonuses to employees who make successful referrals, you may also give non-cash incentives. Here are some incentives you can give away:

  • Gift cards
  • Additional paid time off
  • Tickets to special events

One of the key elements impacting the success of your employee referral program is the financial incentives on offer. Of course, it’s not the only element.

People won’t refer people in their professional network to the company if they don’t enjoy the work environment. We won’t discuss considerations like these in the article, but they are important considerations that will impact the success of your program.

Set up program guidelines & incentives

Once you’ve set out the incentives for employee referrals, you need to create program guidelines. Creating guidelines for your referral program is relatively straightforward but important.

Below are some important considerations:

  • Who is eligible to make a referral? For example, can anyone refer someone for a managerial position, or does the referrer need to be a manager or someone with a more senior position?
  • Is there a maximum number of referrals a person can make? For example, you might limit the number to three referrals per person.
  • How will the employee make a referral? Is there something on the application form to identify who made the recommendation? Or, do you have some form of community platform you use for employees to make referrals?
  • What happens when two people make the same referral? Does the person who made the referral first get the financial incentive?

Creating guidelines for your referral program is important, especially for a large company. You want to have rules to point to if anyone has questions. More importantly, those guidelines will reduce the risk of conflict occurring if two employees recommend the same person.

Promote your program

Hopefully, at this stage you’ve got a great idea for a referral program. The next step is promoting the program to get your employees to refer people they know. You should run a limited campaign to promote your employee referral program so people know it exists.

Sometimes, the traditional way is the best way of promoting your program.

Making posters and displaying them in high-traffic locations throughout your office will give your program a lot of visibility. You can also send a company newsletter.

When you are looking to fill new positions, you will need to run targeted marketing campaigns. You need to promote your referral program to people who are likely to refer a qualified candidate to the recruitment team each time you want to fill a new position.

Monitor and evaluate success

Your job doesn’t end when you have your employee referral program up and running. You need to monitor the program and assess its impact. That way, you can make the necessary adjustments to your strategy and execution.

Here are other metrics you should look at when assessing your program:

  • Program participation rate across your company
  • Percentage of referrals leading to successful recruitment
  • The average tenure of referred employees with your company
  • Overall recruitment duration
  • Employee engagement

You should keep your employees updated about any changes to the program you make.

In Summary

If you’re running a business or a member of the HR team for a company, you should consider establishing an employee referral program. An employee referral program can help reduce the cost of recruitment and improve the quality of the candidates.

While it isn’t tricky to set up an effective employee referral program, it still takes a significant amount of planning and monitoring. You have to determine your hiring needs, consider your current expenses, and set out the incentives on offer for referrals. You then need to create guidelines for the program, promote it, and monitor performance.

By following the steps set out in this guide, you should end up with an employee referral program that engages your employees and bolsters your recruitment pipeline at the same time.


About the Author

Baidhurya Mani is the founder of He regularly shares tips, tools, and strategies to help creators and entrepreneurs build a successful online course business.

Team 6Q

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